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.
Through our accountable care organization and our network of IPAs we were responsible for coordinating the care for approximately 1.3 million patients primarily in California as of December 31, 2022. These covered patients are comprised of managed care members whose health coverage is provided either through their employers, acquired 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.
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 2017 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 2017 Merger, NMM’s historical results of operations replaced ApolloMed’s historical results of operations for periods prior to the 2017 Merger, and the results of operations of both companies are included in the accompanying consolidated financial statements for periods following the 2017 Merger.
2022 Highlights
Shared Savings from Centers for Medicare and Medicaid Services for 2021 Performance Year
Following the end of each performance year and at such other times as may be required under the NGACO Participation Agreement between APAACO and CMS (the “Participation Agreement”), CMS will issue a settlement report to the Company setting forth the amount of any shared savings or shared losses and the amount of other monies. As APAACO does not have sufficient insight into the financial performance of the shared risk pool with CMS because of unknown factors related to IBNR claims, risk adjustment factors, and stop-loss provisions, among other factors, an estimate cannot be developed. Due to these limitations, APAACO cannot determine the amount of surplus or deficit that will likely be recognized in the future and, therefore, this shared-risk pool revenue is considered fully constrained until it is settled. The settlement for the 2021 performance year was finalized and the Company recognized $48.8 million related to savings as revenue in risk pool settlements and incentives in the accompanying consolidated statements of income for the year ended December 31, 2022.
Business and Asset Acquisitions
Orma Health, Inc., and Provider Growth Solutions, LLC
In January 2022, the Company acquired 100% of the capital stock of Orma Health, Inc., and Provider Growth Solutions, LLC (together, “Orma Health”). The purchase was paid in cash and in the Company’s capital stock. Orma Health’s real-time Clinical AI platform ingests data from multiple sources and utilizes advanced risk-stratification models to identify patients for various clinical programs, including remote patient monitoring (“RPM”), mental health support, chronic care management, and more. Its clinical platform is also deeply integrated with Orma Health’s proprietary RPM ecosystem, which consists of smart health devices and a suite of technology tools to manage patient health.
Jade Health Care Medical Group, Inc.
In April 2022, the Company acquired 100% of the capital stock of Jade. The purchase was paid in cash. Jade is a primary and specialty care physicians’ group focused on providing high-quality care to its patients in the San Francisco Bay Area in Northern California.
Tag-6 Medical Investment Group, LLC , and Tag-8 Medical Investment Group, LLC
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In August 2022, using cash comprised solely of Excluded Assets, APC acquired the remaining 50% interest in Tag-6 Medical Investment Group, LLC (“Tag 6”) and Tag-8 Medical Investment Group, LLC (“Tag 8”) for $4.9 million and $4.1 million, respectively. As a result, Tag 6 and Tag 8 are now 100% owned subsidiaries of APC and are included in the consolidated financial statements.
Valley Oaks Medical Group (“VOMG”)
On October 14, 2022, a sole equity holder acquired 100% of the equity interest in VOMG. Under the terms of the Physician Equity Holder Agreement (the “Equity Agreement”) between ApolloMed and the equity holder, ApolloMed may designate a third party who is permitted under Nevada law to be an owner or equity holder of VOMG with the right (the “Acquisition Right”) (a) to acquire equity holder’s equity interest or (b) to acquire from VOMG. The Acquisition Right shall be exercisable by ApolloMed and equity holder shall be obligated to assign and transfer the equity interest or to cause VOMG to issue new equity interests (as applicable) to ApolloMed. As a result of the arrangement and in accordance with relevant accounting guidance, VOMG is determined to be a VIE of ApolloMed and is consolidated by the Company. VOMG owns nine primary care clinics consisting of seven in Nevada and two in Texas. The purchase price consists of cash funded upon close of the transaction and additional cash consideration contingent on VOMG meeting financial metrics for fiscal year 2023 and 2024.
All American Medical Group (“AAMG”)
On October 31, 2022, AP-AMH 2, a VIE of the Company, acquired 100% of the equity interest in AAMG. AAMG is an IPA operating in Northern California. The purchase price consists of cash funded upon close of the transaction and additional cash and stock consideration contingent on AAMG meeting financial metrics for fiscal year 2023 and 2024.
Recent Developments
ApolloMed purchase of APC-LSMA’s entities
On February 23, 2023, AP-AMH 2, a VIE of ApolloMed, purchased 100% of the equity interest in each of AMG, a Professional Medical Corporation, 1 World Medicine Urgent Care Corporation, and Eleanor Leung, M.D., a Professional Medical Corporation from APC-LSMA, a VIE of APC. As a result of the purchase, these entities will become consolidated entities of AP-AMH 2.
Key Financial Measures and Indicators
Operating Revenues
Our revenue, which is recorded in the period in which services are rendered and earned, primarily consists of capitation revenue, risk pool settlements and incentives, GPDC revenue, management fee income, and fee-for-services (“FFS”) revenue. 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: (i) patient care paid to contracted providers; (ii) information technology equipment and software; and (iii) hiring staff to provide management and administrative support services to our affiliated physician groups, as further described in the following sections. These services include claims processing, utilization management, contracting, accounting, credentialing, and administrative oversight.
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Results of Operations
2022 Compared to 2021
Our consolidated operating results for the year ended December 31, 2022, as compared to the year ended December 31, 2021 were as follows:
Apollo Medical Holdings, Inc.
Consolidated Statements of Income (in thousands)
Years Ended December 31,
Revenue
Operating expenses
Other (expense) income
Gain on sale of equity method investment — 2,193 (2,193) (100) %
Net Income
Our net income in 2022 was $50.5 million, as compared to $49.3 million in 2021, an increase of $1.2 million or 3%.
Physician Groups and Patients
As of December 31, 2022 and 2021, the total number of affiliated physician groups we managed were 14 groups and 12 groups, respectively, and the total number of patients for whom we managed the delivery of healthcare services was approximately 1.3 million and 1.2 million, respectively.
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Revenue
Our total revenue in 2022 was $1,144.2 million, as compared to $773.9 million in 2021, an increase of $370.2 million or 48%. The increase in total revenue was primarily attributable to the following:
(i) An overall increase of $336.9 million in capitation revenue primarily driven by organic membership growth in our core IPAs and participation in a value-based Medicare fee-for-service model.
(ii) An increase of $23.0 million in fee-for-services revenue attributable to fees generated from ApolloMed primary, multi-specialty, and ancillary care delivery entities.
Cost of Services, Excluding Depreciation and Amortization
Expenses related to cost of services, excluding depreciation and amortization, in 2022 were $944.7 million, as compared to $596.1 million in 2021, an increase of $348.5 million or 58%. The overall increase was primarily due to expected return to pre-COVID-19 medical expense run rates, participation in a value-based Medicare fee-for-service model and growth in membership, which was commensurate to our increase in revenue.
General and Administrative Expenses
General and administrative expenses in 2022 were $77.7 million, as compared to $62.1 million in 2021, an increase of $15.6 million or 25%. This increase was primarily due to an $14.8 million increase in personnel-related costs to support the continued growth in the depth and breadth of our operations.
Depreciation and Amortization
Depreciation and amortization expense was $17.5 million and $17.5 million for the years ended December 31, 2022 and 2021, respectively. These amounts included depreciation of property and equipment and the amortization of intangible assets.
