Company Quick10K Filing
Quick10K
Apollo Medical
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$20.25 36 $724
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-03-31 Annual: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-03-31 Annual: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-K 2015-03-31 Annual: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-K 2014-01-31 Annual: 2014-01-31
8-K 2019-06-17 Shareholder Vote
8-K 2019-06-07 Enter Agreement
8-K 2019-05-31 Other Events, Exhibits
8-K 2019-05-10 Enter Agreement, Earnings, Off-BS Arrangement, Sale of Shares, Shareholder Rights, Other Events, Exhibits
8-K 2019-03-27 Officers
8-K 2019-03-18 Earnings, Exhibits
8-K 2019-01-11 Officers, Regulation FD, Other Events, Exhibits
8-K 2018-12-21 Regulation FD, Exhibits
8-K 2018-11-15 Officers
8-K 2018-11-14 Earnings, Exhibits
8-K 2018-11-08 Officers
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-06-21 Officers, Other Events, Exhibits
8-K 2018-06-18 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-05-31 Officers, Other Events, Exhibits
8-K 2018-04-19 Amend Bylaw, Other Events, Exhibits
8-K 2018-03-16 Enter Agreement, Exhibits
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GRIF Griffin Industrial Realty 188
IRIX Iridex 70
CFBK Central Federal 56
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RHE Regional Health Properties 6
MGHL Morgan Group Holding 0
AMEH 2019-03-31
Part I Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-2.4 tv520199_ex2-4.htm
EX-31.1 tv520199_ex31-1.htm
EX-31.2 tv520199_ex31-2.htm
EX-32 tv520199_ex32.htm

Apollo Medical Earnings 2019-03-31

AMEH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv520199_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from  ___ to ___.

 

Commission File No. 001-37392

 

Apollo Medical Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 95-4472349
(State or other jurisdiction
of incorporation or organization)
(IRS Employer Identification No.)

 

1668 S. Garfield Avenue, 2nd Floor, Alhambra, CA 91801

(Address of principal executive offices and zip code)

 

(626) 282-0288

(Registrant’s telephone number, including area code) 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   x   Yes     ¨    No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   x   Yes     ¨    No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller reporting company ¨
  Emerging growth company  ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  ¨    Yes     x    No

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class   Trading Symbol   Name of Each Exchange on Which Registered
Common Shares, par value $0.001 per share   AMEH   Nasdaq Capital Market

 

As of May 3, 2019, there were 35,768,076 shares of common stock of the registrant, $0.001 par value per share, issued and outstanding.

 

 

 

 

 

 

APOLLO MEDICAL HOLDINGS, INC.

 

INDEX TO FORM 10-Q FILING

 

TABLE OF CONTENTS

 

    PAGE
  Introductory Note 3
  Note About Forward-Looking Statements 3
     
  PART I
FINANCIAL INFORMATION
 
     
Item 1. Condensed Consolidated Financial Statements – Unaudited 5
  Balance Sheets as of March 31, 2019 and December 31, 2018 5
  Statements of Income for the Three Months Ended March 31, 2019 and 2018 7
  Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 9
  Notes to Condensed Consolidated Financial Statements - Unaudited 11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 43
Item 3. Quantitative and Qualitative Disclosures about Market Risk 48
Item 4. Controls and Procedures 49
     
  PART II
OTHER INFORMATION
 
     
Item 1. Legal Proceedings 50
Item 1A. Risk Factors 50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 3. Defaults Upon Senior Securities 51
Item 4. Mine Safety Disclosures 51
Item 5. Other Information 51
Item 6. Exhibits 51

 

 2 

 

 

INTRODUCTORY NOTE

 

Unless the context dictates otherwise, references in this Quarterly Report on Form 10-Q (the “Report”) to the “Company,” “we,” “us,” “our,” and similar words are to Apollo Medical Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries and affiliated entities, as appropriate, including its consolidated variable interest entities (“VIEs”).

 

The Centers for Medicare & Medicaid Services (“CMS”) have not reviewed any statements contained in this Quarterly Report on Form 10-Q describing the participation of APA ACO, Inc. (“APAACO”) in the next generation accountable care organization (“NGACO”) model.

 

Trade names and trademarks of the Company and its subsidiaries referred to herein and their respective logos, are our property. This Quarterly Report on Form 10-Q may contain additional trade names and/or trademarks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names and/or trademarks, if any, to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any statements about our future business, financial condition, strategic transactions (including mergers, acquisitions and management services agreements), sources of revenue, operating results, plans, objectives, expectations and intentions, any projections of earnings, revenue or other financial items, such as our projected capitation from CMS and our future liquidity; any statements of any plans, targets, strategies and objectives of management for future operations such as any material opportunities that we believe exist for our company; any statements concerning anticipated, proposed or prospective services, developments, timelines, costs, investments, returns, effects or results, such as our outlook regarding our NGACO, and our strategic transactions, including the prospects of and future investments for our strategic transactions; any statements regarding management’s view of future expectations and prospects for us; any statements about prospective adoption of new accounting standards or effects of changes in accounting standards; any statements regarding future economic conditions or performance of our company; any statements of belief; any statements of assumptions underlying any of the foregoing; and other statements that are not historical facts. Forward-looking statements may be identified by the use of forward-looking terms such as “anticipate,” “could,” “can,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “plan,” “envision,” “intend,” “continue,” “target,” “seek,” “will,” “would,” and the negative of such terms, other variations on such terms or other similar or comparable words, phrases or terminology. Forward-looking statements reflect current views with respect to future events and condition and are based on current estimates, expectations and assumptions only as of the date of this Quarterly Report on Form 10-Q and therefore are speculative in nature and subject to change. Although we believe that the expectations reflected in our forward-looking statements are reasonable, our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and significant risks and uncertainties that could cause actual condition, outcomes and results to differ materially from those indicated by such statements. Should one or more of these risks or uncertainties materialize, or should any expectations or assumptions underlying the relevant forward-looking statements prove incorrect, it could significantly affect our operations and may cause the actual actions, results, financial condition, performance or achievements of the Company and its consolidated subsidiaries and consolidated variable interest entities to be substantially different from any future actions, results, financial condition, performance or achievements, expressed or implied by any such forward-looking statements, as being expected, anticipated, intended, planned, believed, sought, estimated or projected on the basis of historical trends.

  

Some of the key factors impacting these risks and uncertainties include, but are not limited to:

 

·risks related to our ability to successfully locate new strategic targets and integrate our operations following mergers, acquisitions or other strategic transactions, including that the integration may be more costly or more time consuming and complex than anticipated and that synergies anticipated to be realized may not be fully realized or may take longer to realize than expected;

 

·our dependence on a few key payors;

   

·changes in federal and state programs and policies regarding medical reimbursements and capitated payments for health services we provide;

 

 3 

 

 

·the success of our focus on our NGACO, to which we have devoted, and intend to continue to devote, considerable effort and resources, financial and otherwise, including whether we can manage medical costs for patients assigned to us within the capitation received from CMS and whether we can continue to participate in the All-Inclusive Population-Based Payment Mechanism (“AIPBP Mechanism”) of the NGACO Model as payments thereunder represent a significant part of our total revenues;

 

·our expenses may exceed capitation payments, whether from CMS under the AIPBP Mechanism or health plans, which could lead to substantial losses, and uncertainty related to the final settlements of such incurred expenses and our actual earnings that are generally determined in subsequent periods;

 

·general economic uncertainty;

 

·the impact of emerging and existing competitors;

 

·any adverse development in general market, business, economic, labor, regulatory and political conditions;

 

·changing government programs in which we participate for the provision of health services and on which we are also significantly dependent in generating revenue;

 

·changes in laws and regulations and other market-wide developments affecting our industry in general and our operations in particular, including the impact of any change to applicable laws and regulations relating to trade, monetary and fiscal policies, taxes, price controls, regulatory approval of new products, registration and licensure, healthcare reform and reimbursements for medical services from private insurance, on which we are significantly dependent in generating revenue and the impact, including additional costs, of mandates and other obligations that may be imposed upon us as a result of new or revised federal and state healthcare laws;

 

·risks related to our ability to raise capital as equity or debt to finance our growth and strategic transactions;

 

·our ability to retain key individuals, including members of senior management;

 

·the impact of rigorous competition in the healthcare industry;

  

·the impact of any potential future impairment of our assets;

 

·the effectiveness of our compliance and control initiatives;

 

·risks related to changes in accounting literature or accounting interpretations; and

 

·the fluctuations in the market value of our securities.

 

For a detailed description of these and other factors that could cause our actual results to differ materially from those expressed in any forward-looking statement, please see Item 1A entitled “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 18, 2019. In light of the foregoing, investors are advised to carefully read this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K in connection with the important disclaimers set forth above and are urged not to rely on any forward-looking statements in reaching any conclusions or making any investment decisions about us or our securities. Except as required by law, we do not intend, and undertake no obligation, to update any statement, whether as a result of the receipt of new information, the occurrence of future events, the change of circumstances or otherwise. We further do not accept any responsibility for any projections or reports published by analysts, investors or other third parties.

 

 4 

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

APOLLO MEDICAL HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   March 31,
2019
   December 31,
2018
 
         
Assets          
           
Current assets          
Cash and cash equivalents  $93,007,780   $106,891,503 
Investment in marketable securities   1,143,006    1,127,102 
Receivables, net   6,640,236    7,127,217 
Receivables, net – related parties   55,888,846    49,328,739 
Other receivables   12,247,776    1,003,133 
Prepaid expenses and other current assets   7,984,419    7,385,098 
           
Total current assets   176,912,063    172,862,792 
           
Noncurrent assets          
Land, property and equipment, net   12,332,342    12,721,082 
Intangible assets, net   83,056,658    86,875,883 
Goodwill   185,805,880    185,805,880 
Loans receivable – related parties   17,500,000    17,500,000 
Investment in other entities – equity method   34,027,323    34,876,980 
Investment in a privately held entity that does not report net asset value per share   405,000    405,000 
Restricted cash   740,212    745,470 
Right-of-use assets   8,528,159    - 
Other assets   1,551,359    1,205,962 
           
Total noncurrent assets   343,946,933    340,136,257 
           
Total assets  $520,858,996   $512,999,049 

 

 5 

 

 

APOLLO MEDICAL HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(UNAUDITED)

 

   March 31,
2019
   December 31,
2018
 
         
Liabilities, Mezzanine Equity and Stockholders’ Equity          
           
Current liabilities          
           
Accounts payable and accrued expenses  $47,654,471   $25,075,489 
Fiduciary accounts payable   2,084,926    1,538,598 
Medical liabilities   23,265,865    33,641,701 
Income taxes payable   12,831,839    11,621,861 
Bank loan   -    40,257 
Finance lease obligation   101,741    101,741 
Lease liabilities   2,461,924    - 
           
Total current liabilities   88,400,766    72,019,647 
           
Noncurrent liabilities          
Lines of credit – related party   13,000,000    13,000,000 
Deferred tax liability   16,992,790    19,615,935 
Liability for unissued equity shares   1,185,025    1,185,025 
Finance lease obligation   492,110    517,261 
Lease liabilities   5,977,145    - 
           
Total noncurrent liabilities   37,647,070    34,318,221 
           
Total liabilities   126,047,836    106,337,868 
           
Commitments and Contingencies (Note 10)          
           
Mezzanine equity          
Noncontrolling interest in Allied Pacific of California IPA (“APC”)   212,434,390    225,117,029 
           
Stockholders’ equity          
Series A Preferred stock, par value $0.001; 5,000,000 shares authorized (inclusive of Series B Preferred stock); 1,111,111 issued and zero outstanding   -    - 
Series B Preferred stock, par value $0.001; 5,000,000 shares authorized (inclusive of Series A Preferred stock); 555,555 issued and zero outstanding   -    - 
Common stock, par value $0.001; 100,000,000 shares authorized, 34,503,704 and 34,578,040 shares outstanding, excluding 1,944,054 and 1,850,603 treasury shares, at March 31, 2019 and December 31, 2018, respectively   34,504    34,578 
Additional paid-in capital   163,005,851    162,723,051 
Retained earnings   17,927,867    17,788,203 
    180,968,222    180,545,832 
           
Noncontrolling interest   1,408,548    998,320 
           
Total stockholders’ equity   182,376,770    181,544,152 
           
Total liabilities, mezzanine equity and stockholders’ equity  $520,858,996   $512,999,049 

    

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 6 

 

 

APOLLO MEDICAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

   Three Months Ended
March 31,
 
   2019   2018 
Revenue          
Capitation, net  $71,516,778   $85,905,284 
Risk pool settlements and incentives   10,093,841    17,986,736 
Management fee income   8,996,600    12,074,572 
Fee-for-service, net   4,080,674    6,236,628 
Other income   1,069,278    1,720,026 
           
Total revenue   95,757,171    123,923,246 
           
Operating expenses          
Cost of services   83,432,474    84,614,686 
General and administrative expenses   10,263,960    11,301,237 
Depreciation and amortization   4,417,581    5,058,512 
Provision for doubtful accounts   951,014    247,102 
           
Total expenses   99,065,029    101,221,537 
           
(Loss) income from operations   (3,307,858)   22,701,709 
           
Other income (expense)          
Loss from equity method investments   (849,657)   (28,024)
Interest expense   (210,979)   (85,001)
Interest income   323,008    269,818 
Other income   187,116    87,993 
           
Total other (expense) income, net   (550,512)   244,786 
           
(Loss) income before (benefit from) provision for income taxes   (3,858,370)   22,946,495 
           
(Benefit from) provision for income taxes   (1,408,241)   7,228,840 
           
 Net (loss) income   (2,450,129)   15,717,655 
           
Net (loss) income attributable to noncontrolling interest   (2,589,793)   13,557,200 
           
Net income attributable to Apollo Medical Holdings, Inc.  $139,664   $2,160,455 
           
Earnings per share – basic  $0.00   $0.07 
           
Earnings per share – diluted  $0.00   $0.06 
           
Weighted average shares of common stock outstanding-basic   34,496,622    32,421,467 
           
Weighted average shares of common stock outstanding – diluted   38,074,174    38,098,373 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 7 

 

 

APOLLO MEDICAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE AND SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

   Mezzanine                         
   Equity –                         
   Noncontrolling                         
   Interest in APC                         
   Noncontrolling   Common Stock Outstanding   Additional   Retained   Noncontrolling   Shareholders' 
   Interest   Shares   Amount   Paid-in Capital   Earnings   Interest   Equity 
                             
Balance January 1, 2019  $225,117,029    34,578,040   $34,578   $162,723,051   $17,788,203   $998,320   $181,544,152 
Net (loss) income   (3,000,021)   -    -    -    139,664    410,228    549,892 
Purchase of treasury shares   (40,000)   (93,451)   (93)   93    -    -    - 
Shares issued for exercise of options and warrants   155,000    17,516    17    139,957    -    -    139,974 
Share-based compensation   202,382    1,599    2    142,750    -    -    142,752 
Dividends   (10,000,000)   -    -    -    -    -    - 
                                    
Balance at March 31, 2019  $212,434,390    34,503,704   $34,504   $163,005,851   $17,927,867   $1,408,548   $182,376,770 

 

   Mezzanine                         
   Equity –                         
   Noncontrolling                         
   Interest in APC                         
   Noncontrolling   Common Stock Outstanding   Additional   Retained   Noncontrolling   Shareholders' 
   Interest   Shares   Amount   Paid-in Capital   Earnings   Interest   Equity 
                             
Balance January 1, 2018  $172,129,744    32,304,876   $32,305   $158,181,192   $1,734,531   $4,235,398   $164,183,426 
ASC 606 Adoption   7,351,434                   1,002,468         1,002,468 
Net income   12,970,752    -    -    -    2,160,455    586,448    2,746,903 
Shares issued for exercise of options and warrants   -    309,826    310    1,923,474    -    -    1,923,784 
Share-based compensation   202,382    37,593    38    631,524    -    -    631,562 
Dividends   (2,000,000)   -    -    -    -    -    - 
                                    
Balance at March 31, 2018  $190,654,312    32,652,295   $32,653   $160,736,190   $4,897,454   $4,821,846   $170,488,143 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 8 

 

 

APOLLO MEDICAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Three Months Ended 
   March 31, 
   2019   2018 
         
Cash flows from operating activities          
Net (loss) income  $(2,450,129)  $15,717,655 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   4,417,581    5,058,512 
Loss on disposal of property and equipment   -    41,782 
Provision for doubtful accounts   951,014    247,102 
Share-based compensation   345,134    833,944 
Unrealized (gain) loss from investment in equity securities   (7,727)   8,550 
Loss from equity method investments   849,657    28,024 
Deferred tax   (2,623,145)   2,807,407 
Changes in operating assets and liabilities:          
Receivable, net   486,981    1,296,519 
Receivable, net – related parties   (7,511,121)   (22,631,440)
Other receivables   (11,244,643)   - 
Prepaid expenses and other current assets   (728,631)   232,392 
Right-of-use assets   447,960      
Other assets   (442,882)   (59,444)
Accounts payable and accrued expenses   22,578,982    (1,169,363)
Incentives payable   -    (6,600,000)
Fiduciary accounts payable   546,328    (630,963)
Medical liabilities   (10,375,836)   5,138,508 
Income taxes payable   1,209,978    4,416,174 
Lease liabilities   (416,255)   - 
Net cash (used in) provided by operating activities   (3,966,754)   4,735,359 
           
Cash flows from investing activities          
Purchases of marketable securities   (8,177)   (3,932)
Purchases of property and equipment   (103,616)   (485,121)
Net cash used in investing activities   (111,793)   (489,053)
           
Cash flows from financing activities          
Repayment of bank loan   (40,257)   (140,608)
Dividends paid   (10,000,000)   (2,000,000)
Payment of capital lease obligations   (25,151)   (24,407)
Proceeds from the exercise of stock options and warrants   139,974    1,923,784 
Repurchase of shares   (40,000)   - 
Proceeds from common stock offering   155,000    - 
Net cash used in financing activities   (9,810,434)   (241,231)
           
Net (decrease) increase in cash, cash equivalents and restricted cash   (13,888,981)   4,005,075 
           
Cash, cash equivalents and restricted cash, beginning of period   107,636,973    118,500,095 
           
Cash, cash equivalents and restricted cash, end of period  $93,747,992   $122,505,170 
           
Supplementary disclosures of cash flow information:          
Cash paid for income taxes  $-   $- 
Cash paid for interest   181,819    73,610 
           
Supplemental disclosures of non-cash investing and financing activities          
Cashless exercise of stock options  $-   $43 
Deferred tax liability adjustment to goodwill   -    914,011 

 

Refer to Note 15 for supplemental cash flow information related to the adoption of ASC 842. 

