Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
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In this section, “we,” “our,” “ours” and “us” refer to Apollo Medical Holdings, Inc.(“ApolloMed”) and its consolidated subsidiaries and affiliated entities, as appropriate, including its consolidated variable interest entities (“VIEs”).
Overview
Apollo Medical Holdings, Inc. is a leading physician-centric, technology-powered, risk-bearing healthcare management company. Leveraging its proprietary population health management and healthcare delivery platform, ApolloMed operates an integrated, value-based healthcare model, which aims to empower the providers in its network to deliver the highest quality of care to its patients in a cost-effective manner. We, together with our affiliated physician groups and consolidated entities, provide coordinated outcomes-based medical care in a cost-effective manner. The majority of our patients reside in California, most of whom are covered by private or public insurance such as Medicare, Medicaid and health maintenance organizations (“HMOs”), with a small portion of our revenue coming from non-insured patients. We provide care coordination services to each major constituent of the healthcare delivery system, including patients, families, primary care physicians, specialists, acute care hospitals, alternative sites of inpatient care, physician groups and health plans. Our physician network consists of primary care physicians, specialist physicians and hospitalists. We operate primarily through the following subsidiaries of ApolloMed: Network Medical Management, Inc. (“NMM”), Apollo Medical Management, Inc. (“AMM”), and APA ACO, Inc. (“APAACO”), and their consolidated entities.
Through our Next Generation Accountable Care Organization (“NGACO”) model and our network of Independent Practice Associations (“IPAs”) with more than 7,000 contracted physicians, in which physician groups have agreements with various health plans, hospitals and other HMOs, we were responsible for coordinating the care for over 1.1 million patients primarily in California as of December 31, 2020. These covered patients are comprised of managed care members whose health coverage is provided through their employers or who have acquired health coverage directly from a health plan or as a result of their eligibility for Medicaid or Medicare benefits. Our managed patients benefit from an integrated approach that places physicians at the center of patient care and utilizes sophisticated risk management techniques and clinical protocols to provide high-quality, cost effective care. To implement a patient-centered, physician-centric experience, we also have other integrated and synergistic operations, including (i) MSOs that provide management and other services to our affiliated IPAs, (ii) outpatient clinics and (iii) hospitalists.
On December 8, 2017, ApolloMed completed its business combination with NMM (i.e. the “2017 Merger”). The combination of ApolloMed and NMM brought together two complementary healthcare organizations to form one of the nation’s largest integrated population health management companies. As a result of the Merger, NMM became a wholly-owned subsidiary of ApolloMed and the former NMM shareholders received a majority of the issued and outstanding common stock of ApolloMed. For accounting purposes, NMM was considered the accounting acquirer and accordingly, as of the closing of the Merger, NMM’s historical results of operations replaced ApolloMed’s historical results of operations for periods prior to the Merger, and the results of operations of both companies are included in the accompanying consolidated financial statements for periods following the Merger.
2020 Highlights
Universal Care Acquisition Partners, LLC (“UCAP”), a 100% owned subsidiary of APC, was formed in June 2014 for the purpose of holding an investment in Universal Care, Inc. (“UCI”). On April 30, 2020, UCAP completed the sale of its 48.9% ownership interest in UCI to Bright Health Company of California, Inc. ("Bright") for approximately $69.2 million in cash proceeds (including $16.5 million as repayment of indebtedness owed to APC), plus non-cash consideration consisting of shares of Bright Health, Inc.'s preferred stock having an estimated fair value of approximately $36.2 million on the date of sale. In addition, pursuant to the terms of the stock purchase agreement, APC has a beneficial interest in the equity method investment sold. The estimated fair value of such interest on April 30, 2020, was $15.7 million (see Note 6). As set forth in the Company’s definitive proxy statement filed with the SEC on July 31, 2019 (the “ 2019 Proxy Statement”), the 48.9% interest in UCI is included in Excluded Assets that remain solely for the benefit of APC and its shareholders. As such, any proceeds or gain on the sale of APC’s indirect ownership interest in UCI has no impact on the Series A Dividend payable by APC to AP-AMH Medical Corporation as described in the 2019 Proxy Statement and consequently the sale, did not affect net income attributable to ApolloMed.
In December 2020, APC purchased a 100% interest in Medical Property Partners LLC, AMG Properties LLC, and ZLL Partners LLC, each of which own land and buildings leased to tenants in Alhambra and Pasadena, California. We consolidated these entities in our consolidated financial statements. APC also purchased a 50% interest in Tag-6 Medical Investments Group LLC ("Tag 6"), Tag-8 Medical Investments Group LLC ("Tag 8"), and One MSO LLC ("One MSO"). Tag 6 and Tag 8 own land in Alhambra, California. One MSO owns a building in Monterey Park, California, which is currently leased to tenants.
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Recent Developments
On January 26, 2021, the Company entered into an agreement to purchase a 30% interest in CAIPA MSO. CAIPA MSO provides management, consulting, administrative, and other support services to professional healthcare service providers, including to the Chinese American IPA d/b/a Coalition of Asian-American IPA ("CAIPA"), a leading independent practice association serving the greater New York City area. The transaction is subject to third-party consents and other customary closing conditions. ApolloMed will fund the transaction from cash on hand. We expect this transaction will close by the end of the second quarter of 2021.
Key Financial Measures and Indicators
Operating Revenues
Our revenue primarily consists of capitation revenue, risk pool settlements and incentives, NGACO AIPBP revenue, management fee income and fee-for-services (“FFS”) revenue. Revenue is recorded in the period in which services are rendered. The form of billing and related risk of collection for such services may vary by type of revenue and the customer.
Operating Expenses
Our largest expenses consist of the cost of patient care paid to contracted physicians, the cost of information technology equipment and software and the cost of hiring staff to provide management and administrative support services to our affiliated physician groups, as further described in the following sections. These services include payroll, benefits, physician practice billing, revenue cycle services, physician practice management, administrative oversight, coding services, and other consulting services.
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Results of Operations
2020 Compared to 2019
Our consolidated operating results for the year ended December 31, 2020, as compared to the year ended December 31, 2019 were as follows:
Apollo Medical Holdings, Inc.
Consolidated Statements of Income (in thousands)
Years Ended December 31,
Revenue
Operating expenses
Impairment of goodwill and intangibles assets — 1,994 (1,994) (100) %
Other (expense) income
Net income attributable to noncontrolling interests 84,454 3,557 80,897 *
* Percentage change of over 1000%
Net Income
Our net income in 2020 was $122.3 million, as compared to $17.7 million in 2019, an increase of $104.6 million or 592%.
Physician Groups and Patients
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As of December 31, 2020 and 2019, the total number of affiliated physician groups we managed were 14 groups and 13 groups, respectively, and the total number of patients for whom we managed the delivery of healthcare services was 1.1 million and 0.9 million, respectively.
Revenue
Our total revenue in 2020 was $687.2 million, as compared to $560.6 million in 2019, an increase of $126.6 million or 23%. The increase in total revenue was primarily attributable to the following:
(i) An overall increase of $103.2 million in capitation revenue primarily driven by the acquisition of Alpha Care and Accountable Health Care in August 2019 and September 2019, respectively. For the full year ended December 31, 2020, Alpha Care and Accountable Health Care contributed additional capitation revenues of $52.4 million and $29.0 million, respectively. In addition, capitation revenue at APC increased by $16.4 million due to increased rates from incentives being met and increased patient lives under management. Lastly, capitation revenue at APAACO increased by $5.3 million as a result of organic growth and expansion of the ACO program.
(ii) An increase of $26.3 million in risk pool settlements and incentives revenue due to the settlement of the 2019 ACO Performance Year, resulting in a shared risk settlement of $19.8 million recognized during the third quarter of 2020, as compared to $0.9 million in shared risk settlement related to the 2018 performance year and recognized during the year ended December 31, 2019. In addition, during the year ended December 31, 2020, risk pool revenues increased by $6.2 million primarily driven by reduced hospital costs as a result of COVID-19.
(iii) A decrease in fees-for-services revenue of $2.8 million primarily due to the COVID-19 pandemic that resulted in the closure of our surgery centers and heart center from March 2020 to May 2020 and fewer procedures completed in 2020.
Cost of Services, Excluding Depreciation and Amortization
Expenses related to cost of services, excluding depreciation and amortization, in 2020 were $539.2 million, as compared to $467.8 million in 2019, an increase of $71.4 million or 15%. The increase was due primarily to the acquisitions of Alpha Care and Accountable Health Care in May 2019 and September 2019, respectively, which provided for a full year of costs for the year ended December 31, 2020. Cost of services, excluding depreciation and amortization, related to Alpha Care and Accountable Health Care contributed $52.2 million and $28.0 million, respectively, to the overall increase. Furthermore, there was an $8.6 million increase at our APAACO entity resulting from a full year of services in the 2020 performance year as compared to nine months of services under the 2019 performance year due to the delayed commencement by CMS of APAACO’s 2019 Next Generation ACO performance year from January 1, 2019 to April 1, 2019. Lastly, cost of sales increased by $5.6 million at NMM to support the continued growth of the Company. These increases were offset by a reduction in claims costs totaling approximately $25.1M as a result of the COVID-19 pandemic which caused a decrease in office visits and a reduction in non-emergency procedures. We do not expect similar decreases in claims costs as a result of COVID-19 to occur again in fiscal 2021.
General and Administrative Expenses
General and administrative expenses in 2020 were $49.1 million, as compared to $41.5 million in 2019, an increase of $7.6 million or 18%. This increase was primarily due to $4.5 million in additional provider bonuses and $2.4 million from share based compensation related to stock options and restricted stock awards granted in 2020 and 2019.
Depreciation and Amortization
Depreciation and amortization expense was $18.4 million and $18.3 million for the years ended December 31, 2020 and 2019, respectively. These amounts included depreciation of property and equipment and the amortization of intangible assets.
Provision for Doubtful Accounts
During the year ended December 31, 2019, we released reserves related to certain management fees in the amount of approximately $1.4 million as collectability of the outstanding amount was no longer in doubt. These reserves were related to various preacquisition obligations of Accountable Health Care and were no longer necessary as a result of our acquisition of Accountable Health Care.
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Impairment of Goodwill and Intangible Assets
There was no impairment of goodwill and intangible assets for the year ended December 31, 2020, as compared to $2.0 million for the year ended December 31, 2019, which related to a write-off of Medicare licenses that were acquired as part of the merger between ApolloMed and NMM.
Income (Loss) from Equity Method Investments
Income from equity method investments in 2020 was $3.7 million, as compared to a loss of $6.9 million in 2019, an increase of $10.6 million, or 154%. The increase was primarily due to equity earnings recognized related to Universal Care Inc, of $3.6 million compared to a loss of $1.2 million in 2019. During the year ended December 31, 2020, we recognized equity earnings from our investment of LSMA of $0.3 million as compared to an equity loss of $2.8 million in 2019. Further, we recognized an equity loss of $2.5 million related to our investment in Accountable Health Care during the year ended December 31, 2019, which was acquired in August 2019 and is now a consolidated entity of APC.
Interest Expense
Interest expense in 2020 was $9.5 million as compared to $4.7 million in 2019. The increase was primarily due to interest incurred from a new credit facility we secured in September 2019 to fund growth, primarily through acquisitions.
Interest Income
Interest income in 2020 was $2.8 million as compared to $2.0 million in 2019, an increase of $0.8 million or 39%. The increase in interest income is mainly related to interest earned from money market, certificate of deposits and loan receivables.
