UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2020
OR
for the transition period from ___ to ___ .
Commission file number: 001-37392
Apollo Medical Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
95-4472349
(I.R.S. Employer
Identification No.)
1668 S. Garfield Avenue, 2nd Floor, Alhambra, California 91801
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (626) 282-0288
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value per share
Trading Symbol
AMEH
Name of Each Exchange on Which Registered
Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes No
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. 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). 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 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
Non-accelerated filer
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of common stock held by non-affiliates of the registrant, as of June 30, 2020, the last day of the registrant’s most recently completed second fiscal quarter, was
approximately $503.6 million (based on the closing price for shares of the registrant’s common stock as reported by the NASDAQ Capital Market on June 30, 2020).
As of March 8, 2021, there were 54,585,258 shares of common stock of the registrant, $0.001 par value per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2021 annual meeting of the stockholders of the registrant are incorporated herein by reference in Part III of this Annual Report
on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission (the “SEC”) within 120 days of the registrant’s fiscal year ended
December 31, 2020.
Table of Contents
ITEM
ITEM 1
ITEM 1A
ITEM 1B
ITEM 2
ITEM 3
ITEM 4
ITEM 5
ITEM 6
ITEM 7
ITEM 7A
ITEM 8
ITEM 9
ITEM 9A
ITEM 9B
ITEM 10
ITEM 11
ITEM 12
ITEM 13
ITEM 14
Apollo Medical Holdings, Inc.
Form 10-K
Fiscal Year Ended December 31, 2020
Page
Introductory Note
Note About Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
ITEM 15
ITEM 16
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
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4
5
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142
The following abbreviations or acronyms that may be used in this document shall have the adjacent meanings set forth below:
Glossary
Accountable Health Care
AHMC
AIPBP
Alpha Care
AMG
AMG Properties
AMH
AMM
AP-AMH
APAACO
APC
APC-LSMA
BAHA
Bright
CDSC
CMS
CQMC
CSI
DMHC
DMG
HSMSO
ICC
IPA
LMA
MMG
MPP
MSSP
NGACO
NMM
PASC
PMIOC
SCHC
Tag 6
Tag 8
UCAP
UCI
VIE
ZLL
Accountable Health Care IPA, a Professional Medical Corporation
AHMC Healthcare Inc.
All-Inclusive Population-Based Payments
Alpha Care Medical Group, Inc.
AMG, a Professional Medical Corporation
AMG Properties, LLC
ApolloMed Hospitalists, a Medical Corporation
Apollo Medical Management, Inc.
AP-AMH Medical Corporation
APA ACO, Inc.
Allied Physicians of California, a Professional Medical Corporation
APC-LSMA Designated Shareholder Medical Corporation
Bay Area Hospitalist Associates
Bright Health Company of California, Inc.
Concourse Diagnostic Surgery Center, LLC
Centers for Medicare & Medicaid Services
Critical Quality Management Corporation
College Street Investment LP, a California limited partnership
California Department of Managed Healthcare
Diagnostic Medical Group
Health Source MSO Inc., a California corporation
AHMC International Cancer Center, a Medical Corporation
independent practice association
LaSalle Medical Associates
Maverick Medical Group, Inc.
Medical Property Partners
Medicare Shared Savings Program
Next Generation Accountable Care Organization
Network Medical Management, Inc.
Pacific Ambulatory Health Care, LLC
Pacific Medical Imaging and Oncology Center, Inc.
Southern California Heart Centers
Tag-6 Medical Investments Group, LLC
Tag-8 Medical Investments Group, LLC
Universal Care Acquisition Partners, LLC
Universal Care, Inc.
variable interest entity
ZLL Partners, LLC
INTRODUCTORY NOTE
Unless the context dictates otherwise, references in this Annual Report on Form 10-K to the “Company,” “we,” “us,” “our,” and similar words are references to Apollo
Medical Holdings, Inc., a Delaware corporation (“ApolloMed”), and its consolidated subsidiaries and affiliated entities, as appropriate, including its consolidated variable
interest entities (“VIEs”).
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The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our results of operations and
financial performance. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein, and with our prior
filings with the Securities and Exchange Commission (the “SEC”).
The Centers for Medicare & Medicaid Services (“CMS”) have not reviewed any statements contained in this Report, including statements describing the participation
of APA ACO, Inc. (“APAACO”) in the next generation accountable care organization (“NGACO”) model.
