Alignment Healthcare, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. The company provides Medicare Advantage and related healthcare services, primarily in California, North Carolina, Nevada and Arizona. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
- Revenue: $345.5, up 29.4% from $267.1 in Q1 2021. Earned premiums were $345.3; management attributed growth to membership gains, higher CMS benchmark rates and higher revenue per member.
- Medical costs and margins: Medical expenses were $303.8, up 21.0%. Medical benefits ratio (MBR) improved to 87.0% from 91.5%. Adjusted gross profit, a non-GAAP measure, was $44.9 versus $22.6; adjusted gross profit margin was 13.0% versus 8.5%.
- Profitability: Operating loss was $36.5, compared with $52.7; net loss was $40.8, compared with $56.9. Net loss per share was $0.23 versus $0.37. Adjusted EBITDA, a non-GAAP measure, was a loss of $3.9 versus a loss of $14.0.
- Expenses: SG&A increased 14.4% to $74.3, primarily from network development and sales and marketing. Equity-based compensation totaled $28.0, including $24.9 in SG&A.
- Cash flow: Operating cash use was $11.6, compared with $38.1 in Q1 2021. Investing cash use was $6.1, including $4.9 of property and equipment purchases and $1.1 for a business acquisition. There was no financing cash flow in Q1 2022; the prior-year period included IPO proceeds. Cash and restricted cash ended the quarter at $450.6, down $17.8 from year-end 2021.
- Balance sheet and debt: Cash was $448.8; total assets were $646.6; current liabilities were $195.0, including $155.0 of medical expenses payable. Long-term debt, net of issuance costs, was $152.3; gross debt including fees and payment-in-kind interest was $155.2. The term loan matures in June 2023 and bears 10.25% interest; the company reported covenant compliance.
- Liquidity: Management said liquid assets and anticipated operating revenues should fund operating and organic capital needs for at least the next 12 months. Cash held at the parent company was $319.2; transfers from regulated subsidiaries are subject to restrictions.
Changes versus Q1 2021 and business developments
- Health Plan Membership rose 13.4% to approximately 94,200. The company expanded from 22 to 38 markets, adding Arizona and new counties in North Carolina and Nevada. It also reported approximately 5,200 traditional Medicare members in its Direct Contracting Entities.
- Revenue growth outpaced medical expense growth, and MBR improved. Management said Q1 2021 had higher COVID-related inpatient utilization; Q1 2022 utilization was lower than the year-earlier quarter, though COVID-related utilization rebounded during late 2021 and Q1 2022.
- Medical expenses included $5.9 of favorable prior-year claims development, primarily from better-than-expected recoveries and lower actual claims costs than previously estimated.
- SG&A growth reflected continued investment in network development and marketing. The company recorded $0.5 of acquisition-related expense and paid $1.1, net of cash received, for a business acquisition.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or membership guidance. Management expects continued investment in the AVA technology platform, new markets, sales and marketing, and product offerings; it also expects corporate and public-company expenses to rise in absolute dollars.
- Management describes seasonality: membership growth is concentrated in Q1; per-member revenue can decline as new members enter with less complete diagnosis documentation; and medical costs may be higher in Q1 and Q4. Medicare Part D plan design can also raise MBR in the first half of the year.
- Key risks include ongoing net losses and ability to achieve profitability; accurate medical-claims and risk-adjustment estimates; CMS reimbursement and regulatory requirements; member growth and retention; provider relationships; quality ratings; COVID-19 effects; cybersecurity and data privacy; and the concentration of operations in four states.
- The company added risks related to the Russia-Ukraine conflict, including possible inflation, pressure on government program spending, cyber threats, supply-chain disruption and reduced access to capital. It said inflation had not materially affected results to date.
- Medical claims reserves depend on actuarial estimates and could differ materially from actual claims. The company reported no material legal accruals and said management did not expect the resolution of ordinary-course legal proceedings to materially affect the financial statements. No off-balance-sheet arrangements were reported.
- The filing disclosed an immaterial correction to prior-period equity classification: $7.8 should have been reflected as additional paid-in capital rather than accumulated deficit. Management concluded it was not material to previously issued financial statements.
Important facts for investors to verify
- Whether improved MBR and lower claims costs persist, particularly after the favorable $5.9 prior-year claims development and changing COVID-related utilization.
- Whether membership expansion and higher revenue per member translate into durable margins, while accounting for new-member mix, seasonality and market-entry costs.
- Cash use, regulated-subsidiary transfer restrictions, and the company’s ability to address the June 2023 term-loan maturity and related covenants.
- How much of reported adjusted gross profit and adjusted EBITDA improvement depends on exclusions, especially equity-based compensation and acquisition costs.
- Future CMS risk-adjustment, Star-rating and minimum medical loss ratio outcomes, including potential effects on revenue, benefits and required remittances.