Income (Loss) From Equity Method Investments
Income from equity method investments in 2022 was $5.6 million, as compared to a loss of $4.3 million in 2021, an increase of $9.9 million. The increase in income from equity method investments was primarily due to our investment partner having a favorable contract change including rate and division of financial responsibility on certain claims.
Gain on Sale of Equity Method Investment
Gain on sale of equity method investment in 2022 was $0, as compared to $2.2 million in 2021, a decrease of $2.2 million. The decrease in gain on sale of equity method investment is due to APC-LSMA selling 21.25% of its interest in LMA back to Dr. Arteaga for the year end December 31, 2021. There was no sale of our equity method investment for the year ended December 31, 2022.
Interest Expense
Interest expense in 2022 was $7.9 million, as compared to $5.4 million in 2021, an increase of $2.5 million. The increase in interest expense for the year was primarily due to higher interest rates. On December 31, 2022, the interest rate on the Amended Credit Agreement was 5.92% compared to 1.71% on December 31, 2021.
Interest Income
Interest income in 2022, was $2.0 million, as compared to $1.6 million in 2021, an increase of $0.4 million. Interest income reflects interest earned on cash held in money market and certificate of deposit accounts and the interest from notes receivable.
Unrealized Loss on Investments
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Unrealized loss on investments in 2022 was $21.3 million, as compared to an unrealized loss on investments of $10.7 million in 2021, an increase of $10.5 million. The increase in unrealized loss on investments was primarily driven by a decrease in the stock price of a payor partner in which we hold shares and Nutex.
Other Income (Expense)
Other income in 2022 was $3.9 million, as compared to other expense of $3.8 million in 2021, an increase of $7.7 million. The increase was primarily due to the write-off of certain beneficial interest related to the UCI disposition totaling $15.7 million for the year ended December 31, 2021. The beneficial interest was an Excluded Assets that was deemed solely for the benefit of APC and its shareholders. As such, the write-off did not result in any impact to net income attributable to Apollo Medical Holdings, Inc. This was offset by non-recurring income recognized for the year ended December 31, 2021 relating to $2.8 million income from consolidating an equity method investment, $5.3 million income from the stock purchase agreement with Nutex, and $1.7 million income in stimulus checks. In addition, the Company recognized a $2.3 million gain on sale of equity securities for the year ended December 31, 2022.
Provision for Income Taxes
Provision for income taxes was $36.1 million in 2022, as compared to $28.5 million in 2021, an increase of $7.6 million or 27%. This was primarily attributable to an increase in pre-tax income in 2022, as compared to 2021, due to the factors described above.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income attributable to non-controlling interests was $1.5 million in 2022, as compared to net loss of $24.6 million in 2021, an increase of $26.0 million. The increase in net income attributable to noncontrolling interest was primarily due to non-recurring write-offs recognized for the year ended December 31, 2021 related to certain beneficial interest related to the UCI disposition totaling $15.7 million.
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2021 Compared to 2020
Our consolidated operating results for the year ended December 31, 2021, as compared to the year ended December 31, 2020, were as follows:
Apollo Medical Holdings, Inc.
Consolidated Statements of Income (in thousands)
Years Ended December 31,
Revenue
Operating expenses
Other income (expense)
Net Income
Our net income in 2021 was $49.3 million, as compared to $122.3 million in 2020, a decrease of $73.0 million or 60%.
Physician Groups and Patients
As of December 31, 2021 and 2020, the total number of affiliated physician groups we managed were 12 groups and 14 groups, respectively, and the total number of patients for whom we managed the delivery of healthcare services was 1.2 million and 1.1 million, respectively.
Revenue
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Our total revenue in 2021 was $773.9 million, as compared to $687.2 million in 2020, an increase of $86.7 million or 13%. The increase in total revenue was primarily attributable to the following:
(i) An overall increase of $35.9 million in capitation revenue primarily driven by membership growth at APC and Alpha Care and higher average capitation rate at APC. APC and Alpha Care contributed additional capitation revenue of approximately $38.2 million and $7.0 million, respectively. This was offset with a decrease in capitation revenue of $11.5 million at Accountable Health Care due to decreased membership.
(ii) An increase of $34.3 million in risk pool settlements and incentives revenue due to an increase of $14.7 million in shared savings generated from our full risk pool arrangements driven by reduced utilization at ApolloMed’s partner hospitals resulting from the suspension of non-emergency medical procedures in early 2020 when the COVID-19 pandemic first began, revenues from ApolloMed’s partner hospitals reflect a 15-18 month lag, $13.1 million from health plan incentives and settlements from various payor partners, which was mainly attributable to increased membership and timing of settlements, $4.5 million resulting from a settlement with a health plan within our full risk pool arrangement, and a $2.0 million increase in the shared savings settlement earned from ApolloMed’s participation in an ACO related to performance year 2020, as compared to prior year.
(iii) An increase of $13.9 million in fee-for-services revenue attributable to fees generated from Sun Labs and DMG totaling $7.2 million due to the consolidation of Sun Labs in August 2021, and DMG in October 2021. In addition, there was an increase of $5.4 million from increased visits to our surgery and heart centers, which were partially closed in the prior year due COVID-19.
Cost of Services, Excluding Depreciation and Amortization
Expenses related to cost of services, excluding depreciation and amortization, in 2021 were $596.1 million, as compared to $539.2 million in 2020, an increase of $56.9 million or 11%. The overall increase was due to an increase in medical claims incurred of $33.4 million, $12.1 million in additional costs as a result of the consolidation of Sun Labs in August 2021 and DMG in October 2021, and $8.3 million in increased sub-capitation payments due to a new oncology vendor joining in November 2020.
General and Administrative Expenses
General and administrative expenses in 2021 were $62.1 million, as compared to $49.1 million in 2020, an increase of $13.0 million or 26%. This increase was primarily due to an $8.9 million increase in personnel-related costs to support the continued growth in the depth and breadth of our operations and $2.7 million in a one-time cost related to vendor settlement and execution of the Amended Credit Facility agreement.
Depreciation and Amortization
Depreciation and amortization expense was $17.5 million and $18.4 million for the years ended December 31, 2021 and 2020, respectively. These amounts included depreciation of property and equipment and the amortization of intangible assets.
Income (Loss) From Equity Method Investments
Loss from equity method investments in 2021 was $4.3 million, as compared to income of $3.7 million in 2020, a decrease of $8.0 million. The $8.0 million decrease in income from equity method investments was primarily due to the sale of UCI in April 2020. For the nine months ended September 30, 2020, UCI contributed equity earnings of $3.6 million. The additional decrease is from our investment in LMA. The Company incurred a loss of $5.8 million from LMA as a result of increased claims expense for the year ended December 31, 2021, as compared to equity earnings of $0.3 million for the year ended December 31, 2020. The loss was partially offset by increases in income from One MSO, Tag 6, and CAIPA MSO of $0.5 million, $0.3 million, and $0.3 million, respectively.
Gain on Sale of Equity Method Investment
Gain on sale of equity method investment in 2021 was $2.2 million, as compared to $99.8 million in 2020, a decrease of $97.6 million. The $97.6 million decrease in sale of equity method investment is primarily driven by a $99.6 million gain from the sale of UCI in 2020, as compared to a $2.2 million gain from sale of 21.25% interest in LMA in 2021.
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Interest Expense
Interest expense in 2021 was $5.4 million, as compared to $9.5 million in 2020, a decrease of $4.1 million. The decrease in interest expense for the year was primarily due to the Company refinancing their Credit Facility to the Amended Credit Facility in June 2021 which resulted in lower interest rates, as compared to the same periods in 2020.