Gain on Sale of Equity Method Investment
Gain on sale of equity method investment for the year ended December 31, 2020 was $99.8 million resulting primarily from the sale of UCI which closed on April 30, 2020.
Other Income
Other income was $1.1 million for 2020 as compared to $3.0 million in 2019, a decrease of $2.0 million or 64%. Other income for the year ended December 31, 2020 is primarily related to certain loan forgiveness. The decrease from 2019 was primarily attributable to the gain on assumption of a loan receivable as a result of the Accountable Health Care acquisition in August 2019.
Provision for Income Taxes
Provision for income taxes was $56.1 million in 2020, as compared to $8.2 million in 2019, an increase of $47.9 million or 587%. This was primarily attributable to the increase in pre-tax income in 2020, as compared to 2019, due to the factors described above.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $84.5 million in 2020, as compared to $3.6 million in 2019, an increase of $80.9 million. The increase was primarily due to the sale of UCI in April 2020 where the gain, net of tax, remained strictly with the APC Excluded Assets and increased consolidated net income generated in the current period which resulted in additional income allocated to the noncontrolling interest.
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2019 Compared to 2018
Our consolidated operating results for the year ended December 31, 2019, as compared to the year ended December 31, 2018 were as follows:
Apollo Medical Holdings, Inc.
Consolidated Statements of Income (in thousands)
Years Ended December 31,
Revenue
Operating expenses
Impairment of goodwill and intangibles assets 1,994 3,799 (1,805) (48) %
Other (expense) income
Net Income
Our net income in 2019 was $17.7 million, as compared to $60.3 million in 2018, a decrease of $42.6 million or 71%.
Physician Groups and Patients
As of December 31, 2019 and 2018, the total number of affiliated physician groups we managed was 13 groups and 11 groups, respectively, and the total number of patients for whom we managed the delivery of healthcare services was 0.9 million patients and 1.0 million patients, respectively.
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Revenue
Our total revenue in 2019 was $560.6 million, as compared to $519.9 million in 2018, an increase of $40.7 million or 8%. The increase in total revenue was primarily attributable to the following:
(i) an increase of $109.9 million in capitation revenue due to the acquisitions of Alpha Care and Accountable Health Care which were acquired as of May 31, 2019 and August 30, 2019, respectively, resulting in our recognition of approximately $79.2 million and $17.2 million in revenue, respectively, from these acquired IPAs, in addition to capitation revenue growth at APC of $22.4 million. These increase was offset by the delayed commencement by the Centers for Medicare & Medicaid Services ("CMS") of APAACO's 2019 Next Generation ACO performance year from January 1, 2019, to April 1, 2019 which resulted in decreased revenue of approximately $8.9 million.
(ii) a decrease of $49.9 million in risk pool revenue due to the refinement of the assumptions used to estimate the amount of net surplus expected to be received from the risk pool of our affiliated hospitals. Our estimated risk pool receivable is calculated based on reports received from our hospital partners and on management's estimate of the Company's portion of any estimated risk pool surpluses in which payments have not been received. The actual risk pool surpluses are settled approximately 18 months later.
(iii) a decrease in management fee income of $15.1 million, primarily due to the acquisition of Accountable Health Care and a decrease in the number of patients served by some of our affiliated physician groups, including Golden Shore Medical Group, which contributed approximately $3.8 million in management fee income for the year ended December 31, 2018, that ceased operations on January 31, 2019 as their primary health plan canceled their contract.
(iv) a decrease in FFS revenue of $4.2 million, primarily due to our wind down of affiliated medical groups, Bay Area Hospitalist Associates ("BAHA"), AKM Medical Group, Inc. ("AKM"), and Maverick Medical Group, Inc. ("MMG").
Cost of Services, Excluding Depreciation and Amortization
Expenses related to cost of services, excluding depreciation and amortization, in 2019 were $467.8 million, as compared to $361.1 million in 2018, an increase of $106.7 million or 30%. The increase was due to a $100.4 million increase in medical claims, capitation and other health services expenses driven by the Alpha Care and Accountable Health Care acquisitions, a $2.8 million increase in management fee expense paid to a third party MSO during Alpha Care's transition, and an increase of $3.5 million in personnel costs to support the continued growth in the depth and breadth of our operations.
General and Administrative Expenses
General and administrative expenses in 2019 were $41.5 million, as compared to $43.4 million in 2018, a decrease of $1.9 million or 4%. The decrease was primarily due to a reduction in professional services costs of $2.0 million.
Depreciation and Amortization
Depreciation and amortization expense was $18.3 million and $19.3 million for the years ended December 31, 2019 and 2018, respectively. These amounts included depreciation of property and equipment and the amortization of intangible assets.
Provision for Doubtful Accounts
During the year ended December 31, 2019, we released reserves related to certain management fees in the amount of $3.8 million as the collectability of the outstanding amount was no longer in doubt. These reserves related to Accountable Health Care and were no longer necessary as a result of our acquisition of the company. As such our provision for doubtful accounts was a negative $1.4 million.
Impairment of Goodwill and Intangible Assets
Impairment of goodwill and intangible assets was $2.0 million for the year ended December 31, 2019, as compared to $3.8 million for the year ended December 31, 2018. During 2019, we impaired intangible assets related to Medicare licenses obtained as part of the Merger. In 2018, we impaired the goodwill related to MMG. We will no longer utilize the Medicare licenses and MMG has been wound down. Accordingly, we do not expect to receive future economic benefits from such assets and goodwill.
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Loss from Equity Method Investments
Loss from equity method investments in 2019 was $6.9 million, as compared to $8.1 million in 2018, a decrease of $1.2 million, or 15%. The decrease was primarily due to equity losses related to our investments in LMA's IPA line of business, Accountable Health Care, UCI, MWN Community Hospital, LLC, and 531 W. College LLC of $2.8 million, $2.5 million, $1.2 million, $0.2 million and $0.2 million, respectively, which was offset by equity earnings of $0.3 million from our investment in Diagnostic Medical Group ("DMG") for the year ended December 31, 2019. In addition, during the year ended December 31, 2019 we recognized an impairment loss of $0.3 million related to our investment in Pacific Ambulatory Surgery Center, LLC ("PASC") as we do not expect to recover our investment. This is compared to equity losses of $6.0 million, $2.4 million, $0.4 million and $0.3 million allocated from our investments in UCI, LSMA, 531 W. College, LLC and PASC, respectively, which were offset by income of $1.0 million allocated from our investment in DMG for the year ended 2018.
Interest Expense
Interest expense in 2019 was $4.7 million as compared to interest expense of $0.6 million in 2018. The increase was primarily due to interest incurred from a new credit facility we secured in September 2019 to fund growth, primarily through acquisitions.
Interest Income
Interest income in 2019 was $2.0 million as compared to $1.3 million in 2018, an increase of $0.7 million or 61%. The increase in interest income was a result of additional cash held in money market, certificates of deposit accounts and increased loan receivables issued in 2019.
Other Income
Other income was $3.0 million for 2019 as compared to $1.6 million in 2018, an increase of $1.4 million or 87%. The increase was primarily attributable to the assumption of a loan receivable as a result of the Accountable Health Care acquisition.
Provision for Income Taxes
Provision for income taxes was $8.2 million in 2019, as compared to $22.4 million in 2018, a decrease of $14.2 million or 63%. This decrease was primarily attributable to a decrease in the amount of pre-tax income in 2019 as compared to 2018.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $3.6 million for the year ended December 31, 2019, as compared to $49.4 million for the year ended December 31, 2018, a decrease of $45.8 million or 93%. This decrease was primarily due to reduced net income generated from APC mainly attributable to a decrease in risk pool revenue as a result of the refinement of the assumptions used to estimate the amount of net surplus expected to be received from the risk pools of our affiliated hospitals and our completion of a series of transactions with APC as further described in "2019 Highlights" above, which resulted in preferred, cumulative dividends from APC being allocated to AP-AMH.
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2021 Guidance
ApolloMed is providing the following guidance for total revenue, net income, net income attributable to ApolloMed, EBITDA, and Adjusted EBITDA, based on the Company’s existing business, current view of existing market conditions and assumptions for the year ending December 31, 2021.
($ in millions) 2021 Guidance Range
Net income attributable to ApolloMed $35.0 - $45.0
See "Guidance Reconciliation of Net Income to EBITDA and Adjusted EBITDA" and "Use of Non-GAAP Financial Measures" for additional information. There can be no assurance that actual amounts will not be materially higher or lower than these expectations. See "Forward-Looking Statements" within this Annual Report on Form 10-K.
Guidance Reconciliation of Net Income to EBITDA and Adjusted EBITDA
Year Ending
(in thousands)
Low High
Income from equity method investments (500) (1,000)
EBITDA adjustment for recently acquired IPAs 14,500 15,000
Use of Non-GAAP Financial Measures
This Annual Report on Form 10-K contains the non-GAAP financial measures EBITDA and adjusted EBITDA, of which the most directly comparable financial measure presented in accordance with generally accepted accounting principles ("GAAP") is net income. These measures are not in accordance with, or an alternative to, U.S. GAAP, and may be different from other non-GAAP financial measures used by other companies. The Company uses adjusted EBITDA as a supplemental performance measure of our operations, for financial and operational decision-making, and as a supplemental means of evaluating period-to-period comparisons on a consistent basis. Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation, and amortization, excluding income from equity method investments, provider bonuses, impairment of intangibles, provision of doubtful accounts and other income earned that is not related to the Company's normal operations. Adjusted EBITDA also excludes the effect on EBITDA of certain IPAs we recently acquired.
The Company believes the presentation of these non-GAAP financial measures provides investors with relevant and useful information as it allows investors to evaluate the operating performance of the business activities without having to account for differences recognized because of non-core or non-recurring financial information. When GAAP financial measures are viewed in conjunction with non-GAAP financial measures, investors are provided with a more meaningful understanding of ApolloMed's ongoing operating performance. In addition, these non-GAAP financial measures are among those indicators the
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Company uses as a basis for evaluating operational performance, allocating resources and planning and forecasting future periods. Non-GAAP financial measures are not intended to be considered in isolation, or as a substitute for, GAAP financial measures. To the extent this release contains historical or future non-GAAP financial measures, the Company has provided corresponding GAAP financial measures for comparative purposes. The reconciliation between certain GAAP and non-GAAP measures is provided above.
Liquidity and Capital Resources
Cash, cash equivalents and investment in marketable securities at December 31, 2020 totaled $261.2 million. Working capital totaled $223.6 million at December 31, 2020, compared to $223.7 million at December 31, 2019, a decrease of $0.1 million.
We have historically financed our operations primarily through internally generated funds. We generate cash primarily from capitations, risk pool settlements and incentives, fees for medical management services provided to our affiliated physician groups, as well as FFS reimbursements. We generally invest cash in money market accounts, which are classified as cash and cash equivalents. We believe we have sufficient liquidity to fund our operations at least through March 2022.
Our cash and cash equivalents and restricted cash increased by $90.0 million from $104.0 million at December 31, 2019 to $194.0 million at December 31, 2020. Cash provided by operating activities during the year ended December 31, 2020 was $46.2 million, as compared to $13.7 million during the year ended December 31, 2019. The change was due to a $104.6 million increase in net income, driven the gain on sale of equity method investments of $99.8 million, which primarily consisted of the gain on sale of UCI, in addition to the timing of working capital. For the year ended December 31, 2020 receivable, net, receivable, net - related parties, and other receivable resulted in net cash inflow of $15.6 million as compared to cash outflow of $5.8 million for the year ended December 31, 2019, driven by the timing of collections related to our full risk revenue. Further, for the year ended December 31, 2020, accounts payable and accrued expenses, fiduciary accounts payable, right-of-use assets, operating lease liabilities, and income taxes payable generated cash inflow of $15.9 million as compared to cash outflow of $11.3 million for the year ended December 31, 2019. This was partially offset by increased net cash outflow of $6.4 million, $5.5 million, and $8.7 million related to prepaid expenses and other current assets, other assets, and medical liabilities, respectively, for the year ended December 31, 2020 as compared to the same period in 2019 to support the continued growth of the Company.
