Apollo Medical Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. The filing registrant is Apollo Medical Holdings, Inc. (now identified in the request metadata as Astrana Health, Inc.). Financial statements are unaudited. Comparisons with Q1 2017 require caution: the December 2017 merger with Network Medical Management (NMM) was accounted for as a reverse acquisition, and the 2017 comparative results principally reflect NMM, while Q1 2018 includes both businesses.
Business context
The company is a California-focused, physician-centric population health and healthcare management business, combining medical groups and IPAs, management services, physician services, and accountable care operations. It reported 11 affiliated physician groups and managed care delivery for 962,922 patients at March 31, 2018, versus 795,960 a year earlier. Its strategy emphasized value-based care and the CMS Next Generation ACO (NGACO) model.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $124.2 million | $85.3 million | +46% |
| Operating income | $22.7 million | $15.7 million | +45% |
| Net income, consolidated | $15.7 million | $11.7 million | +34% |
| Net income attributable to Apollo Medical Holdings | $2.2 million | $4.3 million | -50% |
| Basic / diluted EPS | $0.07 / $0.06 | $0.17 / $0.15 | Lower |
| Operating cash flow | $4.7 million | $21.1 million | Lower by $16.4 million |
Capitation revenue was $85.9 million (+33%); risk pool settlements and incentives were $18.0 million (+62%); management fee income was $12.1 million (+85%); and fee-for-service revenue was $7.7 million (+191%). Management attributed revenue growth to membership and capitation-rate increases, favorable utilization trends, expanded management services, and higher surgery-center activity. Reported operating margin was approximately 18.3%, compared with 18.4% in Q1 2017; consolidated net margin was approximately 12.7%, versus 13.7%.
Cost of services rose 42% to $84.7 million, and general and administrative expense rose 125% to $11.7 million. Management said the decline in parent-attributable income reflected post-merger integration costs and investment to support two new management services agreements. Noncontrolling-interest income increased to $13.6 million from $7.4 million.
Cash and cash equivalents were $103.7 million at March 31; cash, cash equivalents and restricted cash totaled $122.5 million. Cash, cash equivalents and marketable securities totaled $104.9 million. Working capital was $70.0 million, versus $34.6 million at December 31, 2017. Operating cash flow was reduced by a $21.1 million increase in receivables, among other working-capital movements. Investing activities used $0.5 million and financing activities used $0.2 million; cash and restricted cash increased $4.0 million during the quarter.
Reported debt included a $5.0 million NMM line-of-credit balance, a $0.4 million bank loan, and approximately $0.7 million of capital lease obligations. APC had no borrowings on its separate credit line. The company stated that it believed liquidity was sufficient to fund operations through at least May 2019. Its NMM and APC credit facilities were amended after quarter-end to extend maturity to June 22, 2018.
Material changes and unusual items
- Revenue grew substantially, but comparisons reflect the merger and the inclusion in 2018 of ApolloMed and MMG operations not present in the NMM-based 2017 comparison.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The opening adjustment increased receivables by $11.6 million, deferred tax liabilities by $3.2 million, and equity balances; management said adoption did not significantly affect Q1 revenue or operating-profit comparisons.
- Q1 2017 included $2.2 million of equity-method investment income and a $1.5 million derivative fair-value gain, neither of which recurred comparably in Q1 2018. Equity-method results were a $28,000 loss in Q1 2018.
- The merger’s $18.0 million former-shareholder distribution was held in restricted cash at quarter-end. Approximately $10.0 million was distributed in April 2018, leaving $8.0 million held for distribution.
Outlook, risks and contingencies
- NGACO: Following CMS reconsideration, APAACO remained eligible for the AIPBP payment mechanism and was receiving approximately $7.3 million per month beginning February 2018. Management expected NGACO revenue to be significant, but results depend on medical-cost management, CMS terms and later reconciliation. The Participation Agreement ran through December 31, 2018, with renewal subject to CMS.
- Integration and growth: Management expected substantial post-merger integration to be completed by the end of Q2 2018 and did not expect further material expenditures to support the new contracts beyond Q1. The company expanded staffing for its Accountable IPA and Golden Shore Medical Group agreements.
- Regulatory: MMG was not compliant with California DMHC financial requirements at March 31 and was required to develop a corrective action plan. Substantially all of MMG’s direct-contracted health plans moved membership out effective May 1, 2018. APC was reported compliant.
- Legal: Prospect Medical Group and Prospect Medical Systems filed arbitration claims against MMG, ApolloMed and AMM seeking damages exceeding $5 million and alleging contract and other claims. The company disputed the allegations; management said it was too early to assess the probability or amount of any loss.
- Concentration and operating risk: The company depends on a limited number of payors and government healthcare programs, and faces medical-cost, claims-estimation, reimbursement, regulatory and contract-settlement uncertainty. Two payors represented 38.2% and 25.6% of receivables at quarter-end. AIPBP claims history was limited, increasing estimation uncertainty.
- Other: Approximately $135 million of bank deposits exceeded FDIC-insured limits. APC acquired a 50% interest in a real-estate joint venture in April; its property purchase was expected to close May 31, 2018. No formal full-year revenue or earnings guidance was provided.
Most important facts for investors to verify
- How much of reported revenue growth and operating performance is organic versus attributable to the merger and changes in consolidation.
- Whether the $7.3 million monthly AIPBP payments continue, and the eventual CMS settlement, medical costs and risk-sharing exposure.
- Whether receivables are collected as expected and whether operating cash flow recovers from the Q1 working-capital outflow.
- Progress on MMG’s DMHC corrective action plan, the membership transfer, and any resulting financial or operational impact.
- Developments in the Prospect arbitration, including any change in management’s assessment of potential loss.
- The status and terms of the extended credit facilities, remaining $8.0 million former-shareholder distribution, and real-estate joint venture closing.