 9 

 

 

APOLLO MEDICAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total amounts of cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows.

 

   Three Months Ended
March 31,
 
   2019   2018 
Cash and cash equivalents  $93,007,780   $103,731,761 
Restricted cash – short-term - distributions to former NMM shareholders   -    18,028,116 
Restricted cash – long-term – letters of credit   740,212    745,293 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows  $93,747,992   $122,505,170 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 10 

 

 

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.Description of Business

 

Overview

 

Apollo Medical Holdings, Inc. (“ApolloMed”), entered into an Agreement and Plan of Merger dated as of December 21, 2016 (as amended on March 30, 2017 and October 17, 2017) (the “Merger Agreement”) among ApolloMed, Apollo Acquisition Corp., a California corporation and wholly-owned subsidiary of ApolloMed, Network Medical Management, Inc. (“NMM”), and Kenneth Sim, M.D., not individually but in his capacity as the representative of the shareholders of NMM, pursuant to which ApolloMed effected a merger with NMM (the “Merger”). The Merger closed and became effective on December 8, 2017 (the “Closing”). As a result of the Merger, NMM is now a wholly-owned subsidiary of ApolloMed and the former NMM shareholders own a majority of the issued and outstanding common stock of ApolloMed. For accounting purposes, the Merger is treated as a “reverse acquisition,” and NMM is considered the accounting acquirer and ApolloMed is the accounting acquiree. Accordingly, as of the Closing, NMM’s historical results of operations replaced ApolloMed’s historical results of operations for all periods prior to the Merger, and the results of operations of both companies are included in the accompanying condensed consolidated financial statements for all periods following the Merger.  

 

The combined company, following the Merger, together with its affiliated physician groups and consolidated entities (collectively, the “Company”), is a physician-centric integrated population health management company providing coordinated, outcomes-based medical care in a cost-effective manner and serving patients in California, the majority of whom are covered by private or public insurance provided through Medicare, Medicaid and health maintenance organizations (“HMOs”). A small portion of the Company’s revenue is generated from non-insured patients. 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. The Company operates primarily through the following subsidiaries of ApolloMed: NMM, Apollo Medical Management, Inc. (“AMM”), APAACO and Apollo Care Connect, Inc. (“Apollo Care Connect”), and their consolidated entities.

 

NMM was formed in 1994 as a management service organization (“MSO”) for the purposes of providing management services to medical companies and independent practice associations (“IPAs”). The management services include primarily billing, collection, accounting, administrative, quality assurance, marketing, compliance and education.

 

Allied Physicians of California IPA, a Professional Medical Corporation d.b.a. Allied Pacific of California IPA (“APC”) was incorporated on August 17, 1992 for the purpose of arranging health care services as an IPA. APC has contracts with various HMOs or licensed health care 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 health care 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 health care services in excess of the fixed amounts received. Some of the risk is transferred to the contracted physicians or professional corporations. The risk is also minimized by stop-loss provisions in contracts with HMOs.

 

On July 1, 1999, APC entered into an amended and restated management and administrative services agreement with NMM (the initial management services agreement was entered into in 1997) for an initial fixed term of 30 years. In accordance with relevant accounting guidance, APC is determined to be a variable interest entity (“VIE”) of the Company as NMM is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect APC’s economic performance through its majority representation on the APC Joint Planning Board; therefore APC is consolidated by NMM. As of March 31, 2019 and December 31, 2018, APC had an ownership interest of 4.89% and 4.82% in ApolloMed, respectively.

 

Concourse Diagnostic Surgery Center, LLC (“CDSC”) was formed on March 25, 2010 in the state of California. CDSC is an ambulatory surgery center in City of Industry, California. Its facility is Medicare Certified and accredited by the Accreditation Association for Ambulatory Healthcare, Inc. During 2011, APC invested $0.6 million for a 41.59% ownership interest in CDSC. APC’s ownership percentage in CDSC’s capital stock increased to 43.43% on July 31, 2016. CDSC is consolidated as a VIE by APC as it was determined that APC has a controlling financial interest in CDSC and is the primary beneficiary of CDSC.

 

APC-LSMA was formed on October 15, 2012 as a designated shareholder professional corporation. Dr. Thomas Lam, a shareholder, Chief Executive and Financial Officer of APC and CEO of ApolloMed, is a nominee shareholder of APC. APC makes all the investment decisions on behalf of APC-LSMA, funds these investments and receives all the distributions from the investments. APC has the obligation to absorb losses or rights to receive benefits from all the 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 who is the primary beneficiary of this VIE. The only activity of APC-LSMA is to hold the investments in medical corporations, including the IPA line of business of LaSalle Medical Associates (“LMA”), Pacific Medical Imaging and Oncology Center, Inc. (“PMIOC”), Diagnostic Medical Group (“DMG”) and AHMC International Cancer Center (“ICC”).

 

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ICC was formed on September 2, 2010 in the state of California. ICC is a Professional Medical California Corporation and has entered into agreements with HMOs, IPAs, medical groups and other purchasers of medical services for the arrangement of services to subscribers or enrollees. On November 15, 2016, APC-LSMA, a holding company of APC, agreed to purchase and acquire from ICC 40% of the aggregate issued and outstanding shares of capital stock of ICC for $0.4 million in cash. Certain requirements to complete the investment transaction was completed in August 2017 and effective on October 31, 2017, ICC was determined to be a VIE of APC and is consolidated by APC as it was determined that APC is the primary beneficiary of ICC through its obligation to absorb losses and right to receive benefits that could potentially be significant to ICC.

 

Universal Care Acquisition Partners, LLC (“UCAP”), a 100% owned subsidiary of APC, was formed on June 4, 2014, for the purpose of holding an investment in Universal Care, Inc. (“UCI”). 

 

APAACO, jointly owned by NMM and AMM, began participating in the next generation accountable care organization model (“NGACO Model”) of the CMS in January 2017. The NGACO Model is a new CMS program that allows provider groups to assume higher levels of financial risk and potentially achieve a higher reward from participating in this new attribution-based risk sharing model. In addition to APAACO, NMM and AMM operated three accountable care organizations (“ACOs”) that participated in the Medicare Shared Savings Program (“MSSP”), with the goal of improving the quality of patient care and outcomes through a more efficient and coordinated approach among providers. MSSP revenues are uncertain, and, if such amounts are payable by CMS, they will be paid on an annual basis significantly after the time earned, and are contingent on various factors, including achievement of the minimum savings rate for the relevant period. Such payments are earned and made on an “all or nothing” basis.

   

AMM, a wholly-owned subsidiary of ApolloMed, manages affiliated medical groups, which consist of ApolloMed Hospitalists (“AMH”), a hospitalist company, Southern California Heart Centers (“SCHC”), Bay Area Hospitalist Associates (“BAHA”), a medical corporation, ApolloMed Care Clinic (“ACC”) and AKM Medical Group, Inc. (“AKM”). AMH provides hospitalist, intensivist and physician advisor services. SCHC is a specialty clinic that focuses on cardiac care and diagnostic testing. BAHA, ACC and AKM are no longer active to any material extent.

 

Apollo Care Connect, a wholly-owned subsidiary of ApolloMed, provides a cloud and mobile-based population health management platform that includes digital care plans, a case management module, connectivity with multiple healthcare tracking devices and the ability to integrate with multiple electronic health records to capture clinical data.

  

2.Basis of Presentation

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet at December 31, 2018, has been derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying unaudited condensed consolidated financial statements as of March 31, 2019 and for the three months ended March 31, 2019 and 2018, have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 18, 2019. In the opinion of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been made to the condensed consolidated financial statements. The condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X, Rule 10-01. The Company’s quarterly results fluctuate. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future periods.

 

Principles of Consolidation

 

The condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, and the condensed consolidated statements of income for the three months ended March 31, 2019 and 2018, include the accounts of ApolloMed, its consolidated subsidiaries NMM, AMM, APAACO and Apollo Care Connect, including NMM’s subsidiaries, APCN-ACO and AP-ACO, NMM’s consolidated VIE, APC, APC’s subsidiary, UCAP, and APC’s consolidated VIEs, CDSC, APC-LSMA and ICC.

 

 12 

 

 

All material intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

  

The preparation of the condensed 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 (including historical medical loss ratios (“MLR”), and incurred, but not reported (“IBNR”) claims), determination of full-risk and shared-risk revenue and receivables (including constraints and completion factors), income taxes, valuation of 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.

 

Reportable Segments

 

The Company operates as one reportable segment, the healthcare delivery segment, and implements and operates innovative health care models to create a patient-centered, physician-centric experience. The Company reports its condensed consolidated financial statements in the aggregate, including all activities in one reportable segment.

 

Reclassifications

 

Certain amounts disclosed in prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no material effect on the Company’s reported revenue, net income, cash flows or total assets.

 

Cash and Cash Equivalents

 

The Company’s cash and cash equivalents primarily consist of money market funds and certificates of deposit. The Company considers all highly liquid investments that are both readily convertible into known amounts of cash and mature within ninety days from their date of purchase to be cash equivalents.

 

The Company maintains its cash in deposit accounts with several banks, which at times may exceed the insured limits of the Federal Deposit Insurance Corporation (“FDIC”). The Company believes it is not exposed to any significant credit risk with respect to its cash, cash equivalents and restricted cash. As of March 31, 2019, the Company’s deposit accounts with banks exceeded the FDIC’s insured limit by approximately $110.0 million. 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.

 

Investments in Marketable Securities

 

The appropriate classification of investments is determined at the time of purchase and such designation is reevaluated at each balance sheet date. Investments in marketable debt securities have been classified and accounted for as held-to-maturity based on management’s investment intentions relating to these securities. Held-to-maturity marketable securities are stated at amortized cost, which approximates fair value. As of March 31, 2019 and December 31, 2018, short-term marketable securities in the amount of approximately $1.1 million, consist of certificates of deposit with various financial institutions, reported at par value plus accrued interest, with maturity dates from four months to twelve months (see fair value measurements of financial instruments below). Investments in certificates of deposits are classified as Level 1 investments in the fair value hierarchy.

 

Receivables 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.

 

 13 

 

 

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. During the three months ended March 31, 2019, recoverable claims paid related to the 2019 APAACO performance year to be administered following instructions from CMS, fee-for-services (“FFS”) reimbursement for patient care, certain expense reimbursements, transportation reimbursements from the hospitals, and stop loss insurance premium reimbursements are included in “Other receivables” in the accompanying condensed consolidated balance sheet.

 

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 analyses 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.

 

Amounts are recorded as a receivable when the Company is able to determine amounts receivable under these contracts and/or agreements based on information provided and collection is reasonably likely to occur. The Company continuously monitors its collections of receivables and its policy is to write off receivables when they are determined to be uncollectible. As of March 31, 2019 and December 31, 2018, the Company’s allowance for doubtful accounts was approximately $5.2 million and approximately $4.3 million, respectively.

 

Concentrations of Risks

 

The Company disaggregates revenue from contracts by service type and by payor. 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 for the three months ended March 31, 2019 and 2018:

 

Three Months Ended March 31,  2019   2018 
         
Commercial  $31,784,992   $105,106,621 
Medicare   22,947,690    18,541,115 
Medicaid   32,820,500    176,350 
Other third parties   8,203,989    99,160 
Revenue  $95,757,171   $123,923,246 

 

The Company had major payors that contributed the following percentage of net revenue:

 

    For the Three Months
Ended March 31,
 
    2019     2018  
             
Payor A     17.4 %     * %
Payor B     15.3 %     12.0 %
Payor C     12.0 %     10.9 %

 

*Less than 10% of total net revenues

 

The Company had major payors that contributed to the following percentage of receivables and receivables – related parties before the allowance for doubtful accounts:

 

   As of
March 31,
2019
   As of
December 31,
2018
 
         
Payor D   35.3%   34.1%
Payor E   42.9%   42.2%

 

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Fair Value Measurements of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, fiduciary cash, restricted cash, investment in marketable securities, receivables, loans receivable, accounts payable, certain accrued expenses, capital lease obligations, bank loan and the line of credit. The carrying values of the financial instruments classified as current in the accompanying condensed consolidated balance sheets are considered to be at their fair values, due to the short maturity of these instruments. The carrying amounts of the loan receivables – long term, bank loan, capital lease obligations and line of credit 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”) ASC 820, Fair Value Measurement (“ASC 820”), applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. ASC 820 establishes a fair value hierarchy for disclosures of the inputs to valuations used to measure fair value.

 

This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1 —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.

 

Level 2 —Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3 —Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

 

The carrying amounts and fair values of the Company’s financial instruments as of March 31, 2019 are presented below:

 

   Fair Value Measurements     
   Level 1   Level 2   Level 3   Total 
Assets                    
Money market funds*  $68,004,532   $-   $-   $68,004,532 
Marketable securities – certificates of deposit   1,074,280    -    -    1,074,280 
Marketable securities – equity securities   68,726    -    -    68,726 
                     
Total  $69,147,538   $-   $-   $69,147,538 

 

The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2018 are presented below:

 

   Fair Value Measurements     
   Level 1   Level 2   Level 3   Total 
Assets                    
Money market funds*  $85,500,745   $-   $-   $85,500,745 
Marketable securities – certificates of deposit   1,066,103    -    -    1,066,103 
Marketable securities – equity securities   60,999    -    -    60,999 
                     
Total  $86,627,847   $-   $-   $86,627,847 

 

*Included in cash and cash equivalents

 

There were no Level 3 inputs measured on a recurring basis for the three months ended March 31, 2019.

 

There have been no changes in Level 1, Level 2, or Level 3 classification and no changes in valuation techniques for these assets for the three months ended March 31, 2019 and December 31, 2018.

 

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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. The Company determined that there was no impairment of its finite-lived intangible or long-lived assets during the three months ended March 31, 2019 and 2018.

 

Goodwill and Indefinite-Lived Intangible Assets

 

Under the 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 main 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.

 

The Company determined that there was no impairment of its goodwill or indefinite-lived intangible assets during the three months ended March 31, 2019 and 2018.

 

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 condensed 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. As of March 31, 2019, the Company recognized an impairment loss of $0.3 million related to its investment in Pacific Ambulatory Surgery Center, LLC (“PASC”) (included in loss from equity method investments in the accompanying condensed consolidated statements of income) as the Company does not expect to recover its investment (see Note 4).

 

Medical Liabilities

 

APC, APAACO and MMG are responsible for integrated care that the associated physicians and contracted hospitals provide to its enrollees. APC, APAACO and MMG 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 expenses in the accompanying condensed consolidated statements of income.

 

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An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in the accompanying condensed consolidated balance sheets. Medical liabilities include claims reported as of the balance sheet date and estimates IBNR claims. Such estimates are developed using actuarial methods and are based on numerous variables, including the utilization of health care 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.