Interest Income
Interest income in 2021, was $1.6 million, as compared to $2.8 million in 2020, a decrease of $1.2 million. Interest income reflects interest earned on cash held in money market and certificate of deposit accounts and the interest from notes receivable.
Unrealized (Loss) on Investments
Unrealized loss on investments in 2021 was $10.7 million, as compared to unrealized loss on investment of $0 for the same period in 2020, an increase of $10.7 million. The $10.7 million unrealized loss on investments is primarily driven by an unrealized loss of $12.1 million due to fluctuations in the stock price of a payor partner in which we hold shares. These shares are recorded as marketable securities and deemed an Excluded Assets that are solely for the benefit of APC and its shareholders. Any resulting gain or loss does not impact net income attributable to Apollo Medical Holdings, Inc. The unrealized loss was partially offset by an unrealized gain of $1.3 million due to fluctuations in the stock price of our equity holdings in Clinigence.
Other (Expense) Income
Other expense in 2021 was $3.8 million, as compared to other income of $1.1 million for the same period in 2020, a decrease of $4.9 million. The decrease was primarily due to the write-off of certain beneficial interest related to the UCI disposition totaling $15.7 million. The beneficial interest was an Excluded Assets that was deemed solely for the benefit of APC and its shareholders. As such, the write-off did not result in any impact to net income attributable to Apollo Medical Holdings, Inc. This was offset by non-recurring income recognized for the year ended December 31, 2021 relating to $2.8 million income from consolidating an equity method investment, $5.3 million income from the stock purchase agreement with Nutex, and $1.7 million income in stimulus checks.
Provision for Income Taxes
Provision for income taxes was $28.5 million in 2021, as compared to $56.1 million in 2020, a decrease of $27.7 million or 49%. This was primarily attributable to the decrease in pre-tax income in 2021, as compared to 2020, due to the factors described above.
Net Income Attributable to Noncontrolling Interests
Net loss attributable to non-controlling interests was $24.6 million in 2021, as compared to net income of $84.5 million in 2020, a decrease of $109.0 million. The decrease was primarily due to unrealized loss on investment recognized for the year ended December 31, 2021, related to a payor partner as compared to the gain on sale of UCI in April 2020.
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2023 Guidance
ApolloMed is providing the following guidance for total revenue, net income, EBITDA, Adjusted EBITDA, and earnings per share — diluted. The net income and EBITDA guidance ranges below include the impact of the excluded assets held by APC, which are solely for the benefit of APC and its shareholders. Any gains or losses associated with these excluded assets do not have an impact on Adjusted EBITDA and earnings per share — diluted. These guidance assumptions are based on the Company's existing business, current view of existing market conditions and assumptions for the year ending December 31, 2023.
($ in millions, except per share amounts) 2023 Guidance Range
Low High
Earnings per share – diluted $ 0.95 $ 1.20
See “Guidance Reconciliation of Net Income to EBITDA and Adjusted EBITDA” and “Use of Non-GAAP Financial Measures” below for additional information. There can be no assurance that actual amounts will not be materially higher or lower than these expectations. See “Note About Forward-Looking Statements” above for additional information.
Guidance Reconciliation of Net Income to EBITDA and Adjusted EBITDA
(in thousands) 2023 Guidance Range
Low High
Loss (income) from equity method investments (750) (750)
Set forth below are reconciliations of Net Income to EBITDA and Adjusted EBITDA for the years ended December 31, 2022 and 2021:
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Reconciliation of Net Income to EBITDA and Adjusted EBITDA
Year Ended December 31,
Income from equity method investments (746) (268)
Gain on sale of equity method investment — (2,193)
(1) Other, net for the year ended December 31, 2022 relates to transaction costs incurred and changes in the fair value of our mandatory purchase of investments and contingent considerations.
(2) Other, net for the year ended December 31, 2021 relates to stimulus checks received in 2021.
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 or loss from equity method investments, non-recurring and non-cash transactions, stock-based compensation, and APC excluded assets costs. Beginning in the third quarter ended September 30, 2022, the Company has revised the calculation for Adjusted EBITDA to exclude provider bonus payments and losses from recently acquired IPAs, which it believes to be more reflective of its business.
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 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 investments in marketable securities at December 31, 2022 totaled $293.6 million. Working capital totaled $287.8 million at December 31, 2022, compared to $283.4 million at December 31, 2021, an increase of $4.4 million.
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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 February 2024.
Our cash and cash equivalents increased by $54.9 million from $233.1 million at December 31, 2021, to $288.0 million at December 31, 2022. Cash provided by operating activities during the year ended December 31, 2022 was $82.1 million, as compared to $70.3 million during the year ended December 31, 2021. The increase in cash provided by operating activities was primarily driven by changes in net income and working capital. For the year ended December 31, 2022, net income exclusive of depreciation and amortization, amortization of debt issuance costs, share-based compensation, impairments, gains or losses from sale of investments, unrealized gains or losses, income or loss from equity method investments, and deferred tax was $91.7 million compared to $90.5 million for the year ended December 31, 2021. Working capital for the year ended December 31, 2022, decreased operating cash flow by $9.6 million, compared to a $20.1 million decrease in operating cash flow at December 31, 2021. The change in working capital for the year ended December 31, 2022, was mainly driven by an increase in receivables, net, and increase in medical liabilities related to the Company’s participation in value-based Medicare fee-for-service model. This was offset by a decrease in related party receivables primarily related to risk pool settlements, decrease in other receivables related to settlement of recoverable claims paid related to the 2021 NGACO performance year, and decrease in accounts payable and accrued expense and fiduciary accounts payable due to timing of payments for our accrued expenses and sub IPAs.
Cash used in investing activities during the year ended December 31, 2022, was $7.1 million, primarily due to purchases of property and equipment of $22.9 million, payments for business acquisition, net of cash, of $16.4 million, purchase of marketable securities of $1.9 million, and funding for equity method investments of $2.1 million. The cash used in investing activities was partially offset by proceeds from the sale of marketable securities of $31.7 million, repayment of a loan receivable of $4.1 million, and distributions from an equity method investment of $0.4 million. Cash provided by investing activities during the year ended December 31, 2021, was $16.5 million, primarily due to proceeds from sale of marketable securities of $67.6 million, proceeds from sale of equity method investment totaling $6.4 million, and cash recognized from consolidation of VIE of $5.9 million. These were offset by purchases of equity method investments of $13.6 million, purchases of property and equipment of $19.2 million, payments for business acquisition, net of cash acquired of $2.6 million, and purchases of marketable securities of $28.0 million.
Cash used in financing activities during the year ended December 31, 2022 was $20.1 million, as compared to cash used in financing activities of $47.7 million for the year ended December 31, 2021. Cash used in financing activities during the year ended December 31, 2022 was primarily attributable dividend payments of $14.0 million, repurchase of common shares of $9.3 million, purchase of non-controlling interest of $5.0 million, repayment of debt of $3.9 million, and repayment of finance lease obligations of $0.6 million. This was offset by proceeds from the exercise of options and warrants of $8.6 million, borrowings from the Construction Loan of $3.6 million and proceeds from sale of non-controlling interest of $0.4 million. This is compared to cash used in financing activities for the year ended December 31, 2021 for repayment of Credit Facility and other debt of $238.3 million, the payments of dividends totaling $31.1 million, payment of debt issuance cost related to the Amended Credit Facility of $0.7 million, distribution to noncontrolling interests of $1.5 million, and repurchases of shares totaling $5.7 million. This was offset by proceeds from the exercise of stock options and warrants of $9.1 million, borrowings on the Amended Credit Facility of $180.0 million, borrowings on Tag 8’s Construction Loan of $0.6 million, and proceeds from sale of shares of $40.1 million.