Trade names and trademarks of ApolloMed and its subsidiaries referred to herein and their respective logos, are our property. This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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
business, financial condition, 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, strategies and objectives of management for future operations such as the material opportunities that
we believe exist for our company; any statements concerning proposed services, developments, mergers or acquisitions; any statements regarding the outlook on our NGACO
or 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; 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,” “think,” “plan,” “envision,” “intend,”
“continue,” “target,” “seek,” “contemplate,” “budgeted,” “will,” “would,” and the negative of such terms, other variations on such terms or other similar or comparable words,
phrases or terminology. These forward-looking statements present our estimates and assumptions only as of the date of this Annual Report on Form 10-K and are subject to
change.
Forward-looking statements involve risks and uncertainties and are based on the current beliefs, expectations and certain assumptions of management. Some or all of
such beliefs, expectations and assumptions may not materialize or may vary significantly from actual results. Such statements are qualified by important economic, competitive,
governmental and technological factors that could cause our business, strategy, or actual results or events to differ materially from those in our forward-looking statements.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in
any of our forward-looking statements. 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 conditions, outcomes and results to differ materially from those indicated by such statements.
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PART I
Item 1. Business
Overview
Apollo Medical Holdings, Inc. is a leading physician-centric, technology-powered, risk-bearing healthcare management company. Leveraging its proprietary
population health management and healthcare delivery platform, ApolloMed operates an integrated, value-based healthcare model, which aims to empower the providers in its
network to deliver the highest quality of care to its patients in a cost-effective manner. We, together with our affiliated physician groups and consolidated entities, provide
coordinated outcomes-based medical care primarily 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, Inc. (“NMM”), Apollo Medical Management, Inc. (“AMM”), and
APAACO, and their consolidated entities, including consolidated VIEs.
Led by a management team with several decades of experience, we have built a company and culture that is focused on physicians providing high-quality medical care,
population health management and care coordination for patients. As a result, we are well-positioned to take advantage of the shift in the U.S. healthcare industry toward
providing value-based and results-oriented healthcare with a focus on patient satisfaction, high-quality care and cost efficiency.
Through our NGACO model and a network of independent practice associations (“IPAs”) with more than 7,000 contracted physicians, which have agreements with
various health plans, hospitals and other HMOs, we are responsible for coordinating the care of over 1.1 million patients in California, as of December 31, 2020. These covered
patients are comprised of managed care members whose health coverage is provided through their employers or who have acquired health coverage directly from a health plan
or as a result of their eligibility for Medicaid or Medicare benefits. Our managed patients benefit from an integrated approach that places physicians at the center of patient care
and utilizes sophisticated risk management techniques and clinical protocols to provide high-quality, cost effective care. To implement a patient-centered, physician-centric
experience, we also have other integrated and synergistic operations, including (i) management service organizations (“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.
In December 2017, we completed a business combination with NMM, a California corporation formed in 1994 (the “2017 Merger”). As a result of the 2017 Merger,
NMM became a wholly owned subsidiary of ApolloMed. The combined company operates under the Apollo Medical Holdings name. NMM is the larger entity in terms of
assets, revenues and earnings. In addition, as of the closing of the 2017 Merger, the majority of the board of directors of the combined company was comprised of former NMM
directors and directors nominated for election by NMM. Accordingly, ApolloMed is considered to be the legal acquirer (and accounting acquiree), whereas NMM is considered
to be the accounting acquirer (and legal acquiree).
Our affiliated medical groups provide hospitalist services at multiple acute-care hospitals. ApolloMed and its subsidiaries, and consolidated VIEs, generate revenue by
providing administrative, medical management and clinical services to affiliated IPAs and medical groups. The administrative services cover billing, collection, accounting,
administrative, quality assurance, marketing, compliance and education. In addition, our NGACO, APAACO, which served over 29,000 beneficiaries in 2020, is eligible to
receive capitation payments from CMS for managing care for aligned beneficiaries.
We implement and operate different innovative health care models, primarily including the following integrated operations:
•
•
•
IPAs, which contract with physicians and provide care to Medicare, Medicaid, commercial and dual-eligible patients on a risk- and value-based fee basis;
MSOs, which provide management, administrative and other support services to our affiliated physician groups such as IPAs;
APAACO, which participates in the Medicare Shared Savings Program (the “MSSP”) sponsored by CMS and focuses on providing high-quality and cost-
efficient care to Medicare fee-for-service (“FFS”) patients;
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•
•
Outpatient clinics providing specialty care, including an ambulatory surgery center and a specialty clinic that focuses on cardiac care and diagnostic testing; and
Hospitalists, which include our contracted physicians who focus on the delivery of comprehensive medical care to hospitalized patients.
We operate under one reportable segment, the healthcare delivery segment. Our revenue streams are diversified among our various operations and contract types, and
include:
•
•
•
•
Capitation payments, including payments made by CMS from the NGACO Model;
Risk pool settlements and incentives;
Management fees, including stipends from hospitals and percentages of collections; and
FFS reimbursements.
