Apollo Medical Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing identifies the registrant as Apollo Medical Holdings, Inc.; the 2018 results include the combined company following its December 2017 merger with Network Medical Management (NMM). For accounting purposes, the merger was a reverse acquisition, so 2017 comparative operating results reflect NMM alone and are not directly comparable with 2018.
Business context
The company is a California-focused, physician-centric population-health and care-management business, operating through physician groups, IPAs, management services organizations and accountable care organizations. It reported responsibility for coordinating care for more than 1.0 million patients and a network of over 4,000 contracted physicians. Revenue is primarily from capitation, risk-pool settlements and incentives, management fees, and fee-for-service activity.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $123.0m | $81.3m | $247.2m | $166.6m |
| Operating income | $7.1m | $4.1m | $29.9m | $19.7m |
| Net income | $7.9m | $1.4m | $23.6m | $13.1m |
| Net income attributable to Apollo Medical Holdings | $2.7m | $2.0m | $4.8m | $6.3m |
| Diluted EPS | $0.07 | $0.07 | $0.13 | $0.22 |
| Operating cash flow | Not separately stated | Not separately stated | $13.4m | $24.7m |
- Reported revenue increased 51% in Q2 and 48% for the first half; these comparisons include the merger-related change in the reporting entity. Management cited membership and capitation-rate growth, favorable utilization trends contributing to risk-pool revenue, and increased management-fee and fee-for-service activity.
- Operating margin was approximately 5.8% in Q2 and 12.1% for the first half, versus approximately 5.0% and 11.8%, respectively, in the reported prior-year periods. These comparisons are also affected by the merger.
- Parent-attributable net income rose 34% in Q2 but declined 24% for the first half. Consolidated net income increased, while a greater share was attributable to noncontrolling interests, primarily APC.
- First-half operating cash flow fell to $13.4m from $24.7m. The filing highlights a $16.4m reduction in incentives payable as a significant operating cash-flow use. Investing cash outflow was $20.3m, including $16.7m invested in a joint venture to acquire a former Los Angeles hospital; financing cash outflow was $1.7m, including $12.0m of dividends, partly offset by $8.0m of credit-line borrowing.
- At June 30, cash and cash equivalents were $101.1m; cash, cash equivalents and restricted cash totaled $109.9m. Marketable securities were $1.1m and working capital was $63.6m. Current assets were $152.8m and current liabilities $89.1m.
- Credit-line borrowings were $13.0m, up from $5.0m at year-end, under a $20.0m NMM facility; only about $0.3m remained available. APC had a separate $10.0m facility with no borrowings and about $9.7m available, but those funds are limited to APC. A $0.3m bank loan and $0.7m of capital-lease obligations were also reported. Management said it believed liquidity was sufficient for at least the next 12 months.
- Medical liabilities were $66.9m, versus $64.0m at December 31, 2017. Total assets were $511.0m; total liabilities were $140.2m. APC noncontrolling interests of $195.9m are classified as mezzanine equity.
Material changes, outlook and risks
- NGACO/CMS exposure: The company was eligible to receive approximately $7.3m per month under the CMS All-Inclusive Population-Based Payment mechanism for 2018 after CMS reversed an earlier nonrenewal decision. Management expected NGACO revenue to be significant in 2018 and future periods, but noted that continued participation depends on compliance with program terms and regulatory requirements. CMS has not reviewed the filing’s statements about APAACO’s NGACO participation.
- Growth and integration: The company expanded management-service arrangements, including a ten-year agreement with Accountable IPA, and a new agreement with Golden Shore Medical Group. It incurred additional personnel and administrative costs while preparing to serve more patients. Merger integration, associated costs and realization of expected benefits remain risks.
- Hospital project: A joint venture closed on the $33.3m purchase of a former Los Angeles hospital in June. The intended integrated-care facility could become operational in Q4 2018, contingent on obtaining required licenses.
- Accounting change: The company adopted ASC 606 in January 2018. Adoption increased Q2 and first-half reported revenue by $3.4m and net income by $2.4m versus prior guidance; it also produced an opening-balance adjustment, including $11.6m of additional receivables and related tax and equity adjustments. 2017 comparative figures were not restated.
- Contingency: Prospect Medical Group and Prospect Medical Systems filed arbitration claims against MMG, ApolloMed and AMM seeking damages in excess of $5m and alleging contract and other claims. The company disputes the allegations and intends to defend itself. The filing also notes that healthcare reimbursement, contract interpretation and medical-claim estimates can result in later adjustments.
- Other risks: Revenue depends on government programs and a limited number of payors; NGACO medical costs and settlements are subject to estimation uncertainty. The company also faces healthcare regulation and reimbursement risk, provider-cost risk, and integration and financing risks. It reported no material change in risk factors from its 2017 Form 10-K. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess the underlying growth and earnings trend using merger-adjusted comparisons, rather than relying on reported year-over-year growth alone.
- Verify NGACO/AIPBP participation, monthly CMS payments, medical-cost experience, settlement exposure and the conditions for continued participation.
- Review operating cash conversion, the large decline in incentives payable, and the remaining availability and covenants on the NMM credit facility.
- Track the Prospect arbitration, medical-liability estimates and any material changes in regulatory or payor relationships.
- Monitor licenses, remaining funding needs and the operating timeline for the hospital joint venture, as well as the effects of ASC 606 on risk-pool revenue and receivables.