Cash provided by investing activities during the year ended December 31, 2020 was $95.5 million, as compared to cash used in investing activities of $180.6 million during the year ended December 31, 2019. This was primarily due to proceeds of marketable securities of $50.6 million, proceeds from sale of equity method investment totaling $52.7 million, and proceeds from repayment of loans receivable of $16.5 million. These were offset by purchases of equity method investments of $10.0 million, payments for business acquisitions of $11.4 million, and purchases of marketable securities of $1.8 million. This is compared to cash used in investing activities for the year ended December 31, 2019 for the purchases of marketable securities of $115.4 million, payments for business acquisitions, net of cash acquired of $49.4 million, advances on loans receivable of $11.4 million, investments made in our equity method investments and investments in privately held entities of $3.6 million and purchases of property and equipment of $1.0 million, which were offset with dividends received of $0.2 million.
Cash used in financing activities during the year ended December 31, 2020 was $51.7 million, as compared to cash provided by financing activities of $163.3 million for the year ended December 31, 2019. This decrease was primarily attributable to the payments of dividends totaling $51.3 million, repayment on our term loan totaling $9.5 million, distribution to noncontrolling interests of $1.0 million and repurchases of shares totaling $0.5 million. Cash used was offset with the proceeds from the exercise of stock options and warrants of $10.8 million. This is compared to cash provided by financing activities for the year ended December 31, 2019 from borrowings on our line of credit totaling $289.6 million, proceeds from the exercise of stock options and warrants of $3.1 million and proceeds from a common stock offering of $0.8 million offset with payment of dividends, repayments on our bank loan and lines of credit, cost of debt and equity issuances, repurchase of common shares and repayments on long-term debt totaling $61.7 million, $52.6 million, $5.8 million, $7.6 million, and $2.4 million respectively.
Excluded Assets
In September 2019, APC and AP-AMH entered into the Second Amendment to Series A Preferred Stock Purchase Agreement clarifying the term Excluded Assets. “Excluded Assets” means (i) assets received from the sale of shares of the Series A Preferred equal to the Series A Purchase Price, (ii) the assets of the Company that are not Healthcare Services Assets, including the Company’s equity interests in Universal Care, Inc., Apollo Medical Holdings, Inc., and any entity that is primarily engaged in the business of owning, leasing, developing or otherwise operating real estate, (iii) any assets acquired with the
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proceeds of the sale, assignment or other disposition of any of the assets described in clauses (i) or (ii), and (iv) any proceeds of the assets described in clauses (i), (ii) and (iii).
Excluded Assets consisted of the following (in thousands):
Land, property and equipment, net 24,466 5,137
Loan receivable - related parties 4,145 —
Investments in other entities - equity method 25,847 18,360
Investment in privately held entities 36,179 —
Long term debt (7,580) —
Credit Facilities
Credit Facility
The Company's credit facility consisted of the following (in thousands):
Real Estate Loans 7,580
Less: current portion of debt (10,889)
Less: unamortized financing cost (4,605)
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The following table presents scheduled maturities of the Company's credit facility as of December 31, 2020:
Amount
Credit Agreement
In September 2019, the Company entered into a secured credit agreement (the “Credit Agreement,” and the credit facility thereunder, the “Credit Facility”) with Truist Bank (formerly known as SunTrust Bank), in its capacity as administrative agent for the lenders (in such capacity, the “Agent”), as a lender, an issuer of letters of credit and as swingline lender, and Preferred Bank, which is affiliated with one of the Company's board members, JPMorgan Chase Bank, N.A., MUFG Union Bank, N.A., Royal Bank of Canada, Fifth Third Bank and City National Bank, as lenders (the “Lenders”). In connection with the closing of the Credit Agreement, the Company, its subsidiary, NMM, and the Agent entered into a Guaranty and Security Agreement (the “Guaranty and Security Agreement”), pursuant to which, among other things, NMM guaranteed the obligations of the Company under the Credit Agreement.
The Credit Agreement provides for a five-year revolving credit facility to the Company of $100.0 million (“Revolver Loan”), which includes a letter of credit subfacility of up to $25.0 million. The Credit Agreement also provides for a term loan of $190.0 million, (“Term Loan A”). The unpaid principal amount of the term loan is payable in quarterly installments on the last day of each fiscal quarter commencing on December 31, 2019. The principal payment for each of the first eight fiscal quarters is $2.4 million, for the following eight fiscal quarters thereafter is $3.6 million and for the following three fiscal quarters thereafter is $4.8 million. The remaining principal payment on the term loan is due on September 11, 2024.
The proceeds of the term loan and up to $60.0 million of the revolving credit facility may be used to (i) finance a portion of the $545.0 million loan made by the Company to AP-AMH Medical Corporation, a California professional medical corporation (“AP-AMH”), concurrently with the closing of the Credit Agreement (the “AP-AMH Loan”) as described in the May 13, 2019, Current Report and the August 29, 2019, Current Report, (ii) refinance certain indebtedness of the Company and its subsidiaries and, indirectly, APC, (iii) pay transaction costs and expenses arising in connection with the Credit Agreement, the AP-AMH Loan and certain other related transactions and (iv) provide for working capital, capital expenditures and other general corporate purposes. The remainder of the revolving credit facility will be used to finance future acquisitions and investments and to provide for working capital needs, capital expenditures and other general corporate purposes.
The Company is required to pay an annual facility fee of 0.20% to 0.35% on the available commitments under the Credit Agreement, regardless of usage, with the applicable fee determined on a quarterly basis based on the Company’s leverage ratio. The Company is also required to pay customary fees as specified in a separate fee agreement between the Company and Truist Securities, Inc. (formerly SunTrust Robinson Humphrey, Inc.), the lead arranger of the Credit Agreement.
Amounts borrowed under the Credit Agreement will bear interest at an annual rate equal to either, at the Company’s option, (a) the rate for Eurocurrency deposits for the corresponding deposits of U.S. dollars appearing on Reuters Screen LIBOR01 Page (“LIBOR”), adjusted for any reserve requirement in effect, plus a spread of from 2.00% to 3.00%, as determined on a quarterly basis based on the Company’s leverage ratio, or (b) a base rate, plus a spread of 1.00% to 2.00%, as determined on a quarterly basis based on the Company’s leverage ratio. As of December 31, 2020, the interest rate on the Credit Agreement was 2.27%. The base rate is defined in a manner such that it will not be less than LIBOR. The Company will pay fees for standby letters of credit at an annual rate equal to 2.00% to 3.00%, as determined on a quarterly basis based on the Company’s leverage ratio, plus facing fees and standard fees payable to the issuing bank on the respective letter of credit. Loans outstanding under the Credit Agreement may be prepaid at any time without penalty, except for LIBOR breakage costs and expenses. If LIBOR ceases to be reported, the Credit Agreement requires the Company and the Agent to endeavor to establish a commercially reasonable alternative rate of interest and until they are able to do so, all borrowings must be at the base rate.
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The Credit Agreement requires the Company and its subsidiaries to comply with various affirmative covenants, including, without limitation, furnishing updated financial and other information, preserving existence and entitlements, maintaining properties and insurance, complying with laws, maintaining books and records, requiring any new domestic subsidiary meeting a materiality threshold specified in the Credit Agreement to become a guarantor thereunder and paying obligations. The Credit Agreement requires the Company and its subsidiaries to comply with, and to use commercially reasonable efforts to the extent permitted by law to cause certain material associated practices of the Company, including APC, to comply with, restrictions on liens, indebtedness and investments (including restrictions on acquisitions by the Company), subject to specified exceptions. The Credit Agreement also contains various other negative covenants binding the Company and its subsidiaries, including, without limitation, restrictions on fundamental changes, dividends and distributions, sales and leasebacks, transactions with affiliates, burdensome agreements, use of proceeds, maintenance of business, amendments of organizational documents, accounting changes and prepayments and modifications of subordinated debt.
The Credit Agreement requires the Company to comply with two key financial ratios, each calculated on a consolidated basis.
Coverage Ratios (1) Requirement December 31, 2020
Consolidated leverage ratio Less than 3.50 to 1.00 1.64
Consolidated interest coverage ratio Greater than 3.25 to 1.00 13.91
(1) All covenant ratio titles utilize terms as defined in the respective debt agreements.
Pursuant to the Guaranty and Security Agreement, the Company and NMM have granted the Lenders a security interest in all of their assets, including, without limitation, all stock and other equity issued by their subsidiaries (including NMM) and all rights with respect to the AP-AMH Loan. The Guaranty and Security Agreement requires the Company and NMM to comply with various affirmative and negative covenants, including, without limitation, covenants relating to maintaining perfected security interests, providing information and documentation to the Agent, complying with contractual obligations relating to the collateral, restricting the sale and issuance of securities by their respective subsidiaries and providing the Agent access to the collateral.
The Credit Agreement contains events of default, including, without limitation, failure to make a payment when due, default on various covenants in the Credit Agreement, breach of representations or warranties, cross-default on other material indebtedness, bankruptcy or insolvency, occurrence of certain judgments and certain events under the Employee Retirement Income Security Act of 1974 aggregating more than $10.0 million, invalidity of the loan documents, any lien under the Guaranty and Security Agreement ceasing to be valid and perfected, any change in control, as defined in the Credit Agreement, an event of default under the AP-AMH Loan, failure by APC to pay dividends in cash for any period of two consecutive fiscal quarters, failure by AP-AMH to pay cash interest to the Company, or if any modification is made to the Certificate of Determination or the Special Purpose Shareholder Agreement that directly or indirectly restricts, conditions, impairs, reduces or otherwise limits the payment of the Series A Preferred dividend by APC to AP-AMH. In addition, it will constitute an event of default under the Credit Agreement if APC uses all or any portion of the consideration received by APC from AP-AMH on account of AP-AMH’s purchase of Series A Preferred Stock for any purpose other than certain specific approved uses described in the following sentence, unless not less than 50.01% of all holders of common stock of APC at such time approve such use; provided that APC may use up to $50.0 million in the aggregate of such consideration for any purpose without any requirement to obtain such approval of the holders of common stock of APC. The approved uses include (i) any permitted investment, (ii) any dividend or distribution to the holders of the common stock of APC, (iii) any repurchase of common stock of APC, (iv) paying taxes relating to or arising from certain assets and transactions, or (v) funding losses, deficits or working capital support on account of certain non-healthcare assets in an amount not to exceed $125.0 million. If any event of default occurs and is continuing under the Credit Agreement, the Lenders may terminate their commitments, and may require the Company and its guarantors to repay outstanding debt and/or to provide a cash deposit as additional security for outstanding letters of credit. In addition, the Agent, on behalf of the Lenders, may pursue remedies under the Guaranty and Security Agreement, including, without limitation, transferring pledged securities of the Company’s subsidiaries in the name of the Agent and exercising all rights with respect thereto (including the right to vote and to receive dividends), collect on pledged accounts, instruments and other receivables (including the AP-AMH Loan), and all other rights provided by law or under the loan documents and the AP-AMH Loan.
