Evolent Health(EVH) - 2025 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited interim consolidated financial statements for Evolent Health, Inc. as of June 30, 2025, and for the three and six-month periods then ended Consolidated Balance Sheet Highlights (Unaudited) | (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $150,995 | $104,203 | | Total current assets | $562,257 | $607,117 | | Goodwill | $1,137,321 | $1,137,320 | | Total assets | $2,461,532 | $2,544,411 | | Liabilities & Equity | | | | Total current liabilities | $557,519 | $715,501 | | Long-term debt, net | $648,455 | $490,520 | | Total liabilities | $1,336,727 | $1,352,979 | | Total shareholders' equity | $896,005 | $1,001,259 | Consolidated Statement of Operations Highlights (Unaudited) | (in thousands, except per share data) | For the Six Months Ended June 30, 2025 | For the Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Revenue | $927,977 | $1,286,798 | | Total operating expenses | $930,770 | $1,292,419 | | Operating income (loss) | $(2,793) | $(5,621) | | Net loss attributable to common shareholders | $(123,340) | $(31,608) | | Loss per common share - Basic and diluted | $(1.07) | $(0.28) | Consolidated Statement of Cash Flows Highlights (Unaudited) | (in thousands) | For the Six Months Ended June 30, 2025 | For the Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(25,769) | $26,326 | | Net cash used in investing activities | $(73,624) | $(23,273) | | Net cash provided by (used in) financing activities | $98,927 | $(88,499) | | Net decrease in cash and cash equivalents | $(526) | $(85,508) | Note 4. Transactions On August 1, 2024, the company acquired certain assets of Machinify, Inc. for $28.5 million, enhancing its AI capabilities Machinify Acquisition Purchase Price Allocation (August 1, 2024) | (in thousands) | Amount | | :--- | :--- | | Purchase Consideration | | | Cash | $19,500 | | Fair value of contingent consideration | $9,000 | | Total consideration | $28,500 | | Allocation | | | Technology (Intangible Asset) | $7,700 | | Goodwill | $20,809 | | Liabilities assumed | $9 | | Net assets acquired | $28,500 | Note 5. Revenue Recognition Revenue is primarily from multi-year contracts for care management services, recognized over time, with a significant year-over-year decrease in Medicare and Performance Suite revenue Disaggregation of Revenue by Line of Business (in thousands) | Line of Business | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--- | :--- | :--- | :--- | :--- | | Medicaid | $193,018 | $217,068 | $381,142 | $432,192 | | Medicare | $109,042 | $268,673 | $224,360 | $555,633 | | Commercial and other | $142,268 | $161,404 | $322,475 | $298,973 | | Total | $444,328 | $647,145 | $927,977 | $1,286,798 | Disaggregation of Revenue by Product Type (in thousands) | Product Type | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--- | :--- | :--- | :--- | :--- | | Performance Suite | $267,917 | $461,602 | $570,938 | $909,820 | | Specialty Technology and Services Suite | $81,401 | $81,515 | $164,222 | $170,518 | | Administrative Services | $55,880 | $60,770 | $113,071 | $119,339 | | Cases | $39,130 | $43,258 | $79,746 | $87,121 | | Total | $444,328 | $647,145 | $927,977 | $1,286,798 | Note 8. Goodwill and Intangible Assets, Net As of June 30, 2025, the company held $1.14 billion in goodwill and $651.2 million in net intangible assets, with no impairment identified - The annual goodwill impairment test as of October 31, 2024, concluded that goodwill was not impaired, as the reporting unit's fair value exceeded its carrying value by approximately $336.0 million, or 13.6%[96] - Amortization expense for intangible assets decreased to $33.6 million for the six months ended June 30, 2025, from $44.0 million in the prior year period, primarily because several corporate trade names were fully amortized by December 2024[99] Note 9. Debt The company's debt includes $575 million in Convertible Senior Notes and a First Lien Credit Agreement, with a new $150.0 million facility secured to retire 2025 Notes Summary of Convertible Senior Notes (as of June 30, 2025) | Term | 2025 Notes | 2029 Notes | | :--- | :--- | :--- | | Aggregate principal amount | $172,500,000 | $402,500,000 | | Interest rate | 1.5% | 3.5% | | Maturity date | Oct 15, 2025 | Dec 1, 2029 | | Conversion price | $33.43 | $38.00 | | Carrying value | $172,119,000 | $393,880,000 | - During the six months ended June 30, 2025, the Company borrowed $200.0 million under its Term Loan Facility. As of June 30, 2025, $262.5 million was outstanding under the Term Loan and Revolving Facilities[128] - On June 19, 2025, the company secured a commitment letter from Ares for up to $150.0 million in additional debt capital to retire its 2025 Notes and for working capital[118] Note 10. Commitments and Contingencies The company faces significant revenue concentration risk with key partners and has a Tax Receivables Agreement liability of $108.1 million Revenue Concentration by Partner (YTD) | Partner | % of Revenue YTD 2025 | % of Revenue YTD 2024 | | :--- | :--- | :--- | | Molina Healthcare, Inc. | 24.1% | 12.1% | | Cook County Health and Hospitals System | 16.5% | 11.2% | | Florida Blue Medicare, Inc. | 14.5% | 12.6% | | Centene Corporation | 11.2% | * | | Humana Insurance Company | * | 21.7% | | Represents less than 10.0% | | | - As of June 30, 2025, the company had a Tax Receivables Agreement (TRA) liability of $108.1 million, representing its obligation to pay certain pre-IPO investors 85% of specific tax benefits it realizes[136][137] Note 16. Investments and Equity Method Investees In Q2 2025, the company purchased the remaining interest in an equity method investment for $51.5 million, recognizing a $52.5 million loss - In Q2 2025, the company purchased the remaining portion of an equity method