Apollo Medical Holdings, Inc. (now identified in the request as Astrana Health, Inc.) — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 14, 2018. The filing registrant is Apollo Medical Holdings, Inc. The 2018 results include the combined company following its December 2017 merger with Network Medical Management (NMM); 2017 comparatives reflect NMM alone and are therefore not directly comparable.
Business context
The company provides coordinated, population-health medical care primarily in California through physician groups, IPAs, management services and accountable care organizations. It reported responsibility for coordinating care for more than 1.0 million patients and managed 12 affiliated physician groups at September 30, 2018. CMS’s Next Generation ACO (NGACO) program and its All-Inclusive Population-Based Payment (AIPBP) mechanism are important revenue sources.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $167.3 million | $97.1 million | $414.5 million | $263.8 million |
| Income from operations | $56.6 million | $21.3 million | $86.4 million | $41.0 million |
| Net income | $38.6 million | $11.8 million | $62.2 million | $24.9 million |
| Net income attributable to Apollo Medical Holdings | $9.1 million | $5.6 million | $13.9 million | $12.0 million |
| Diluted EPS | $0.24 | $0.20 | $0.37 | $0.42 |
| Operating margin | 33.8% | 21.9% | 20.9% | 15.5% |
- Revenue mix: Q3 capitation was $90.6 million, risk-pool settlements and incentives $57.8 million, management fees $12.9 million, and fee-for-service revenue $5.7 million. For the nine months, those amounts were $266.8 million, $89.6 million, $37.3 million and $19.1 million, respectively.
- Drivers and expenses: Management attributed growth to the expanded combined business, higher membership and capitation rates, favorable utilization trends, and increased management-fee activity. Nine-month cost of services rose 46% to $281.7 million and G&A rose 104% to $31.5 million. The company reported $48.3 million of nine-month net income attributable to noncontrolling interests, reducing the portion attributable to the parent.
- Cash flow: Nine-month operating cash flow was $31.9 million, versus $36.3 million in 2017. Investing used $20.2 million, principally for a $16.7 million joint-venture investment and advances to related parties. Financing used $5.4 million, including $16.7 million of dividends, partly offset by $8.0 million of line-of-credit borrowings and $3.6 million from stock and warrant exercises.
- Liquidity and debt: At September 30, cash and cash equivalents were $119.8 million; cash, cash equivalents and restricted cash totaled $124.7 million. Management reported working capital of $110.6 million, compared with $34.6 million at year-end 2017, and believed liquidity was sufficient for at least 12 months. Outstanding line-of-credit borrowings were $13.0 million; the bank loan was $0.16 million and capital-lease obligations were approximately $0.64 million. Additional credit availability was reported, but some facilities are restricted to particular entities or purposes.
- Balance sheet: Total assets were $551.9 million and total liabilities $141.6 million. Receivables were $70.1 million, up from $20.1 million at December 31, 2017; goodwill was $189.6 million and net intangible assets $90.8 million.
Material changes, outlook and risks
- Comparability and accounting: The reverse merger makes reported year-over-year comparisons incomplete: 2017 reflects NMM only, while 2018 reflects the combined company. The company adopted ASC 606 using the modified retrospective method. Adoption added $25.5 million to Q3 2018 revenue and $28.9 million to nine-month revenue, primarily through risk-pool revenue; the 2017 figures were not restated. Reported diluted EPS for the nine months declined year over year despite higher reported revenue and net income.
- CMS settlement and AIPBP: CMS notified the company on November 6, 2018 that approximately $34.5 million of AIPBP payments relating to 2017, including a run-out through June 30, 2018, had been overpaid. The amount was accrued at September 30 as a payable and the company expected to refund it in Q4. AIPBP payments had been about $7.3 million per month from February 2018; the company said it remained eligible at approximately $5.5 million per month effective October 1, 2018. Continued participation and payment levels remain subject to CMS terms and requirements.
- Management outlook: No numerical earnings or revenue guidance was provided. Management expected NGACO revenue to remain significant, but gave no assurance. It also described plans to convert a purchased Los Angeles hospital into an integrated care center; potential operation of portions during Q4 2018 was contingent on required licenses.
- Key risks: Medical costs may exceed capitation; risk-pool and CMS settlements involve estimation uncertainty and later reconciliation. Revenue depends on a limited number of payors and government programs. The company also cited integration and growth execution, regulation and reimbursement changes, and competition. Two payors represented 48.8% and 19.6% of receivables at quarter-end.
- Contingencies and unusual items: Prospect Medical Group and Prospect Medical Systems sought damages exceeding $5 million in arbitration; the company disputed the allegations and planned to defend itself. A proposed settlement with former shareholders contemplated repurchases of ApolloMed and APC shares for approximately $4.2 million and $1.7 million, respectively, subject to completion. Approximately $4.2 million remained restricted for distribution to former NMM shareholders. The company also disclosed that bank deposits exceeded FDIC-insured limits by approximately $146.3 million.
- Controls: Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the $34.5 million CMS repayment, its timing and any effect on subsequent cash flows or settlements.
- Assess earnings quality and comparability, including ASC 606’s risk-pool revenue impact, the reverse-merger reporting basis and high noncontrolling-interest allocation.
- Track whether AIPBP participation and the approximately $5.5 million monthly payment rate continue, and how medical costs compare with those payments.
- Review receivables concentration, collection trends and the estimation of medical liabilities and risk-pool settlements.
- Check the outcome of the Prospect arbitration, former-shareholder settlement, and licensing and execution milestones for the integrated care center.