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 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).
The Excluded Assets as of December 31, 2022, are primarily comprised of assets and liabilities from operating real estate and proceeds from the sale of UCI. Any dividends issued to APC shareholders are paid using cash from Excluded Assets. Excluded Assets consisted of the following (in thousands):
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Investment in marketable securities 4,543 49,066
Loan receivable – related parties — 4,000
Investments in other entities – equity method 27,561 24,969
Other receivable and assets 3,907 936
Years ended December 31,
Credit Facilities
The Company’s debt balance consisted of the following (in thousands):
Construction Loan 4,159
Less: Current portion of debt (619)
Less: Unamortized financing costs (3,319)
The following are the future commitments of the Company’s debt for the years ending December 31 (in thousands):
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Amount
Credit Agreement
On June 16, 2021, the Company entered into an amended and restated credit agreement (the “Amended Credit Agreement” and the credit facility thereunder, the “Amended Credit Facility”) with Truist Bank, in its capacities as administrative agent for the lenders (in such capacity, the “Agent”), issuing bank, swingline lender and a lender, Truist Securities, Inc., JPMorgan Chase Bank, N.A., MUFG Union Bank, N.A., Preferred Bank, Royal Bank of Canada, and Fifth Third Bank, National Association, in their capacities as joint lead arrangers and/or lenders (the “Lenders”), and Bank of the West, The Toronto-Dominion Bank, New York Branch, Well Fargo, National Association, and City National Bank in their capacities as Lenders, to, among other things, amend and restate that certain credit agreement, dated September 11, 2019, by and among the Company, certain Lenders and the Agent (the credit facility thereunder, the “Credit Facility”), in its entirety.
The Amended Credit Agreement provides for a five-year revolving credit facility (“Revolver Loan”) to the Company of $400.0 million, which includes a letter of credit sub-facility of up to $25.0 million and a swingline loan sub-facility of $25.0 million. The revolving credit facility will be used to, among other things, refinance certain existing indebtedness of the Company and certain subsidiaries, finance certain future acquisitions and investments, and provide for working capital needs and other general corporate purposes. Under the Amended Credit Agreement, the terms and conditions of the Guaranty and Security Agreement remain in effect.
The Amended Credit Agreement requires the Company to comply with two key financial ratios, each calculated on a consolidated basis.
On December 20, 2022, an amendment was made to the Amended Credit Facility, in which all amounts borrowed under the Amended Credit Agreement as of the effective date shall be automatically converted from LIBOR Loans to SOFR Loans with an initial interest period of one month on and as of the amendment effective date.
Refer to Note 10 – “Credit Facility, Bank Loans, and Lines of Credit”to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information on the Amended Credit Agreement.
Deferred Financing Costs
In September 2019, the Company recorded deferred financing costs of $6.5 million related to its entry into the Credit Facility. In June 2021, the Company recorded additional deferred financing costs of $0.7 million related to its entry into the Amended Credit Facility. Deferred financing costs are recorded as a direct reduction of the carrying amount of the related debt liability using straight-line amortization. The remaining unamortized deferred financing costs related to the Credit Facility and the new costs related to the Amended Credit Facility are amortized over the life of the Amended Credit Facility.
Effective Interest Rate
The Company’s average effective interest rate on its total debt during the years ended December 31, 2022, 2021, and 2020 was 3.22%, 2.06%, and 3.48%, respectively. Interest expense in the consolidated statements of income included amortization of deferred debt issuance costs for the years ended December 31, 2022, 2021, and 2020 of $0.9 million, $1.2 million, and $1.4 million, respectively.
Real Estate Loans
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On December 31, 2020, using cash comprised solely of Excluded Assets, APC purchased a 100% interest in MPP, AMG Properties, and ZLL. As a result of the purchase, the Company assumed $6.4 million, $0.7 million, and $0.7 million of existing loans held by MPP, AMG Properties, and ZLL, respectively, on the day of acquisition. Refer to Note 10 – “Credit Facility, Bank Loans, and Lines of Credit”to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information.
On January 25, 2022, 120 Hellman, a subsidiary of APC, entered into a loan agreement with MUFG Union Bank N.A. with the principal on the loan of $16.3 million and a maturity date of March 1, 2032. Refer to Note 10 – “Credit Facility, Bank Loans, and Lines of Credit”to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information.
Construction Loans
In April 2021, Tag 8 entered into a construction loan agreement with MUFG Union Bank N.A. (“Construction Loan”) that allows Tag 8 to borrow up to $10.7 million. Tag 8 is a VIE consolidated by the Company. Refer to Note 10 – “Credit Facility, Bank Loans, and Lines of Credit”to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information.
On August 31, 2022, APC owned 100% equity interest in Tag 6. As a result. APC consolidated Tag 6 including a construction loan Tag 6 entered into with Preferred Bank (“Tag 6 Construction Loan”). On the day of acquisition, the outstanding balance on the loan was $3.4 million with a maturity date of September 7, 2022. On September 6, 2022, APC paid off the outstanding Tag 6 Construction Loan balance of $3.4 million. Refer to Note 10 – “Credit Facility, Bank Loans, and Lines of Credit”to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information.
Lines of Credit – Related Party
On September 10, 2019, APC amended its promissory note agreement with Preferred Bank (“APC Business Loan Agreement”), which is affiliated with one of the Company’s board members, to modify loan availability to $4.1 million. 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.
Standby Letters of Credit
Under the Amended Credit Agreement, the Company established irrevocable standby letters of credit with Truist Bank for a total of $21.1 million for the benefit of CMS. Unless the institution provides notification that the standby letters of credit will be terminated prior to the expiration date, the letters will be automatically extended without amendment for additional one-year periods from the present, or any future expiration date.
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.
Under the APC Business Loan Agreement, Alpha Care established irrevocable standby letters of credit with Preferred Bank, 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, Maverick Medical Group, Inc. (“MMG”), Bay Area Hospitalist Associates (“BAHA”), AKM Medical Group, Inc. (“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 record of the applicable
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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.
Jade entered into an Intercompany Loan Agreement with NMM pursuant to which NMM agreed to provide a revolving loan commitment to Jade. The Intercompany Loan agreement between NMM and Jade matures on June 1, 2024.
Year Ended December 31, 2022 (in thousands)
Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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, 2022 and 2021, and consolidated statements of income for the years ended December 31, 2022, 2021, and 2020, include the accounts of (i) ApolloMed, ApolloMed’s consolidated subsidiaries, NMM, AMM, APAACO, Orma Health Inc, and Provider Growth Solutions, LLC, and its VIEs, AP-AMH, AP-AMH 2, Sun Labs, DMG, and Valley Oaks Medical Group; (ii) AP-AMH 2’s consolidated subsidiaries, APCMG, Jade, and AAMG; (iii) AMM’s VIEs, SCHC and AMH; (iv) NMM’s VIE, APC; (v) APC’s consolidated subsidiaries, Universal Care Acquisition Partners, LLC (“UCAP”), MPP, AMG Properties, ZLL, ICC, 120 Hellman and its VIEs, CDSC, APC-LSMA, Tag 8, and Tag 6; and (vi) APC-LSMA’s consolidated subsidiaries, Alpha Care, Accountable Health Care, and AMG.