 

Revenue Recognition

 

The Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” on January 1, 2018 and recognizes revenue in accordance with the applicable guidance.

 

The Company receives payments from the following sources for services rendered: (i) commercial insurers; (ii) the federal government under the Medicare program administered by CMS; (iii) state governments under the Medicaid and other programs; (iv) other third party payors (e.g., hospitals and IPAs); and (v) individual patients and clients.

 

Nature of Services and Revenue Streams

 

Revenue primarily consists of capitation revenue, risk pool settlements and incentives, NGACO All-Inclusive Population-Based Payments (“AIPBP”) revenue, management fee income, and FFS revenue. Revenue is recorded in the period in which services are rendered or the period in which the Company is obligated to provide services. The form of billing and related risk of collection for such services may vary by type of revenue and the customer. The following is a summary of the principal forms of the Company’s billing arrangements and how revenue is recognized for each.

 

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Capitation, net

 

Managed care revenues of the Company consist primarily of capitated fees for medical services provided by the Company under a capitated arrangement directly made with various managed care providers including HMOs. Capitation revenue is typically prepaid monthly to the Company based on the number of enrollees selecting the Company as their healthcare provider. Capitation revenue is recognized in the month in which the Company is obligated to provide services to plan enrollees under contracts with various health plans. Minor ongoing adjustments to prior months’ capitation, primarily arising from contracted HMOs finalizing their monthly patient eligibility data for additions or subtractions of enrollees, are recognized in the month they are communicated to the Company. Additionally, Medicare pays capitation using a “Risk Adjustment” model, which compensates managed care organizations and providers based on the health status (acuity) of each individual enrollee. Health plans and providers with higher acuity enrollees will receive more and those with lower acuity enrollees will receive less. Under Risk Adjustment, capitation is determined based on health severity, measured using patient encounter data. Capitation is paid on a monthly basis based on data submitted for the enrollee for the preceding year and is adjusted in subsequent periods after the final data is compiled. Positive or negative capitation adjustments are made for Medicare enrollees with conditions requiring more or less healthcare services than assumed in the interim payments. Since the Company cannot reliably predict these adjustments, periodic changes in capitation amounts earned as a result of Risk Adjustment are recognized when those changes are communicated by the health plans to the Company.

 

PMPM managed care contracts generally have a term of one year or longer. All managed care contracts have a single performance obligation that constitutes a series for the provision of managed healthcare services for a population of enrolled members for the duration of the contract. The transaction price for PMPM contracts is variable as it primarily includes PMPM fees associated with unspecified membership that fluctuates throughout the contract. In certain contracts, PMPM fees also include adjustments for items such as performance incentives, performance guarantees and risk shares. The Company generally estimates the transaction price using the most likely methodology and amounts are only included in the net transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The majority of the Company’s net PMPM transaction price relates specifically to the Company’s efforts to transfer the service for a distinct increment of the series (e.g. day or month) and is recognized as revenue in the month in which members are entitled to service.

 

Risk Pool Settlements and Incentives

 

APC enters into full risk capitation arrangements with certain health plans and local hospitals, which are administered by a third party, where the hospital is responsible for providing, arranging and paying for institutional risk and APC is responsible for providing, arranging and paying for professional risk. Under a full risk pool sharing agreement, APC generally receives a percentage of the net surplus from the affiliated hospital’s risk pools with HMOs after deductions for the affiliated hospital’s costs. Advance settlement payments are typically made quarterly in arrears if there is a surplus. Risk pool settlements under arrangements with health plans and hospitals are recognized using the most likely 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 factor and constraint percentages were used by management in applying the most likely method.

 

Under capitated arrangements with certain HMOs APC participates in one or more shared risk arrangements relating to the provision of institutional services to enrollees (shared risk arrangements) and thus can earn additional revenue or incur losses based upon the enrollee utilization of institutional services. Shared risk capitation arrangements are entered into with certain health plans, which are administered by the health plan, where APC is responsible for rendering professional services, but the health plan does not enter into a capitation arrangement with a hospital and therefore the health plan retains the institutional risk. Shared risk deficits, if any, are not payable until and unless (and only to the extent of any) risk sharing surpluses are generated. At the termination of the HMO contract, any accumulated deficit will be extinguished.

 

Risk pool settlements under arrangements with HMOs are recognized, using the most likely methodology, and only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur. Given the lack of access to the health plans’ data and control over the members assigned to APC, the adjustments and/or the withheld amounts are unpredictable and as such APC’s risk share revenue is deemed to be fully constrained until APC is notified of the amount by the health plan. Risk pools for the prior contract years are generally final 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 the quality incentive programs and commercial generic pharmacy incentive programs to compensate the Company for efforts it takes to improve the quality of services and for efficient and effective use of pharmacy supplemental benefits provided to the HMO’s members. The incentive programs track specific performance measures and calculate payments to the Company based on the performance measures. Incentives earned 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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NGACO AIPBP Revenue

 

APAACO and CMS entered into a Next Generation ACO Model Participation Agreement (the “Participation Agreement”) with an initial term of two performance years through December 31, 2018, which has been extended for another two renewal years.

 

For each performance year, the Company shall submit to CMS its selections for risk arrangement; the amount of the profit/loss cap; alternative payment mechanism; benefits enhancements, if any; and its decision regarding voluntary alignment under the NGACO Model. The Company must obtain CMS consent before voluntarily discontinuing any benefit enhancement during a performance year.

 

Under the NGACO Model, CMS aligns beneficiaries to the Company to manage (direct care and pay providers) based on a budgetary benchmark established with CMS. The Company is responsible for managing medical costs for these beneficiaries. The beneficiaries will receive services from physicians and other medical service providers that are both in-network and out-of-network. The Company receives capitation from CMS on a monthly basis to pay claims from in-network providers. The Company records such capitation received from CMS as revenue as the Company is primarily responsible and liable for managing the patient care and for satisfying provider obligations, is assuming the credit risk for the services provided by in-network providers through its arrangement with CMS, and has control of the funds, the services provided and the process by which the providers are ultimately paid. Claims from out-of-network providers are processed and paid by CMS and the Company’s shared savings or losses in managing the services provided by out-of-network providers are generally determined on an annual basis after reconciliation with CMS. Pursuant to the Company’s risk share agreement with CMS, the Company will be eligible to receive the savings or be liable for the deficit according to the budget established by CMS based on the Company’s efficiency or lack thereof, respectively, in managing how the beneficiaries aligned to the Company by CMS are served by in-network and out-of-network providers. The Company’s savings or losses on providing such services are both capped by CMS, and are subject to significant estimation risk, whereby payments can vary significantly depending upon certain patient characteristics and other variable factors. Accordingly, the Company recognizes such surplus or deficit upon substantial completion of reconciliation and determination of the amounts. The Company records NGACO capitation revenues monthly, as that is when the Company is obligated to provide services to its members. Excess, over claims paid plus an estimate for the related IBNR (see Note 7), monthly capitation received are deferred and recorded as a liability until actual claims are paid or incurred. CMS will determine if there were any excess capitation paid for the performance year and the excess is refunded to CMS. Further, in accordance with the guidance in ASC 606-10-55-36 through 55-40 on principal versus agent considerations, the Company records such revenues in the gross amount of consideration.

 

For each performance year, CMS shall pay the Company in accordance with the alternative payment mechanism, if any, for which CMS has approved the Company; the risk arrangement for which the Company has been approved by CMS; and as otherwise provided in the Participation Agreement. Following the end of each performance year and at such other times as may be required under 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. If CMS owes the Company shared savings or other monies, CMS shall pay the Company in full within 30 days after the date on which the relevant settlement report is deemed final, except as provided in the Participation Agreement. If the Company owes CMS shared losses or other monies owed as a result of a final settlement, the Company shall pay CMS in full within 30 days after the relevant settlement report is deemed final. If the Company fails to pay the amounts due to CMS in full within 30 days after the date of a demand letter or settlement report, CMS shall assess simple interest on the unpaid balance at the rate applicable to other Medicare debts under current provisions of law and applicable regulations. In addition, CMS and the U.S. Department of the Treasury may use any applicable debt collection tools available to collect any amounts owed by the Company.

 

The Company participates in the AIPBP track of the NGACO Model. Under the AIPBP track, CMS estimates the total annual expenditures for APAACO’s assigned patients and pays that projected amount to the Company in monthly installments, and the Company is responsible for all Part A and Part B costs for in-network participating providers and preferred providers contracted by the Company to provide services to the assigned patients.

 

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, risk adjustment factors, 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 probably not be reversed in the future and therefore this shared risk pool revenue is considered fully constrained.

 

For performance year 2018, the Company received monthly AIPBP payments at a rate of approximately $7.3 million per month from CMS that started in February 2018, which was reduced to $5.5 million per month beginning October 1, 2018. The Company will need to continue to comply with all terms and conditions in the Participation Agreement and various regulatory requirements to be eligible to participate in the AIPBP mechanism and/or NGACO Model. The Company continues to be eligible in receiving AIPBP payments under the NGACO Model for performance year 2019, with the effective date of the performance year beginning April 1, 2019. The monthly AIPBP payments have been increased from approximately $5.5 million to approximately $8.3 million per month for performance year 2019. The Company has received approximately $24.8 million in total AIPBP payments for the three months ended March 31, 2019 and have recorded the entire amount received as deferred revenue included in “Accounts payable and accrued expenses” in the accompanying condensed consolidated balance sheet. The Company also recorded an asset of approximately $11.2 million related to recoverable claims paid during the three months ended March 31, 2019 which will be administered following instructions from CMS. This balance is included in “Other receivables” in the accompanying condensed consolidated balance sheet.

 

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Management Fee Income

 

Management fee income encompasses fees paid for management, physician advisory, healthcare staffing, administrative and other non-medical services provided by the Company to IPAs, hospitals and other healthcare providers. Such fees may be in the form of billings at agreed-upon hourly rates, percentages of revenue or fee collections, or amounts fixed on a monthly, quarterly or annual basis. The revenue may include variable arrangements measuring factors such as hours staffed, patient visits or collections per visit against benchmarks, and, in certain cases, may be subject to achieving quality metrics or fee collections. The Company recognizes such variable supplemental revenues in the period when such amounts are determined to be fixed and therefore contractually obligated as payable by the customer under the terms of the respective agreement. The Company’s MSA revenue also includes revenue sharing payments from the Company’s partners based on their non-medical services.

 

The Company provides a significant service of integrating the services selected by the Company’s clients into one overall output for which the client has contracted. Therefore, such management contracts generally contain a single performance obligation. The nature of the Company’s performance obligation is to stand ready to provide services over the contractual period. Also, the Company’s performance obligation forms a series of distinct periods of time over which the Company stands ready to perform. The Company’s performance obligation is satisfied as the Company completes each period’s obligations.

 

Consideration from management contracts is variable in nature because the majority of the fees are generally based on revenue or collections, which can vary from period to period. The Company has control over pricing. Contractual fees are invoiced to the Company’s clients generally monthly and payment terms are typically due within 30 days. The variable consideration in the Company’s management contracts meets the criteria to be allocated to the distinct period of time to which it relates because (i) it is due to the activities performed to satisfy the performance obligation during that period and (ii) it represents the consideration to which the Company expects to be entitled.

 

The Company’s management contracts generally have long terms (e.g., ten years), although they may be terminated earlier under the terms of the respective contracts. Since the remaining variable consideration will be allocated to a wholly unsatisfied promise that forms part of a single performance obligation recognized under the series guidance, the Company has applied the optional exemption to exclude disclosure of the allocation of the transaction price to remaining performance obligations.

 

Fee-for-Service Revenue

 

FFS revenue represents revenue earned under contracts in which the Company bills and collects the professional component of charges for medical services rendered by the Company’s contracted physicians and employed physicians. Under the FFS arrangements, the Company bills the hospitals and third-party payors for the physician staffing and further bills patients or their third-party payors for patient care services provided and receives payment. FFS revenue related to the patient care services is reported net of contractual allowances and policy discounts and are recognized in the period in which the services are rendered to specific patients. All services provided are expected to result in cash flows and are therefore reflected as net revenue in the financial statements. The recognition of net revenue (gross charges less contractual allowances) from such services is dependent on such factors as proper completion of medical charts following a patient visit, the forwarding of such charts to the Company’s billing center for medical coding and entering into the Company’s billing system and the verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for payment of such services. Revenue is recorded based on the information known at the time of entering of such information into the Company’s billing systems as well as an estimate of the revenue associated with medical services.

 

The Company is responsible for confirming member eligibility, performing program utilization review, potentially directing payment to the provider and accepting the financial risk of loss associated with services rendered, as specified within the Company’s client contracts. The Company has the ability to adjust contractual fees with clients and possess the financial risk of loss in certain contractual obligations. These factors indicate the Company is the principal and, as such, the Company records gross fees contracted with clients in revenues.

 

Consideration from FFS arrangements is variable in nature because fees are based on patient encounters, credits due to clients and reimbursement of provider costs, all of which can vary from period to period. Patient encounters and related episodes of care and procedures qualify as distinct goods and services, provided simultaneously together with other readily available resources, in a single instance of service, and thereby constitute a single performance obligation for each patient encounter and, in most instances, occur at readily determinable transaction prices. As a practical expedient, the Company adopted a portfolio approach for the FFS revenue stream to group contracts with similar characteristics and analyze historical cash collections trends. The contracts within the portfolio share the characteristics conducive to ensuring that the results do not materially differ under the new standard if it were to be applied to individual patient contracts related to each patient encounter. Accordingly, there was not a change in the Company's method to recognize revenue under ASC 606 from the previous accounting guidance.

 

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Estimating net FFS revenue is a complex process, largely due to the volume of transactions, the number and complexity of contracts with payors, the limited availability at times of certain patient and payor information at the time services are provided, and the length of time it takes for collections to fully mature. These expected collections are based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patient's healthcare plans, mandated payment rates in the case of Medicare and Medicaid programs, and historical cash collections (net of recoveries) in combination with expected collections from third party payors.

 

The relationship between gross charges and the transaction price recognized is significantly influenced by payor mix, as collections on gross charges may vary significantly, depending on whether and with whom the patients the Company provides services to in the period are insured and the Company's contractual relationships with those payors. Payor mix is subject to change as additional patient and payor information is obtained after the period services are provided. The Company periodically assesses the estimates of unbilled revenue, contractual adjustments and discounts, and payor mix by analyzing actual results, including cash collections, against estimates. Changes in these estimates are charged or credited to the consolidated statement of income in the period that the assessment is made. Significant changes in payor mix, contractual arrangements with payors, specialty mix, acuity, general economic conditions and health care coverage provided by federal or state governments or private insurers may have a significant impact on estimates and significantly affect the results of operations and cash flows.

 

Contract Assets

 

Typically, revenues and receivables are recognized once the Company has satisfied its performance obligation. Accordingly, the Company’s contract assets are comprised of receivables and receivables – related parties. Generally, the Company does not have material amounts of other contract assets.

 

The Company's billing and accounting systems provide historical trends of cash collections and contractual write-offs, accounts receivable agings and established fee adjustments from third-party payors. These estimates are recorded and monitored monthly as revenues are recognized. The principal exposure for uncollectible fee for service visits is from self-pay patients and, to a lesser extent, for co-payments and deductibles from patients with insurance.

 

Contract Liabilities (Deferred Revenue)

 

Contract liabilities are recorded when cash payments are received in advance of the Company’s performance, or in the case of the Company’s NGACO, the excess of AIPBP capitation received and the actual claims paid or incurred. The Company’s contract liability balance was $33.2 million and $9.1 million as of March 31, 2019 and December 31, 2018, respectively, and is presented within “Accounts payable and accrued expenses” in the accompanying condensed consolidated balance sheets. During the three months ended March 31, 2019, $0.1 million of the Company’s contracted liability accrued in 2018 has been recognized as revenue.

 

Leases

 

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” Refer to “Recent Accounting Pronouncements” below and to Note 15 – Leases for further details.

 

The Company determines if an arrangement is a lease at inception. Operating leases are included in “Right-of-use assets”, and “Lease liabilities” in the accompanying condensed consolidated balance sheets. Finance leases are included in “Land, property and equipment, net” and “Capital lease obligations” in the accompanying condensed consolidated balance sheets.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

 

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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 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 financial statements.

 

Share-Based Compensation

 

The Company maintains a stock-based compensation program for employees, non-employees, directors and consultants. The value of share-based awards such as options is recognized as compensation expense on a cumulative straight-line basis over the vesting terms of the awards, adjusted for expected forfeitures. At times, 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 performance of services in the future.

 

The Company accounts for share-based awards granted to persons other than employees and directors under ASC 505-50 Equity-Based Payments to Non-Employees. As such the fair value of such shares of stock is periodically re-measured using an appropriate valuation model and income or expense is recognized over the vesting period.