ApolloMed’s common stock is listed on the NASDAQ Capital Market and trades under the symbol “AMEH.”
Organization
Subsidiaries
We operate through our subsidiaries, including:
•
•
•
NMM;
AMM; and
APAACO.
Each of NMM and AMM operates as an MSO and is in the business of providing management services to physician practice corporations under long-term
management and/or administrative services agreements (“MSAs”), pursuant to which the MSO manages certain non-medical services for the physician groups and have
exclusive authority over all non-medical decision making related to ongoing business operations. The MSAs generally provide for management fees that are recognized as
earned based on a percentage of revenue or cash collections generated by the physician practices.
APAACO has participated in the NGACO Model of CMS since January 2017. The NGACO Model is a CMS program that allows provider groups to assume higher
levels of financial risk and potentially achieve a higher reward from participating in this new attribution-based risk sharing model.
Variable Interest Entities
If an entity is determined to be a VIE, we evaluate whether we are the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power
and benefits. We consolidate a VIE if we have both power and benefits – that is, (i) we have the power to direct the activities of a VIE that most significantly influence the
VIE’s economic performance, and (ii) we have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.
See Note 18 – “Variable Interest Entities (VIEs)” to our consolidated financial statements for information on our entities that qualify as consolidated VIEs. If we have a variable
interest in a VIE but are not the primary beneficiary, we may account for our investment using the equity method of accounting (see Note 6 – “Investments in Other Entities”).
Some states have laws that prohibit business entities with non-physician owners from practicing medicine, which are generally referred to as the corporate practice of
medicine laws. States that have corporate practice of medicine laws require only physicians to practice medicine, exercise control over medical decisions or engage in certain
arrangements with other physicians, such as fee-splitting. California is a corporate practice of medicine state.
Therefore, in addition to our subsidiaries, we mainly operate by maintaining long-term MSAs with our affiliated IPAs, which are owned and operated by a network of
independent primary care physicians and specialists, and which employ or contract with additional physicians to provide medical services. Under such agreements, we provide
and perform non-medical
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management and administrative services, including financial management, information systems, marketing, risk management and administrative support.
NMM has entered into MSAs with several affiliated IPAs, including Allied Physicians of California IPA d.b.a. Allied Pacific of California IPA (“APC”). APC
contracts with various HMOs or licensed health care service plans, each of which pays a fixed capitation payment. 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. The risk is subject to stop-loss provisions in contracts with HMOs. Some risk is transferred to the
contracted physicians or professional corporations. The physicians in the IPA are exclusively in control of, and responsible for, all aspects of the practice of medicine for
enrolled patients. In accordance with relevant accounting guidance, APC has been determined to be a VIE of NMM, as NMM is its primary beneficiary with the ability, through
majority representation on the APC Joint Planning Board and otherwise, to direct the activities (excluding clinical decisions) that most significantly affect APC's economic
performance. Therefore, APC and its consolidated subsidiaries, UCAP, MPP, AMG Properties, ZLL, and APC’s consolidated VIEs, CDSC, APC-LSMA, and ICC are
consolidated in the accompanying financial statements.
Concourse Diagnostic Surgery Center, LLC (“CDSC”) is an ambulatory surgery center in City of Industry, California. The facility is Medicare Certified and accredited
by the Accreditation Association for Ambulatory Healthcare. 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. AHMC International Cancer Center (“ICC”) provides comprehensive, compassionate post-cancer-diagnosis care and a wide
range of support services. 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
power and obligation to absorb losses and rights to receive benefits that could potentially be significant to ICC.
APC-LSMA Designated Shareholder Medical Corporation (“APC-LSMA”) was formed in October 2012 as a designated shareholder professional corporation. Dr.
Thomas Lam, a shareholder and the Chief Executive Officer and Chief Financial Officer of APC and the Co-Chief Executive Officer of ApolloMed, is a nominee shareholder
of APC-LSMA. APC makes all investment decisions on behalf of APC-LSMA, funds all investments and receives all distributions from the investments. APC has the
obligation to absorb losses and the right to receive benefits from all investments made by APC-LSMA. APC-LSMA’s sole function is to act as the nominee shareholder for APC
in other California medical professional corporations. Therefore, APC-LSMA, and its consolidated subsidiaries, Alpha Care and Accountable Health, are controlled and
consolidated by APC as the primary beneficiary.
Through AMM, we manage a number of our affiliates pursuant to their long-term MSAs, including: ApolloMed Hospitalists (“AMH”), a physician group that
provides hospitalist, intensivist and physician advisor services and Southern California Heart Centers (“SCHC”), a specialty clinic that focuses on cardiac care and diagnostic
testing. Each of AMH and SCHC are VIEs of AMM. We have determined that AMM is the primary beneficiary of such entities.
