Evolent Health, Inc. Form 8-K Summary
Business Context and Reporting Period
This Current Report on Form 8-K was filed on December 30, 2019, by Evolent Health, Inc. (Evolent). The filing details the consummation of a major asset acquisition and the execution of a new senior credit facility to fund the transaction and support growth.
Key Financial Metrics and Transactions
- Acquisition Consideration: Evolent acquired substantially all assets of Passport Health Plan's Medicaid business for $70.0 million in cash and a 30% equity interest in the acquisition subsidiary (Justify Holdings, Inc.).
- Escrow Arrangement: Approximately $16.2 million of the purchase price related to owned real property is held in escrow pending the transfer of assets free of encumbrances.
- Debt Financing: Evolent entered into a Credit Agreement with Ares Capital Corporation for an initial term loan of $75.0 million and a delayed draw term loan facility of up to $50.0 million.
- Debt Terms: Interest rates are Eurodollar + 8.00% or Base Rate + 7.00%. The facility matures on December 30, 2024, or 91 days prior to the maturity of Evolent's 2021 Convertible Notes, whichever is earlier.
- Equity Warrants: The company issued warrants to purchase up to 1,513,786 shares of Class A common stock at an exercise price of $8.05 per share.
- Partner Concentration: Passport Health Plan represented 16.4% of total revenue as of September 30, 2019.
Material Changes and Operational Impact
The filing reports the completion of the acquisition of Passport's Medicaid business. A material change involves the delayed transfer of Passport's Dual Eligible Special Needs Plan (D-SNP) business. Evolent will administer and assume financial risk for the D-SNP business immediately, but legal title will transfer only after Evolent obtains Medicare Advantage Organization certification. Additionally, as of December 27, 2019, all Class B common units of Evolent Health, LLC were exchanged for Class A shares, resulting in the company owning 100% of the voting and economic interests in the LLC.
Outlook, Risks, and Contingencies
- Use of Proceeds: The initial term loan proceeds will fund working capital, growth capital expenditures, and the Passport acquisition. The delayed draw facility is designated for repurchasing 2021 Convertible Notes or funding permitted acquisitions.
- Covenants: The credit agreement includes financial covenants such as a minimum net revenue test, a minimum liquidity test, and a total secured leverage ratio (commencing March 31, 2021).
- Prepayment Penalties: Mandatory prepayment provisions exist for asset dispositions and change of control. Voluntary prepayments prior to the fifth anniversary are subject to premiums ranging from 4.00% down to 2.00%.
- Forward-Looking Statements: The company notes that the transfer of the D-SNP business is contingent on regulatory certification, which represents a key contingency.
Investor Verification Checklist
- Verify the status of Evolent's Medicare Advantage Organization certification required to finalize the D-SNP business transfer.
- Review the full text of the Credit Agreement (Exhibit 10.1) for specific definitions of the minimum net revenue and liquidity covenants.
- Monitor the $16.2 million escrow account status regarding the transfer of real property assets.
- Assess the impact of the new $75.0 million term loan on the company's existing leverage ratios and ability to service the 2021 Convertible Notes.
- Confirm the valuation of the 30% equity interest issued to Passport owners as part of the acquisition consideration.