 

Basic and Diluted Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income attributable to holders of the Company’s common stock by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed using the weighted average number of shares of common stock outstanding plus the effect of dilutive securities outstanding during the periods presented, using the treasury stock method. Refer to Note 13 for a discussion of shares treated as treasury shares for accounting purposes.

 

Noncontrolling Interests

 

The Company consolidates entities in which the Company has a controlling financial interest. The Company consolidates subsidiaries in which the Company holds, directly or indirectly, more than 50% of the voting rights, and VIEs in which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests (including certain VIEs) in the Company’s consolidated entities. The amount of net income attributable to noncontrolling interests is disclosed in the consolidated statements of income.

 

Mezzanine Equity

 

Pursuant to APC’s shareholder agreements, in the event of a disqualifying event, as defined in the agreements, APC could be required to repurchase the shares from the respective shareholders based on certain triggers outlined in the shareholder agreements. As the redemption feature of the shares is not solely within the control of APC, the equity of APC does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Accordingly, the Company recognizes noncontrolling interests in APC as mezzanine equity in the condensed consolidated financial statements. APC’s shares are not redeemable and it is not probable that the shares will become redeemable as of March 31, 2019 and December 31, 2018.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASC 842”), which amends the existing accounting standards for leases to increase transparency and comparability among organizations by requiring the recognition of right of use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

 

The Company adopted ASC 842 effective January 1, 2019 using the following practical expedients as permitted under the transition guidance within the new standard; (i) not reassess whether any expired or existing contracts are or contain leases; not reassess the lease classification for any expired or existing leases; not reassess initial direct costs for existing leases; and (ii) use hindsight in determining the lease term and in assessing impairment of the entity’s ROU assets. The Company has also implemented additional internal controls to enable future preparation of financial information in accordance with ASC 842.

 

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The standard had a material impact on our consolidated balance sheets, but did not materially impact our consolidated results of operations and had no impact on cash flows. The most significant impact was the recognition of ROU assets of $9.0 million and lease liabilities of $8.9 million for operating leases, while our accounting for finance leases remained substantially unchanged. The 2018 comparative information has not been restated and continues to be reported under the accounting standards in effect for that period (ASC 840). Refer to Note 15 – Leases for further details.

 

ASC 842 provides a number of optional practical expedients in transition. The Company elected: (1) the “package of practical expedients”, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs, and (2) the use-of-hindsight in determining the lease term and in assessing impairment of ROU assets. In addition, ASC 842 provides practical expedients for an entity’s ongoing accounting that the Company has elected, 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 that qualify. Refer to Note 15 – Leases for further details.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will become effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-13 will have on the condensed consolidated financial statements.

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part 1) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception” (“ASU 2017-11”). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part 1 of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted ASU 2017-11 on January 1, 2019. The adoption of ASU 2017-11 did not have a material impact on the Company’s condensed consolidated financial statements.

 

In October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”). This ASU reduces the cost and complexity of financial reporting associated with consolidation of variable interest entities (VIEs). A VIE is an organization in which consolidation is not based on a majority of voting rights. The new guidance supersedes the private company alternative for common control leasing arrangements issued in 2014 and expands it to all qualifying common control arrangements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently assessing the impact the adoption of ASU 2018-17 will have on the Company’s condensed consolidated financial statements.

 

With the exception of the new standards discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations and cash flows.

 

3.Intangible Assets, Net

 

At March 31, 2019, the Company’s intangible assets, net, consisted of the following:

 

   Useful  Gross       Net 
   Life  March 31,   Accumulated   March 31, 
   (Years)  2019   Amortization   2019 
Indefinite Lived Assets:                  
Medicare license  N/A  $1,994,000   $-   $1,994,000 
Amortized Intangible Assets:                  
Network relationships  11-15   109,883,000    (51,215,352)   58,667,648 
Management contracts  15   22,832,000    (8,031,971)   14,800,029 
Member relationships  12   6,696,000    (1,555,286)   5,140,714 
Patient management platform  5   2,060,000    (549,333)   1,510,667 
Tradename/trademarks  20   1,011,000    (67,400)   943,600 
      $144,476,000   $(61,419,342)  $83,056,658 

 

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At December 31, 2018, the Company’s intangible assets, net, consisted of the following:

 

   Useful  Gross       Net 
   Life  December 31,   Accumulated   December 31, 
   (Years)  2018   Amortization   2018 
Indefinite Lived Assets:                  
Medicare license  N/A  $1,994,000   $-   $1,994,000 
Amortized Intangible Assets:                  
Network relationships  11-15   109,883,000    (48,361,773)   61,521,227 
Management contracts  15   22,832,000    (7,447,581)   15,384,419 
Member relationships  12   6,696,000    (1,289,667)   5,406,333 
Patient management platform  5   2,060,000    (446,333)   1,613,667 
Tradename/trademarks  20   1,011,000    (54,763)   956,237 
      $144,476,000   $(57,600,117)  $86,875,883 

 

Included in depreciation and amortization on the accompanying condensed consolidated statements of income is amortization expense of $3.9 million and $4.4 million (excluding $0.1 million of amortization expense for exclusivity incentives) for the three months ended March 31, 2019 and 2018, respectively.

 

Future amortization expense is estimated to be as follows for the years ending December 31:

 

   Amount 
     
2019 (excluding the three months ended March 31, 2019)  $10,661,000 
2020   12,671,000 
2021   10,960,000 
2022   9,448,000 
2023   7,790,000 
Thereafter   29,532,000 
      
   $81,062,000 
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4.Investments in Other Entities

 

Equity Method Investment Summary

 

Investments in other entities – equity method consisted of the following:

 

   March 31,
2019
   December 31,
2018
 
         
Universal Care, Inc.  $3,673,132   $2,635,945 
LaSalle Medical Associates – IPA Line of Business   5,980,923    7,054,888 
Diagnostic Medical Group   2,481,166    2,257,346 
Pacific Medical Imaging & Oncology Center, Inc.   1,429,960    1,359,494 
Pacific Ambulatory Surgery Center, LLC   -    285,198 
Accountable Health Care IPA- related party   4,202,958    4,977,957 
531 W. College, LLC – related party   16,226,184    16,273,152 
MWN, LLC – related party   33,000    33,000 
   $34,027,323   $34,876,980 

 

LaSalle Medical Associates

 

LaSalle Medical Associates (“LMA”) was founded by Dr. Albert Arteaga in 1996 and currently operates four neighborhood medical centers employing more than 120 dedicated healthcare professionals, treating children, adults and seniors in San Bernardino County. LMA’s patients are primarily served by Medi-Cal. LMA accepts Blue Cross, Blue Shield, Molina, Care 1st, Health Net and Inland Empire Health Plan. LMA is also an IPA of independently contracted doctors, hospitals and clinics, delivering high quality care to more than 313,000 patients in Fresno, Kings, Los Angeles, Madera, Riverside, San Bernardino and Tulare Counties. During 2012, APC-LSMA and LMA entered into a share purchase agreement whereby APC-LSMA invested $5.0 million for a 25% interest in LMA’s IPA line of business. NMM has a management services agreement with LMA. APC accounts for its investment in LMA under the equity method as APC has the ability to exercise significant influence, but not control over LMA’s operations. For the three months ended March 31, 2019 and 2018, APC recorded losses from this investment of $1.1 million and $0.4 million, respectively, in the accompanying condensed consolidated statements of income. The accompanying condensed consolidated balance sheets include the related investment balance of $6.0 million and $7.1 million at March 31, 2019 and December 31, 2018, respectively.

 

LMA’s summarized balance sheets at March 31, 2019 and December 31, 2018 and summarized statements of operations for the three months ended March 31, 2019 and 2018 with respect to its IPA line of business are as follows:

 

Balance Sheets

 

   March 31,
2019
   December 31,
2018
 
         
Assets          
           
Cash and cash equivalents  $204,981   $18,444,702 
Receivables, net   7,116,487    2,897,337 
Other current assets   3,526,319    5,459,442 
Loan receivable   2,250,000    1,250,000 
Restricted cash   673,204    667,414 
           
Total assets  $13,770,991   $28,718,895 

 

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Liabilities and Stockholders’ (Deficit) Equity

 

   March 31,
2019
   December 31,
2018
 
         
Current liabilities  $16,185,769   $26,837,814 
Stockholders’ (deficit) equity   (2,414,778)   1,881,081 
           
Total liabilities and stockholders’ (deficit) equity  $13,770,991   $28,718,895 

 

Statements of Operations

 

   Three Months
Ended
March 31,
2019
   Three Months
Ended
March 31,
2018
 
         
Revenues  $46,406,351   $52,983,791 
Expenses   50,702,210    54,002,458 
           
Net loss  $(4,295,859)  $(1,018,667)

 

Pacific Medical Imaging and Oncology Center, Inc.

 

PMIOC was incorporated in 2004 in the state of California. PMIOC provides comprehensive diagnostic imaging services using state-of-the-art technology. PMIOC offers high quality diagnostic services such as MRI/MRA, PET/CT, CT, nuclear medicine, ultrasound, digital x-rays, bone densitometry and digital mammography at its facilities.

 

In July 2015, APC-LSMA and PMIOC entered into a share purchase agreement whereby APC-LSMA invested $1.2 million for a 40% ownership in PMIOC.

 

APC and PMIOC have an Ancillary Service Contract together whereby PMIOC provides covered services on behalf of APC to enrollees of the plans of APC. Under the Ancillary Service Contract, APC paid PMIOC fees for the three months ended March 31, 2019 and 2018 of approximately $0.7 million and $0.4 million, respectively. APC accounts for its investment in PMIOC under the equity method of accounting as APC has the ability to exercise significant influence, but not control over PMIOC’s operations. During the three months ended March 31, 2019 and 2018, APC recorded income (loss) from this investment of approximately $70,466 and $(26,025) respectively, in the accompanying condensed consolidated statements of income. The accompanying condensed consolidated balance sheets include the related investment balance of $1.4 million at March 31, 2019 and December 31, 2018.

 

Universal Care, Inc.

 

UCI is a privately held health plan that has been in operation since 1985 in order to help its members through the complexities of the healthcare system. UCI holds a license under the California Knox-Keene Health Care Services Plan Act (“Knox-Keene Act”) to operate as a full-service health plan. UCI contracts with CMS under the Medicare Advantage Prescription Drug Program.

 

On August 10, 2015, UCAP, an entity solely owned 100% by APC with APC’s executives, Dr. Thomas Lam, Dr. Pen Lee and Dr. Kenneth Sim, as designated managers of UCAP, purchased from UCI 100,000 shares of UCI class A-2 voting common stock (comprising 48.9% of the total outstanding UCI shares, but 50% of UCI’s voting common stock) for $10.0 million. APC accounts for its investment in UCI under the equity method of accounting as APC has the ability to exercise significant influence, but not control over UCI’s operations. During the three months ended March 31, 2019 and 2018, the Company recorded income (loss) from this investment of approximately $1.0 million and $(20,202), respectively, in the accompanying condensed consolidated statements of income. The accompanying condensed consolidated balance sheets include the related investment balance of $3.6 million and $2.6 million at March 31, 2019 and December 31, 2018, respectively.

 

 26 

 

 

UCI’s balance sheets at March 31, 2019 and December 31, 2018 and statements of income for the three months ended March 31, 2019 and 2018 are as follows:

 

Balance Sheets

 

   March 31,
2019
   December 31,
2018
 
         
Assets          
           
Cash  $29,161,538   $27,812,520 
Receivables, net   49,693,015    46,978,703 
Other current assets   32,487,216    18,670,350 
Other assets   659,897    661,621 
Property and equipment, net   2,943,466    2,786,996 
           
Total assets  $114,945,132   $96,910,190 

 

Liabilities and Stockholders’ Deficit

 

   March
31, 2019
   December 31,
2018
 
         
Current liabilities  $104,980,771   $89,731,133 
Other liabilities   25,014,826    25,024,043 
Stockholders’ deficit   (15,050,465)   (17,844,986)
           
Total liabilities and stockholders’ deficit  $114,945,132   $96,910,190 

  

Statements of Income

 

   Three Months
Ended
March 31,
2019
   Three Months
Ended
March 31,
2018
 
         
Revenues  $113,318,827   $72,665,437 
Expenses   111,408,456    72,154,950 
           
Income before (benefit from) provision for income taxes   1,910,371    510,487 
(Benefit from) provision for income taxes   (210,667)   551,800 
           
Net income (loss)  $2,121,038   $(41,313)

 

Accountable Health Care, IPA – Related Party

  

Accountable Health Care IPA (“Accountable”) is a California professional medical corporation that has served the local community in the greater Los Angeles County area through a network of physicians and health care providers for more than 20 years. Accountable currently has a network of over 400 primary and 700 specialty care physicians, and eight community and regional hospital medical centers that provide quality health care services to more than 160,000 members of seven federally qualified health plans and multiple product lines, including Medi-Cal, Commercial, Medicare and Healthy Families.

 

On September 21, 2018, APC and NMM each exercised their option to convert their respective $5.0 million loans into shares of Accountable capital stock (see Note 6). As a result, APC’s $5.0 million loan was converted into a 25% equity interest with the remaining $5.0 million loan held by NMM to be converted into an equity interest that will be determined based on a third party valuation of Accountable’s current enterprise value, which has not been completed as of the filing of this Report. APC accounts for its investment in Accountable under the equity method of accounting. During the three months ended March 31, 2019, the Company recorded losses from this investment of $0.8 million in the accompanying condensed consolidated statements of income. The accompanying condensed consolidated balance sheets include the related investment balance of $4.2 million and $5.0 million at March 31, 2019 and December 31, 2018, respectively.

 

 27 

 

 

Accountable’s balance sheet at March 31, 2019 and December 31, 2018 and statements of operations for the three months ended March 31, 2019 are as follows:

 

Balance Sheets

 

   March 31,
2019
   December 31,
2018
 
         
Assets          
           
Cash  $4,381,055   $5,582,837 
Receivables, net   11,246,477    11,246,477 
Other current assets   30,940    30,940 
Other assets   1,312,769    1,312,768 
Property and equipment, net   138,690    138,690 
           
Total Assets  $17,109,931   $18,311,712 

 

Liabilities and Stockholders’ Deficit

 

   March 31,
2019
   December 31,
2018
 
         
Current Liabilities  $18,723,556   $16,824,083 
Other Liabilities   19,500,000    19,500,000 
Stockholders’ deficit   (21,113,625)   (18,012,371)
           
Total liabilities and stockholders’ deficit  $17,109,931   $18,311,712 

  

Statement of Operation

 

   Three Months
Ended
March 31,
2019
 
     
Revenues  $22,990,290 
Expenses   26,091,544 
      
Loss before provision for income taxes   (3,101,254)
Provision for income taxes   - 
      
Net loss*  $(3,101,254)

  

*APC’s allocation of net loss commenced on September 21, 2018.

 

Diagnostic Medical Group

 

On May 14, 2016, David C.P. Chen M.D., Inc., a California professional corporation doing business as Diagnostic Medical Group (“DMG”), and David C.P. Chen M.D., individually and APC-LSMA, a designated shareholder professional corporation formed on October 15, 2012, which is 100% owned by Dr. Thomas Lam (CEO of APC) and is controlled and consolidated by APC who is the primary beneficiary of this VIE, entered into a share purchase agreement whereby APC-LSMA acquired a 40% ownership interest in DMG for total cash consideration of $1.6 million.

 

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APC accounts for its investment in DMG under the equity method of accounting as APC has the ability to exercise significant influence, but not control over DMG’s operations. For the three months ended March 31, 2019 and 2018, APC recorded income from this investment of $0.2 million and $0.3 million, respectively, in the condensed consolidated statements of income. The accompanying condensed consolidated balance sheets include the related investment balance of $2.5 million and $2.3 million as of March 31, 2019 and December 31, 2018, respectively.

 

Pacific Ambulatory Surgery Center, LLC

 

PASC, a California limited liability company, is a multi-specialty outpatient surgery center that is certified to participate in the Medicare program and is accredited by the Accreditation Association for Ambulatory Health Care. PASC has entered into agreements with organizations such as healthcare service plans, independent physician practice associations, medical groups and other purchasers of healthcare services for the arrangement of the provision of outpatient surgery center services to subscribers or enrollees of such health plans. On November 15, 2016, PASC and APC, entered into a membership interest purchase agreement whereby PASC sold 40% of its aggregate issued and outstanding membership interests to APC for total consideration of $0.8 million.

