Apollo Medical Holdings, Inc. (filing period: Q3 2019)
The registrant filed this Form 10-Q for the quarter and nine months ended September 30, 2019. The filing describes a California-focused, physician-centric population-health and healthcare-delivery business operating through physician groups, IPAs, management services organizations and an accountable care organization. It reported responsibility for coordinating care for more than 1 million patients. Financial statements are unaudited and consolidated.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $156.1 million, down 6% from $166.7 million | $381.9 million, down 8% from $413.3 million |
| Operating income | $10.1 million, down 82%; operating margin 6.5% versus 33.9% | $21.5 million, down 75%; operating margin 5.6% versus 20.9% |
| Net income attributable to Apollo Medical Holdings | $3.7 million versus $9.1 million; diluted EPS $0.10 versus $0.24 | $7.4 million versus $13.9 million; diluted EPS $0.20 versus $0.37 |
| Net cash from operations | Not presented for the quarter | $10.1 million versus $31.9 million |
For the nine-month period, cost of services rose 13% to $315.9 million, while total expenses rose 10% to $360.4 million. Cash, cash equivalents and marketable securities totaled approximately $231.5 million at quarter-end; working capital was $216.2 million. Cash and restricted cash increased by $123.4 million from year-end 2018. Investing activities used $60.4 million, including $49.4 million for acquisitions; financing activities provided $173.7 million, largely reflecting borrowing.
At September 30, gross debt under the new credit facility was $250 million: a $190 million term loan and $60 million drawn under a $100 million revolving facility. The filing reported $10.2 million available under the revolver and compliance with its financial covenants. The facility is secured by substantially all assets of Apollo Medical Holdings and NMM; its covenants include a maximum leverage ratio and minimum interest coverage ratio.
Changes and notable transactions
- Capitation revenue rose 44% in Q3 and 15% for the nine months, primarily reflecting the acquisitions of Alpha Care and Accountable Health Care. This was more than offset by lower risk-pool settlements and incentives: down 80% in Q3 and 64% year to date.
- Management attributed the risk-pool revenue decline to revised assumptions estimating hospital risk-pool surpluses; final settlements generally occur about 18 months later. The filing notes a material weakness in controls over completeness and accuracy of external risk-pool reports used in these estimates.
- Cost of services increased with medical claims and healthcare costs associated with acquired businesses. Patient volume was approximately 1 million, compared with 1,039,859 a year earlier; one affiliated physician group ceased operations after its primary health plan cancelled its contract.
- The company acquired Alpha Care in May, acquired the remaining 75% of Accountable Health Care in August, and acquired AMG in September. These acquisitions increased goodwill and intangible assets.
- On September 11, the company completed a complex transaction involving a $545 million, 10-year secured loan to AP-AMH at 10% simple annual interest, AP-AMH’s purchase of APC Series A preferred shares, and APC’s $300 million purchase of Apollo Medical Holdings common shares. The company also entered into the $290 million secured credit facility and drew $250 million. The transaction carries substantial repayment, dividend, covenant and structural risks.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said it believed liquidity was sufficient to fund operations for at least the next 12 months.
- For the 2019 NGACO performance year, monthly AIPBP payments were approximately $8.3 million from April through August, then reduced by CMS to about $3.7 million beginning September 1. Of approximately $45.0 million received through September, $36.5 million was recognized as revenue. Shared savings or losses remain subject to substantial estimation uncertainty.
- Q3 included a $2.0 million impairment of unused Medicare licenses. Year-to-date results included a $3.8 million release of doubtful-account reserves related to Accountable Health Care and a $1.8 million gain on its acquisition; other income also included a $2.3 million gain related to assumed loan receivables.
- Management concluded disclosure controls were not effective at the reasonable-assurance level because controls over external full-risk-pool reports were deficient. Remediation procedures were being developed; management nevertheless stated the financial statements fairly present the company’s results and position.
- Risks include the ability of AP-AMH to service the $545 million loan, the timing and legal availability of APC preferred dividends, debt-service and collateral exposure, healthcare regulatory changes and corporate-practice-of-medicine concerns. The filing also describes a Prospect arbitration seeking damages in excess of $5 million; the potential loss could not be reasonably estimated. Management discussed ongoing uncertainty around healthcare law and litigation but reported no known pending or threatened regulatory investigation.
Important facts for investors to verify
- How the risk-pool estimate revisions were calculated, whether report-control remediation was completed, and how subsequent settlements compare with recorded receivables and revenue.
- Whether APC’s preferred dividends and AP-AMH loan payments can be made on schedule, and the effect of the transaction structure on consolidated cash flows and debt-service capacity.
- Current borrowing availability, covenant headroom, interest costs and any restrictions on dividends, acquisitions or other uses of cash.
- Acquisition-related contribution to revenue, claims costs, integration results, goodwill and intangible-asset valuations.
- Developments in the Prospect arbitration and healthcare regulatory matters, including whether any material loss or operational restriction becomes estimable.