In the ordinary course of business, certain of the Lenders under the Credit Agreement and their affiliates have provided to the Company and its subsidiaries and the associated practices, and may in the future provide, (i) investment banking, commercial banking (including pursuant to certain existing business loan and credit agreements being terminated in connection with entering into the Credit Agreement), cash management, foreign exchange or other financial services, and (ii) services as a
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bond trustee and other trust and fiduciary services, for which they have received compensation and may receive compensation in the future.
Deferred Financing Costs
The Company recorded deferred financing costs of $6.5 million related to the issuance of the Credit Facility. This amount was recorded as a direct reduction of the carrying amount of the related debt liability. The deferred financing costs related to the term loan will be amortized over the life of the Credit Facility using the effective interest rate method. The deferred financing costs related to the Revolver Loan will be amortized using the straight line method over the term of the revolver.
Effective Interest Rate
The Company’s average effective interest rate on its total debt during the years ended December 31, 2020, 2019 and 2018 was 3.48%, 3.39%, and 4.72%, respectively. Interest expense in the consolidated statements of income included amortization of deferred debt issuance costs for the years ended December 31, 2020 and 2019 of $1.4 million and, $0.5 million, respectively.
Real Estate Loans
On December 31, 2020, the Company purchased 100% of MPP, AMG Properties, and ZLL (refer to Note 4). As a result of this purchase, the Company assumed the existing loans held by MPP, AMG Properties, and ZLL.
MPP
On July 3, 2020, MPP entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the principal on the loan is $6.4 million with a variable interest rate of 0.50% less than the independent index which is the daily Wall Street Journal "Prime Rate." If the index is not available, East West Bank may designate a substitute index after notifying MPP. Monthly payments on the principal and any accrued interest rate not yet paid began in September 2020. MPP must maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1.
AMG
On August 5, 2020, AMG Properties entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the principal on the loan is $0.7 million with a variable interest rate of 0.30% less than the independent index which is the daily Wall Street Journal "Prime Rate." If the index is not available, East West Bank may designate a substitute index after notifying AMG Properties. Monthly payments on the principal and any accrued interest rate not yet paid began in September 2020. AMG Properties must maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1.
ZLL
On July 27, 2020, ZLL entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the principal on the loan is $0.7 million with a variable interest rate of 0.50% less than the independent index which is the daily Wall Street Journal "prime rate." If the index is not available, East West Bank may designate a substitute index after notifying AMG Properties. Monthly payments on the principal and any accrued interest rate not yet paid began in September 2020. ZLL must maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1.
Lines of Credit – Related Party
NMM Business Loan
On June 14, 2018, NMM amended its promissory note agreement with Preferred Bank (“NMM Business Loan Agreement”). Preferred Bank is affiliated with one of the Company’s board members who serves as the Chairman and CEO of Preferred Bank. The NMM Business Loan Agreement provides for loan availability of up to $20.0 million with a maturity date of June 22, 2020. The NMM Business Loan Agreement was subsequently amended to temporarily increase the loan availability to $27.0 million for the period from September 1, 2018 to October 31, 2019 to facilitate the issuance of an additional standby
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letter of credit for the benefit of CMS. The amounts outstanding as of June 30, 2019 of $5.0 million were fully repaid on September 11, 2019.
On September 5, 2018, NMM entered into a non-revolving line of credit agreement with Preferred Bank (“NMM Line of Credit Agreement”) which provides for loan availability of up to $20.0 million with a maturity date of September 5, 2019. This credit facility was subsequently amended in 2019 to reduce the loan availability to $2.2 million. The interest rate is based on the Wall Street Journal “Prime Rate” plus 0.125%, or 3.375%, as of December 31, 2020. Each drawdown from the line of credit is converted into a five-year term loan with monthly principal payments plus interest based on a five-year amortization schedule.
On September 11, 2019, the NMM Business Loan Agreement, dated as of June 14, 2018, between NMM and Preferred Bank, as amended, and the Line of Credit Agreement, dated as of September 5, 2018, between NMM and Preferred Bank, as amended, were terminated in connection with the closing of the credit facility.
APC Business Loan
On June 14, 2018, APC entered its promissory note agreement with Preferred Bank, which is affiliated with one of the Company’s board members, (“APC Business Loan Agreement”) which provides for loan availability of up to $10.0 million with a maturity date of June 22, 2020. APC Business Loan Agreement was subsequently amended on April 17, 2019 and June 11, 2019 to decrease the loan availability from $10.0 million to $4.1 million and extend the maturity date through December 31, 2020. On August 1, 2019 and September 10, 2019, APC Business Loan Agreement was further amended to increase loan availability from $40.0 million to $43.8 million, and decrease loan availability from $43.8 million to $4.1 million, respectively. This decrease further limited the purpose of the indebtedness under APC Business Loan Agreement to the issuance of standby letters of credit, and added as a permitted lien the security interest in all of its assets granted by APC in favor of NMM under a Security Agreement dated on or about September 11, 2019 securing APC’s obligations to NMM under, and as required pursuant to, that certain Management Services Agreement dated as of July 1, 1999, as amended. The interest rate is based on the Wall Street Journal “Prime Rate” plus 0.125%, or 3.375% and 4.875%, as of December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020 and 2019, there is no additional availability under this line of credit.
Standby Letters of Credit
APAACO established an irrevocable standby letter of credit with Preferred Bank, which is affiliated with one of the Company’s board members, (through the NMM Business Loan Agreement) and was amended in 2019 to the amount of $14.8 million for the benefit of CMS. The letter of credit is automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless notified by the institution to terminate prior to 90 days from any expiration date. APAACO may continue to draw from the letter of credit for one year following the bank’s notification of non-renewal. In September 2019, these letters were terminated with Preferred Bank and reissued under the Credit Agreement. In August 2020, $14.8 million of the irrevocable standby letters of credit were released by CMS and no amounts remain outstanding as of December 31, 2020. As of December 31, 2020 we have $25.0 million available under the letter of credit subfacility.
APC established irrevocable standby letters of credit with a financial institution for a total of $0.3 million for the benefit of certain health plans. The standby letters of credit are automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless notified by the institution in advance of the expiration date that the letter will be terminated.
Alpha Care established irrevocable standby letters of credit with Preferred Bank under the APC Business Loan Agreement for a total of $3.8 million for the benefit of certain health plans. The standby letters of credit are automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless notified by the institution in advance of the expiration date that the letter will be terminated.
Intercompany Loans
Each of AMH, MMG, BAHA, ACC, AKM and SCHC has entered into an Intercompany Loan Agreement with AMM under which AMM has agreed to provide a revolving loan commitment to each of the affiliated entities in an amount set forth in each Intercompany Loan Agreement. Each Intercompany Loan Agreement provides that AMM’s obligation to make any advances automatically terminates concurrently with the termination of the management agreement with the applicable affiliated entity. In addition, each Intercompany Loan Agreement provides that (i) any material breach by the shareholder of
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record of the applicable Physician Shareholder Agreement or (ii) the termination of the management agreement with the applicable affiliated entity constitutes an event of default under the Intercompany Loan Agreement. All the intercompany loans have been eliminated in consolidation.
Year Ended December 31, 2020 (in thousands)
Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and to the reported amounts of revenues and expenses during the period. The Company bases its estimates on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. Changes in estimates are recorded if and when better information becomes available. Actual results could differ from those estimates under different assumptions and conditions. The Company believes that the accounting policies discussed below are those that are most important to the presentation of its financial condition and results of operations and that require its management’s most difficult, subjective and complex judgments. Our significant accounting policies are described in Note 2 – “ Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements under Item 8 in this annual report on Form 10-K.
Principles of Consolidation
The consolidated balance sheets as of December 31, 2020 and 2019 and consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 include the accounts of ApolloMed, its consolidated subsidiaries NMM, AMM, and APAACO, including ApolloMed's consolidated VIE, AP-AMH, AMM's consolidated VIE, SCHC, NMM’s consolidated subsidiaries, APCN-ACO and AP-ACO, and NMM’s consolidated VIE, APC, APC’s subsidiaries, UCAP, MPP, AMG Properties, ZLL and APC’s consolidated VIEs, CDSC, APC-LSMA, and ICC, and APC-LSMA's consolidated subsidiaries Alpha Care and Accountable Health Care.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include collectability of receivables, recoverability of long-lived and intangible assets, business combination and goodwill valuation and impairment, accrual of medical liabilities (incurred but not reported (“IBNR”) claims), determination of full-risk and shared-risk revenue and receivables (including constraints, completion factors and historical margins), income tax valuation allowance, share-based compensation, and right-of-use ("ROU") assets and lease liabilities. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates and assumptions.
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Receivables and Receivables – Related Parties
The Company’s receivables are comprised of accounts receivable, capitation and claims receivable, risk pool settlements and incentive receivables, management fee income and other receivables. Accounts receivable are recorded and stated at the amount expected to be collected.
The Company’s receivables – related parties are comprised of risk pool settlements and incentive receivables, management fee income and other receivables. Receivables – related parties are recorded and stated at the amount expected to be collected.
Capitation and claims receivable relate to each health plan’s capitation, which is received by the Company in the month following the month of service. Risk pool settlements and incentive receivables mainly consist of the Company’s full risk pool receivable that is recorded quarterly based on reports received from our hospital partners and management’s estimate of the Company’s portion of the estimated risk pool surplus for open performance years. Settlement of risk pool surplus or deficits occurs approximately 18 months after the risk pool performance year is completed. Other receivables include fee-for-services (“FFS”) reimbursement for patient care, certain expense reimbursements, and stop loss insurance premium reimbursements from IPAs.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. The Company also regularly analyzes the ultimate collectability of accounts receivable after certain stages of the collection cycle using a look-back analysis to determine the amount of receivables subsequently collected and adjustments are recorded when necessary. Reserves are recorded primarily on a specific identification basis.
Receivables are recorded when the Company is able to determine amounts receivable under applicable contracts and agreements based on information provided and collection is reasonably likely to occur. In regards to the credit loss standard, the Company continuously monitors its collections of receivables and our expectation is that the historical credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses that would be estimated under the current expected credit losses ("CECL") model.
Fair Value Measurements
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, investment in marketable securities, receivables, loans receivable – related parties, accounts payable, certain accrued expenses, capital lease obligations, bank loan, line of credit – related party, and long-term debt. The carrying values of the financial instruments classified as current in the accompanying consolidated balance sheets are considered to be at their fair values, due to the short maturity of these instruments. The carrying amount of the loan receivables – related parties, net of current portion, bank loan, capital lease obligations line of credit - related party, and long-term debt approximate fair value as they bear interest at rates that approximate current market rates for debt with similar maturities and credit quality. The FASB ASC 820, Fair Value Measurement (“ASC 820”), applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. ASC 820 establishes a fair value hierarchy for disclosures of the inputs to valuations used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
Business Combinations
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We use the acquisition method of accounting for all business combinations, which requires assets and liabilities of the acquiree to be recorded at fair value, to measure the fair value of the consideration transferred, including contingent consideration, to be determined on the acquisition date, and to account for acquisition related costs separately from the business combination.
Intangible Assets and Long-Lived Assets
Intangible assets with finite lives include network-payor relationships, management contracts and member relationships and are stated at cost, less accumulated amortization and impairment losses. These intangible assets are amortized on the accelerated method using the discounted cash flow rate. Intangible assets with finite lives also include a patient management platform, as well as trade names and trademarks, whose valuations were determined using the cost to recreate method and the relief from royalty method, respectively. These assets are stated at cost, less accumulated amortization and impairment losses, and are amortized using the straight-line method.