investment for $51.5 million, recognizing a loss of $52.5 million, which represents the difference between the fixed purchase price and the estimated fair value of the interests acquired[172] Note 21. Reserve for Claims and Performance-Based Arrangements The company's reserve for claims and performance-based arrangements decreased to $187.3 million as of June 30, 2025, due to claims payments exceeding newly incurred costs Activity in Reserves for Claims and Performance-Based Arrangements (in thousands) | | For the Six Months Ended June 30, 2025 | For the Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Balance, beginning of period | $318,705 | $404,048 | | Total claims incurred | $420,239 | $731,158 | | Total claims paid | $(551,693) | $(817,643) | | Balance, end of period | $187,251 | $317,563 | Note 23. Subsequent Events Subsequent to quarter-end, the "One Big Beautiful Bill Act" was enacted, and the company exchanged its Series A Preferred Shares for a new second lien term loan facility - On August 7, 2025, the company completed the exchange of its Series A Preferred Shares for a new second lien term loan facility with similar economic terms but without a common stock conversion feature[209] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a significant revenue decrease in H1 2025 due to contractual updates, while medical claims cost growth slowed Recent Events and Industry Climate Medical claims costs continued to rise in H1 2025, albeit at a slower pace, and the company completed a significant financing transaction by exchanging Series A Preferred Shares - Medical claims costs in the Performance Suite continued to grow faster than historical averages in the first half of 2025, though at a slower pace than in previous quarters, impacting financial results[216] - On August 7, 2025, the company exchanged its Series A Preferred Shares for a new second lien term loan, which has substantively similar economic terms but lacks a common stock conversion feature[221] Results of Operations Revenue for the first six months of 2025 decreased by 27.9% to $928.0 million due to contractual changes, leading to a shift towards higher-margin business Consolidated Results Summary (YTD) | (in thousands) | YTD 2025 | YTD 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $927,977 | $1,286,798 | $(358,821) | (27.9)% | | Cost of revenue | $725,121 | $1,075,849 | $(350,728) | (32.6)% | | Selling, general and administrative | $153,618 | $148,289 | $5,329 | 3.6% | | Operating income (loss) | $(2,793) | $(5,621) | $2,828 | 50.3% | - The decrease in total revenue for the first six months of 2025 was primarily driven by contractual updates, including transitioning a customer from Performance Suite to Specialty Technology and Services Suite ($257.6 million impact) and narrowing the scope with other Performance Suite customers ($96.6 million impact)[255] - Cost of revenue as a percentage of total revenue decreased from 83.6% to 78.1% for the six months ended June 30, year-over-year, reflecting a shift in business mix towards higher-margin product types[258] Liquidity and Capital Resources As of June 30, 2025, the company had $151.0 million in cash, with net cash used in operating activities of $25.8 million, primarily due to prior-year contract payments Summary of Cash Flows (in thousands) | | For the Six Months Ended June 30, 2025 | For the Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(25,769) | $26,326 | | Net cash used in investing activities | $(73,624) | $(23,273) | | Net cash provided by (used in) financing activities | $98,927 | $(88,499) | - Cash used in operating activities for H1 2025 was primarily driven by $67.5 million in payments to clients for reconciliations of prior-year Performance Suite contracts that have since been restructured[277] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations, with a 1% SOFR increase leading to a $2.63 million rise in annual interest expense - The company is exposed to interest rate risk on its variable-rate debt. For every 1% increase in the SOFR, annual interest expense on outstanding term and revolving loans would increase by $2.63 million[294] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2025[299] PART II - OTHER INFORMATION Item 1. Legal Proceedings A shareholder derivative action was dismissed in January 2023, and a subsequent demand for litigation was refused by the Board after an investigation - A shareholder derivative action was dismissed in January 2023. The Board later investigated and refused a subsequent shareholder demand to commence litigation related to the same matters[139][304] Item 1A. Risk Factors The company updates its risk factors, emphasizing those related to significant indebtedness, potential need for additional financing, and restrictive covenants - The company highlights significant risks associated with its substantial debt, which could make it difficult to satisfy obligations, limit its ability to obtain additional financing, and place it at a competitive disadvantage[306][314] - Restrictive covenants in the company's Credit Agreements impose limitations on incurring additional debt, selling assets, making investments, and paying dividends, which could interfere with business activities[316][320] Item 5. Other Information On August 7, 2025, the company exchanged its Series A Preferred Shares for a new $175.0 million second lien term loan facility, removing the common stock conversion feature - On August 7, 2025, the company exchanged its Series A Preferred Shares for a new $175.0 million second lien term loan facility, which has similar economic terms but no equity conversion feature[323][324] - The new Second Lien Term Loan Facility matures on December 6, 2029, and carries an interest rate of SOFR + 6.00% or ABR + 5.00%, subject to step-downs[325][326]