As of December 31, 2020, ApolloMed’s consolidated VIE, AP-AMH, AMM’s consolidated VIE, SCHC, NMM’s consolidated VIE, APC, APC’s subsidiaries, UCAP,
MPP, AMG Properties, ZLL, APC’s consolidated VIEs, CDSC, APC-LSMA, ICC, and APC-LSMA's consolidated subsidiaries Alpha Care and Accountable Health Care are
consolidated in the accompanying financial statements.
Investments
We invested in several entities in the healthcare and real estate industries through APC, our VIE. APC holds a 50% interest in each of the following entities: 531 W.
College LLC, One MSO LLC, Tag-6 Medical Investment Group LLC, and Tag-8 Investment Medical Group LLC. Universal Care Acquisition Partners, LLC (“UCAP”), a
wholly owned subsidiary of APC, held a 48.9% ownership interest and 50% voting interest in Universal Care, Inc. (“UCI”), a private full-service health plan that contracts with
CMS under Medicare Advantage. On April 30, 2020, UCAP sold its 48.9% ownership and voting interest in UCI to Bright Health Company of California, Inc. (“Bright”) for
$69.2 million in cash proceeds and preferred stock in Bright valued at approximately $36.2 million. In May 2018, APC purchased membership interests of MediPortal LLC, a
New York limited liability company, which represented an approximately 2.8% ownership interest. As of December 31, 2020, APC also holds a 22.58% ownership interest in
ApolloMed.
Due to laws prohibiting a California professional corporation which has more than one shareholder (such as APC) from being a shareholder in another California
professional corporation, APC cannot directly own shares in other professional corporations in which APC has invested. An exception to this prohibition, however, permits a
professional corporation that has only one shareholder to own shares in another professional corporation. In reliance on this exception, APC-LSMA, a designated
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shareholder professional corporation solely owned by Dr. Thomas Lam and controlled by APC, holds controlling and non-controlling ownership interests in several medical
corporations. APC-LSMA holds controlling interests in Alpha Care and Accountable Health Care and non-controlling interests in the IPA line of business of LaSalle Medical
Associates (“LMA”), Pacific Medical Imaging and Oncology Center, Inc. (“PMIOC”), and Diagnostic Medical Group (“DMG”). The IPA line of business of LMA operates six
neighborhood medical centers and serves patients across Fresno, Kings, Los Angeles, Madera, Riverside, San Bernardino and Tulare Counties in California and is managed by
NMM through an MSA. PMIOC offers comprehensive diagnostic imaging services at its facilities. DMG, operates complete outpatient imaging centers to improve the
detection and treatment of heart disease.
Our Industry
Industry Overview
U.S. healthcare spending has increased steadily over the past 20 years. According to CMS, the estimated total U.S. healthcare expenditures are expected to grow at an
average annual rate of 5.4% from 2019 to 2028 and to reach $6.2 trillion by 2028. Health spending is projected to grow 1.1% faster than the U.S. gross domestic product per
year on average over 2019-2028, and as a result, the healthcare share of gross domestic product is expected to rise from 17.7% in 2019 to 19.7% by 2028. Medicare spending
increased 6.7% to $799.4 billion and Medicaid spending increased by 2.9% to $613.5 billion in 2019, which accounted for 21% and 16% of total health expenditures,
respectively. Private health insurance spending increased 3.7% to $1.2 trillion in 2019, accounting for 31% of total health expenditures. Medicare spending is expected to have
the fastest growth (7.6% per year for 2019-2028) primarily due to the projected enrollment growth.
Managed care health plans were developed in the U.S. primarily during the 1980s, in an attempt to mitigate the rising cost of providing health care to populations
covered by health insurance. These managed care health plans enroll members through their employers in connection with federal Medicare benefits or state Medicaid programs.
As a result of the prevalence of these health plans, many seniors now becoming eligible for Medicare have been interacting with managed care companies through their
employers for the last 30 years. Individuals now turning 65 are likely more familiar with the managed care setting than previous Medicare populations. The healthcare industry,
however, is highly regulated by various government agencies and heavily relies on reimbursement and payments from government sponsored programs such as Medicare and
Medicaid. Companies in the healthcare industry therefore have to organize and operate around, and face challenges from, idiosyncratic laws and regulations.