Finite-lived intangibles and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the carrying value of the asset to its estimated fair value. Fair value is determined based on appropriate valuation techniques.
Goodwill and Intangible Assets
Under FASB ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment.
At least annually, at the Company’s fiscal year end, or sooner, if events or changes in circumstances indicate that an impairment has occurred, the Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments for each of the Company’s three reporting units, (1) management services, (2) IPA, and (3) ACO. The Company is required to perform a quantitative goodwill impairment test only if the conclusion from the qualitative assessment is that it is more likely than not that a reporting unit’s fair value is less than the carrying value of its assets. Should this be the case, a quantitative analysis is performed to identify whether a potential impairment exists by comparing the estimated fair values of the reporting units with their respective carrying values, including goodwill.
An impairment loss is recognized if the implied fair value of the asset being tested is less than its carrying value. In this event, the asset is written down accordingly. The fair values of goodwill are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances.
At least annually, indefinite-lived intangible assets are tested for impairment. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible asset exceeds its fair value. The fair values of indefinite-lived intangible assets are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances.
Accrual of Medical Liabilities
APC, Alpha Care, Accountable Health Care, and APAACO are responsible for integrated care that the associated physicians and contracted hospitals provide to their enrollees. APC, Alpha Care, Accountable Health Care, and APAACO provide integrated care to HMOs, Medicare and Medi-Cal enrollees through a network of contracted providers under sub-capitation and direct patient service arrangements. Medical costs for professional and institutional services rendered by contracted providers are recorded as cost of services, excluding depreciation and amortization, expense in the accompanying consolidated statements of income.
An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in the accompanying consolidated balance sheets. Medical liabilities include claims reported as of the balance sheet date and estimated IBNR claims. Such estimates are developed using actuarial methods and are based on numerous variables, including the utilization of healthcare services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and other factors. The estimation methods and the resulting accrual are periodically reviewed and updated. Many of the medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the
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provision of various services. Such differing interpretations may not come to light until a substantial period of time has passed following the contract implementation.
Risk Pool Settlements and Incentives
APC enters into full risk capitation arrangements with certain health plans and local hospitals, which are administered by a third party, where the hospital is responsible for providing, arranging and paying for institutional risk and APC is responsible for providing, arranging and paying for professional risk. Under a full risk pool sharing agreement, APC generally receives a percentage of the net surplus from the affiliated hospital’s risk pools with HMOs after deductions for the affiliated hospitals costs. Advance settlement payments are typically made quarterly in arrears if there is a surplus. The Company's risk pool settlements under arrangements with health plans and hospitals are recognized using the most likely amount methodology and amounts are only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The assumptions for historical MLR, IBNR completion factors and constraint percentages were used by management in applying the most likely amount methodology.
Under capitated arrangements with certain HMOs APC participates in one or more shared risk arrangements relating to the provision of institutional services to enrollees (shared risk arrangements) and thus can earn additional revenue or incur losses based upon the enrollee utilization of institutional services. Shared risk capitation arrangements are entered into with certain health plans, which are administered by the health plan, where APC is responsible for rendering professional services, but the health plan does not enter into a capitation arrangement with a hospital and therefore the health plan retains the institutional risk. Shared risk deficits, if any, are not payable until and unless (and only to the extent of any) risk sharing surpluses are generated. At the termination of the HMO contract, any accumulated deficit will be extinguished.
The Company's risk pool settlements under arrangements with HMOs are recognized, using the most likely methodology, and only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur. Given the lack of access to the health plans’ data and control over the members assigned to APC, the adjustments and/or the withheld amounts are unpredictable and as such APC’s risk share revenue is deemed to be fully constrained until APC is notified of the amount by the health plan. Risk pools for the prior contract years are generally fully settled in the third or fourth quarter of the following year.
In addition to risk-sharing revenues, the Company also receives incentives under “pay-for-performance” programs for quality medical care, based on various criteria. As an incentive to control enrollee utilization and to promote quality care, certain HMOs have designed quality incentive programs and commercial generic pharmacy incentive programs to compensate the Company for its efforts to improve the quality of services and efficient and effective use of pharmacy supplemental benefits provided to HMO members. The incentive programs track specific performance measures and calculate payments to the Company based on the performance measures. The Company's incentives under “pay-for-performance” programs are recognized using the most likely methodology. However, as the Company does not have sufficient insight from the health plans on the amount and timing of the shared risk pool and incentive payments these amounts are considered to be fully constrained and only recorded when such payments are known and/or received.
Generally, for the foregoing arrangements, the final settlement is dependent on each distinct day’s performance within the annual measurement period but cannot be allocated to specific days until the full measurement period has occurred and performance can be assessed. As such, this is a form of variable consideration estimated at contract inception and updated through the measurement period (i.e. the contract year), to the extent the risk of reversal does not exist and the consideration is not constrained.
Share-Based Compensation
The Company maintains a stock-based compensation program for employees, non-employees, directors and consultants. The value of share-based awards such as options is recognized as compensation expense on a cumulative straight-line basis over the vesting period of the awards, adjusted for expected forfeitures. From time to time, the Company issues shares of its common stock to its employees, directors and consultants, which shares may be subject to the Company’s repurchase right (but not obligation) that lapses based on time-based and performance-based vesting schedules.
Leases
The Company determines if an arrangement is a lease at its inception. The expected term of the lease used for computing the lease liability and right-of-use ("ROU") asset and determining the classification of the lease as operating or financing may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that
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option. The Company elected practical expedients for ongoing accounting that is provided by the new standard comprised of the following: (1) the election for classes of underlying asset to not separate non-lease components from lease components, and (2) the election for short-term lease recognition exemption for all leases under 12 months term. The present value of the lease payments is calculated using a rate implicit in the lease, when readily determinable. However, as most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate to determine the present value of the lease payments for the majority of its leases
Variable interest model
We perform a primary beneficiary analysis on all our identified variable interest entities, which comprises a qualitative analysis based on power and economics. We consolidate a VIE if both power and benefits belong to us – that is, we (i) have the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). We consolidate VIEs whenever it is determined that we are the primary beneficiary.
Investment in Other Entities - Equity Method
We account for certain investments using the equity method of accounting when it is determined that the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the consolidated statements of income under “Income from equity method investments” and also is adjusted by contributions to and distributions from the investee. Equity method investments are subject to impairment evaluation. During the period ended December 31, 2020, the Company recognized no impairment loss.
Noncontrolling Interests
The Company consolidates entities in which the Company has a controlling financial interest. The Company consolidates subsidiaries in which the Company holds, directly or indirectly, more than 50% of the voting rights, and variable interest entities (VIEs) in which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests (including certain VIEs) in the Company’s consolidated entities. The amount of net income attributable to noncontrolling interests is disclosed in the consolidated statements of income.
Mezzanine Equity
Based on the shareholder agreements for APC, in the event of a disqualifying event, as defined in the agreements, APC could be required to repurchase the shares from their respective shareholders based on certain triggers outlined in the shareholder agreements. As the redemption feature of the shares is not solely within the control of APC, the equity of APC does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Accordingly, the Company recognizes noncontrolling interests in APC as mezzanine equity in the consolidated financial statements. APC’s shares were not redeemable and it was not probable that the shares would become redeemable as of December 31, 2020 and 2019.
Revenue Recognition
The Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, using the modified retrospective method on January 1, 2108. Modified retrospective adoption required entities to apply the standard retrospectively to the most current period presented in the financial statements, requiring the cumulative effect of the retrospective application as an adjustment to the opening balance of retained earnings and noncontrolling interests at the date of initial application. Revenue from substantially all of the Company’s contracts with customers continues to be recognized over time as services are rendered.
Income Taxes
Federal and state income taxes are computed at currently enacted tax rates less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the
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timing of when items of income and expense are recognized for financial reporting and income tax purposes, changes in the recognition of tax positions and any changes in the valuation allowance caused by a change in judgment about the realizability of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
The Company uses a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be recognized in the consolidated financial statements. Once the recognition threshold is met, the tax position is then measured to determine the actual amount of benefit to recognize in the consolidated financial statements.
Effect of New Accounting Standards
See “Recent Accounting Pronouncements” under “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies.”
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Borrowings under our Credit Agreement exposed us to interest rate risk. As of December 31, 2020, we had $238.1 million in outstanding borrowings under our Credit Agreement. Amount borrowed under the Credit Agreement bears interest at an annual rate equal to either, at the Company's option, (a) the rate for Eurocurrency deposits for the corresponding deposits of U.S. dollars appearing on Reuters Screen LIBOR01 Page ("LIBOR"), adjusted for any reserve requirement in effect, plus a spread of 2.00% to 3.00%, as determined on a quarterly basis based on the Company's leverage ratio, or (b) a base rate, plus a spread of 1.00% to 2.00%, as determined on a quarterly basis based on the Company's leverage ratio. The base rate is defined in a manner such that it will not be less than LIBOR. The Company will pay fees for standby letters of credit at an annual rate equal to 2.00% to 3.00%, as determined on a quarterly basis based on the Company’s leverage ratio, plus facing fees and standard fees payable to the issuing bank on the respective letter of credit. Furthermore, as of December 31, 2020, the Company had $7.6 million in outstanding borrowings for real estate loans related to ZLL, MPP, and AMG Properties. Each agreement bears interest that is subject to change from time to time based on changes in an independent index which is the daily Wall Street Journal Prime Rate, as quoted in the "Money Rates" column of The Wall Street Journal (Western edition) as determined by the Lender (the "Index"). On the dates of the agreement, the Index is 3.250% per annum. Under no circumstances will the interest rate on this loan be less than 3.500% per annum or more than the maximum rate allowed by applicable law. A hypothetical 1% change in our interest rates for our outstanding borrowings under our Credit Agreement and Business Loan agreement would have increased or decreased our interest expense for the year ended December 31, 2020 by $2.5 million.
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Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements Page
Reports of Independent Registered Public Accounting Firms 70
Consolidated Balance Sheets as of December 31, 2020 and 2019 74
Notes to the Consolidated Financial Statements 82
69
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Apollo Medical Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Apollo Medical Holdings, Inc. (the Company) as of December 31, 2020, the related consolidated statements of income, mezzanine and stockholders' equity and cash flows for the year ended December 31, 2020, and the related notes(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework),and our report dated March 12, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
70
Risk Pool Settlements and Related Receivables
71
Valuation of Incurred but not Reported (IBNR) Claims Liability
/s/ Ernst and Young, LLP
We have served as the Company’s auditor since 2020.
Los Angeles, California
72
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Apollo Medical Holdings, Inc.
Alhambra, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Apollo Medical Holdings, Inc. (the “Company”) as of December 31, 2019, the related consolidated statements of income, mezzanine and stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Method Related to Leases
As discussed in Notes 2 and 19 to the consolidated financial statements, the Company changed its method for accounting for leases effective January 1, 2019 as a result of the adopting Accounting Standards Codification (“ASC”) 842 - Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We served as the Company’s auditor from 2014 to 2020.
