Alignment Healthcare, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unless noted, financial amounts are in millions of dollars. Alignment operates Medicare Advantage plans and coordinates care for seniors, primarily in California, North Carolina and Nevada. It also began serving traditional Medicare beneficiaries through CMS Direct Contracting Entities (DCEs) in April 2021.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $293.5 | $247.9 | $869.5 | $716.8 |
| Medical expenses | $254.0 | $190.1 | $779.5 | $578.0 |
| Operating income (loss) | $(41.5) | $15.1 | $(134.6) | $22.5 |
| Net income (loss) | $(45.8) | $10.8 | $(147.5) | $9.1 |
| Adjusted EBITDA | $(5.5) | $19.4 | $(24.2) | $34.0 |
| Adjusted gross profit / margin | $42.0 / 14.3% | $57.9 / 23.3% | $101.6 / 11.7% | $139.1 / 19.4% |
Margins and growth: Revenue rose 18.4% in Q3 and 21.3% year to date, mainly from Medicare Advantage membership growth. Membership was approximately 86,000, up 29.3% from 66,500. The medical benefits ratio (medical expenses, excluding specified depreciation and equity compensation, as a share of revenue) increased to 85.7% from 76.7% in Q3 and to 88.3% from 80.6% year to date. Medical costs grew faster than revenue, compressing adjusted gross profit.
Cash flow and liquidity: Nine-month operating cash flow was $(48.6), versus $17.7 provided in 2020; investing cash use was $17.9. Financing provided $360.1, largely reflecting the IPO. Cash was $500.5 at September 30, 2021, with an additional $0.95 of restricted cash; the company reported total cash and restricted cash of $501.4. Management stated available liquid assets and expected operating revenue should fund operations and capital needs for at least 12 months.
Debt and balance sheet: Long-term debt had a $149.0 carrying value, net of issuance costs, and $153.0 total balance including fees and payment-in-kind interest. It matures in June 2023, bears 10.25% interest, and is secured by unrestricted subsidiary assets and guaranteed by certain subsidiaries. The company reported compliance with debt covenants. Current assets were $577.4 and current liabilities $175.1; total liabilities were $331.9 and stockholders’ equity $325.1. Medical expenses payable were $128.8.
Material changes versus the prior comparable period
- Growth in membership drove higher earned premiums, but the increase in medical expenses exceeded revenue growth.
- SG&A rose 98.1% in Q3 and 102.2% year to date. Management attributed much of the increase to IPO-related equity compensation: total equity compensation was $30.5 in Q3 and $93.2 year to date. Excluding equity compensation, SG&A still increased, reflecting sales, marketing, hiring and public-company costs.
- Results shifted from profit to substantial losses. Adjusted EBITDA also turned negative, although it excludes equity compensation and certain transaction and acquisition costs.
- The March 2021 IPO generated $361.6 in net proceeds to the company. Shares outstanding increased, and the proceeds substantially strengthened cash and equity.
- Operating cash flow turned negative year to date, while financing cash flow increased substantially due to the IPO.
Outlook, management commentary and risks
- Management anticipated expanding from 22 markets in 2021 to 38 in 2022, adding Arizona and expanding in North Carolina and Nevada. It also announced expanded PPO, D-SNP and C-SNP offerings for 2022; certain offerings were subject to approval. No specific financial guidance was provided in the filing.
- The company had approximately 5,400 beneficiaries in its DCE arrangement at quarter-end. Management described the program as an early opportunity but cautioned that results and benefits were uncertain. DCE contracts are reviewed annually by CMS and renewal was not assured.
- COVID-19-related inpatient utilization was below Q1 levels in Q2 and Q3, but the Delta variant increased Q3 utilization. Management said the pandemic’s ultimate effects on claims, results and financial condition remained uncertain. It also cited challenges in documenting member conditions and lower risk-adjustment scores among new members.
- Medical expenses payable rely on estimates of incurred-but-not-reported claims and risk-adjustment data; actual claims could differ materially. Q3 included favorable prior-year claims development of $1.3, while the nine-month period included unfavorable development of $0.05, excluding provision for adverse deviation.
- Other risks include persistent losses and rising growth costs, competition and member acquisition, maintaining plan quality ratings, provider relationships, regulatory and CMS reimbursement changes, data security, and the company’s concentration in a limited number of states.
- Legal proceedings in the ordinary course were not expected by management to have a material adverse effect; accrued legal amounts were not material. The company reported no material off-balance-sheet arrangements and no material changes in contractual obligations.
Important facts for investors to verify
- Whether membership and 2022 market expansion translate into sustainable revenue growth and improved medical benefits ratios.
- Medical claims development, reserve adequacy, COVID-19 utilization trends and risk-adjustment revenue estimates.
- Cash burn and capital needs as IPO proceeds fund expansion, and the amount of cash restricted by regulatory requirements.
- Debt repayment or refinancing plans ahead of the June 2023 maturity, including compliance with liquidity and revenue covenants.
- The recurring cost of equity compensation and public-company expenses, alongside the company’s GAAP losses and non-GAAP adjustments.
- CMS approvals, performance and renewal prospects for DCE contracts and planned 2022 products.