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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 (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 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.
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 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 regard 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 include 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:
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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
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
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APC, Alpha Care, Accountable Health Care, APCMG, Jade, and AAMG (“consolidated IPAs”) and APAACO, are responsible for integrated care that the associated physicians and contracted hospitals provide to their enrollees. The consolidated IPAs 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.
Risk Pool Settlements and Incentives
APC and Accountable Health Care enter 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 IPA is responsible for providing, arranging and paying for professional risk. Under a full-risk pool-sharing agreement, the IPA generally receives a percentage of the net surplus from the affiliated hospital’s risk pools with HMOs after deductions for the affiliated hospital’s 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, Accountable, and Alpha Care participate 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 the IPA 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, Accountable Health Care, and Alpha Care’s risk-share revenue is deemed to be fully constrained until they are 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.
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Share-Based Compensation
The Company maintains a stock-based compensation program for employees, non-employees, directors, and consultants. 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. The value of share-based awards is recognized as compensation expense and adjusted for forfeitures as they occur. Compensation expense for time-based awards are recognized on a cumulative straight-line basis over the vesting period of the awards. Share-based awards with performance conditions are recognized to the extent the performance conditions are probable of being achieved. Compensation expense for performance-based awards are recognized on an accelerated attribution method. The fair value of options granted are determined using the Black-Scholes option pricing model and include several assumptions, including expected term, expected volatility, expected dividends, and risk-free rates. The expected term is presumed to be the midpoint between the vesting date and the end of the contractual term. The expected stock price volatility is determined based on an average of historical volatility. The expected dividend yield is based on the Company’s expected dividend payouts. The risk-free interest rate is based on the U.S. Constant Maturity curve over the expected term of the option at the time of grant.
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 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 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, 2022, the Company recognized no impairment loss.
Non-controlling 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 VIEs in which the Company is the primary beneficiary. Non-controlling interests represent third-party equity ownership interests (including certain VIEs) in the Company’s consolidated entities. The amount of net income attributable to non-controlling interests is disclosed in the consolidated statements of income.
Mezzanine Equity
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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 non-controlling 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, 2022 and 2021.
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 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
Refer to “Recent Accounting Pronouncements” under 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 for additional information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Borrowings under our Amended Credit Agreement exposed us to interest rate risk. As of December 31, 2022, we had $180.0 million in outstanding borrowings under our Amended Credit Agreement. The amount borrowed under the Amended Credit Agreement bears interest at an annual rate equal to either, at the Company’s option, (a) the Term SOFR Reference Rate, calculated two U.S. Government Securities Business Days prior to the first day of such interest period, as such rate is published by the Term SOFR Administrator (Federal Reserve Bank of New York), adjusted for any Term SOFR Adjustment, plus a spread of from 1.25% to 2.50%, as determined on a quarterly basis based on the Company’s leverage ratio, or (b) a base rate, plus a spread of 0.25% to 1.50%, as determined on a quarterly basis based on the Company’s leverage ratio. In addition, as of December 31, 2022, Tag 8, a VIE consolidated by the Company, had $4.2 million in outstanding borrowings for the Construction Loan. Interest rate on the “Construction Loan” is equal to an index rate determined by the bank. Furthermore, as of December 31, 2022, APC had $23.2 million in outstanding borrowings for real estate loans related to ZLL, MPP, AMG Properties, and 120 Hellman (“Real Estate Loans”). 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 3.25% per annum. Under no circumstances will the interest rate on this loan be less than 3.50% per annum or more than the maximum rate allowed by applicable law. The Company has entered into interest rate swap agreements for certain of these agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. A hypothetical 1% change in our interest rates for our outstanding borrowings under our Credit Agreement, Construction Loans, and Real Estate Loans would have increased or decreased our interest expense for the year ended December 31, 2022, by $1.7 million.
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Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 42) 73
Consolidated Balance Sheets as of December 31, 2022 and 2021 76
Notes to the Consolidated Financial Statements 85
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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 sheets of Apollo Medical Holdings, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, mezzanine and stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 1, 2023 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 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 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 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 audits 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.
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Risk Pool Settlements and Related Receivables
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Valuation of Incurred but not Reported (IBNR) Claims Liability
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Los Angeles, California
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, December 31,
Assets
Current assets
Investment in marketable securities 5,567 53,417
Income taxes receivable 4,015 —
Prepaid expenses and other current assets 14,798 18,637
Loans receivable 996 —
Loans receivable - related party 2,125 4,000
Non-current assets
Loans receivable — 569
Investments in other entities – equity method 40,299 41,715
Investments in privately held entities 896 896
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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 $ 49,562 $ 43,951
Income taxes payable — 652
Finance lease liabilities 594 486
Current portion of long-term debt 619 780
Non-current liabilities
Finance lease liabilities, net of current portion 1,275 973
Operating lease liabilities, net of current portion 19,915 13,198
Commitments and contingencies (Note 14)
Mezzanine equity
Stockholders’ equity
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(1)The Company’s consolidated balance sheets include the assets and liabilities of its consolidated VIEs. The consolidated balance sheets include total assets that can be used only to settle obligations of the Company’s consolidated VIEs totaling $505.8 million and $567.0 million as of December 31, 2022 and December 31, 2021, 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 $129.7 million and $91.7 million as of December 31, 2022 and December 31, 2021, respectively. These VIE balances do not include $304.8 million of investment in affiliates and $30.3 million of amounts due from affiliates as of December 31, 2022 and $802.8 million of investment in affiliates and $6.6 million of amounts due from affiliates as of December 31, 2021 as these are eliminated upon consolidation and not presented within the consolidated balance sheets. See Note 18 – “Variable Interest Entities (VIEs)” for further detail.
See accompanying notes to consolidated financial statements.