Los Angeles, California
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, December 31,
Assets
Current assets
Restricted cash — 75
Prepaid expenses and other current assets 16,747 10,315
Loan receivable - short term 50 22,925
Noncurrent assets
Loans receivable 480 —
Loans receivable – related parties 4,145 —
Investments in other entities – equity method 43,292 28,427
Investments in privately held entities 37,075 896
74
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share data)
December 31, December 31,
Liabilities, Mezzanine Equity and Stockholders’ Equity
Current liabilities
Accounts payable and accrued expenses $ 36,143 $ 27,279
Finance lease liabilities 102 102
Current portion of long-term debt 10,889 9,500
Noncurrent liabilities
Finance lease liabilities, net of current portion 311 415
Operating lease liabilities, net of current portion 15,865 11,373
Commitments and Contingencies (Note 13)
Mezzanine equity
Stockholders’ equity
Noncontrolling interest 87 786
75
Total liabilities, mezzanine equity and stockholders’ equity $ 817,486 $ 728,713
(1)The Company's consolidated balance sheets include the assets and liabilities of its consolidated variable interest entities ("VIEs"). The consolidated balance sheets include total assets that can be used only to settle obligations of the Company’s consolidated VIEs totaling $801.3 million and $849.3 million as of December 31, 2020 and December 31, 2019, respectively, and total liabilities of the Company’s consolidated VIEs for which creditors do not have recourse to the general credit of the primary beneficiary of $111.3 million and $114.5 million as of December 31, 2020 and December 31, 2019, respectively. See Note 18 – Variable Interest Entities (VIEs) for further detail.
See accompanying notes to consolidated financial statements.
76
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
Years ended December 31,
Revenue
Operating expenses
Provision for doubtful accounts — (1,363) 3,888
Impairment of goodwill and intangible assets — 1,994 3,799
Other (expense) income
Income (loss) from equity method investments 3,694 (6,901) (8,125)
Gain on sale of equity method investment 99,839 — —
Net income attributable to noncontrolling interests 84,454 3,557 49,432
Earnings per share – basic $ 1.04 $ 0.41 $ 0.33
Earnings per share – diluted $ 1.01 $ 0.39 $ 0.29
See accompanying notes to consolidated financial statements.
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF MEZZANINE AND STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common Stock Outstanding
Shares Amount
Purchase price adjustment from Merger — — — 868 — — 868
Noncontrolling interest capital change — — — — — 28 28
Acquisition of additional shares in consolidated entity — — — 2,832 — (2,832) —
Shares issued for exercise of options and warrants — 418,619 — 3,233 — — 3,233
Stock subscription 754 — — — — — —
Shares issued in connection with business acquisition 414 — — — — — —
Cost of equity issuance of preferred shares (878) — — — — — —
Noncontrolling interest capital change — 28 28
Reclassification of options liability to equity 1,185 — — — — —
Purchase of treasury shares — (16,897) — (301) — — (301)
Distribution to noncontrolling interest (1,037) — — — — — —
Shares issued for vesting of restricted stock awards — 66,788 — — — — —
Shares issued for cashless exercise of warrants — 66,517 — — — — —
Share-based compensation — — — 3,383 — — 3,383
Cancellation of restricted stock awards — — — (236) — — (236)
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
Cash flows from operating activities
Amortization of debt issuance cost 1,347 473 —
Loss on disposal of property and equipment 91 — 42
Impairment of goodwill and intangible assets — 1,994 3,799
Provision for doubtful accounts — (1,363) 3,888
Gain on sale of equity method investment (99,839) — —
Gain on loan assumption — (2,250) —
Unrealized loss (gain) from investment in equity securities 11 (9) 25
(Income) loss from equity method investments (3,694) 6,901 8,125
Changes in operating assets and liabilities, net of acquisition amounts:
Prepaid expenses and other current assets (6,432) (2,756) (2,814)
Fiduciary accounts payable 7,615 488 —
Capitation incentives payable — — (21,500)
Operating lease liabilities (2,973) (2,244) —
Cash flows from investing activities
Purchases of marketable securities (1,793) (115,402) (9)
Proceeds from sale of marketable securities 50,625 — —
Proceeds from repayment of loans receivable - related parties 16,500 — —
Dividends received from equity method investments — 240 607
Proceeds from sale of fixed assets 50 — —
Payments for business acquisitions, net of cash acquired (11,354) (49,403) —
Purchases of investments in privately held entities — (491) (405)
Proceeds from sale of equity method investment 52,743 — —
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Cash flows from financing activities
Repayment of term loan (9,500) — —
Change in noncontrolling interest capital — 28 27
Borrowings on line of credit — 39,600 —
Repayments on long-term debt — (2,375) —
Repayments on bank loan and lines of credit — (52,640) (495)
Payment of capital lease obligations (105) (102) (99)
Proceeds from exercise of stock options and warrants 10,802 3,123 3,997
Proceeds from common stock offering — 755 200
Distribution to noncontrolling interest (1,037) — —
Cost of debt and equity issuances — (5,771) —
Supplemental disclosures of cash flow information
Supplemental disclosures of non-cash investing and financing activities
Cashless exercise of warrants $ 599 $ — $ —
Dividend declared included in dividend payable 485 271 —
APC stock issued in exchange for AMG — 414 —
Deferred tax liability adjusted to goodwill — 6,334 1,110
Reclassification of liability for equity shares — 1,185 —
Purchase price adjustment for acceleration of vested stock options — — 868
Reclassification of dividends related to share repurchase — — 4,216
Deferred tax liability adjustment related to warrant exercises 690 — —
Preferred shares received from sale of equity method investment 36,179 — —
Beneficial interest acquired from sale of equity method investment 15,723 — —
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The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total amounts of cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows.
Years Ended December 31,
Restricted cash – long-term - letters of credit 500 746 745
Restricted cash – short-term — 75 —
See accompanying notes to consolidated financial statements.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
1. Description of Business
Apollo Medical Holdings, Inc. ("ApolloMed") is a leading physician-centric, technology-powered, risk-bearing healthcare management company. Leveraging its proprietary population health management and healthcare delivery platform, ApolloMed operates an integrated, value-based healthcare model, which aims to empower the providers in its network to deliver the highest quality of care to its patients in a cost-effective manner. ApolloMed was formed via its merger with Network Medical Management ("NMM") on December 8, 2017 ("2017 Merger"). As a result of the merger, NMM became a wholly-owned subsidiary of ApolloMed, and the former NMM shareholders own a majority of the issued and outstanding common stock of ApolloMed and maintain control of the board of directors of ApolloMed.
Headquartered in Alhambra, California, ApolloMed's subsidiaries include management services organizations ("MSOs"), affiliated independent practice associations ("IPAs") and a Next Generation Accountable Care Organization ("NGACO"). Network Medical Management, Inc. ("NMM") and Apollo Medical Management, Inc. ("AMM") are the administrative and managerial services companies for the professional corporations that contract with independent physicians to deliver medical services in-office and virtually. Allied Physicians of California, a Professional Medical Corporation d.b.a. Allied Pacific of California IPA ("APC"), Alpha Care Medical Group, Inc. and Accountable Health Care IPA are the affiliated IPA groups that provide medical services. These affiliated IPAs are supported by ApolloMed Hospitalists, a Medical Corporation ("AMH") and Southern California Heart Centers, a Medical Corporation ("SCHC"). The Company's NGACO operates under the APA ACO, Inc. ("APAACO") brand and participates in the Centers for Medicare & Medicaid Services program that allows provider groups to assume higher levels of financial risk and potentially achieve a higher reward from participation in the program's attribution-based risk sharing model.
The Company provides care coordination services to each major constituent of the healthcare delivery system, including patients, families, primary care physicians, specialists, acute care hospitals, alternative sites of inpatient care, physician groups and health plans. The Company’s physician network consists of primary care physicians, specialist physicians, and hospitalists.
NMM was formed in 1994 as an MSO for the purposes of providing management services to medical companies and IPAs. The management services primarily include billing, collection, accounting, administration, quality assurance, marketing, compliance, and education. Following a business combination, NMM became a wholly-owned subsidiary of ApolloMed in December 2017.
APC was incorporated in 1992 for the purpose of arranging healthcare services as an IPA. APC has contracts with various health maintenance organizations (“HMOs”) and other licensed healthcare service plans as defined in the California Knox-Keene Health Care Service Plan Act of 1975. Each HMO negotiates a fixed amount per member per month (“PMPM”) that is to be paid to APC. In return, APC arranges for the delivery of healthcare services by contracting with physicians or professional medical corporations for primary care and specialty care services. APC assumes the financial risk of the cost of delivering healthcare services in excess of the fixed amounts received. Some of the risk is transferred to the contracted physicians or professional corporations. The risk is also minimized by stop-loss provisions in contracts with HMOs.
In July 1999, APC entered into an amended and restated management and administrative services agreement with NMM (amending an initial management services agreement that was entered into in 1997) for an initial fixed term of 30 years. In accordance with relevant accounting guidance, APC is determined to be a variable interest entity (“VIE”) of the Company as NMM is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect APC’s economic performance through its majority representation on the APC Joint Planning Board; therefore APC is consolidated by NMM.
AP-AMH Medical Corporation (“AP-AMH”) was formed in May 2019, as a designated shareholder professional corporation. Dr. Thomas Lam, a shareholder, and the Chief Executive Officer and Chief Financial Officer of APC and Co-Chief Executive Officer of ApolloMed, is the sole shareholder of AP-AMH. ApolloMed makes all the decisions on behalf of AP-AMH and funds and receives all the distributions from its operations. ApolloMed has the right to receive benefits from the operations of AP-AMH and has the option, but not the obligation, to cover its losses. AP-AMH's sole function and only activity is to act as the nominee shareholder for ApolloMed's investments in APC. Therefore, AP-AMH is controlled by and consolidated by ApolloMed as the primary beneficiary of this VIE.
In September 2019, ApolloMed completed the following series of transactions with its affiliates, AP-AMH and APC:
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
1.ApolloMed loaned AP-AMH $545.0 million pursuant to a ten-year secured loan agreement (the “AP-AMH Loan”). The loan bears interest at a rate of 10% per annum simple interest, is not prepayable (except in certain limited circumstances), requires quarterly payments of interest only in arrears, and is secured by a first priority security interest in all of AP-AMH's assets, including the shares of APC Series A Preferred Stock to be purchased by AP-AMH. To the extent that AP-AMH is unable to make any interest payment when due because it has received dividends on the APC Series A Preferred Stock insufficient to pay in full such interest payment, then the outstanding principal amount of the loan will be increased by the amount of any such accrued but unpaid interest, and any such increased principal amounts will bear interest at the rate of 10.75% per annum simple interest.
2.AP-AMH purchased 1,000,000 shares of APC Series A Preferred Stock for aggregate consideration of $545.0 million in a private placement. Under the terms of the APC Certificate of Determination of Preferences of Series A Preferred Stock (the "Certificate of Determination"), AP-AMH is entitled to receive preferential, cumulative dividends that accrue on a daily basis and that are equal to the sum of (i) APC's net income from Healthcare Services (as defined in the Certificate of Determination), plus (ii) any dividends received by APC from certain of APC's affiliated entities, less (iii) any Retained Amounts (as defined in the Certificate of Determination). During the year ended December 31, 2020 and 2019, APC distributed $30.4 million and $8.9 million, respectively, as preferred returns.
3.APC purchased 15,015,015 shares of the Company's common stock for total consideration of $300.0 million in private placement. In connection therewith, the Company granted APC certain registration rights with respect to the Company's common stock that APC purchased, and APC agreed that APC votes in excess of 9.99% of the Company's then outstanding shares will be voted by proxy given to the Company's management, and that those proxy holders will cast the excess votes in the same proportion as all other votes cast on any specific proposal coming before the Company's stockholders. During the year ended December 31, 2020, APC distributed approximately 5.0 million shares of the Company's common stock to APC shareholders.
4.ApolloMed licensed to AP-AMH the right to use certain tradenames for certain specified purposes for a fee equal to a percentage of the aggregate gross revenues of AP-AMH. The license fee is payable out of any Series A Preferred Stock dividends received by AP-AMH from APC.