Many health plans recognize both the opportunity for growth from adding members as well as the potential risks and costs associated with managing additional
members. In California, many health plans subcontract a significant portion of the responsibility for managing patient care to integrated medical systems such as ApolloMed and
our affiliated physician groups. These integrated health care systems offer a comprehensive medical delivery system and sophisticated care management know-how and
infrastructure to more efficiently provide for the health care needs of the population enrolled with that health plan. While reimbursement models for these arrangements vary
around the U.S., health plans often prospectively pay the integrated health care system a fixed capitation payment, which is often based on a percentage of the amount received
by the health plan. Capitation payments to integrated health care systems, in the aggregate, represent a prospective budget from which the system manages care-related expenses
on behalf of the population enrolled with that system. To the extent that these systems manage such expenses under the capitated levels, the system realizes an operating profit.
On the other hand, if the expenses exceed projected levels, the system will realize an operating deficit. Since premiums paid represent a substantial amount per person, there is a
significant revenue opportunity for an integrated medical system that is able to effectively manage health care costs for the capitated arrangements entered into by its affiliated
physician groups.
Industry Trends and Demand Drivers
We believe that the healthcare industry is undergoing a significant transformation and the demand for our offerings is driven by the confluence of a number of
fundamental healthcare industry trends, including:
Shift to Value-Based and Results-Oriented Models. According to the 2019 National Health Expenditure Projections prepared by CMS, healthcare spending in the U.S.
is projected to have increased 4.6% on a year-over-year basis to $3.8 trillion in 2019, representing 17.7% of U.S. Gross Domestic Product (“GDP”). CMS projects healthcare
spending in the U.S. to increase at an average rate of 5.4% per year for 2019-2028 and to reach approximately $6.2 trillion by 2028. To address this expected significant rise in
healthcare costs, the U.S. healthcare market is seeking more efficient and effective methods of delivering care. It is argued that the fee-for-service reimbursement model has
played a major role in increasing the level and growth rate of healthcare spending. In response, both the public and private sectors are shifting away from the fee-for-service
reimbursement model toward value-based, capitated payment models that are designed to incentivize value and quality at an
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individual patient level. The number of Americans covered by capitated payment programs continues to increase, which drives more coordinated and outcomes-based patient
care.
Increasingly Patient-Centered. More patients want to take a more active and informed role in how their own healthcare is delivered. This transformation results in the
healthcare marketplace becoming increasingly patient-centered and requires providers to deliver team-based, coordinated and accessible care to stay competitive.
Added Complexity. In the healthcare space, more sophisticated technology has been employed, new diagnostics and treatments have been introduced, research and
development has expanded, and regulations have multiplied. This expanding complexity drives a growing and continuous need for integrated care delivery systems.
Integration of Healthcare Information. Across the healthcare landscape, a significant amount of data is being created every day, driven by patient care, payment
systems, regulatory compliance, and record keeping. As the amount of healthcare data continues to grow, it becomes increasingly important to connect disparate data and apply
insights in a targeted manner in order to better achieve the goals of higher quality and more efficient care.
Integrated Medical Systems
Integrated medical systems that are able to pool a large number of patients, such as our Company and our affiliated physician groups, are positioned to take advantage
of industry trends, meet patient and government demands, and benefit from cost advantages resulting from their scale of operation and integrated approach of care delivery. In
addition, integrated medical systems with years of managed care experience can leverage their expertise and sizeable medical data to identify specific treatment strategies and
interventions, improve the quality of medical care and lower cost. Many integrated medical systems have also established physician performance metrics that allow them to
monitor quality and service outcomes achieved by participating physicians in order to reward efficient, high quality care delivered to members and initiate improvement efforts
for physicians whose performance can be enhanced.
IPAs and MSOs
An IPA is an association of independent physicians, or other organization that contracts with independent physicians, and provides services to HMOs, which are
medical insurance groups that provide health services generally for a fixed annual fee, on a negotiated per capita rate, flat retainer fee, or negotiated FFS basis. Because of the
prohibition against corporate practice of medicine under certain state laws, MSOs are formed to provide management and administrative support services to affiliated physician
groups such as IPAs. These services include payroll, benefits, human resource services, physician practice billing, revenue cycle services, physician practice management,
administrative oversight, coding and other consulting services.
NGACOs
CMS established the NGACO Model to test whether health outcomes will improve and Medicare Parts A and B expenditures for Medicare beneficiaries will decrease
if ACOs (1) accept a higher level of financial risk compared to the existing MSSP model, and (2) are permitted to select certain innovative Medicare payment arrangements and
offer certain additional benefit enhancements to their assigned Medicare beneficiaries. As a result, ACOs generally assume higher levels of financial risk and reward under the
NGACO Model. CMS also established the MSSP to improve the care quality and reduce costs for beneficiaries in the Medicare FFS program. MSSP promotes accountability,
facilitates coordination and cooperation among care providers, and encourages investment in infrastructure and redesign of care processes.
