Astrana Health, Inc. (then Apollo Medical Holdings, Inc.) — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter report. The company changed its year-end from March 31 to December 31 following its December 8, 2017 merger with Network Medical Management, Inc. (NMM). For accounting purposes, NMM was the acquirer: 2017 results include NMM for the full year but ApolloMed only from the merger date, limiting comparison with 2016. The 2017 financial statements were audited by BDO, which gave an unqualified opinion.
Business context
The company provides healthcare management and coordinated medical care, primarily in California, through affiliated physician groups, IPAs, management services organizations, clinics, hospitalist services, hospice and home health operations, and an accountable care organization. At year-end it managed care for about 795,960 patients through 11 affiliated physician groups; its network included more than 4,000 contracted physicians. APAACO participated in CMS’s Next Generation ACO (NGACO) model.
Financial performance and position
| Metric | FY 2017 / Dec. 31, 2017 | FY 2016 / Dec. 31, 2016 |
|---|---|---|
| Revenue | $357.7 million | $305.9 million |
| Operating income | $35.1 million | $11.7 million |
| Net income | $45.8 million | $10.0 million |
| Net income attributable to Apollo Medical Holdings | $25.8 million | $11.5 million |
| Basic / diluted EPS | $1.01 / $0.90 | $0.46 / $0.41 |
| Cash from operating activities | $51.9 million | $21.9 million |
| Cash and cash equivalents | $99.7 million | $54.8 million |
| Working capital | $34.5 million | $30.5 million |
| Total assets | $490.6 million | $350.0 million |
| Total liabilities | $154.3 million | $99.6 million |
- Revenue increased 17%. Capitation, the largest revenue stream, rose 10% to $272.9 million; risk-pool settlements and incentives nearly doubled to $44.6 million. Management cited membership and rate growth and favorable healthcare utilization as key factors.
- Operating margin was approximately 9.8%, compared with 3.8% in 2016. Net margin was approximately 12.8%, compared with 3.3%; reported net income was affected by non-operating and tax items described below.
- Cost of services was $274.7 million, up 8%; general and administrative expense was $26.4 million, up 26%. The company recorded $2.4 million of impairment expense, primarily for ACO member-relationship intangibles no longer expected to provide economic benefit.
- Other income included a $13.7 million investment fair-value gain related to the merger accounting and a $0.9 million gain on settlement of a preexisting note. Equity-method investments recorded a $1.1 million loss, versus $4.7 million of income in 2016.
- The $3.9 million tax provision included a provisional $9.7 million deferred tax benefit from remeasuring deferred tax balances following the Tax Cuts and Jobs Act; tax accounting was not yet complete. The filing also reports a 20.7 million deferred-tax adjustment in the operating cash-flow reconciliation.
- Operating cash flow was $51.9 million. Investing activities provided $8.0 million, including $36.4 million cash acquired in the merger, partly offset by $18.0 million of restricted cash and $10.0 million of advances on loans receivable. Financing activities used $15.0 million, including $10.4 million of dividends paid and $3.2 million of share repurchases.
- Current assets were $144.2 million and current liabilities $109.6 million. The balance sheet included $18.0 million of restricted cash intended for an escrow distribution to former NMM shareholders; it was not freely available liquidity. Management stated liquidity was sufficient to fund operations at least through March 2019.
- Debt included $5.0 million drawn on NMM’s bank line, $25,000 on BAHA’s line, and a $510,000 bank loan; capital-lease obligations totaled about $718,000. The NMM and APC credit facilities had covenant noncompliance waivers through March 31, 2018. NMM’s $20 million facility matured April 22, 2018; the separate $10 million APC facility was undrawn.
Material changes versus the prior comparable period
- The merger substantially changed the scale, ownership, and composition of the reporting company. Former NMM shareholders received the majority of the combined company, and NMM’s historical results are the accounting basis for periods before the merger.