5.Through its subsidiary, NMM, the Company agreed to provide certain administrative services to AP-AMH for a fee equal to a percentage of the aggregate gross revenues of AP-AMH. The administrative fee also is payable out of any APC Series A Preferred Stock dividends received by AP-AMH from APC.
As part of the series of transactions, in September 2019, APC and AP-AMH entered into a Second Amendment to the Series A Preferred Stock Purchase Agreement clarifying the term excluded assets ("Excluded Assets"). Excluded Assets means (i) assets received from the sale of shares of the Series A Preferred equal to the Series A Purchase Price, (ii) the assets of the Company that are not Healthcare Services Assets, including the Company’s equity interests in Universal Care, Inc., Apollo Medical Holdings, Inc., and any entity that is primarily engaged in the business of owning, leasing, developing or otherwise operating real estate, (iii) any assets acquired with the proceeds of the sale, assignment or other disposition of any of the assets described in clauses (i) or (ii), and (iv) any proceeds of the assets described in clauses (i), (ii) and (iii).
APC's ownership in ApolloMed was 22.58% and 32.50% as of December 31, 2020 and December 31, 2019, respectively.
Concourse Diagnostic Surgery Center, LLC (“CDSC”) was formed in March 2010 in the state of California. CDSC is an ambulatory surgery center in City of Industry, California, is organized by a group of highly qualified physicians, and the surgical center utilizes some of the most advanced equipment in Eastern Los Angeles County and San Gabriel Valley. The facility is Medicare Certified and accredited by the Accreditation Association for Ambulatory Healthcare, Inc. As of December 31, 2020, APC owned 45.01% of CDSC's capital stock. CDSC is determined to be a VIE and APC is determined to be the primary beneficiary. APC has the ability to direct the activities that most significantly affect CDSC’s economic performance and receives the most economic benefits; therefore CDSC is consolidated by APC.
APC-LSMA Designated Shareholder Medical Corporation (“APC-LSMA”) was formed in October 2012 as a designated shareholder professional corporation. Dr. Thomas Lam, a shareholder and the Chief Executive Officer and Chief Financial Officer of APC and Co-Chief Executive Officer of ApolloMed, is a nominee shareholder of APC-LSMA. APC makes all investment decisions on behalf of APC-LSMA, funds all investments and receives all distributions from the investments. APC has the obligation to absorb losses and the right to receive benefits from all investments made by APC-LSMA. APC-LSMA’s sole function is to act as the nominee shareholder for APC in other California medical professional corporations. Therefore, APC-LSMA is controlled and consolidated by APC as the primary beneficiary of this VIE. The only activity of APC-LSMA is
83
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
to hold the investments in medical corporations, including the IPA lines of business of LaSalle Medical Associates (“LMA”), Pacific Medical Imaging and Oncology Center, Inc. (“PMIOC”), Diagnostic Medical Group (“DMG”) and AHMC International Cancer Center, a Medical Corporation (“ICC”). APC-LSMA also holds a 100% ownership interest in Maverick Medical Group, Inc. (“MMG”), Alpha Care Medical Group, Inc. (“Alpha Care”), Accountable Health Care IPA, a Professional Medical Corporation ("Accountable Health Care"), and AMG, a Professional Medical Corporation ("AMG").
Alpha Care, an IPA, was acquired by APC-LSMA in May 2019 for an aggregate purchase price of $45.1 million in cash, has been operating in California since 1993 and is a risk bearing organization engaged in providing professional services under capitation arrangements with its contracted health plans through a provider network consisting of primary care and specialty care physicians. Alpha Care specializes in delivering high-quality healthcare to over 180,000 enrollees, as of December 31, 2020, and focuses on Medi-Cal/Medicaid, Commercial, Medicare and Dual Eligible members in the Riverside and San Bernardino counties of Southern California (see Note 3).
Accountable Health Care is a California based IPA that has served the local community in the greater Los Angeles County area through a network of physicians and health care providers for more than 20 years. As of December 31, 2020, Accountable Health Care had a network of over 336 primary care physicians and 559 specialty care physicians and is affiliated with a community hospital and regional medical center that provide quality health care services to more than 73,000 members of three federally qualified health plans and multiple product lines, including Medi-Cal, Commercial, Medicare and the California Healthy Families program. In August 2019, APC and APC-LSMA acquired the remaining outstanding shares of capital stock they did not already own (comprising 75%) for $7.3 million in cash (see Note 3 and Note 6).
AMG is a network of family practice clinics operating in three main locations in Southern California. AMG provides professional and post-acute care services to Medicare, Medi-Cal/Medicaid, and Commercial patients through its networks of doctors and nurse practitioners. On September 10, 2019, APC-LSMA acquired 100% of the aggregate issued and outstanding shares of capital stock of AMG for $1.2 million in cash and $0.4 million of APC common stock (see Note 3).
Universal Care Acquisition Partners, LLC (“UCAP”), a 100% owned subsidiary of APC, was formed in June 2014 for the purpose of holding the investment in Universal Care, Inc. (“UCI”). On April 30, 2020, UCAP completed the sale of its 48.9% ownership interest in UCI to Bright Health Company of California, Inc. ("Bright") for approximately $69.2 million in cash proceeds (including $16.5 million as repayment of indebtedness owed to APC), plus non-cash consideration consisting of shares of Bright Health, Inc.'s preferred stock having an estimated fair value of approximately $36.2 million on the date of sale. In addition, pursuant to the terms of the stock purchase agreement, APC has a beneficial interest in the equity method investment sold. The estimated fair value of such interest on April 30, 2020 was $15.7 million (see Note 6). As set forth in the Company’s definitive proxy statement filed with the SEC on July 31, 2019 (the “2019 Proxy Statement”), the 48.9% interest in UCI is included in Excluded Assets that remain solely for the benefit of APC and its shareholders. As such, any proceeds or gain on the sale of APC’s indirect ownership interest in UCI has no impact on the Series A Dividend payable by APC to AP-AMH Medical Corporation as described in the 2019 Proxy Statement and consequently the sale did not affect net income attributable to ApolloMed.
On December 31, 2020, APC paid $12.2 million for 100% interest in three limited liability companies that own office buildings leased to tenants (see Note 4). As a result, Medical Property Partners LLC ("MPP"), AMG Properties LLC ("AMG Properties"), and ZLL Partners LLC ("ZLL") are 100% owned subsidiaries of APC and are included in the consolidated financial statements.
APAACO, jointly owned by NMM and AMM, began participating in the Next Generation Accountable Care Organization (“NGACO") Model of the Centers for Medicare & Medicaid Services (“CMS”) in January 2017. The NGACO Model is a CMS program that allows provider groups to assume higher levels of financial risk and potentially achieve a higher reward from participating in this new attribution-based risk sharing model.
AMM, a wholly-owned subsidiary of ApolloMed, manages affiliated medical groups, consisting of ApolloMed Hospitalists (“AMH”), a hospitalist company and Southern California Heart Centers (“SCHC”). AMH provides hospitalist, intensivist and physician advisor services. SCHC is a specialty clinic that focuses on cardiac care and diagnostic testing.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles of Consolidation
The consolidated balance sheets as of December 31, 2020 and 2019 and consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 include the accounts of ApolloMed; its consolidated subsidiaries, NMM, AMM, and APAACO; its consolidated VIE, AP-AMH; AMM’s consolidated VIE, SCHC; NMM’s consolidated subsidiaries, APCN-ACO and AP-ACO; NMM’s consolidated VIE, APC; APC’s consolidated subsidiaries, UCAP, MPP, AMG Properties and ZLL, APC’s consolidated VIEs, CDSC, APC-LSMA and ICC; and APC-LSMA’s consolidated subsidiaries, Alpha Care and Accountable Health Care.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include collectability of receivables, recoverability of long-lived and intangible assets, business combination and goodwill valuation and impairment, accrual of medical liabilities (incurred but not reported (“IBNR”) claims), determination of full-risk and shared-risk revenue and receivables (including constraints, completion factors and historical margins), income tax valuation allowance, share-based compensation, and right-of-use ("ROU") assets and lease liabilities. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates and assumptions.
Variable Interest Entities
On an ongoing basis, as circumstances indicate the need for reconsideration, the Company evaluates each legal entity that is not wholly owned by it in accordance with the consolidation guidance. The evaluation considers all of the Company’s variable interests, including equity ownership, as well as management services agreements (“MSA”). To fall within the scope of the consolidation guidance, an entity must meet both of the following criteria:
•The entity has a legal structure that has been established to conduct business activities and to hold assets; such entity can be in the form of a partnership, limited liability company, or corporation, among others; and
•The Company has a variable interest in the legal entity – i.e., variable interests that are contractual, such as equity ownership, or other financial interests that change with changes in the fair value of the entity’s net assets.
If an entity does not meet both criteria above, the Company applies other accounting guidance, such as the cost or equity method of accounting. If an entity does meet both criteria above, the Company evaluates such entity for consolidation under either the variable interest model if the legal entity meets any of the following characteristics to qualify as a VIE, or under the voting model for all other legal entities that are not VIEs.
A legal entity is determined to be a VIE if it has any of the following three characteristics:
•The entity does not have sufficient equity to finance its activities without additional subordinated financial support;
•The entity is established with non-substantive voting rights (i.e., where the entity deprives the majority economic interest holder(s) of voting rights); or
•The equity holders, as a group, lack the characteristics of a controlling financial interest. Equity holders meet this criterion if they lack any of the following:
•The power, through voting rights or similar rights, to direct the activities of the entity that most significantly influence the entity’s economic performance, as evidenced by:
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
•Substantive participating rights in day-to-day management of the entity’s activities; or
•Substantive kick-out rights over the party responsible for significant decisions;
•The obligation to absorb the entity’s expected losses; or
•The right to receive the entity’s expected residual returns.
If the Company concludes that any of the three characteristics of a VIE are met, the Company will conclude that the entity is a VIE and evaluate it for consolidation under the variable interest model.
Variable interest model
If an entity is determined to be a VIE, the Company evaluates whether the Company is the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and economics. The Company consolidates a VIE if both power and benefits belong to the Company – that is, the Company (i) has the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary. Refer Note 18 – “Variable Interest Entities (VIEs)” to the consolidated financial statements for information on the Company’s consolidated VIE. If there are variable interests in a VIE but the Company is not the primary beneficiary, the Company may account for the investment using the equity method of accounting, refer to Note 6 – “Investments in Other Entities” for entities that qualify as VIEs but the Company is not the primary beneficiary.
Business Combinations
The Company uses the acquisition method of accounting for all business combinations, which requires assets and liabilities of the acquiree to be recorded at fair value, to measure the fair value of the consideration transferred, including contingent consideration, to be determined on the acquisition date, and to account for acquisition related costs separately from the business combination.
Reportable Segments
The Company operates as one reportable segment, the healthcare delivery segment, and implements and operates innovative healthcare models to create a patient-centered, physician-centric experience. The Company reports its consolidated financial statements in the aggregate, including all activities in one reportable segment.
Reclassifications
Certain 2019 amounts disclosed in prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications were made between depreciation and amortization and amortization of debt issuance cost on the consolidated statements of cash flows. They had no material effect on net income, earnings per share, retained earnings, cash flows or total assets.
Cash and Cash Equivalents
The Company's cash and cash equivalents primarily consist of money market funds and certificates of deposit. The Company considers all highly liquid investments that are both readily convertible into known amounts of cash and mature within ninety days from their date of purchase to be cash equivalents.