Outpatient Clinics
Ambulatory surgery centers and other outpatient clinics are healthcare facilities that specialize in performing outpatient surgeries, ambulatory treatments and diagnostic
and other services in local communities. As medical care has increasingly been delivered in clinic settings, many integrated medical systems also operate healthcare facilities
primarily focused on the diagnosis and/or care of outpatients, including those with chronic conditions such as heart disease and diabetes, to cover the primary healthcare needs
of local communities.
Hospitalists
Hospitalists are doctors specialized in the care of patients in the hospital. Hospitalists assume the inpatient care responsibilities otherwise provided by primary care or
other attending physicians and are reimbursed through the same billing procedures as other physicians. Hospitalists tend to focus exclusively on inpatient care. By practicing in
the same facilities,
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hospitalists perform consistent functions, interact regularly with the same healthcare professionals and thus are familiar with specific and unique hospital processes, which can
result in greater efficiency, less process variability and better outcomes. Through managing the treatment of a large number of patients with similar clinical needs, hospitalists
generally develop practice expertise in both the diagnosis and treatment of common conditions that require hospitalization. For these reasons, hospitalists have an increasingly
important role in improving care quality.
Population Health Management
Population health management (“PHM”) is a central trend within healthcare delivery, which includes the aggregation of patient data across multiple health
information technology resources, the analysis of that data into a single, actionable patient record, and the actions through which care providers can improve both clinical and
financial outcomes. PHM seeks to improve the health outcomes, by monitoring and identifying individual patients, aggregating data, and providing a comprehensive clinical
picture of each patient. Using that data, providers can track, and hopefully improve, clinical outcomes while lowering costs. A successful PHM platform requires a robust care
and risk management infrastructure, a cohesive delivery system, and a well-managed partnership network.
Our Business Operations
IPAs
Each of our affiliated IPAs is comprised of a network of independent primary care physicians and specialists who collectively care for patients and contract with
HMOs to provide physician services to their enrollees typically under capitated arrangements. Under the capitated model, a HMO pays the IPA a capitation payment and assigns
it the responsibility for providing physician services required by patients. The IPA physicians are exclusively in control of, and responsible for, all aspects of the practice of
medicine for enrolled patients. Most of the HMO agreements have an initial term of two years renewing automatically for successive one-year terms. The HMO agreements
generally allow either party to terminate the HMO agreements without cause typically with a four to six months advance notice and provide for a termination for cause by the
HMO at any time.
MSOs
Our MSOs generally provide services to our affiliated IPAs or ACOs under long-term MSAs, pursuant to which they manage certain non-medical services for the
physician groups and have exclusive authority over all non-medical decision making related to ongoing business operations. These services include but are not limited to:
Physician recruiting;
Physician and health plan contracting;
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• Medical management, including utilization management and quality assurance;
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• Member services, including annual wellness evaluations; and
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Provider relations;
Pre-negotiating contracts with specialists, labs, imaging centers, nursing homes and other vendors.
NGACO
On January 18, 2017, CMS announced that APAACO was approved to participate in the NGACO Model and APAACO began operations under this new model. We
have devoted, and expect to continue to devote, significant effort and resources, financial and otherwise, to the NGACO Model. APAACO is now in its fifth year of
participation under its Participation Agreement with CMS.
In advance of its participation in the NGACO Model, APAACO entered into agreements with over 750 medical care providers, including physicians, hospitals, nursing
facilities and multiple labs, radiology centers, outpatient surgery centers, dialysis clinics and other service providers. APAACO negotiated discounted rates and such providers
agreed to receive 100% of their claims for beneficiaries reimbursed by APAACO.
Among many requirements to be eligible to participate in the NGACO Model, ACOs must have at least 10,000 assigned Medicare beneficiaries and must maintain that
number throughout each performance year. APAACO's aligned beneficiaries totaled approximately 29,000 in 2020 and 2019, respectively. This number may decrease if
beneficiaries join a managed care plan, pass away or move out of the service area.
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Under the Participation Agreement, APAACO must require its participants and preferred providers to make medically necessary covered services available to
beneficiaries in accordance with applicable laws, regulations and guidance, and APAACO and its participants may not participate in any other Medicare shared savings
initiatives.
There are different levels of financial risk and reward that an ACO may select under the NGACO Model, and the extent of risk and reward may be limited on a
percentage basis. The NGACO Model offers two risk arrangement options. In Arrangement A, the ACO takes 80% of Medicare Part A and Part B risk. In Arrangement B, the
ACO takes 100% of Medicare Part A and Part B risk. Under each risk arrangement, the ACO can cap aggregate savings and losses anywhere between 5% to 15%. The cap is
elected annually by the ACO. APAACO has opted for Risk Arrangement A and a shared savings and losses cap of 5%.