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years ended December 31,
Revenue
Operating expenses
Other (expense) income
Income (loss) from equity method investments 5,622 (4,306) 3,694
Gain on sale of equity method investment — 2,193 99,839
Net income (loss) attributable to noncontrolling interests 1,482 (24,564) 84,454
Earnings per share – basic $ 1.09 $ 1.69 $ 1.04
Earnings per share – diluted $ 1.08 $ 1.63 $ 1.01
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 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)
Purchase of non-controlling interest (1,546) — — — — (75) (75)
Sale of non-controlling interest 150 — — — — — —
Shares issued for vesting of restricted stock awards — 29,973 — — — — —
Shares issued for exercise of options and warrants — 898,583 1 9,060 — — 9,061
Share-based compensation — — — 6,745 — — 6,745
Investment in non-controlling interest — — — — — 3,769 3,769
Acquisition of non-controlling interest — — — — — 500 500
Cancellation of restricted stock awards — (10,707) — (334) — — (334)
Non-controlling interest capital change — — — — — 48 48
80
Purchase of non-controlling interest — — — — — (4,338) (4,338)
Sale of non-controlling interest — — — — — 66 66
Share buy back (708) — — — — — —
Shares issued for vesting of restricted stock awards — 342,584 — (321) — — (321)
Issuance of shares for business acquisition — 18,756 — 1,000 — — 1,000
Investment in non-controlling interest — — — — — 371 371
Cancellation of restricted stock awards — (11,084) — (457) — — (457)
Tax impact of acquisition (448) — — — — — —
AAMG stock contingent consideration (see Note 3) — — — 5,569 — — 5,569
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
Cash flows from operating activities
Loss (gain) on consolidation of equity method investment 901 (2,752) —
Gain on contingent equity securities — (4,270) —
Gain from investment in warrants — (1,145) —
Loss (income) from equity method investments, net (5,622) 4,306 (3,694)
Impairment of beneficial interest — 15,723 —
Unrealized (gain) loss on interest rate swaps (4,235) 1,071 —
Loss of disposal of property and equipment — — 91
Changes in operating assets and liabilities, net of acquisition amounts:
Prepaid expenses and other current assets 818 2,708 (6,432)
Accounts payable and accrued expenses (49) 3,217 8,204
Cash flows from investing activities
Proceeds from repayment of loans receivable - related parties 4,067 56 16,500
Advances on loans receivable — — (145)
Purchases of investments – equity method — (13,622) (9,969)
Proceeds from sale of equity method investment — 6,375 52,743
Proceeds from sale of fixed assets — — 50
82
Cash recorded from consolidation of VIE — 5,927 —
Distribution from investment - equity method 400 — —
Contribution to investment - equity method (2,105) — —
Net cash (used in) provided by investing activities (7,113) 16,540 95,493
Cash flows from financing activities
Payment of finance lease obligations (561) (208) (105)
Proceeds from exercise of stock options and warrants 8,633 9,061 10,802
Proceeds from sale of common stock — 40,134 —
Proceeds from sale of noncontrolling interest 436 48 —
Cost of debt and equity issuances — (727) —
Net increase in cash, cash equivalents, and restricted cash 54,930 39,127 89,960
Supplemental disclosures of cash flow information
Supplemental disclosures of non-cash investing and financing activities
Dividend declared included in dividend payable — 71 485
Issuance of financing obligation for business combinations — 12,706 —
Cashless exercise of warrants 694 — 599
Fixed asset obtained in exchange for finance lease liabilities 971 — —
Common stock issued in business combination 1,000 — —
Cancellation of Restricted Stock Awards — 334 —
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
83
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 (in thousands).
Years Ended December 31,
Restricted cash – long-term - letters of credit — — 500
See accompanying notes to consolidated financial statements.
84
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
1. Description of Business
Overview
Apollo Medical Holdings, Inc. (“ApolloMed”) is a leading physician-centric, technology-powered, risk-bearing healthcare company. Leveraging its proprietary end-to-end technology solutions, ApolloMed operates an integrated healthcare delivery platform that enables providers to participate successfully in value-based care arrangements, thus empowering them to deliver high-quality care to patients in a cost-effective manner. ApolloMed was merged with Network Medical Management (“NMM”) in December 2017 (the “2017 Merger”). As a result of the 2017 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. Unless the context dictates otherwise, references in these notes to the financial statements, the “Company,” “we,” “us,” “our,” and similar words are references to ApolloMed and its consolidated subsidiaries and affiliated entities, as appropriate, including its consolidated variable interest entities (“VIEs”).
Headquartered in Alhambra, California, ApolloMed’s subsidiaries and VIEs include management services organizations (“MSOs”), affiliated independent practice associations (“IPAs”), and an accountable care organization (“ACO”) participating in the Global and Professional Direct Contracting (“GPDC”) model. NMM and Apollo Medical Management, Inc. (“AMM”) are the administrative and managerial services companies for the affiliated physician-owned professional corporations that contract with independent physicians to deliver medical services in-office and virtually under the following brands: (i) Allied Physicians of California, a Professional Medical Corporation d.b.a. Allied Pacific of California IPA (“APC”), (ii) Alpha Care Medical Group, Inc. (“Alpha Care”), (iii) Accountable Health Care IPA, a Professional Medical Corporation (“Accountable Health Care”), (iv) Jade Health Care Medical Group, Inc. (“Jade”), (v) Access Primary Care Medical Group (“APCMG”), and (vi) All American Medical Group (“AAMG”). These affiliates are supported by ApolloMed Hospitalists, a Medical Corporation (“AMH”) and Southern California Heart Centers, a Medical Corporation (“SCHC”). The Company’s ACO operates under the APA ACO, Inc. (“APAACO”) brand and participates in the Centers for Medicare & Medicaid Services (“CMS”) 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.
MSOs and Affiliates
AMM, a wholly owned subsidiary of ApolloMed, manages affiliated medical groups AMH and SCHC. AMH provides hospitalist, intensivist, and physician advisory services. SCHC is a specialty clinic that focuses on cardiac care and diagnostic testing.
NMM was formed in 1994 as an MSO for the purpose 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 the 2017 Merger, NMM became a wholly owned subsidiary of ApolloMed.
IPAs and Affiliates
APC was incorporated in 1992 for the purpose of arranging healthcare services as an IPA. APC is owned by California-licensed physicians and professional medical corporations, and 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 subject to stop-loss provisions in contracts with HMOs.
85
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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 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”) and AP-AMH 2 Medical Corporation (“AP-AMH 2”) were formed in May 2019 and July 2021, respectively, 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 and AP-AMH 2. ApolloMed makes all the decisions on behalf of AP-AMH and AP-AMH 2 and funds and receives all the distributions from its operations. ApolloMed has the right to receive benefits from the operations of AP-AMH and AP-AMH 2 and has the option, but not the obligation, to cover its losses. Therefore, AP-AMH and AP-AMH 2 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:
1.A $545.0 million loan to AP-AMH, pursuant to a 10-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. 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.A $545.0 million private placement, where AP-AMH purchased 1,000,000 shares of APC Series A Preferred Stock which entitle AP-AMH to receive preferential, cumulative dividends that accrue on a daily basis. During the years ended December 31, 2022 and 2021, APC distributed $54.1 million and $55.1 million, respectively, as preferred returns.
3.A $300.0 million private placement, where APC purchased 15,015,015 shares of the Company’s common stock and in connection therewith, the Company granted APC certain registration rights with respect to the purchased shares. During the year ended December 31, 2022, APC distributed approximately 1.0 million shares of the Company’s common stock to APC shareholders.
4.ApolloMed licensed to AP-AMH the right to use certain tradenames for 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 is also 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 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 18.12% and 19.68% as of December 31, 2022 and 2021, 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, organized by a group of highly qualified physicians, which utilizes some of the most advanced equipment in the eastern part of Los Angeles County and the San Gabriel Valley. The facility is Medicare-certified and accredited by the Accreditation Association for Ambulatory Healthcare. As of December 31, 2022, APC owned 44% of CDSC’s capital stock. CDSC is determined to be a VIE and APC is determined to be the primary beneficiary.
86
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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 stockholder 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 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 of Southern California (“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, Accountable Health Care, and AMG, a Professional Medical Corporation (“AMG”).
Alpha Care, an IPA acquired by the Company in May 2019, has been operating in California since 1993 as 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 its enrollees and focuses on Medi-Cal/Medicaid, Commercial, and Medicare and Dual Eligible members in the Riverside and San Bernardino counties of Southern California.
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 healthcare providers for more than 20 years. Accountable Health Care provides quality healthcare services to its members through three federally qualified health plans and multiple product lines, including Medi-Cal, Commercial, and Medicare.
AMG is a network of family practice clinics operating out of three main locations in Southern California. AMG provides professional and post-acute care services to Medicare, Medi-Cal/Medicaid, and Commercial patients through its network of doctors and nurse practitioners. In September 2019, APC-LSMA purchased 100% of the shares of capital stock of AMG.
