Evolent Health(EVH) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The IPG acquisition drove significant increases in assets and liabilities, improving Q3 net income and reducing the nine-month net loss Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $156,756 | $266,280 | | Goodwill | $722,790 | $426,297 | | Intangible assets, net | $451,398 | $279,784 | | Total assets | $1,759,182 | $1,419,458 | | Long-term debt, net | $412,444 | $215,676 | | Tax receivable agreement liability | $42,870 | $0 | | Total liabilities | $903,044 | $725,825 | | Total shareholders' equity | $856,138 | $693,633 | Consolidated Statements of Operations and Comprehensive Income (Loss) Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $352,585 | $222,471 | $969,581 | $659,599 | | Operating income (loss) | $12,951 | $(6,581) | $5,520 | $(30,197) | | Net income (loss) | $2,123 | $(13,040) | $(7,815) | $(31,954) | | Diluted EPS | $0.02 | $(0.15) | $(0.09) | $(0.37) | Consolidated Statements of Cash Flows Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(47,248) | $(27,909) | | Net cash (used in) provided by investing activities | $(254,659) | $38,582 | | Net cash provided by (used in) financing activities | $142,395 | $(90,446) | | Net decrease in cash | $(160,124) | $(79,826) | Notes to Consolidated Financial Statements Notes detail the IPG acquisition's impact on assets and liabilities, new credit agreements, and a potential material goodwill impairment Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights strong Q3 revenue growth from new partners and the IPG acquisition, discusses segment performance, liquidity, and a potential Q4 goodwill impairment Business Overview and Recent Developments - Evolent is a market leader in value-based care, providing integrated solutions to providers and payers through two segments: Evolent Health Services (EHS) and Clinical Solutions[215][217] - On August 1, 2022, the company acquired Implantable Provider Group (IPG) for total consideration of $461.7 million, consisting of cash, stock, and contingent earn-outs. IPG is consolidated into the Clinical Solutions segment[229][230] - To finance the IPG acquisition, the company entered into a new credit agreement on August 1, 2022, for a $175.0 million term loan and a $50.0 million revolving credit facility[231] - In August 2022, the company exchanged $92.8 million of its 2024 Convertible Notes for 5.4 million shares of Class A common stock, resulting in a $10.2 million loss on debt extinguishment[232] - Subsequent Event: On October 11, 2022, Bright Health Group notified the company of its intent to exit certain business lines, which may cause a material goodwill impairment to the EHS segment (with $214.2 million of goodwill) in Q4 2022[233] Results of Operations Consolidated Results Summary (in thousands) | Metric | Q3 2022 | Q3 2021 | Change | 9 Months 2022 | 9 Months 2021 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $352,585 | $222,471 | +58.5% | $969,581 | $659,599 | +47.0% | | Cost of Revenue | $266,617 | $163,126 | +63.4% | $736,061 | $493,071 | +49.3% | | SG&A | $68,521 | $51,292 | +33.6% | $186,408 | $152,582 | +22.2% | | Operating Income (Loss) | $12,951 | $(6,581) | +296.8% | $5,520 | $(30,197) | +118.3% | - Q3 2022 revenue growth of $130.1 million was driven by new partners and expansion. Evolent Health Services revenue grew by $44.5 million, and Clinical Solutions revenue grew by $85.6 million[258][259] - Cost of revenue for Q3 2022 increased by $103.5 million, primarily due to $68.6 million in higher claims activity, $11.7 million in higher personnel costs, and $15.1 million in device costs from the IPG acquisition[262] - SG&A expenses for Q3 2022 increased by $17.2 million, mainly due to the acquisitions of Vital Decisions and IPG, leading to higher personnel costs ($8.1 million) and technology services ($2.6 million)[263] - A non-operating loss on debt extinguishment of $10.2 million was recorded in Q3 2022 related to the exchange of 2024 Notes[278] - A charge of $42.9 million was recorded for the Tax Receivable Agreement (TRA) liability, triggered by the reduction in the valuation allowance from deferred tax liabilities created by the IPG acquisition[282] Liquidity and Capital Resources - As of September 30, 2022, the company had $156.8 million in cash and cash equivalents and believes this is sufficient to meet working capital and capital expenditure needs for the next twelve months[286][287] Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(47,248) | $(27,909) | | Net cash used in/provided by investing activities | $(254,659) | $38,582 | | Net cash provided by (used in) financing activities | $142,395 | $(90,446) | - Cash used in investing activities of $254.7 million was primarily for the $245.0 million acquisition of IPG and $27.6 million in capital expenditures[292] - Cash provided by financing activities of $142.4 million was primarily from $219.7 million in proceeds from the new 2022 Credit Agreement, partially offset by claims processing outflows and taxes paid for equity awards[294] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from its new floating-rate debt, with a 1% SOFR increase adding $2.3 million in annual interest expense, and minor foreign currency risk - The company has $225.0 million in floating-rate debt ($175.0M term loan, $50.0M revolving facility) based on SOFR. For every 1% increase in SOFR, annual interest expense would increase by $2.3 million[305] - The company's $196.8 million in convertible notes are fixed-rate instruments and not subject to interest rate fluctuations[305] - The company has foreign currency risk from operating expenses denominated in Indian Rupees, recognizing a translation loss of $0.7 million for the nine months ended September 30, 2022[307] Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2022, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[309] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[310] PART II - OTHER INFORMATION Legal Proceedings The company is involved in a settled shareholder class action, expected to be insurance-funded, and an ongoing shareholder derivative action - A shareholder class action lawsuit has been settled for $23.5 million, which is expected to be fully covered by insurance, resulting in no significant net loss or cash outflow for the company. The settlement is pending final court approval[150][315] - A shareholder derivative action filed in June 2021, related to oversight of the Passport Health Plan, is ongoing. The company has filed a motion to dismiss and believes the case has little legal or factual merit[151][315] Risk Factors Key risks include inflationary pressures, significant interest rate risk from new floating-rate debt, and restrictive covenants limiting operational flexibility - Increasing inflationary pressures on wages and other costs may negatively impact the company's margins, profitability, and results of operations[317][318] - The company is exposed to interest rate risk from its new 2022 Credit Agreement, as its floating rate (based on SOFR) could significantly increase debt service obligations if rates continue to rise[319] - The 2022 Credit Agreement imposes significant operating and financial restrictions, including limitations on incurring additional debt, making investments, and paying dividends. Failure to comply with these covenants could result in an event of default[320][323]