The NGACO Model offers four payment mechanisms:
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Payment Mechanism #1: Normal FFS.
Payment Mechanism #2: Normal FFS plus Infrastructure payments of $6 Per Beneficiary Per Month (“PBPM”).
Payment Mechanism #3: Population-Based Payments (“PBP”). PBP provide ACOs with a monthly payment to support ongoing ACO activities. ACO participants and
preferred providers must agree to percentage payment fee reductions, which are then used to estimate a monthly PBP to be received by the ACO.
Payment Mechanism #4: All-Inclusive Population-Based Payments (“AIPBP”). Under this mechanism, CMS will estimate the total annual expenditures of the ACO’s
aligned beneficiaries and pay that projected amount in PBPM payments. ACOs in AIPBP may have alternative compensation arrangements with their providers,
including 100% FFS, discounted FFS, capitation or case rates.
APAACO opted for, and was approved by CMS effective on April 1, 2017 to participate in, the AIPBP track, which is the most advanced risk-taking payment model.
When approved, APAACO was the only ACO participating in the AIPBP track, out of 44 ACOs approved for the NGACO Model in the U.S. Under the AIPBP track, CMS
estimates the total annual expenditures for APAACO’s beneficiaries and then pays that projected amount to APAACO on a PBPM basis. APAACO is responsible for paying all
Part A and Part B costs for in-network participating providers and preferred providers with whom it has contracted.
The monthly AIPBP paid by CMS and received by the Company for performance year 2019 was approximately $8.3 million per month for the period beginning April
1, 2019 through August 30, 2019 and approximately $3.7 million for the period starting September 1, 2019 based on CMS’ updated estimate of total claims to be incurred. For
performance year 2020, the Company received monthly AIPBP payments at a rate of approximately $7.2 million per month from CMS. As of December 31, 2020 the Company
has recorded a deferred revenue balance of approximately $12.6 million related to the 2020 performance year resulting from the excess of capitation received and earned under
the NGACO alternative payment arrangement.
Our Revenue Streams
Our revenue reflected in the accompanying consolidated financial statements includes revenue generated by our subsidiaries and consolidated entities. Revenue
generated by consolidated entities, however, does not necessarily result in available or distributable cash for ApolloMed. Our revenue streams flow from various multi-year
renewable contractual arrangements that vary by type of business operation as follows:
Capitation Revenue
Our capitation revenue consists primarily of capitated fees for medical services we provide under capitated arrangements made directly with various managed care
providers including HMOs. Capitation revenues are typically prepaid monthly to us based on the number of enrollees selecting us as their healthcare provider. Capitation is a
fixed payment amount per patient per unit of time paid in advance for the delivery of health care services, whereby the service providers are generally liable for excess medical
costs. The actual amount paid is determined by the ranges of services provided, the number of patients enrolled, and the period of time during which the services are provided.
Capitation rates are generally based on local costs and average utilization of services. Because Medicare pays capitation using a “risk adjustment model,” which compensates
managed care providers based on the health status (acuity) of each individual enrollee, managed care providers with higher acuity enrollees receive more, and those with lower
acuity enrollees receive less, capitation that can be allocated to service providers. Under the risk adjustment model, capitation is paid on an interim basis based on enrollee data
submitted for the preceding year and is adjusted in subsequent periods after the final data is compiled.
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Per member per month (“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 term of the contract. In certain
contracts, PMPM fees also include adjustments for items such as performance incentives, performance guarantees and risk shares.
Risk Pool Settlements and Incentives
Capitation arrangements are supplemented by risk sharing arrangements. We have two different types of capitation risk sharing arrangements: full risk and shared risk
arrangements.
We enter into full risk capitation arrangements with certain health plans and local hospitals, which are administered by a related party, where the hospital is responsible
for providing, arranging and paying for institutional risk. We are responsible for providing, arranging and paying for professional risk. Under a full risk pool sharing agreement,
we generally receive 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 amount methodology and amounts are only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any
uncertainty is resolved. The assumptions for medical loss ratios (“MLR”), incurred but not reported (“IBNR”) completion factor and constraint percentages were used by
management in applying the most likely amount methodology.
Under capitation arrangements with certain HMOs, we participate in one or more shared risk arrangements relating to the provision of institutional services to enrollees
(shared risk arrangements) and thus can earn additional revenue or incur losses based upon the enrollee utilization of institutional services. Shared risk capitation arrangements
are entered into with certain health plans, which are administered by the health plan, where we are 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.