DMG is a professional medical California corporation and a complete outpatient imaging center. APC accounted for its 40% investment in DMG under the equity method of accounting. In October 2021, DMG entered into an administrative services agreement with a subsidiary of the Company, causing the Company to reevaluate the accounting for the Company’s investment in DMG. Based on the reevaluation and in accordance with relevant accounting guidance, DMG is determined to be a VIE of the Company and is consolidated by the Company. In addition, APC-LSMA is obligated to purchase the remaining equity interest within three years from the effective date. The purchase of the remaining equity value is considered a financing obligation with a carrying value of $8.5 million as of December 31, 2022. As the financing obligation is embedded in the non-controlling interest, the non-controlling interest is recognized in other long-term liabilities in the accompanying consolidated balance sheets.
In December 2020, using cash comprised solely of Excluded Assets, APC purchased a 100% interest in each of Medical Property Partners, LLC (“MPP”), AMG Properties, LLC (“AMG Properties”), and ZLL Partners, LLC (“ZLL”) and a 50% interest in each of One MSO, LLC (“One MSO”), Tag-6 Medical Investment Group, LLC (“Tag 6”), and Tag-8 Medical Investment Group, LLC (“Tag 8”). These entities own buildings that are currently leased to tenants, as well as vacant land that is being developed. MPP, AMG Properties, and ZLL are 100% owned subsidiaries of APC and are included in the consolidated financial statements. One MSO is accounted for as an equity method investment, as APC has the ability to exercise significant influence, but not control over the operations of the entity. On August 31, 2022, using cash comprised solely of Excluded Assets, APC acquired the remaining 50% interest in Tag 8 and Tag 6 for $4.1 million and $4.9 million, respectively. As a result, Tag 8 and Tag 6 are 100% owned subsidiaries of APC and are included in the consolidated financial statements. Since APC is a guarantor of Tag 8’s loan with MUFG Union Bank N.A. and APC paid off Tag 6’s loan, Tag 8 and Tag 6 are VIEs and consolidated by APC. These purchases are deemed Excluded Assets that are solely for the benefit of APC and its shareholders. As such, any income pertaining to APC’s interests in these properties has no impact on the Series A Dividend payable by APC to AP-AMH Medical Corporation, and consequently will not affect net income attributable to ApolloMed.
87
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
In July 2021, AP-AMH 2, a VIE of the Company, purchased an 80% equity interest (on a fully diluted basis) in Access Primary Care Medical Group (“APCMG”), a primary care physicians’ group focused on providing high-quality care to senior patients in the northern California cities of Daly City and San Francisco. As a result, APCMG is consolidated by the Company.
In August 2021, Apollo Medical Holdings, Inc. acquired 49% of the aggregate issued and outstanding shares of capital stock of Sun Clinical Laboratories (“Sun Labs”) for an aggregate purchase price of $4.0 million. Sun Labs is a Clinical Laboratory Improvement Amendments-certified full-service lab that operates across the San Gabriel Valley in Southern California. In accordance with relevant accounting guidance, Sun Labs is determined to be a VIE of the Company and is consolidated by the Company (see Note 3 — “Business Combinations and Goodwill”). The Company is obligated to purchase the remaining equity interest within three years from the effective date. The purchase of the remaining equity value is considered a financing obligation with a carrying value of $5.8 million at December 31, 2022. As the financing obligation is embedded in the non-controlling interest, the non-controlling interest is recognized in other long-term liabilities in the accompanying consolidated balance sheets.
On January 27, 2022, the Company acquired 100% of the capital stock of Orma Health, Inc., and Provider Growth Solutions, LLC (together, “Orma Health”) (see Note 3 — “Business Combinations and Goodwill”). Orma Health’s real-time Clinical AI platform ingests data from multiple sources and utilizes advanced risk-stratification models to identify patients for various clinical programs, including remote patient monitoring (“RPM”), mental health support, chronic care management, and more. Its clinical platform is also deeply integrated with Orma Health’s proprietary RPM ecosystem, which consists of smart health devices and a suite of technology tools to manage patient health.
On April 19, 2022, the AP-AMH 2 acquired 100% of the capital stock of Jade (see Note 3 — “Business Combinations and Goodwill”). Jade is a primary and specialty care physicians’ group focused on providing high-quality care to its patients in the San Francisco Bay Area in Northern California.
On October 14, 2022, a sole equity holder acquired 100% of the equity interest in Valley Oaks Medical Group (“VOMG”). Under the terms of the Physician Equity Holder Agreement (the “Equity Agreement”) between ApolloMed and the equity holder, ApolloMed may designate a third party who is permitted under Nevada law to be an owner or equity holder of VOMG with the right (the “Acquisition Right”) (a) to acquire equity holder’s equity interest or (b) to acquire from VOMG. The Acquisition Right shall be exercisable by ApolloMed and equity holder shall be obligated to assign and transfer the equity interest or to cause VOMG to issue new equity interests (as applicable) to ApolloMed. As a result of the arrangement and in accordance with relevant accounting guidance, VOMG is determined to be a VIE of ApolloMed and is consolidated by the Company (see Note 3 — “Business Combinations and Goodwill”). VOMG owns nine primary care clinics consisting of seven in Nevada and two in Texas. The purchase price consists of cash funded upon close of the transaction and additional cash consideration contingent on VOMG meeting financial metrics for fiscal year 2023 and 2024.
On October 31, 2022, AP-AMH 2, a VIE of the Company, acquired 100% of the equity interest in AAMG (see Note 3 — “Business Combinations and Goodwill”). AAMG is an IPA operating in Northern California. The purchase price consists of cash funded upon close of the transaction and additional cash and stock consideration contingent on AAMG meeting financial metrics for fiscal year 2023 and 2024.
NGACO, GPDC / ACO REACH
APAACO began participating in the Next Generation Accountable Care Organization (“NGACO”) Model of CMS in January 2017. The NGACO Model was a CMS program that allowed 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. With the termination of the NGACO Model on December 31, 2021, APAACO applied, and was selected by CMS, to participate as a Direct Contracting Entity (“DCE”) in the standard track of CMS’s GPDC Model for Performance Year 2022 (“PY22”), beginning January 1, 2022. CMS has since redesigned the GPDC Model in response to the current Administration’s health care priorities, including their commitment to advancing health equity, stakeholder feedback, and participant experience, and renamed the GPDC Model to ACO Realizing Equity, Access, and Community Health (“ACO REACH”) Model. The ACO REACH Model will begin participation on January 1, 2023.
2. Basis of Presentation and Summary of Significant Accounting Policies
88
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Basis of Presentation
The accompanying consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Principles of Consolidation
The consolidated balance sheets as of December 31, 2022 and 2021 and consolidated statements of income for the years ended December 31, 2022, 2021 and 2020 include the accounts of (i) ApolloMed, ApolloMed’s consolidated subsidiaries, NMM, AMM, APAACO, Orma Health Inc, and Provider Growth Solutions, LLC and its VIEs, AP-AMH, AP-AMH 2, Sun Labs, DMG, and Valley Oaks Medical Group (“VOMG”) ; (ii) AP-AMH 2’s consolidated subsidiaries, APCMG, Jade, and AAMG; (iii) AMM’s consolidated VIEs, SCHC and AMH; (iv) NMM’s VIE, APC; (v) APC’s consolidated subsidiaries, Universal Care Acquisition Partners, LLC (“UCAP”), MPP, AMG Properties, ZLL, ICC, 120 Hellman LLC (“120 Hellman”) and its VIEs, CDSC, APC-LSMA, Tag 8, and Tag 6; and (vi) APC-LSMA’s consolidated subsidiaries, Alpha Care, Accountable Health Care, and AMG.