 

In connection with the membership interest purchase agreement, PASC entered into a management services agreement with NMM, which requires the payment of management fees computed at predetermined percentage (as defined) of PASC revenues. The term of the management services agreement commenced on the effective date and extend for a period of 60 months thereafter, and may be extended in writing at the sole option of NMM for an additional period of 60 months following the expiration of the initial term and is automatically renewed for additional consecutive terms of three years unless terminated by either party. PASC shall not be permitted to terminate the management services agreement for any reason during the initial term and, if extended, the extended term. 

 

APC accounted for its investment in PASC under the equity method of accounting as APC has the ability to exercise significant influence, but not control over PASC’s operations. For the three months ended March 31, 2018, APC recorded income from this investment of $41,953 in the accompanying condensed consolidated statements of income. The accompanying condensed consolidated balance sheets include the related investment balance of $0.3 million as of December 31, 2018.

 

During the three months ended March 31, 2019, the Company recognized an impairment loss of $0.3 million, which has been included in the loss from equity method investment line on the condensed consolidated statement of income, related to its investment in PASC as the Company does not believe it will recover its investment balance.

 

In 2019, APC advanced $0.3 million to PASC for working capital purposes. The repayment of the advance is based on collections of PASC’s outstanding AR, and accordingly, the entire amount has been classified under “Other Assets” in the accompanying condensed consolidated balance sheets in the amount of $0.3 million as of March 31, 2019.

 

531 W. College LLC – Related Party 

 

In June 2018, College Street Investment LP, a California limited partnership (“CSI”), APC and NMM entered into an operating agreement to govern the limited liability company, 531 W. College, LLC and the conduct of its business, and to specify their relative rights and obligations. CSI, APC and NMM, each owns 50%, 25% and 25%, respectively, of member units based on initial capital contributions of $16.7 million, $8.3 million, and $8.3 million, respectively.

 

An agreement of purchase and sale and joint escrow instructions (“Purchase Agreement”) with an effective date of April 10, 2018 was entered into between 531 W. College, LLC and Societe Francaise De Bienfaisance Mutuelle De Los Angeles, a California nonprofit corporation, pursuant to which 531 W. College LLC agreed to purchase a former hospital located in the City of Los Angeles. The total purchase price of such real estate is $33.3 million. In June 2018, APC, NMM and AMHC Healthcare, Inc. on behalf of CSI, wired $8.3 million, $8.3 million and $16.7 million, respectively into an escrow account for the benefit of 531 W. College, LLC to purchase the hospital pursuant to the Purchase Agreement. The transaction closed on June 29, 2018. APC and NMM accounts for its investment in 531 W. College, LLC under the equity method of accounting as APC and NMM have the ability to exercise significant influence, but not control over the operations of this joint venture. APC and NMM’s investment is presented as an investment in joint venture-equity method in the accompanying condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018.

 

As of March 31, 2019, NMM and APC has recorded losses from its investment in 531 W. College LLC of $23,484, respectively, in the accompanying condensed consolidated statement of income. The accompanying condensed consolidated balance sheet includes the related investment balance of $16.2 million related to NMM and APC’s investment at March 31, 2019. 

 

 29 

 

 

531 W. College LLC’s balance sheets at March 31, 2019 and December 31, 2018 and the statements of operations for the three months ended March 31, 2019 is as follows:

 

Balance Sheet

 

  March 31,
2019
   December 31,
2018
 
Assets          
           
Cash   341,969    158,088 
Other current assets   78,677    16,137 
Other assets   70,000    70,000 
           
Property and equipment, net   $33,394,792   $33,394,792 
           
Total assets  $33,885,438   $33,639,017 
           
Liabilities and Members’ Equity          
           
Current liabilities  $1,433,070   $1,007,413 
Stockholders’ equity    32,452,368    32,631,604 
           
Total liabilities and members’ equity  $33,885,438   $33,639,017 

 

Statements of Operation

 

   March 31,
2019
 
     
Revenues   - 
Expenses   468,560 
Loss from operations   (468,560)
      
Other Income  $289,325 
      
Net loss*  $(179,235)

 

*The Company’s investment in 531 W. College commenced on June 27, 2018.

  

MWN LLC – Related Party 

 

On December 18, 2018, NMM along with 6 Founders LLC, a California limited liability company doing business as Pacific6 Enterprises (“Pacific6”), and Health Source MSO Inc., a California corporation (“HSMSO”) entered into an operating agreement to govern MWN Community Hospital, LLC and the conduct of its business and to specify their relative rights and obligations. NMM, Pacific6, and HSMSO each owns 33.3% of the membership shares based on each member’s initial capital contributions of $3,000 and working capital contributions of $30,000. The accompanying condensed consolidated balance sheets include the related investment balance of $33,000 as of March 31, 2019 and December 31, 2018, respectively.

 

Investment in privately held entity that does not report net asset value per share

 

In May 2018, APC purchased 270,000 membership interests of MediPortal LLC, a New York limited liability company, for $0.4 million or $1.50 per membership interest, which represented approximately 2.8% ownership. APC also received a 5-year warrant to purchase 270,000 membership interests. A 5-year option to purchase an additional 380,000 membership interests and a 5-year warrant to purchase 480,000 membership interests are contingent upon the portal completion date, which has not been completed as of March 31, 2019. As APC does not have the ability to exercise significant influence, and lacks control, over the investee, this investment is accounted for using a measurement alternative which allows the investment to be measured at cost, adjusted for observable price changes and impairments, with changes recognized in net income.

 

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5.Loan Receivable – Related Parties

 

Accountable Health Care IPA

 

On October 9, 2017, NMM and APC-LSMA entered into an agreement with Accountable, Signal Health Solutions, Inc. (“Signal”), a California corporation and George M. Jayatilaka, M.D. (“Dr. Jay”), individually, whereby concurrent with the execution of the agreement, APC-LSMA extended a line of credit to Dr. Jay in the principal amount of $10.0 million (“Dr. Jay Loan”) to fund the working capital needs of Accountable ($5.0 million of which was funded by APC on behalf of APC-LSMA and the other $5.0 million was funded by NMM to Dr. Jay). Interest on the Dr. Jay Loan accrues at a rate that is equal to the prime rate plus 1% (6.50% as of March 31, 2019 and December 31, 2018) and payable in monthly installments of interest only on the first day of each month until the date that is three years following the initial date of funding, at which time, all outstanding principal and accrued interest thereon shall be due and payable in full. The Dr. Jay Loan is not subordinated to any other indebtedness and is secured by a first-lien security interest in certain shares of Accountable owned by Dr. Jay. The outstanding balance as of March 31, 2019 and December 31, 2018 was $5.0 million and $5.0 million, respectively.

 

Concurrently with the funding of the Dr. Jay Loan, Dr. Jay loaned to Accountable the entire proceeds of the Dr. Jay Loan at the same interest rate and maturity date as the Dr. Jay Loan (“Dr. Jay-Accountable Subordinated Loan”). Repayment of the Dr. Jay-Accountable Subordinated Loan is subordinated to Accountable’s creditors in a manner acceptable to the California Department of Managed Health Care (“DMHC”).

 

At any time on or before the date that is one year following the initial funding date of the Dr. Jay Loan, APC-LSMA or its designee have the right, but not the obligation, to convert up to $5.0 million of the outstanding principal amount into shares of Accountable’s capital stock. At any time after the date that is one year following the funding date, the Dr. Jay Loan may be prepaid at any time. Within three years following the initial funding of the Dr. Jay Loan, APC-LSMA or its designee shall have the right, but not the obligation, to convert the then outstanding principal amount into Accountable shares based on Accountable’s then-current valuation. On September 21, 2018, APC and NMM each exercised their option to convert their respective $5.0 million loan into shares of Accountable capital stock. As a result, APC’s $5.0 million loan was converted into a 25% equity interest with the remaining $5.0 million loan held by NMM to be converted into an equity interest that will be determined based on a third party valuation of Accountable’s current enterprise value, which has not been completed as of the filing date of this Report. APC accounted for its investment in Accountable under the equity method of accounting (See Note 4).

 

Subsequent to the funding of the Dr. Jay Loan, to the extent needed by Accountable for working capital needs as determined by APC-LSMA, APC-LSMA will extend an additional line of credit in the principal amount up to $8.0 million. The funding mechanism, interest rate and maturity date of such additional line of credit shall be the same as the Dr. Jay Loan and additional collateral security in Accountable’s issued and outstanding shares will be required.

 

As a condition of funding the Dr. Jay Loan, Accountable entered into a ten-year management service agreement with NMM on October 27, 2017, to commence on the termination of Accountable’s previously existing management agreement with MedPoint Management to be effective on December 1, 2017. Under the management service agreement, NMM is responsible for managing 100% of all health plan membership assigned and delegated to Accountable, and all hospital risk pools. The management service agreement requires the payment of IPA and hospital risk pool management fees as set forth therein.

 

Concurrent with the initial funding of the Dr. Jay Loan, the Accountable Board of Directors shall be automatically reconstituted to be comprised of two directors, which will comprise of Dr. Jay and a director appointed by APC-LSMA. Dr. Jay and APC-LSMA will have two and one votes as a director, respectively.

 

Based on management’s assessment, Accountable is a variable interest entity. However, the Company does not have the power to the direct the activities of Accountable that most significantly impact its economic performance and as such, the Company is not the primary beneficiary of Accountable.

 

Universal Care, Inc.

 

In 2015, APC advanced $5.0 million on behalf of UCAP to UCI for working capital purposes. On June 29, 2018, and November 28, 2018, APC advanced an additional $2.5 million and $5.0 million, respectively. These subordinated loans accrue interest at the prime rate plus 1%, or 6.50%, as of March 31, 2019 and December 31, 2018, with interest to be paid monthly. The repayment schedule is based on certain contingent criteria, and accordingly, the entire note receivable has been classified under loans receivable - related parties on the condensed consolidated balance sheets in the amount of $12.5 million as of March 31, 2019 and December 31, 2018.

 

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6.Accounts Payable and Accrued Expenses

 

The Company’s accounts payable and accrued expenses consisted of the following:

  

   March 31,
2019
   December 31,
2018
 
         
Accounts payable  $4,750,543   $4,481,544 
Specialty capitation payable   300,000    300,000 
Subcontractor IPA risk pool payable   2,191,664    2,532,750 
Professional fees   2,470,583    2,251,741 
Due to related parties   568,385    1,488,313 
Contract liabilities   33,292,123    9,024,235 
Accrued compensation   4,081,173    4,996,906 
           
   $47,654,471   $25,075,489 

 

7.Medical Liabilities

 

The Company’s medical liabilities consisted of the following:

 

   March 31,
2019
   December 31,
2018
 
         
Balance, beginning of period  $33,641,701   $63,972,318 
Claims paid for previous period   (28,850,325)   (36,549,348)
Incurred health care costs   34,974,952    209,002,961 
Claims paid for current period   (16,586,584)   (167,537,480)
Payment to CMS based on APAACO 2017 year settlement   -    (34,464,826)
Adjustments   86,121    (781,924)
           
 Balance, end of period  $23,265,865   $33,641,701 

 

8.Bank Loan and Lines of Credit

 

Bank Loans

 

In December 2010, ICC obtained a loan of $4.6 million from a financial institution. The loan bears interest based on the Wall Street Journal “prime rate”, or 5.50% per annum, as of December 31, 2018. The loan was collateralized by the medical equipment ICC owns and guaranteed by one of ICC’s shareholders. The loan matured on December 31, 2018 and final payment was made in January 2019.

 

Lines of Credit – Related Party

 

On June 14, 2018, NMM amended its promissory note agreement with Preferred Bank (“NMM Business Loan Agreement”), which provides for loan availability of up to $20.0 million with a maturity date of June 22, 2020. One of the Company’s board members is the chairman and CEO of Preferred Bank. The NMM Business Loan Agreement was subsequently amended on September 1, 2018 to temporarily increase the loan availability from $20.0 million to $27.0 million for the period from September 1, 2018 through January 31, 2019, further extended to October 31, 2019, pursuant to an amendment entered into March 5, 2019 to facilitate the issuance of an additional standby letter of credit for the benefit of CMS. The interest rate is based on the Wall Street Journal “prime rate” plus 0.125%, or 5.625%, as of March 31, 2019 and December 31, 2018. As of March 31, 2019, NMM was in compliance with such financial debt covenant requirements. The loan is guaranteed by Apollo Medical Holdings, Inc. and is collateralized by substantially all of the assets of NMM. The amount outstanding as of March 31, 2019 and December 31, 2018 was $13.0 million. As of March 31, 2019 and December 31, 2018, availability under this line of credit was $0.7 million.

  

On September 5, 2018, NMM entered into a non-revolving line of credit agreement with Preferred Bank (“NMM Line of Credit Agreement”), which provides for loan availability of up to $20.0 million with a maturity date of September 5, 2019. This credit facility was subsequently amended on April 17, 2019 to reduce the loan availability from $20.0 million to $16.0 million. The interest rate is based on the Wall Street Journal “prime rate” plus 0.125%, or 5.625%, as of March 31, 2019 and December 31, 2018. The line of credit is guaranteed by Apollo Medical Holdings, Inc. and is collateralized by substantially all assets of NMM. The line of credit was obtained to finance potential acquisitions, with each drawdown to be converted into a five-year term loan with monthly principal payments plus interest based on a five-year amortization schedule, the availability of the line of credit is reduced accordingly based on the aggregate amount drawn. As of March 31, 2019 and December 31, 2018, availability under this line of credit was $20.0 million.

 

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On June 14, 2018, APC amended its promissory note agreement with Preferred Bank (“APC Business Loan Agreement”), which provides for loan availability of up to $10.0 million with a maturity date of June 22, 2020. This credit facility was subsequently amended on April 17, 2019 to increase the loan availability from $10.0 million to $40.0 million. The interest rate is based on the Wall Street Journal “prime rate” plus 0.125%, or 5.625%, as of March 31, 2019 and December 31, 2018. As of March 31, 2019, APC was in compliance with such financial debt covenant requirements. The loan is also collateralized by substantially all assets of APC. No amounts were drawn on this line during the three months ended March 31, 2019 and no amounts were outstanding as of March 31, 2019 and December 31, 2018. As of March 31, 2019 and December 31, 2018, availability under this line of credit was $9.7 million.

 

Standby Letters of Credit

  

On March 3, 2017, APAACO established an irrevocable standby letter of credit with Preferred Bank (through the NMM Business Loan Agreement) for $6.7 million for the benefit of CMS. The letter of credit expired on December 31, 2018 and was deemed automatically extended without amendment for additional one - year periods from the present or any future expiration date, unless notified by the institution to terminate prior to 90 days from any expiration date. APAACO may continue to draw from the letter of credit for one year following the bank’s notification of non-renewal.

 

On October 3, 2018, APAACO established a second irrevocable standby letter of credit with Preferred Bank (through the NMM Business Loan Agreement) for $6.6 million for the benefit of CMS. The letter of credit expires on December 31, 2019 and is deemed automatically extended without amendment for additional one - year periods from the present or any future expiration date, unless notified by the institution to terminate prior to 90 days from any expiration date. APAACO may continue to draw from the letter of credit for one year following the bank’s notification of non-renewal.

 

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.

 

9.Mezzanine and Stockholders’ Equity

  

Mezzanine

 

APC

 

APC’s shareholders have entered into shareholder agreements that requires APC, under the circumstances described in those agreements, to repurchase the APC shares from the shareholders. Since the redemption feature (see Note 2) 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 noncontrolling interests in mezzanine or temporary equity. Except when the repurchase obligation is triggered, APC’s shares are not redeemable and it is not probable that the shares will become redeemable as of March 31, 2019 and December 31, 2018.

 

On December 18, 2018, the Company entered into a settlement agreement and mutual release with former APCN shareholders to repurchase all the equity interests in APC previously held by these shareholders. APC paid approximately $1.7 million to repurchase 1,662,571 shares of common stock (see Note 10).

 

Stockholders’ Equity

 

As of the date of this Report, 480,212 holdback shares have not been issued to certain former NMM shareholders who were NMM shareholders at the time of Closing of the Merger, as they have yet to submit properly completed letters of transmittal to ApolloMed in order to receive their pro rata portion of ApolloMed common stock and warrants as contemplated under the Merger Agreement. Pending such receipt, such former NMM shareholders have the right to receive, without interest, their pro rata share of dividends or distributions with a record date after the effectiveness of the Merger. The condensed consolidated financial statements have treated such shares of common stock as outstanding, given the receipt of the letter of transmittal is considered perfunctory and the Company is legally obligated to issue these shares in connection with the Merger.

 

See options and warrants section below for common stock issued upon exercise of stock options and stock purchase warrants.

