Apollo Medical Holdings, Inc. — Q1 2019 Form 10-Q
Entity note: The filing is for Apollo Medical Holdings, Inc. (Nasdaq: AMEH), not a company named Astrana Health, Inc. It covers the unaudited quarter ended March 31, 2019; the comparable period is Q1 2018. The company provides population-health management and coordinated care, primarily in California, through physician groups, IPAs, management services and accountable care organizations.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $95.8 million | $123.9 million |
| Operating income (loss) | $(3.3) million | $22.7 million |
| Operating margin | (3.5)% | 18.3% |
| Consolidated net income (loss) | $(2.5) million | $15.7 million |
| Net income attributable to Apollo Medical Holdings | $0.14 million | $2.16 million |
| Operating cash flow | $(4.0) million | $4.7 million |
- Revenue fell 23% year over year. Capitation declined 17% to $71.5 million; risk-pool settlements and incentives fell 44% to $10.1 million; management fees decreased 25% to $9.0 million; and fee-for-service revenue decreased 35% to $4.1 million.
- Expenses declined only 2% to $99.1 million, as lower costs from winding down certain medical groups were offset in part by provider bonuses and personnel investment. The company recorded a $1.0 million doubtful-account provision, versus $0.2 million a year earlier.
- Consolidated net loss differs from parent-attributable income because the filing reports a $2.6 million net loss attributable to noncontrolling interests. Basic and diluted EPS were each reported as $0.00, versus $0.07 and $0.06, respectively, in Q1 2018.
- Cash and cash equivalents were $93.0 million at March 31, 2019; marketable securities were $1.1 million and restricted cash was $0.7 million. Working capital was $88.5 million, down from $100.8 million at year-end 2018.
- Cash and restricted cash declined $13.9 million during the quarter. Operating cash use was $4.0 million; financing cash use was $9.8 million, including $10.0 million of dividends. Investing cash use was $0.1 million.
- Total liabilities were $126.0 million. The company had $13.0 million outstanding on a related-party line of credit, bearing 5.625% at quarter-end; reported availability under that facility was $0.7 million. Additional facilities were available for specified purposes and entities. Operating lease liabilities totaled $8.4 million after adoption of the new lease standard.
Material changes and business developments
- The main revenue timing factor was APAACO’s 2019 NGACO performance year starting April 1, rather than early 2018. The company received about $24.8 million of Q1 AIPBP payments at approximately $8.3 million per month, recorded as deferred revenue—not Q1 revenue. Management said the 2019 monthly payment rate increased from about $5.5 million for late 2018.
- Managed patient count fell to approximately 821,000 from 963,000; the company attributed the decrease in part to an affiliated physician group ceasing operations after its primary health plan cancelled its contract. The number of managed affiliated physician groups decreased to 10 from 11.
- Management attributed lower risk-pool revenue to revised estimates of expected hospital-pool surpluses, which generally settle about 18 months after the performance year. Such estimates and settlements remain uncertain.
- The company adopted ASC 842 on January 1, 2019, recognizing $9.0 million of right-of-use assets and $8.9 million of lease liabilities at adoption. It said the change materially affected the balance sheet but did not materially affect results or cash flows.
- A consolidated VIE agreed on March 15 to acquire a healthcare-related entity for $45.0 million in cash, subject to adjustments and closing conditions; the transaction had not closed by the filing date. Subsequent to quarter-end, credit-facility availability was amended, including an increase in APC’s facility from $10 million to $40 million. Also after quarter-end, NMM assigned its 25% interest in 531 W. College LLC to APC for approximately $8.3 million.
- Co-CEO Warren Hossenion resigned effective March 28, 2019; Thomas Lam continued as sole CEO.
Outlook, risks and unusual items
- Management stated it believed liquidity was sufficient to fund operations for at least the next 12 months. The filing gives no formal earnings or revenue guidance.
- Key risks include dependence on a limited number of payors, changes to government reimbursement and healthcare programs, medical-cost and claims-estimate uncertainty, and the ability to manage NGACO costs within CMS payments. The company warned that medical expenses could exceed capitation and that final settlements may materially affect actual results.
- CMS had not reviewed statements in the filing about APAACO’s NGACO participation. The company’s Q1 AIPBP receipts were deferred pending the 2019 performance-year commencement; shared savings or losses are subject to later reconciliation and estimation uncertainty.
- Disclosure controls and procedures were determined not effective at the reasonable-assurance level. Management identified a material weakness in controls over the completeness and accuracy of externally prepared full-risk-pool reports used to estimate revenue, and said it was developing remediation procedures for implementation during 2019.
- A Prospect-related arbitration seeks damages exceeding $5.0 million. The company disputes the allegations and said any loss beyond current accruals could not be reasonably estimated. The filing also notes healthcare regulatory, reimbursement, contract-interpretation and insurance risks.
- The company recognized a $0.3 million impairment of its investment in Pacific Ambulatory Surgery Center and reported increased losses from certain equity-method investments. It also reported significant related-party arrangements, including bank facilities and payments to affiliated or related providers and entities.
Investor facts to verify
- How much of the Q1 revenue decline reflects the delayed 2019 NGACO start, and how much reflects lower membership, risk-pool estimates and discontinued operations?
- Whether deferred AIPBP revenue is recognized as expected after April 1, and what CMS reconciliation ultimately shows for the 2018 and 2019 performance years.
- Whether medical liabilities, receivables and full-risk-pool estimates are adequate, given the disclosed material weakness and settlement lags.
- Cash generation and liquidity after the $10.0 million dividend, the pending $45.0 million acquisition, and the limits and terms on subsidiary-specific credit facilities.
- Progress in remediating the material weakness, and any updates to the Prospect arbitration or other contingencies.