- Patient count managed increased to 795,960 from 632,546. Merger-related operations contributed to reported year-over-year increases, but the filing does not provide a directly comparable full-year combined-company income statement. Unaudited pro forma combined revenue was $478.9 million for 2017 and $358.2 million for 2016; pro forma net income attributable to ApolloMed was $10.0 million and $1.1 million, respectively. These figures are illustrative, not actual reported results.
- APAACO shifted to the NGACO model, while the three MSSP ACOs substantially transitioned their patients and physicians to APAACO. APCN-ACO’s and Apollo-ACO’s MSSP participation ended December 31, 2017; AP-ACO’s ended December 31, 2016. APCN-ACO received $2.8 million of shared savings for 2016 performance in 2017.
- Net income growth outpaced revenue growth, but included the merger-related $13.7 million fair-value gain, the provisional tax benefit, and changes in noncontrolling interests. Net income attributable to the parent was $25.8 million, not the $45.8 million consolidated net income.
Outlook, risks, contingencies, and unusual items
- NGACO outlook and exposure: APAACO selected 80% risk under Risk Arrangement A with a 5% shared-savings/loss cap. The filing estimated a 2017 benchmark of about $335 million and potential losses up to approximately $13.4 million; final performance results were not expected until mid-2018. APAACO received approximately $9.3 million monthly under AIPBP from April through December 2017 and was eligible for approximately $7.3 million monthly in 2018. CMS had initially declined 2018 AIPBP renewal over alleged performance deficiencies, then reversed that decision after reconsideration. Continued eligibility depends on compliance and performance.
- Management expected NGACO revenue to be significant in 2018 and later periods, but gave no quantified earnings or revenue guidance. The NGACO participation agreement ran through December 31, 2018, subject to possible renewal and CMS termination or program changes.
- NGACO risks include medical-cost overruns, uncertain CMS benchmarking and reconciliation, provider payment and data-processing issues, out-of-network utilization, and substantial reserve requirements. The company furnished a $6.7 million letter of credit to CMS. CMS historically indicated about 62% of assigned beneficiaries’ care had been received out of network.
- Four payors generated 54.6% of 2017 revenue, down from 58.5% in 2016, creating concentration risk. The company’s revenue was entirely generated in California and was exposed to reimbursement, regulatory, and state-market changes.
- MMG was not in compliance with certain California DMHC financial-solvency requirements at year-end 2017 and 2016; its corrective action plan was under review. The filing warns that remediation could require additional capital. The company also disclosed that it did not hold a Knox-Keene license and could face consequences if regulators determined one was required.
- A Prospect Medical Group arbitration demand filed in March 2018 sought damages exceeding $5 million and alleged contract, unfair-competition, and interference claims. The company disputed the allegations; the outcome and any loss were not estimable at filing. A separate securities-law investigation relating to the merger was disclosed, with no lawsuit filed as of the report date.
- Management said prior material weaknesses in documentation, segregation of duties, financial-reporting review, and technical accounting were remediated by year-end 2017. Management concluded internal control over financial reporting was effective; the auditor did not attest to that assessment.
- Other risks include capitation losses if care costs exceed payments, healthcare-law and privacy compliance, medical-claim estimation, acquisition integration, dilution, and potential limits on use of tax attributes after the merger. A $18.0 million dividend payable was reported as a noncurrent liability.
Investor verification priorities
- Verify the merger’s final purchase-price allocation, share issuance and holdback releases, and the resulting fully diluted share count.
- Track NGACO/AIPBP eligibility, CMS reconciliations, 2017 shared losses or savings, claim reserves, and the $6.7 million letter of credit and any additional reserve requirements.
- Assess recurring operating earnings and cash generation separately from the $13.7 million fair-value gain, tax-law remeasurement benefit, merger effects, and noncontrolling interests.
- Confirm renewal or refinancing of the bank facilities, resolution of covenant waivers, and the availability of cash excluding restricted and escrowed balances.
- Monitor MMG’s DMHC corrective action plan, the Prospect arbitration, and other litigation or regulatory developments.
- Review actual post-merger combined results against the filing’s illustrative pro forma figures and test whether the reported growth and margins are comparable.