 

 33 

 

 

Options

 

The Company’s outstanding stock options consisted of the following:

 

   Shares   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Term
(Years)
  

Aggregate
Intrinsic
Value

(in millions)

 
                 
Options outstanding at January 1, 2019   647,240   $5.62    4.13   $9.2 
Options granted   45,000    18.11    -    - 
Options exercised   (6,000)   4.50    -    0.1 
Options forfeited   -    -    -    - 
                     
Options outstanding at March 31, 2019   686,240   $6.45    3.95   $8.1 
                     
Options exercisable at March 31, 2019   641,240   $5.27    3.64   $8.1 

 

During the three months ended March 31, 2019 and 2018, stock options were exercised for 6,000 and 75,000 shares, respectively, of the Company’s common stock, which resulted in proceeds of approximately $27,000 and $0.5 million, respectively. The exercise price was $4.50 per share for the exercises during the three months ended March 31, 2019 and ranged from $2.10 to $10.00 per share for the exercises during the three months ended March 31, 2018.

 

During the three months ended March 31, 2018, stock options were exercised pursuant to the cashless exercise provision of the option agreement, with respect to 54,536 shares of the Company’s common stock, which resulted in the Company issuing 43,201 net shares.

 

During the three months ended March 31, 2019, the Company granted 45,000 stock options to certain ApolloMed board members which were recognized at fair value, as determined using the Black-Scholes option pricing model and the following assumptions:

  

   March 31,
2019
 
     
Expected Term   3.0 years 
Expected volatility   

100.27%

 
Risk-free interest rate   

2.51%

 
Market value of common stock  $18.11 
Annual dividend yield   - 
Forfeiture rate   0%

 

During the three months ended March 31, 2019, the Company recorded approximately $0.1 million of share-based compensation expense associated with the issuance of restricted shares of common stock and vesting of stock options which is included in “General and administrative expenses” in the accompanying condensed consolidated statement of income.

 

Outstanding stock options granted to primary care physicians to purchase shares of APC’s common stock consisted of the following:

    

   Shares   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Term
(Years)
  

Aggregate
Intrinsic
Value

(in millions)

 
                 
Options outstanding at January 1, 2019   853,800   $0.167    0.75   $0.5 
Options granted   -    -    -    - 
Options exercised   -    -    -    - 
Options expired/forfeited   -    -    -    - 
                     
Options outstanding and exercisable at March 31, 2019   853,800   $0.167    0.50   $0.5 

 

The aggregate intrinsic value is calculated as the difference between the exercise price and the estimated fair value of common stock as of March 31, 2019.

 

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Share-based compensation expense related to option awards granted to primary care physicians to purchase shares of APC’s common stock, are recognized over their respective vesting periods, and consisted of the following:

 

   Three Months Ended
March 31,
 
   2019   2018 
Share-based compensation expense:          
           
General and administrative  $202,382   $202,382 
           
   $202,382   $202,382 

    

The remaining unrecognized share-based compensation expense of stock option awards granted to primary care physicians to purchase shares of APC’s common stock as of March 31, 2019 was $0.4 million which is expected to be recognized over the remaining term of 0.5 years.

 

Warrants

 

The Company’s outstanding warrants consisted of the following:

 

   Shares   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Term
(Years)
  

Aggregate
Intrinsic
Value

(in millions)

 
                 
Warrants outstanding at January 1, 2019   3,331,995   $9.93    2.97   $33.1 
Warrants granted   -    -    -    - 
Warrants exercised   (11,516)   9.81    -    0.1 
Warrants expired/forfeited   -    -    -    - 
                     
Warrants outstanding at March 31, 2019   3,320,479   $9.93    2.72   $27.9 

 

                        Weighted  
            Weighted           Average  
            Average           Exercise Price  
Exercise Price Per     Warrants     Remaining     Warrants     Per  
Share     Outstanding     Contractual Life     Exercisable     Share  
                           
9.00       1,075,492       1.54       1,075,492       9.00  
  10.00       1,416,085       3.04       1,416,085       10.00  
  11.00       828,902       3.69       828,902       11.00  
                                     
$ 9.00 –11.00       3,320,479       2.72       3,320,479     $ 9.93  

  

During the three months ended March 31, 2019, common stock warrants were exercised for 11,516 shares of the Company’s common stock, which resulted in proceeds of approximately $0.1 million. The exercise price ranged from $9.00 to $11.00 per share.

 

Treasury Stock 

 

APC owned 1,775,561 and 1,682,110 shares of ApolloMed’s common stock as of March 31, 2019 and December 31, 2018, which are legally issued and outstanding but excluded from shares of common stock outstanding in the condensed consolidated financial statements, as such shares are treated as treasury shares for accounting purposes. Pursuant to the issuance of the Holdback Shares (see Note 13), 93,451 shares issued to APC are treated as treasury shares. The remaining treasury shares of 168,493 were repurchased from the former APCN shareholders in 2018.

 

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Dividends

 

During the three months ended March 31, 2019 and 2018, APC paid dividends of $10.0 million and $2.0 million, respectively.

 

10.Commitments and Contingencies

 

Regulatory Matters

 

Laws and regulations governing the Medicare program and healthcare generally are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medi-Cal programs.

 

As risk-bearing organizations, APC is required to follow regulations of the California DMHC, including maintenance of minimum working capital, tangible net equity (“TNE”), cash-to-claims ratio and claims payment requirements prescribed by the California DMHC. TNE is defined as net equity less intangibles, less non-allowable assets (which include unsecured amounts due from affiliates), plus subordinated obligations. At March 31, 2019 and December 31, 2018, APC was in compliance with these regulations.

 

Many of the Company’s payor and provider contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of medical services. Such differing interpretations may not come to light until a substantial period of time has passed following contract implementation. Liabilities for claims disputes are recorded when the loss is probable and can be estimated. Any adjustments to reserves are reflected in current operations.

 

Affordable Care Act

 

The Patient Protection and Affordable Care Act (“PPACA”) has made significant changes to the United States health care system. The legislation impacted multiple aspects of the health care system, including many provisions that change payments from Medicare, Medicaid and insurance companies. Under this legislation, 33 states have expanded their Medicaid programs to cover previously uninsured childless adults, and four additional states voted in 2018 to expand Medicaid or to elect a governor that pledged to expand Medicaid.  In addition, many uninsured individuals have had the opportunity to purchase health insurance via state-based marketplaces, state-based marketplaces using a federal platform, state-partnership marketplaces or the federally-facilitated marketplace. PPACA also implemented a number of health insurance market reforms, such as allowing children to remain on their parents’ health insurance until age 26 or prohibiting certain plans from denying coverage based on pre-existing conditions. Nationally, these reforms have reduced the number of uninsured individuals.

 

It is unclear what changes may be made to PPACA with the divided Congress, current presidential administration, and pending litigation over the validity of PPACA. The Administration has promulgated rules to broaden the availability of coverage options that do not comply with the full range of PPACA requirements for individual market coverage, namely Association Health Plans and Short-Term Limited-Duration Insurance.  The Administration has also provided additional guidance on state PPACA waivers.  These executive actions have been or may be challenged in court.  In addition, the Tax Cuts and Jobs Act (“TCJA”), passed in December 2017, eliminates the individual mandate penalty under PPACA, effective January 1, 2019.  The individual mandate penalty was included in PPACA to address concerns that other market reforms expanding access to coverage might produce adverse selection and higher premiums. The extent to which the repeal of the individual mandate penalty will impact the uninsured rate and 2019 premiums is unclear at this juncture. On December 14, 2018, the United States District Court for the Northern District of Texas ruled that the individual mandate without the penalty is unconstitutional and that PPACA is therefore invalid in its entirety.  Litigation on this issue is ongoing, with the Administration indicating it will continue implementing PPACA pending any appeals, the court ordering expedited briefing on a potential stay and certification of an interlocutory appeal, and pending litigation in the United States District Court for the District of Maryland to ensure continued implementation of PPACA.  This litigation along with any future legislative changes to PPACA or other federal and state legislation could have a material impact on the operations of the Company. The Company is continuing to monitor the legislative environment and developments in pending litigation for risks and uncertainties.

 

Standby Letters of Credit

 

As part of the APAACO participation with CMS, the Company must provide a financial guarantee to CMS, the guarantee generally must be in an amount of 2% of our benchmark Medicare Part A and Part B expenditures. The Company has established irrevocable standby letters of credit with Preferred Bank, which is affiliated with one of the Company’s board members, of $6.6 million and $6.7 million for the 2018 and 2017 performance years, respectively (see Note 8).

 

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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 (see Note 8).

 

Litigation

 

From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of its business. The resolution of any claim or litigation is subject to inherent uncertainty and could have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

  

Prospect Medical Systems

 

On or about March 23, 2018 and April 3, 2018, a Demand for Arbitration and an Amended Demand for Arbitration were filed by Prospect Medical Group, Inc. and Prospect Medical Systems, Inc. (collectively, “Prospect”) against MMG, ApolloMed and AMM with Judicial Arbitration Mediation Services in California, arising out of MMG’s purported business plans, seeking damages in excess of $5.0 million, and alleging breach of contract, violation of unfair competition laws, and tortious interference with Prospect’s current and future economic relationships with its health plans and their members. MMG, ApolloMed and AMM dispute the allegations and intend to vigorously defend against this matter. The resolution of this matter and any potential range of loss in excess of any current accrual cannot be reasonably determined or estimated at this time primarily because the matter has not been fully arbitrated and presents unique regulatory and contractual interpretation issues.

 

Liability Insurance

 

The Company believes that its insurance coverage is appropriate based upon the Company’s claims experience and the nature and risks of the Company’s business. In addition to the known incidents that have resulted in the assertion of claims, the Company cannot be certain that its insurance coverage will be adequate to cover liabilities arising out of claims asserted against the Company, the Company’s affiliated professional organizations or the Company’s affiliated hospitalists in the future where the outcomes of such claims are unfavorable. The Company believes that the ultimate resolution of all pending claims, including liabilities in excess of the Company’s insurance coverage, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows; however, there can be no assurance that future claims will not have such a material adverse effect on the Company’s business. Contracted physicians are required to obtain their own insurance coverage.

 

Although the Company currently maintains liability insurance policies on a claims-made basis, which are intended to cover malpractice liability and certain other claims, the coverage must be renewed annually, and may not continue to be available to the Company in future years at acceptable costs, and on favorable terms.

 

11.Related Party Transactions

 

On November 16, 2015, UCAP entered into a subordinated note receivable agreement with UCI, a 48.9% owned equity method investee (See Note 4), in the amount of $5.0 million. On June 28, 2018 and November 28, 2018, UCAP entered into two additional subordinated note receivable agreements with UCI in the amount of $2.5 million and $5.0 million, respectively (see Note 5).

 

During the three months ended March 31, 2019 and 2018, NMM received approximately $3.2 million and $4.6 million, respectively, in management fees from LMA, which is accounted for under the equity method based on 25% equity ownership interest held by APC in LMA’s IPA line of business (see Note 4).

 

During the three months ended March 31, 2019 and 2018, APC paid approximately $0.7 million and $0.4 million, respectively, to PMIOC for provider services, which is accounted for under the equity method based on 40% equity ownership interest held by APC (see Note 4).

 

During the three months ended March 31, 2019 and 2018, APC paid approximately $2.0 million and $1.6 million, respectively, to DMG for provider services, which is accounted for under the equity method based on 40% equity ownership interest held by APC (see Note 4).

 

During the three months ended March 31, 2019 and 2018, APC paid approximately $92,000 and $22,000, respectively, to Advanced Diagnostic Surgery Center for services as a provider. Advanced Diagnostic Surgery Center shares common ownership with certain board members of APC.

   

During the three months ended March 31, 2019 and 2018, APC paid approximately $1.3 million and $0.7 million, respectively, to AMG, Inc. for services as a provider. AMG, Inc. shares common ownership with certain board members of APC.

 

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During the three months ended March 31, 2019 and 2018, APC paid an aggregate of approximately $9.3 million and $9.2 million, respectively, to shareholders of APC for provider services, which include approximately $3.3 million and $2.3 million, respectively, to shareholders who are also officers of APC.

 

During the three months ended March 31, 2019 and 2018, NMM paid approximately $0.3 million, to Medical Property Partners (“MPP”) for an office lease. MPP shares common ownership with certain board members of NMM.

 

During the three months ended March 31, 2018, APC paid $90,000, to Tag-2 Medical Investment Group, LLC (“Tag-2”) for an office lease. Tag-2 shares common ownership with certain board members of APC.

 

During the three months ended March 31, 2019 and 2018, the Company paid approximately $0.1 million and $35,000, respectively, to Critical Quality Management Corp (“CQMC”) for an office lease. CQMC shares common ownership with certain board members of APC.

 

During the three months ended March 31, 2019 and 2018, SCHC paid approximately $0.1 million, respectively, to Numen, LLC (“Numen”) for an office lease. Numen is owned by a shareholder of APC.

 

The Company has agreements with HSMSO, Aurion Corporation (“Aurion”), and AHMC Healthcare (“AHMC”) for services provided to the Company. One of the Company’s board members is an officer of AHMC, HSMSO and Aurion. Aurion is also partially owned by one of the Company’s board members. The following table sets forth fees incurred and income received related to AHMC, HSMSO and Aurion Corporation:

 

Three months ended March 31,  2019   2018 
         
AHMC – Risk pool and Capitation  $11,600,000   $19,400,000 
HSMSO – Management fees, net   (650,000)   (500,000)
Aurion – Management fees   (100,000)   (100,000)
           
Net total  $10,850,000   $18,800,000 

 

The Company and AHMC has a risk sharing agreement with certain AHMC hospitals to share the surplus and deficits of each of the hospital pools. During the three months ended March 31, 2019 and 2018, the Company has recognized risk pool revenue under this agreement of $10.1 million and $18.0 million respectively, for which $49.8 million and $44.2 million remain outstanding as of March 31, 2019 and December 31, 2018, respectively.

 

In addition, affiliates wholly-owned by the Company’s officers, including our CEO, Dr. Lam, are reported in the accompanying condensed consolidated statement of income on a consolidated basis, together with the Company’s subsidiaries, and therefore, the Company does not separately disclose transactions between such affiliates and the Company’s subsidiaries as related party transactions.

  

For equity method investments, loans receivable and line of credits from related parties, see Notes 4, 5 and 8, respectively.

 

12.Income Taxes

 

The Company uses the liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates.

 

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On an interim basis, the Company estimates what its anticipated annual effective tax rate will be and records a quarterly income tax provision (benefit) in accordance with the estimated annual rate, plus the tax effect of certain discrete items that arise during the quarter. As the year progresses, the Company refines its estimates based on actual events and financial results during the quarter. This process can result in significant changes to the Company’s estimated effective tax rate. If and when this occurs, the income tax provision (benefit) will be adjusted during the quarter in which the estimates are refined so that the year-to-date provision reflects the estimated annual effective tax rate. These changes, along with adjustments to the Company’s deferred taxes and related valuation allowance, may create fluctuations in the Company’s overall effective tax rate from quarter to quarter.

 

As of March 31, 2019 due to the overall cumulative losses incurred in recent years, the Company maintained a full valuation allowance against its deferred tax assets related to loss entities the Company cannot consolidate under the Federal consolidation rules, as realization of these assets is uncertain.

 

The Company’s effective tax rate for the three months ended March 31, 2019 differed from the U.S. federal statutory rate primarily due to state income taxes, income from flow through entities, and change in valuation allowance.

 

As of March 31, 2019, the Company does not have any unrecognized tax benefits related to various federal and state income tax matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.

 

The Company is subject to U.S. federal income tax as well as income tax in California. The Company and its subsidiaries’ state and Federal income tax returns are open to audit under the statute of limitations for the years ended December 31, 2014 through December 31, 2017 and for the years ended December 31, 2015 through December 31, 2017, respectively. The Company currently does not anticipate material unrecognized tax benefits within the next 12 months.

 

13.Earnings Per Share

 

Basic net income per share is calculated using the weighted average number of shares of the Company’s common stock issued and outstanding during a certain period, and is calculated by dividing net income by the weighted average number of shares of the Company’s common stock issued and outstanding during such period. Diluted net income per share is calculated using the weighted average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period, using the as-if converted method for secured convertible notes, preferred stock, and the treasury stock method for options and common stock warrants.

 

Pursuant to the Merger Agreement, ApolloMed held back 10% of the shares of its common stock that were issuable to NMM shareholders (“Holdback Shares”) to secure indemnification of ApolloMed and its affiliates under the Merger Agreement. The Holdback Shares will be held for a period of up to 24 months, with 50% issued on the first anniversary of the merger and the remaining 50% issued on the second anniversary, after the closing of the Merger (to be distributed on a pro-rata basis to former NMM shareholders), during which ApolloMed may seek indemnification for any breach of, or noncompliance with, any provision of the Merger Agreement, by NMM. These Holdback Shares are excluded from the computation of basic earnings per share, but included in diluted earnings per share. As of March 31, 2019 and December 31, 2018 APC held 1,775,561 and 1,682,110 shares of ApolloMed’s and NMM’s common stock, respectively, which are treated as treasury shares for accounting purposes and not included in the number of shares of common stock outstanding used to calculate earnings per share.