The Company maintains its cash in deposit accounts with several banks, which at times may exceed the insured limits of the Federal Deposit Insurance Corporation (“FDIC”). The Company believes it is not exposed to any significant credit risk with respect to its cash, cash equivalents and restricted cash. As of December 31, 2020 and 2019, the Company’s deposit accounts with banks exceeded the FDIC’s insured limit by approximately $294.9 million and $226.5 million, respectively. The Company has not experienced any losses to date and performs ongoing evaluations of these financial institutions to limit the Company’s concentration of risk exposure.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Restricted Cash
Restricted cash consists of cash held as collateral to secure standby letters of credits as required by certain contracts. The restricted cash of $0.1 million held as of December 31, 2019 was released in 2020. As of December 31, 2020 and 2019, there was $0 and $0.1 million, respectively, included in short-term restricted cash in the accompanying consolidated balance sheets.
Investments in Marketable Securities
The appropriate classification of investments is determined at the time of purchase and such designation is reevaluated at each balance sheet date. As of December 31, 2020 and 2019, investments in marketable securities in the amount of approximately $67.7 million and $116.5 million, respectively, consisted of equity securities and certificates of deposit with various financial institutions, reported at fair value, with maturity dates from four months to twenty-four months (see fair value measurements of financial instruments below). Investments in certificates of deposits are classified as Level 1 investments in the fair value hierarchy.
Receivables, Receivables – Related Parties, Loan Receivables and Loan Receivables - Related Parties
The Company’s receivables are comprised of accounts receivable, capitation and claims receivable, risk pool settlements, management fee income, incentive receivables, and other receivables. Accounts receivable are recorded and stated at the amount expected to be collected.
The Company’s receivables – related parties are comprised of risk pool settlements and incentive receivables, management fee income and other receivables. Receivables – related parties are recorded and stated at the amount expected to be collected.
The Company's loan receivables and loan receivables - related party consist of promissory notes from payees that are expected to be collected between 2-4 years and accrue interest per annum.
Capitation and claims receivable relate to each health plan’s capitation and is received by the Company in the month following the month of service. Risk pool settlements and incentive receivables mainly consist of the Company’s full risk pool receivable that is recorded quarterly based on reports received from the Company's hospital partners and management’s estimate of the Company’s portion of the estimated risk pool surplus for open performance years. Settlement of risk pool surplus or deficits occurs approximately 18 months after the risk pool performance year is completed. Other receivables consists of recoverable claims paid related to the 2019 APAACO performance year to be administered following instructions from CMS, fee-for-services (“FFS”) reimbursement for patient care, certain expense reimbursements, transportation reimbursements from the hospitals, and stop loss insurance premium reimbursements.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. The Company also regularly analyzes the ultimate collectability of accounts receivable after certain stages of the collection cycle using a look-back analysis to determine the amount of receivables subsequently collected and adjustments are recorded when necessary. Reserves are recorded primarily on a specific identification basis.
Receivables are recorded when the Company is able to determine amounts receivable under applicable contracts and agreements based on information provided and collection is reasonably likely to occur. In regards to the credit loss standard, the Company continuously monitors its collections of receivables and our expectation is that the historical credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses that would be estimated under the current expected credit losses ("CECL") model.
Concentrations of Risks
The Company disaggregates revenue from contracts by service type and payor type. This level of detail provides useful information pertaining to how the Company generates revenue by significant revenue stream and by type of direct contracts. The consolidated statements of income present disaggregated revenue by service type. The following table presents disaggregated revenue generated by each payor type (in thousands):
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31,
The Company had major payors that contributed the following percentages of net revenue:
Years Ended December 31,
Payor C *% *% 14.1 %
*Less than 10% of total net revenues
The Company had major payors that contributed to the following percentages of net receivables and receivables - related parties :
As of December 31,
Land, Property and Equipment, Net
Land is carried at cost and is not depreciated as it is considered to have an indefinite useful life.
Property and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets ranging from three to thirty-nine years. Leasehold improvements are amortized on a straight-line basis over the shorter of the terms of the respective leases or the expected useful lives of those improvements.
Maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the asset cost and related accumulated depreciation and amortization is removed from the accounts, and any related gain or loss is included in the determination of consolidated net income.
Fair Value Measurements of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, investment in marketable securities, receivables, loans receivable, accounts payable, certain accrued expenses, finance lease obligations, and long-term debt. The carrying values of the financial instruments classified as current in the accompanying consolidated balance sheets are considered to be at their fair values, due to the short maturity of these instruments. The carrying amounts of finance lease obligations and long-term debt approximate fair value as they bear interest at rates that approximate current market rates for debt with similar maturities and credit quality.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”), applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 establishes a fair value hierarchy for disclosure of the inputs to valuations used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2 —Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 —Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2020 are presented below (in thousands):
Fair Value Measurements
Level 1 Level 2 Level 3 Total
Assets
Marketable securities – certificates of deposit 67,637 — — 67,637
Marketable securities – equity securities 58 — — 58
The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2019 are presented below (in thousands):
Fair Value Measurements
Level 1 Level 2 Level 3 Total
Assets
Marketable securities – certificates of deposit 116,469 — — 116,469
Marketable securities – equity securities 70 — — 70
*Included in cash and cash equivalents
There have been no changes in Level 1, Level 2, or Level 3 classification and no changes in valuation techniques for these assets for the year ended December 31, 2020.
Intangible Assets and Long-Lived Assets
Intangible assets with finite lives include network-payor relationships, management contracts and member relationships and are stated at cost, less accumulated amortization and impairment losses. These intangible assets are amortized on the accelerated method using the discounted cash flow rate.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Intangible assets with finite lives also include a patient management platform, as well as trade names and trademarks, whose valuations were determined using the cost to recreate method and the relief from royalty method, respectively. These assets are stated at cost, less accumulated amortization and impairment losses, and are amortized using the straight-line method.
Finite-lived intangibles and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the carrying value of the asset to its estimated fair value. Fair value is determined based on appropriate valuation techniques. The Company determined that there was no impairment of its finite-lived intangible or long-lived assets during the year ended December 31, 2020 and 2019.
Goodwill and Indefinite-Lived Intangible Assets
Under ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment.
At least annually, at the Company’s fiscal year end, or sooner if events or changes in circumstances indicate that an impairment has occurred, the Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments for each of the Company’s three reporting units (1) management services, (2) IPAs, and (3) ACOs. The Company is required to perform a quantitative goodwill impairment test only if the conclusion from the qualitative assessment is that it is more likely than not that a reporting unit’s fair value is less than the carrying value of its assets. Should this be the case, a quantitative analysis is performed to identify whether a potential impairment exists by comparing the estimated fair values of the reporting units with their respective carrying values, including goodwill.
An impairment loss is recognized if the implied fair value of the asset being tested is less than its carrying value. In this event, the asset is written down accordingly. The fair values of goodwill are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances.
At least annually, indefinite-lived intangible assets are tested for impairment. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible asset exceeds its fair value. The fair values of indefinite-lived intangible assets are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances.
For the year ended December 31, 2019, the Company wrote off indefinite-lived intangible assets of approximately $2.0 million related to Medicare licenses, acquired as part of the 2017 Merger between ApolloMed and NMM. The Company will no longer utilize the licenses and as such will not receive future economic benefits therefrom. For the year ended December 31, 2018, the Company wrote off approximately $3.8 million of goodwill related to MMG. The write-offs are included in impairment of goodwill and intangible assets in the accompanying consolidated statements of income. There was no impairment loss recorded related to goodwill and intangibles for the year ended December 31, 2020.
Investments in Other Entities – Equity Method
The Company accounts for certain investments using the equity method of accounting when it is determined that the investment provides the Company with the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the investee and is recognized in the accompanying consolidated statements of income under “Income (loss) from equity method investments” and also is adjusted by contributions to and distributions from the investee. Equity method investments are subject to impairment evaluation. During the years ended December 31, 2019, the Company recognized an impairment loss of approximately $0.3 million related to its investment in PASC as the Company does not believe it will recover its investment balance. Such impairment loss is included in loss from equity method investments in the accompanying consolidated statements of income. There was no impairment loss recorded related to equity method investments for the years ended December 31, 2020 and 2018.
Investments in Privately Held Entities
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The Company accounts for certain investments using the cost method of accounting when it is determined that the investment provides the Company with little or no influence over the investee. Under the cost method of accounting, the investment is measured at cost, adjusted for observable price changes and impairments, with changes recognized in net income. The investments in privately held entities that do not report NAV are subject to qualitative assessment for indicators of impairments.
Medical Liabilities
APC, Alpha Care, Accountable Health Care, and APAACO are responsible for integrated care that the associated physicians and contracted hospitals provide to their enrollees. APC, Alpha Care, Accountable Health Care, and APAACO provide integrated care to HMOs, Medicare and Medi-Cal enrollees through a network of contracted providers under sub-capitation and direct patient service arrangements. Medical costs for professional and institutional services rendered by contracted providers are recorded as cost of services, excluding depreciation and amortization, expense in the accompanying consolidated statements of income.
An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in the accompanying consolidated balance sheets. Medical liabilities include claims reported as of the balance sheet date and estimated IBNR claims. Such estimates are developed using actuarial methods and are based on numerous variables, including the utilization of healthcare services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and other factors. The estimation methods and the resulting accrual are periodically reviewed and updated. Many of the medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such differing interpretations may not come to light until a substantial period of time has passed following the contract implementation.
During the year ended December 31, 2017, as APAACO’s NGACO program was new and there was insufficient claims history, the medical liabilities for the NGACO program were estimated and recorded at 100% of the revenue less actual claims processed for or paid to in-network providers. The Company was notified by CMS that under the NGACO alternative payment arrangement the Company was paid an excess amount of approximately $34.5 million and $7.8 million related to the first performance year (January 1, 2017 through December 31, 2017) and second performance year (February 1, 2018 through December 31, 2018) with 18 month claims run outs, respectively. The excess amount for the first performance year was paid by the Company on December 4, 2018 and the excess for the second performance year was paid in February 2020.
Revenue Recognition
The Company receives payments from the following sources for services rendered: (i) commercial insurers; (ii) the federal government under the Medicare program administered by CMS; (iii) state governments under the Medicaid and other programs; (iv) other third-party payors (e.g., hospitals and IPAs); and (v) individual patients and clients.
On January 1, 2018, the Company adopted the new revenue recognition standard Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, using the modified retrospective method. Modified retrospective adoption requires entities to apply the standard retrospectively to the most current period presented in the financial statements, requiring the cumulative effect of the retrospective application as an adjustment to the opening balance of retained earnings and noncontrolling interests at the date of initial application. Revenue from substantially all of the Company’s contracts with customers continues to be recognized over time as services are rendered. The Company has elected to apply the modified retrospective method only to contracts not completed as of January 1, 2018.
Under the new revenue standard, the Company recognizes incremental costs of obtaining a contract with amortization periods of one year or less as expense when incurred and records within general and administrative expenses, recognizes revenue in the amount of consideration to which the Company has a right to invoice the customer if that amount corresponds directly with the value to the customer of the Company’s services completed to date, and does not recognize an adjustment for the effects of a significant financing component as the period between the time of service and time of payment is typically one year or less.
Nature of Services and Revenue Streams
Revenue primarily consists of capitation revenue, risk pool settlements and incentives, NGACO All-Inclusive Population-Based Payments (“AIPBP”), management fee income, and FFS revenue. Revenue is recorded in the period in which services are rendered or the period in which the Company is obligated to provide services. The form of billing and related risk of collection
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Apollo Medical Holdings, Inc.