Apollo Medical Holdings, Inc. (now identified in the request as Astrana Health) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 9, 2019. Financial statements are unaudited. The filing registrant is Apollo Medical Holdings, Inc.
Business context
The company provides population-health management and coordinated medical care, principally in California, through physician networks, IPAs, management services, hospitalist operations and its CMS Next Generation ACO (NGACO). It reported managing care for approximately 812,000 patients through 11 affiliated physician groups, versus approximately 1,019,000 patients and 12 groups a year earlier. The decline followed a health plan’s cancellation of a contract with an affiliated group.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $130.0 million | $122.7 million | $225.8 million | $246.6 million |
| Operating income | $14.7 million | $7.1 million | $11.4 million | $29.9 million |
| Net income | $10.7 million | $7.9 million | $8.2 million | $23.6 million |
| Net income attributable to Apollo Medical Holdings | $3.5 million | $2.7 million | $3.7 million | $4.8 million |
| Diluted EPS | $0.09 | $0.07 | $0.10 | $0.13 |
- Q2 revenue rose 6%, principally from higher capitation, including approximately $11.5 million attributed to Alpha Care. Six-month revenue fell 8%, reflecting lower risk-pool settlements, management fees and fee-for-service revenue, partly offset by capitation.
- Calculated operating margin was approximately 11.3% in Q2 2019 versus 5.8% in Q2 2018; for the first half it was approximately 5.1% versus 12.1%.
- First-half operating cash flow was negative $22.0 million, versus positive $13.4 million in 2018. Investing cash use was $50.2 million, including $41.5 million for the Alpha Care acquisition. Financing provided $21.6 million, primarily from net borrowing, partly offset by dividends.
- Cash, cash equivalents and restricted cash were $57.0 million at June 30, down from $107.6 million at year-end 2018. Cash and cash equivalents alone were $52.7 million; marketable securities were $1.1 million. Working capital was $89.3 million, down from $100.8 million.
- Related-party lines of credit totaled $44.6 million at June 30, up from $13.0 million at year-end. The company reported $162.7 million in total liabilities, including $14.3 million of operating lease liabilities recognized following adoption of ASC 842.
- Medical liabilities were $42.9 million, versus $33.6 million at year-end. Total assets were $568.3 million, including $209.3 million of goodwill and $109.1 million of net intangible assets.
Material changes and unusual items
- APC and APC-LSMA acquired all of Alpha Care on May 31 for approximately $45.1 million in cash; its results were consolidated effective June 1. The purchase added approximately $23.5 million of goodwill and $29.9 million of network-relationship intangible assets, subject to final purchase accounting.
- The company recorded a $3.8 million release of doubtful-account reserves in Q2 after reassessing collectability of certain management fees; the first-half release was $1.4 million. These credits reduced reported expenses.
- Equity-method results shifted from income of $1.7 million in Q2 2018 to a loss of $42,000 in Q2 2019, and from income of $1.6 million to a loss of $0.9 million for the first half. The filing cites losses at LMA and Accountable Health Care and a $0.3 million impairment of the PASC investment.
- ASC 842 adoption added $14.3 million of operating lease right-of-use assets and lease liabilities to the balance sheet; management said it did not materially affect results or cash flows.
Outlook, risks and contingencies
- Management said liquidity was sufficient to fund operations for at least the next 12 months; the filing gave no numerical earnings or revenue guidance.
- APAACO remained eligible for the NGACO AIPBP mechanism for 2019, with monthly payments increased to approximately $8.3 million from $5.5 million. Of approximately $24.8 million received in the first half, $17.8 million was recognized as revenue. Shared savings or losses remain subject to significant estimation uncertainty and are constrained until determinable.
- A proposed affiliate transaction, requiring shareholder approval at a special meeting scheduled for August 27, 2019, contemplated a $545 million loan to AP-AMH, a corresponding APC preferred-stock purchase and APC’s $300 million purchase of ApolloMed common stock. The filing warned that the transaction could materially change future results, liquidity and capital resources, and described substantial financing, repayment, regulatory and structural risks.
- On July 24, 2019, APC-LSMA agreed to acquire the remaining Accountable Health Care shares and APC agreed to pay $7.3 million toward certain Accountable debt.
- Disclosure controls and procedures were reported ineffective at the reasonable-assurance level. Management identified a material weakness in controls over checking the completeness and accuracy of external full-risk-pool reports used to estimate revenue; remediation was underway.
- A Prospect arbitration sought damages exceeding $5 million. The company disputed the claims and said any loss beyond existing accruals could not be reasonably estimated. The company also noted healthcare regulatory, reimbursement, payor-concentration and risk-pool settlement uncertainties.
Key facts investors should verify
- Whether the proposed APC transactions received shareholder and regulatory approvals, and their final financing terms and effects on consolidated results and liquidity.
- Alpha Care’s post-acquisition contribution, final purchase-price allocation and performance, and the related increase in debt and goodwill.
- Whether operating cash flow, receivable collection and medical-liability trends improve, particularly given first-half cash use and increased related-party receivables.
- Whether full-risk-pool reporting controls are remediated and whether subsequent settlements differ materially from recorded estimates.
- The status and potential financial exposure of the Prospect arbitration and the Accountable Health Care acquisition and payment.
- Continued NGACO eligibility, payment levels, medical-cost performance and eventual CMS settlements; also monitor major-payor concentration and regulatory changes.