 

Below is a summary of the earnings per share computations: 

 

Three Months Ended March 31,  2019   2018 
         
Earnings per share – basic  $0.00   $0.07 
Earnings per share – diluted  $0.00   $0.06 
Weighted average shares of common stock outstanding – basic   34,496,622    32,421,467 
Weighted average shares of common stock outstanding – diluted   38,074,174    38,098,373 

 

Below is a summary of the shares included in the diluted earnings per share computations:

 

Three Months Ended March 31,  2019   2018 
         
Weighted average shares of common stock outstanding – basic   34,496,622    32,421,467 
10% shares held back pursuant to indemnification clause   1,519,805    3,039,749 
Stock options   455,381    835,790 
Warrants   1,602,366    1,801,367 
Weighted average shares of common stock outstanding – diluted   38,074,174    38,098,373 

 

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14.Variable Interest Entities (VIEs)

 

A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE.

 

The Company follows guidance on the consolidation of VIEs that requires companies to utilize a qualitative approach to determine whether it is the primary beneficiary of a VIE. See Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies” to the accompanying condensed consolidated financial statements for information on how the Company determines VIEs and its treatment.

 

The following table includes assets that can only be used to settle the liabilities of APC and the creditors of APC have no recourse to the Company, nor do creditors of the Company have recourse against the assets of APC. These assets and liabilities, with the exception of the investment in a privately held entity that does not report net asset value per share and amounts due to affiliate, which are eliminated upon consolidation with NMM, are included in the accompanying condensed consolidated balance sheets.

 

    March 31,
2019
    December 31,
2018
 
             
Assets                
                 
Current assets                
Cash and cash equivalents   $ 52,359,206     $ 71,726,342  
Investment in marketable securities     1,074,280       1,066,103  
Receivables, net     3,096,946       3,904,586  
Receivables, net – related party     51,606,081       45,258,916  
Prepaid expenses and other current assets     3,944,518       3,647,654  
                 
Total current assets     112,081,031       125,603,601  
                 
Noncurrent assets                
Land, property and equipment, net     9,400,074       9,602,228  
Intangible assets, net     56,273,585       58,984,420  
Goodwill     56,213,450       56,213,450  
Loans receivable – related parties     12,500,000       12,500,000  
Investment in a privately held entity that does not report net asset value per share     4,725,000       4,725,000  
Investments in other entities – equity method     25,881,231       26,707,404  
Restricted cash     740,212       745,470  
Right-of-use assets     4,216,800       -  
Other assets     1,282,090       839,085  
                 
Total noncurrent assets     171,232,442       170,317,057  
                 
Total assets   $ 283,313,473     $ 295,920,658  
                 
Current liabilities                
Accounts payable and accrued expenses   $ 5,379,342     $ 6,378,751  
Fiduciary accounts payable     2,084,926       1,538,598  
Medical liabilities     21,610,483       24,983,110  
Income taxes payable     12,706,621       11,621,861  
Amount due to affiliate     12,197,167       11,505,680  
Bank loan     -       40,257  
Lease liabilities     840,525       -  
Capital lease obligations     101,741       101,741  
                 
Total current liabilities     54,920,805       56,169,998  
                 
Noncurrent liabilities                
Deferred tax liability     13,360,989       15,693,159  
Liability for unissued equity shares     1,185,025       1,185,025  
Lease liabilities     3,278,928          
Capital lease obligations     492,110       517,261  
                 
Total noncurrent liabilities     18,317,052       17,395,445  
                 
Total liabilities   $ 73,237,857     $ 73,565,443  

 

The assets of the Company’s other consolidated VIEs were not considered significant.

 

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15.Leases

 

The Company has operating and finance leases for corporate offices, doctors’ offices, and certain equipment. These leases have remaining lease terms of 1 month to 5 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within one year. As of March 31, 2019 and December 31, 2018, assets recorded under finance leases were $0.6 million, and accumulated depreciation associated with finance leases was $0.2 million.

 

Also, the Company rents or subleases certain real estate to third parties, which are accounted for as operating leases.

 

Leases with an initial term of 12 months or less are not recorded on the balance sheet.

 

The components of lease expense were as follows:

 

Three Months Ended March 31,  2019 
     
Operating lease cost  $1,102,684 
      
Finance lease cost     
Amortization of lease expense  $25,150 
Interest on lease liabilities   4,579 
      
Sublease income  $(100,180)
      
Total finance lease cost, net  $1,032,233 

 

Other information related to leases was as follows:

 

Three Months Ended March 31,  2019 
     
Supplemental Cash Flows Information     
      
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $1,033,514 
Operating cash flows from finance leases   4,579 
Financing cash flows from finance leases   25,150 
      
Right-of-use assets obtained in exchange for lease obligations:     
Operating leases   8,855,324 
Finance leases   - 
      
Weighted Average Remaining Lease Term     
      
Operating leases   4.30 years 
Finance leases   5.25 years 
      
Weighted Average Discount Rate     
      
Operating leases   6.13%
Finance leases   3.00%

  

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Future minimum lease payments under non-cancellable leases as of March 31, 2019 and December 31, 2018 were as follows:

 

March 31, 2019  Operating Leases   Finance Leases 
         
2019 (excluding the three months ended March 31, 2019)  $2,506,838   $89,190 
2020   2,795,554    118,920 
2021   1,595,377    118,920 
2022   1,250,897    118,920 
2023   971,163    118,920 
Thereafter   1,514,842    79,278 
           
Total future minimum lease payments   10,634,671    644,148 
Less: imputed interest   2,195,602    50,297 
 Total lease obligations   8,439,069    593,851 
Less: current portion   2,461,924    101,741 
Long-term lease obligations  $5,977,145   $492,110 

 

December 31, 2018  Operating Leases   Finance Leases 
         
2019  $2,848,000   $119,000 
2020   2,267,000    119,000 
2021   783,000    119,000 
2022   487,000    119,000 
2023   489,000    119,000 
Thereafter   243,000    79,000 
           
Total future minimum lease payments   7,117,000    674,000 

 

As of March 31, 2019, the Company does not have additional operating and finance leases that have not yet commenced.

 

16.Subsequent Events

 

On April 17, 2019, NMM amended its promissory note with Preferred Bank to decrease the amount available under the credit facility from $20 million to $16 million and APC amended its promissory note with Preferred Bank to increase the amount available under the credit facility from $10 million to $40 million (see Note 8).

 

On April 23, 2019, NMM and APC entered into an agreement whereby NMM assigned and APC assumed NMM’s 25% membership interest in 531 W. College LLC for approximately $8.3 million. Subsequently, APC has a 50% ownership in 531 W. College LLC with a total investment balance of approximately $16.2 million.

 

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ITEM 2.  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 unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 18, 2019.

 

The following management’s discussion and analysis contain forward-looking statements that reflect our plans, estimates, and beliefs as discussed in the “Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those plans, estimates, and beliefs. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q as well as the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

In this section, “we,” “our,” “ours” and “us” refer to Apollo Medical Holdings, Inc.

 

Overview

 

We, together with our affiliated physician groups and consolidated entities, are a physician-centric integrated population health management company providing coordinated, outcomes-based medical care in a cost-effective manner and serving patients in California, the majority of whom are covered by private or public insurance provided through Medicare, Medicaid and health maintenance organizations (“HMOs”), with a small portion of our revenue coming from non-insured patients. We provide care coordination services to each major constituent of the healthcare delivery system, including patients, families, primary care physicians, specialists, acute care hospitals, alternative sites of inpatient care, physician groups and health plans. Our physician network consists of primary care physicians, specialist physicians and hospitalists. We operate primarily through Apollo Medical Holdings, Inc. (“ApolloMed”) and the following subsidiaries: Network Medical Management (“NMM”), Apollo Medical Management, Inc. (“AMM”), APA ACO, Inc. (“APAACO”) and Apollo Care Connect, Inc. (“Apollo Care Connect”), and their consolidated entities, including consolidated variable interest entities (“VIE”).

  

Through our next generation accountable care organization (“NGACO”) model and a network of independent practice associations (“IPAs”) with more than 6,000 contracted physicians, which physician groups have agreements with various health plans, hospitals and other HMOs, we are currently responsible for coordinating the care for over 800,000 patients in California. These covered patients are comprised of managed care members whose health coverage is provided through their employers or who have acquired health coverage directly from a health plan or as a result of their eligibility for Medicaid or Medicare benefits. Our managed patients benefit from an integrated approach that places physicians at the center of patient care and utilizes sophisticated risk management techniques and clinical protocols to provide high-quality, cost effective care. To implement a patient-centered, physician-centric experience, we also have other integrated and synergistic operations, including (i) MSOs that provide management and other services to our affiliated IPAs, (ii) outpatient clinics and (iii) hospitalists that coordinate the care of patients in hospitals.

 

Recent Developments

 

The following describes certain developments from 2018 to date that are important to understanding our overall results of operations and financial condition.

  

Business Combination

 

On March 15, 2019, a consolidated VIE of the Company entered into an agreement to acquire a health care-related entity for total cash consideration of $45.0 million, subject to post-closing adjustments. The completion of this acquisition is subject to multiple contingencies and as of the filing date of this Quarterly Report this transaction has not been completed. The closing of the acquisition is scheduled to occur when all of the conditions to closing set forth in the stock purchase agreement have been satisfied or waived.

 

531 W. College

 

On April 23, 2019, NMM and APC entered into an agreement whereby NMM assigned and APC assumed NMM’s 25% membership interest in 531 W. College LLC for approximately $8.3 million. Subsequently, APC has a 50% ownership in 531 W. College LLC with a total investment balance of approximately $16.2 million.

 

On March 27, 2019, Warren Hossenion, M.D., resigned as Co-Chief Executive Officer and as a director of Apollo Medical Holdings, Inc. effective March 28, 2019. Thomas Lam, M.D., ApolloMed’s other Co-Chief Executive Officer, will continue to serve as the sole Chief Executive Officer of ApolloMed. 

 

 43 

 

 

Key Financial Measures and Indicators

 

Operating Revenues

 

Our revenue primarily consists of capitation revenue, risk pool settlements and incentives, NGACO All-Inclusive Population-Based Payments (“AIPBP”) 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 expense is the patient care cost paid to contracted physicians, and the cost of providing management and administrative support services to our affiliated physician groups. These services include payroll, benefits, human resource services, physician practice billing, revenue cycle services, physician practice management, administrative oversight, coding services, and other consulting services.

 

Results of Operations

  

Apollo Medical Holdings, Inc.

Consolidated Statements of Income

(Unaudited)

 

    For the Three Months Ended              
    March 31,     March 31,           %  
    2019     2018     $ Change     Change  
Revenue                                
Capitation, net   $ 71,516,778     $ 85,905,284     $ (14,388,506 )     (17 )%
Risk pool settlements and incentives     10,093,841       17,986,736       (7,892,895 )     (44 )%
Management fee income     8,996,600       12,074,572       (3,077,972 )     (25 )%
Fee-for-services, net     4,080,674       6,236,628       (2,155,954 )     (35 )%
Other income     1,069,278       1,720,026       (650,748 )     (38 )%
Total revenue     95,757,171       123,923,246       (28,166,075 )     (23 )%
Operating expenses                                
Cost of services     83,432,474       84,614,686       (1,182,212 )     (1 )%
General and administrative expenses     10,263,960       11,301,237       (1,037,277 )     (9 )%
Depreciation and amortization     4,417,581       5,058,512       (640,931 )     (13 )%
Provision for bad debt     951,014       247,102       703,912       285 %
Total expenses     99,065,029       101,221,537       (2,156,508 )     (2 )%
(Loss) income from operations     (3,307,858 )     22,701,709       (26,009,567 )     (115 )%
Other income (expense)                                
Loss from equity method investments     (849,657 )     (28,024 )     (821,633 )     2932 %
Interest expense     (210,979 )     (85,001 )     (125,978 )     148 %
Interest income     323,008       269,818       53,190       20 %
Other income     187,116       87,993       99,123       113 %
Total other (expense) income, net     (550,512 )     244,786       (795,298 )     (325 )%
(Loss) income before (benefit from) provision for income taxes     (3,858,370 )     22,946,495       (26,804,865 )     (117 )%
(Benefit from) provision for income taxes     (1,408,241 )     7,228,840       (8,637,081 )     (119 )%
Net (loss) income   $ (2,450,129 )   $ 15,717,655       (18,167,784 )     (116 )%
                                 
Net (loss) income attributable to noncontrolling interests     (2,589,793 )     13,557,200       (16,146,993 )     (119 )%
Net income attributable to Apollo Medical Holdings, Inc.   $ 139,664     $ 2,160,455     $ (2,020,791 )     (94 )%

  

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Net Income Attributable to Apollo Medical Holdings, Inc.

 

Our net income attributable to Apollo Medical Holdings, Inc. for the three months ended March 31, 2019 was $0.1 million, as compared to net income of $2.1 million for the same period in 2018, a decrease of $2.0 million or 94%.

 

Physician Groups and Patients

 

As of March 31, 2019 and 2018, the total number of affiliated physician groups managed by us was 10 and 11 groups, respectively, and the total number of patients for whom we managed the delivery of healthcare services was approximately 821,000 and 963,000, respectively. The decrease was due to the closure of an affiliated physician group on January 31, 2019 as their primary healthplan cancelled their contract.

 

Revenue

 

Our revenue for the three months ended March 31, 2019 was $95.8 million, as compared to $123.9 million for the three months ended March 31, 2018, a decrease of $28.1 million, or 23%. The decrease in revenue was primarily attributable to the following;

 

(i) Capitation revenues decreased by approximately $14.4 million primarily due to the delayed commencement by the Centers for Medicare & Medicaid Services (“CMS”) of APAACO’s 2019 Next Generation ACO performance year to April 1, 2019. In 2018, CMS commenced the performance year in February 2018, and we received payments at a rate of approximately $7.3 million per month from CMS. As a result of the deferral of the 2019 performance year commencement date, no revenues were recognized by us in the first quarter 2019. During the three months ended March 31, 2019, we received monthly payments of approximately $8.3 million for performance year 2019, which was recorded as a contract liability to be recognized as revenue in the second quarter of 2019 based on the amount of All-Inclusive Population-Based Payments (“AIPBP”) made.

 

(ii) Risk pool revenue decreased by $7.9 million due to the refinement of the assumptions used to estimate the amount of net surplus expected to be received from the affiliated hospitals’ risk pools. Our estimated risk pool receivable is calculated based on reports received from our hospital partners and on management’s estimate of the Company’s portion of any estimated risk pool surpluses in which payments have not been received. The actual risk pool surpluses are settled approximately 18 months later.

 

(iii) Management fee income decreased by $3.1 million mainly due to a decrease in the number of patients served by some of our affiliated physician groups, including an affiliated physician group that ceased operations as their primary health plan cancelled their contract.

 

(iv) Fee-for-service revenue decreased by $2.1 million due to strategic decisions in 2018 to wind down several medical groups affiliated with Apollo Medical Holdings, Inc. prior to the Merger. The operations of these medical groups, BAHA, AKM, and MMG, were not consistent with the Company’s future business plans.

 

(v) Other income decreased by $0.6 million as a result of changes in the accrual of revenue related to maternity supplemental (kick) payments.

 

Cost of Services

 

Expenses related to cost of services for the three months ended March 31, 2019 were $83.4 million, as compared to $84.6 million for the same period in 2018, a decrease of $1.2 million, or 1%. The overall decrease was due to a $3.0 million decrease in medical claims, capitation and other health services expense and $7.5 million decrease in costs due to the strategic decisions to wind down BAHA, AKM, and MMG, offset by an increase of $2.3 million of investment in personnel costs to support continued growth in depth and breadth of our operations and an increase of $7.0 million related to provider bonuses.

 

 45 

 

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended March 31, 2019 were $10.3 million, as compared to $11.3 million for the same period in 2018, a decrease of $1.0 million, or 9%. The overall decrease is due to a $0.6 million decrease in stock compensation expense and $1.3 million decrease due to the strategic decisions to wind down legacy ApolloMed businesses, offset by an increase in professional fees of $0.9 million.

  

Depreciation and Amortization

 

Depreciation and amortization expense for the three months ended March 31, 2019 were $4.4 million, as compared to $5.1 million for the same period in 2018. This amount includes depreciation of property and equipment and the amortization of intangible assets from the Merger.

  

Provision for Doubtful Accounts

 

Provision for doubtful accounts was $1.0 million for the three months ended March 31, 2019 as compared to $0.2 million for the three months ended March 31, 2018. The increase related to an allowance against certain management fee income based on management’s assessment of collectability of the related receivable.