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 combinations 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 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 the Company 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. 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
89
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
•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:
•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 determines 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 (economics). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary. Refer to 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.
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 90 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, 2022 and 2021, the Company’s deposit accounts with banks exceeded the FDIC’s insured limit by approximately $324.7 million and $285.9 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.
Restricted Cash
90
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Restricted cash consists of cash held as collateral to secure standby letters of credits as required by certain contracts.
Investments in Marketable Securities
Investments in marketable securities consist of equity securities and certificates of deposit with various financial institutions. The appropriate classification of investments is determined at the time of purchase and such designation is reevaluated at each balance sheet date.
Certificates of deposit in investments in marketable securities are reported at par value, plus accrued interest, with maturity dates greater than four months (see fair value measurements of financial instruments below). As of December 31, 2022 and 2021, certificates of deposit amounted to approximately $0 and $25.0 million, respectively. Investments in certificates of deposit are classified as Level 1 investments in the fair value hierarchy.
Equity securities are reported at fair value. These securities are classified as Level 1 in the valuation hierarchy, where quoted market prices from reputable third-party brokers are available in an active market and unadjusted. Equity securities with low trading volume are determined to not have an active market with buyers and sellers ready to trade. Accordingly, we classify such equity securities as Level 2 in the valuation hierarchy, and their valuation is based on weighted-average share prices from observable market data.
Equity securities held by the Company are primarily comprised of common stock of a payor partner that completed its IPO in June 2021 and Nutex Health, Inc. (formerly known as Clinigence Holdings, Inc.) (“Nutex”). The common stock of a payor partner was acquired as a result of UCAP selling its 48.9% ownership interest in Universal Care, Inc. (“UCI”) in April 2020. In September 2021, ApolloMed and Nutex entered into a stock purchase agreement in which ApolloMed purchased shares of common stock, warrants, and potentially additional shares of common stock if certain metrics are not met (such additional shares “contingent equity securities”) for $3.0 million. The common stock is included in investments in marketable securities in the accompanying consolidated balance sheets. In May 2022, the Company exercised the warrants and subsequently recognized the shares within investments in marketable securities in the accompanying consolidated balance sheet. The contingent equity securities are classified as derivatives and included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. See Note 2 — “Basis of Presentation and Summary of Significant Accounting Policies - Derivative Financial Instruments” in the accompanying consolidated financial statements for information on the treatment of the derivative instruments.
As of December 31, 2022 and 2021, the equity securities were approximately $5.6 million and $28.4 million, respectively, in the accompanying consolidated balance sheets. Gains and losses recognized on equity securities sold are recognized in the accompanying consolidated statements of income under other income. The components comprising total gains and losses on equity securities are as follows (in thousands) for the periods listed below:
Twelve Months EndedDecember 31,
Total losses recognized on equity securities $ (23,713) $ (10,745)
Gains recognized on equity securities sold 2,272 —
Receivables, Receivables – Related Parties, Other Receivables, Loan Receivable, and Loan Receivable - Related Party
The Company’s receivables are comprised of accounts receivable, capitation and claims receivable, risk pool settlements, 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, management fee income, incentive receivables, and other receivables. Receivables – related parties are recorded and stated at the amount expected to be collected.
91
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The Company’s loan receivable and loan receivable - related party consists of promissory notes that accrue interest per annum. As of December 31, 2022, promissory notes are expected to be collected within 12 months.
Capitation and claims receivables relate to each health plan’s capitation and are 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 consist of recoverable claims paid related to the 2021 APAACO performance year to be administered following instructions from CMS for the NGACO program, 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 regard 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 Credit 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):
Years Ended December 31,
The Company had major payors that contributed the following percentages of net revenue:
Years Ended December 31,
Payor B *% *% 10.9 %
* Less than 10% of total net revenues
92
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The Company had major payors that contributed to the following percentages of net receivables and receivables - related parties:
As of December 31,
Payor C 25.0 % *
Payor F ** 30.0 %
* Less than 10% of total receivables and receivables - related parties, net
** Payor E and F have been combined in 2022 under Payor E
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, fiduciary 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.
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 disclosure 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, 2022 are presented below (in thousands):
93
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Fair Value Measurements
Level 1 Level 2 Level 3 Total
Assets
Marketable securities – equity securities 5,567 — — 5,567
Contingent equity securities — — 1,900 1,900
Liabilities
APCMG contingent consideration — — 1,000 1,000
AAMG cash contingent consideration (see Note 3) — — 5,851 5,851
VOMG contingent consideration (see Note 3) — — 17 17
Total liabilities $ — $ — $ 6,868 $ 6,868
The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2021 are presented below (in thousands):
Fair Value Measurements
Level 1 Level 2 Level 3 Total
Assets
Marketable securities – certificates of deposit 25,024 — — 25,024
Contingent equity securities — — 4,270 4,270
Liabilities
Interest rate swaps $ — $ 1,071 $ — $ 1,071
APCMG contingent consideration $ — $ — $ 1,000 $ 1,000
* 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 and liabilities for the year ended December 31, 2022.
The change in the fair value of Level 3 liabilities for the year ended December 31, 2022 was as follows (in thousands):
Amount
AAMG cash contingent consideration (see Note 3) 5,851
VOMG contingent consideration (see Note 3) 17
Intangible Assets and Long-Lived Assets
94
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Intangible assets with finite lives include network-payor relationships, management contracts, member relationships, subscriber relationships, and developed technology and are stated at cost, less accumulated amortization, and impairment losses. These intangible assets are amortized using the accelerated method based on the discounted cash flow rate or using the straight-line method.
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 on its finite-lived intangible or long-lived assets during the years ended December 31, 2022, 2021 and 2020.
Goodwill and Indefinite-Lived Intangible Assets
Under ASC 350, Intangibles – Goodwill and Other, 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 (i) MSOs, (ii) IPAs, and (iii) 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. One reporting unit within our healthcare delivery segment had a negative carrying amount of net assets as of September 30, 2022 and goodwill of approximately $116.5 million.
The Company had no impairment of its goodwill or indefinite-lived intangible assets during the years ended December 31, 2022, 2021 and 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. There was no impairment loss recorded related to equity method investments for the years ended December 31, 2022, 2021, and 2020.
95
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Investments in Privately Held Entities
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 net asset value are subject to qualitative assessment for indicators of impairments.
Medical Liabilities
APC, Alpha Care, Accountable Health Care, APCMG, Jade, and AAMG (“consolidated IPAs”) and APAACO are responsible for integrated care that the associated physicians and contracted hospitals provide to their enrollees. The consolidated IPAs 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, 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 reserves 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.
Fiduciary Cash and Payable
The consolidated IPAs collect cash from health plans on behalf of their sub-IPAs and providers and pass the money through to them. The fiduciary cash balance of $8.1 million and $10.5 million as of December 31, 2022 and 2021, respectively, is presented within prepaid expenses and other current assets and the related payable is presented as fiduciary payable in the accompanying consolidated balance sheets.
Derivative Financial Instruments