  

Loss from Equity Method Investments

 

Loss from equity method investments for the three months ended March 31, 2019 was $0.8 million, as compared to a loss of $28,024 for the same period in 2018. The loss for the three months ended March 31, 2019 was primarily due to earnings from our investments in UCI, DMG, and PMIOC of $1.0 million, $0.2 million, and $0.1 million, respectively, offset by losses from our investments in LMA’s IPA line of business and Accountable of $1.1 million and $0.8 million, respectively. In addition, we recognized an impairment loss of $0.3 million related to our investment in PASC as we do not expect to recover our investment.

 

Interest Expense

 

Interest expense for the three months ended March 31, 2019 and 2018 were $0.2 million and $0.1 million, respectively, and reflects interest on debt obligations associated with bank loans.

 

Interest Income

 

Interest income for the three months ended March 31, 2019 was $0.3 million as compared to $0.2 million for the three months ended March 31, 2018. An increase of approximately $0.1 million, as compared to the same period in 2018 mainly due to an increase in cash held in money market accounts which resulted in an increase in interest earned and the interest from notes receivable.

 

Other Income

 

Other income for the three months ended March 31, 2019 was approximately $0.2 million, as compared to $0.1 million, for the same periods in 2018 mainly due to increased rental income received.

 

Income Tax (Benefit) Provision

 

Income tax benefit was $1.4 million for the three months ended March 31, 2019, as compared to tax provision expense of $7.2 million for the same period in 2018. The tax benefit was due to losses incurred in the current period, as described above.

 

Net Income Attributable to Noncontrolling Interests

 

Net loss attributable to noncontrolling interests was $2.6 million for the three months ended March 31, 2019, compared to net income attributable of $13.6 million for the three months ended March 31, 2018, a decrease of $16.2 million, or 119%. This decrease was primarily due to a net loss generated from APC mainly attributable to increased provider costs and a reduction in risk pool revenue.

  

Liquidity and Capital Resources

 

Cash, cash equivalents and investment in marketable securities at March 31, 2019 totaled $94.2 million. Working capital totaled $88.5 million at March 31, 2019, compared to $100.8 million at December 31, 2018, a decrease of $12.3 million, or 12%.

 

 46 

 

 

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 fee-for-service 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 the next twelve months.

 

Our cash, cash equivalents and restricted cash decreased by $13.9 million from $107.6 million at December 31, 2018 to $93.7 million at March 31, 2019. Cash used in operating activities during the three months ended March 31, 2019 was $4.0 million. The cash used in operations during the three months ended March 31, 2019 is a function of net losses of $2.5 million, adjusted for the following non-cash operating items: depreciation and amortization of $4.4 million, share-based compensation of $0.3 million, provision for doubtful accounts of $1.0 million and losses from equity method investments of approximately $0.8 million offset by a change in deferred tax liability of $2.6 million. Our cash provided by operating activities includes a net decrease in operating assets and liabilities of $5.4 million.

  

Cash used in investing activities during the three months ended March 31, 2019 was $0.1 million, due to purchases of property and equipment of $0.1 million during the three months ended March 31, 2019.

 

Cash used in financing activities during the three months ended March 31, 2019 was $9.8 million reflecting dividend payments of $10.0 million, offset by proceeds from exercise of stock options and warrants of $0.1 million and proceeds from the sale of VIE stock of $0.1 million during the three months ended March 31, 2019.

 

Credit Facilities

 

Lines of CreditRelated Party

 

NMM has a credit facility with Preferred Bank to borrow up to $20.0 million that matures on June 22, 2020. The credit facility was subsequently amended on September 1, 2018 to temporarily increase the loan availability from $20.0 million to $27.0 million for the period from September 1, 2018 through January 31, 2019, further extended to October 31, 2019, pursuant to an amendment entered into March 5, 2019 to facilitate the issuance of an additional standby letter of credit for the benefit of CMS. The amount outstanding as of March 31, 2019 and December 31, 2018 was $13.0 million and is classified as long-term and current liabilities. The interest rate is based on the Wall Street Journal “prime rate” plus 0.125%, or 5.625%, as of March 31, 2019 and December 31, 2018. As of March 31, 2019, NMM was in compliance with such financial debt covenant requirements. As of March 31, 2019 and December 31, 2018, availability under this line of credit was $0.7 million.

 

NMM has a non-revolving line of credit facility with Preferred Bank, which provides for loan availability of up to $20.0 million with a maturity date of September 5, 2019. This credit facility was subsequently amended on April 17, 2019 to reduce the loan availability from $20.0 million to $16.0 million. The interest rate is based on the Wall Street Journal “prime rate” plus 0.125%, or 5.625% as of March 31, 2019 and December 31, 2018. The line of credit was obtained to finance potential acquisitions, with each drawdown to be converted into a five-year term loan with monthly principal payments plus interest based on a five-year amortization schedule, the availability of the line of credit is reduced accordingly based on the aggregate amount drawn. As of March 31, 2019 and December 31, 2018, availability under this line of credit was $20.0 million.

 

APC has a credit facility with Preferred Bank to borrow up to $10.0 million that matures on June 22, 2020. No amounts have been drawn on this facility. This credit facility was subsequently amended on April 17, 2019 to increase the loan availability from $10.0 million to $40.0 million. The interest rate is based on the Wall Street Journal “prime rate” plus 0.125%, or 5.625%, as of March 31, 2019 and December 31, 2018. As of March 31, 2019, APC was in compliance with such financial debt covenant requirements. As of both March 31, 2019 and December 31, 2018, availability under this line of credit was $9.7 million. Because APC is a VIE of NMM, loans obtained by APC can only be used to fund the operations of that company, and, accordingly, we are not liable for the repayment of any of APC’s borrowings under the Preferred Bank credit facility. In addition, this credit facility is not available to support NMM’s liquidity needs and can only be used for APC.

 

Bank Loans

 

In December 2010, ICC obtained a loan of $4.6 million from a financial institution. The loan bears interest based on the Wall Street Journal “prime rate”, or 5.50% per annum, as of December 31, 2018. The loan is collateralized by the medical equipment ICC owns and guaranteed by one of ICC’s shareholders. The loan matured on December 31, 2018 and final payment was made in January 2019. As of December 31, 2018, the balance outstanding was $40,257 and is classified as current liabilities.

 

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Intercompany Loans

 

Each of AMH, MMG, BAHA, ACC, AKM and SCHC has entered into an Intercompany Loan Agreement with AMM under which AMM has agreed to provide a revolving loan commitment to each such 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 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. The following is a summary of the intercompany loans during the three-month period ended March 31, 2019:

 

           Three Months Ended March 31, 2019 
       Interest
rate
   Maximum
Balance
During
   Ending   Principal Paid   Interest
Paid
During
 
Entity  Facility   per Annum   Period   Balance   During Period   Period 
AMH  $10,000,000    10%  $5,140,786   $4,831,575   $695,000   $- 
ACC   1,000,000    10%   1,287,843    1,287,843    -    - 
MMG   3,000,000    10%   3,069,499    3,069,499    -    - 
AKM   5,000,000    10%   -    -    -    - 
SCHC   5,000,000    10%   3,977,226    3,977,226    -    - 
BAHA   250,000    10%   4,064,392    4,064,392    -    - 
   $24,250,000        $17,539,746   $17,230,535   $695,000   $- 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires our management to make judgments, assumptions and estimates that affect the amounts of revenue, expenses, income, assets and liabilities, reported in our condensed consolidated financial statements and accompanying notes. Actual results and the timing of recognition of such amounts could differ from those judgments, assumptions and estimates. In addition, judgments, assumptions and estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. Understanding our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies, therefore, is integral to understanding our financial statements. Critical accounting policies and estimates are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We summarize our most significant accounting policies in relation to the accompanying condensed consolidated financial statements in Note 2 thereto. Please also refer to the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

  

New Accounting Pronouncements

 

See Note 2 to the accompanying condensed consolidated financial statements for recently issued accounting pronouncements, including information on new accounting standards and the future adoption of such standards.

 

Off Balance Sheet Arrangements

 

As of March 31, 2019, we had no off-balance sheet arrangements.

 

Inflation

 

Inflation and changing prices have had no effect on our continuing operations over our two most recent fiscal years.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

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ITEM 4.  CONTROLS AND PROCEDURES

 

We conducted an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the evaluation date, our disclosure controls and procedures were not effective at the reasonable assurance level.

 

Our disclosure controls and procedures are designed to ensure that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure.

 

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, and must reflect the facts that there are resource constraints and that the benefits of controls have to be considered relative to their costs. The inherent limitations in internal control over financial reporting include the realities that judgments can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. In addition, over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.

 

Based on management’s assessment of our internal control over financial reporting as of March 31, 2019, the following material weakness existed as of that date:

 

The Company did not maintain effective internal controls over the review of completeness and accuracy of data included in the full risk pool reports provided by an external party based on which material amounts of revenue were recognized. These reports are used to record an adjustment to accrue for additional surplus amounts, which represents a significant estimate of the expected variable consideration to be received upon settlement, primarily as it relates to revenue adjustments. As a result, unless remediated, there is a reasonable possibility that the Company's controls will fail to prevent or detect a misstatement related to full risk pools; and inaccuracies in the full risk pool reports could result in a potential material misstatement if not detected.

 

Notwithstanding the material weakness discussed above, our management, including our CEO and CFO, concluded that the consolidated financial statements in this Report on Form 10-Q fairly present, in all material respects, the Company's financial condition, results of operations and cash flows for the periods presented, in conformity with U.S. GAAP.

 

Remediation Plan for Material Weakness in Internal Control over Financial Reporting

 

We are currently in the process of implementing our remediation plans. To date, we have implemented and are continuing to implement a number of measures to address the material weakness identified. Our management has taken the following actions that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting: The Company continues to design new procedures to test the reliability of the information included in future full risk pool reports prepared for the Company by an external party and expects to implement these procedures during 2019 to remediate this control gap.

 

Changes in Internal Control Over Financial Reporting

 

Beginning January 1, 2019, we implemented ASC 842, Leases. Although the new leasing standard did not have a material impact on our results of operations or cash flows, it did have a material impact on our financial position due to the recording of an operating lease right-of-use asset and operating lease liability beginning January 1, 2019. As a result, we implemented changes to our processes related to leases and the control activities within them during the three months ended March 31, 2019. These included ongoing contract review requirements and gathering of information provided for disclosures, as well as other requirements of the new lease guidance.

 

 49 

 

 

There were no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

In the ordinary course of our business, we from time to time become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services that are provided by our affiliated hospitalists. Many of the Company’s payor and provider contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of medical services, which may not come to light until a substantial period of time has passed following contract implementation. We may also become subject to other lawsuits which could involve significant claims and/or significant defense costs, but as of the date of this Quarterly Report on Form 10-Q, except as disclosed, we are not a party to any lawsuit or proceeding, which in the opinion of management is expected to individually or in the aggregate have a material adverse effect on us or our business. Nonetheless, the resolution of any claim or litigation is subject to inherent uncertainty and could have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

  

ITEM 1A. RISK FACTORS

 

Our business, financial condition and operating results are affected by a number of factors, whether currently known or unknown, including risks specific to us or the healthcare industry as well as risks that affect businesses in general. In addition to the information and risk factors set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 18, 2019. The risks disclosed in such Annual Report and in this Quarterly Report could materially adversely affect our business, financial condition, cash flows or results of operations and thus our stock price. While we believe there have been no material changes in our risk factors from those disclosed in the Annual Report, additional risks and uncertainties not currently known or we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

 

These risk factors may be important to understanding other statements in this Quarterly Report and should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report. Because of such risk factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

 

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the three months ended March 31, 2019 the Company issued an aggregate of 4,131 shares of common stock and received approximately $37,179 from the exercise of certain warrants at an exercise price of $9.00 per share. The foregoing issuances were exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof, and/or Regulation D promulgated thereunder.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION

 

On March 15, 2019, a consolidated VIE of the Company entered into an agreement to acquire a health care-related entity for total cash considerations of $45.0 million, subject to post-closing adjustments. The completion of this acquisition is subject to multiple contingencies and as of the filing date of this Quarterly Report this transaction has not been completed. The closing of the acquisition is scheduled to occur when all of the conditions to closing set forth in the Stock Purchase Agreement have been satisfied or waived. 

 

ITEM 6.  EXHIBITS

 

The following exhibits are either incorporated by reference into or filed or furnished with this Quarterly Report on Form 10-Q, as indicated below.

 

Exhibit
No.
  Description
     
2.1†   Agreement and Plan of Merger, dated December 21, 2016, among Apollo Medical Holdings, Inc., Network Medical Management, Inc., Apollo Acquisition Corp. and Kenneth Sim, M.D. (the “Merger Agreement”) (incorporated herein by reference to Annex A to the joint proxy statement/prospectus filed pursuant to Rule 424(b)(3) on November 15, 2017 that is a part of a Registration Statement on Form S-4).
     
2.2   Amendment to the Merger Agreement, dated March 30, 2017, among Apollo Medical Holdings, Inc., Network Medical Management, Inc., Apollo Acquisition Corp. and Kenneth Sim, M.D. (incorporated herein by reference to Annex A to the joint proxy statement/prospectus filed pursuant to Rule 424(b)(3) on November 15, 2017 that is a part of a Registration Statement on Form S-4).
     
2.3   Amendment No. 2 to the Merger Agreement, dated October 17, 2017, among Apollo Medical Holdings, Inc., Network Medical Management, Inc., Apollo Acquisition Corp. and Kenneth Sim, M.D. (incorporated herein by reference to Annex A to the joint proxy statement/prospectus filed pursuant to Rule 424(b)(3) on November 15, 2017 that is a part of a Registration Statement on Form S-4).
     
2.4*  

Stock purchase agreement dated March 15, 2019.

     
3.1   Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 21, 2015).
     
3.2   Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 27, 2015).
     
3.3   Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 13, 2017).
     
3.4   Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 21, 2018).
     
3.5   Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on November 16, 2015).

 

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3.6

  Amendment to Sections 3.1 and 3.2 of Article III of Bylaws (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 13, 2017).
     
3.7   Amendment to Sections 3.1 and 3.2 of Article III of Bylaws (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 21, 2018).
     
4.1   Certificate of Designation of Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 19, 2015).
     
4.2   Amended and Restated Certificate of Designation of Apollo Medical Holdings, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 4, 2016).

 

4.3   Form of Certificate for Common Stock of Apollo Medical Holdings, Inc., par value $0.001 per share (incorporated herein by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
     
4.4   Form of Warrant issued as Merger Consideration pursuant to the Merger Agreement for the purchase of Common Stock of Apollo Medical Holdings, Inc., exercisable at $11.00 per share (incorporated herein by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
     
4.5   Form of Warrant issued as Merger Consideration pursuant to the Merger Agreement for the purchase of Common Stock of Apollo Medical Holdings, Inc., exercisable at $10.00 per share (incorporated herein by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
     
4.6   Common Stock Purchase Warrant (“Series A Warrant”) dated October 14, 2015, originally issued by Apollo Medical Holdings, Inc. to Network Medical Management, Inc. to purchase 1,111,111 shares of common stock and subsequently issued as Merger Consideration pursuant to the Merger Agreement (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 19, 2015).
     
4.7   Form of Assignment of Series A Warrant as Merger Consideration pursuant to the Merger Agreement (incorporated herein by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
     
4.8   Common Stock Purchase Warrant (“Series B Warrant”) dated March 30, 2016, originally issued by Apollo Medical Holdings, Inc. to Network Medical Management, Inc. to purchase 555,555 shares of common stock and subsequently issued as Merger Consideration pursuant to the Merger Agreement (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 4, 2016).
     
4.9   Form of Assignment of Series B Warrant as Merger Consideration pursuant to the Merger Agreement (incorporated herein by reference to Exhibit 4.8 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
     
4.10   Common Stock Purchase Warrant dated November 4, 2016, issued by Apollo Medical Holdings, Inc., to Scott Enderby, D.O. (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 10, 2016).
     
4.11   Common Stock Purchase Warrant dated November 17, 2016, issued by Apollo Medical Holdings, Inc. to Liviu Chindris, M.D. (incorporated herein by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on February 14, 2017).
     
31.1*   Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
     
31.2*   Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
     
32**   Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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101.INS*

  XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*  

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
     
  The schedules and exhibits thereof have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the SEC upon request.
     
*   Filed herewith.
     
**   Furnished herewith

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

  APOLLO MEDICAL HOLDINGS, INC.
     

Dated: May 10, 2019

By: /s/ Thomas Lam
    Thomas Lam
    Chief Executive Officer
    (Principal Executive Officer)
     

Dated: May 10, 2019

By: /s/ Eric Chin
    Eric Chin
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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