In addition to risk-sharing revenues, we also receive incentives under “pay-for-performance” programs for quality medical care, based on various criteria. As an
incentive to control enrollee utilization and to promote quality care, certain HMOs have designed quality incentive programs and commercial generic pharmacy incentive
programs to compensate us for our efforts to improve the quality of services and to promote the efficient and effective use of pharmacy supplemental benefits provided to HMO
members. The incentive programs track specific performance measures and calculate payments to us based on the performance measures.
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.
Management Fee Income
Management fee income encompasses fees paid for management, physician advisory, healthcare staffing, administrative and other non-medical services provided by us
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.
NGACO Revenue
Through APAACO, we participate in the AIPBP track of the NGACO Model sponsored by CMS. Under the NGACO Model, CMS grants us a pool of patients to
manage (direct care and pay providers) based on a budgetary benchmark established with CMS. We are ultimately responsible for managing the 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. Under the AIPBP track,
CMS estimates an average of monthly expenditures for the previous calendar year for APAACO’s aligned beneficiaries and pays that projected amount to us in monthly
installments, and we are responsible for all Part A and Part B costs for in-network participating providers and preferred providers contracted by us to provide services to the
aligned beneficiaries. Claims from out-of-network providers are processed and paid by CMS, our shared savings or losses in managing the services provided
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by out-of-network providers are generally determined on an annual basis after reconciliation with CMS. Pursuant to our risk share agreement with CMS, we will be eligible to
receive the surplus or be liable for the deficit according to the budgetary benchmark established by CMS based on our efficiency or lack thereof, in managing how the
beneficiaries aligned to us by CMS are served by in-network and out-of-network providers. Our shared savings or losses on providing such services are both capped by CMS.
We recognize such savings or deficit upon substantial completion of reconciliation and determination of the amounts.
Under the AIPBP agreement we received $19.8 million and $0.9 million in risk pool savings related to the 2019 and 2018 performance years, respectively, and have
recognized such amounts as revenue in the risk pool settlements and incentives in the accompanying consolidated statements of income for the years ended December 31, 2020
and 2019, respectively.
The monthly AIPBP received by the Company for performance year 2019 was approximately $8.3 million per month for the period from April 1, 2019 through August
30, 2019. Subsequently, CMS adjusted the AIPBP to approximately $3.7 million for the period starting September 1, 2019 based on CMS' updated estimate of total claims to be
incurred. For performance year 2020, the Company continues to receive monthly AIPBP payments at a rate of approximately $7.2 million per month from CMS. The Company
has recorded a deferred revenue amount of $9.6 million related under the NGACO alternative payment arrangement as of December 31, 2020. The deferred revenue amount
will be earned or repaid back to CMS based on a settlement that will occur after the standard run-out period.
Fee For Service Revenue
FFS revenue represents revenue earned under contracts in which we bill and collect the professional component of charges for medical services rendered by our
contracted physicians and employed physicians. Under the FFS arrangements, we bill, and receive payments from, the hospitals and third-party payors for physician staffing and
further bill patients or their third-party payors for patient care services provided.
Our Key Payors
A limited number of payors represent a significant portion of our net revenue. For the years ended December 31, 2020, 2019 and 2018, four payors accounted for an
aggregate of 53.4%, 51.6% and 61.5% of our total net revenue, respectively.
Our Strengths and Advantages
The following are some of the material opportunities that we believe exist for our company.
Combination of Clinical, Administrative and Technology Capabilities
We believe our key strength lies in our combined clinical, administrative and technology capabilities. While many companies separately provide clinical, MSO or
technology support services, to our knowledge there are currently very few organizations like us that provide all three types of services to over 1.1 million patients as of
December 31, 2020.
Diversification
Through our subsidiaries, consolidated affiliates, and invested entities, we have been able to reduce our business risk and increase revenue opportunities by
diversifying our service offerings and expanding our ability to manage patient care across a horizontally integrated care network. Our revenue is spread across our operations.
Additionally, with our ability to monitor and manage care within our wide network, we are an attractive business partner to health plans, hospitals, IPAs and other medical
groups seeking to provide better care at lower costs.
Strong Management Team
Our management team has, collectively, several decades of experience managing physician practices, risk-based organizations, health plans, hospitals and health
systems, a deep understanding of the healthcare marketplace and emerging trends, and a vision for the future of healthcare delivery led by physician-driven healthcare networks.
A Robust Physician Network
As of December 31, 2020, our physician network consisted of over 7,000 contracted physicians, including primary care physicians, specialist physicians and
hospitalists, through our affiliated physician groups and ACOs.
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Cultural Affinities with Patients
In addition to delivering premium health care, we believe in the importance of providing services that are sensitive to the needs of local communities, including their
cultural affinities. This value is shared by physicians within our affiliated IPAs and medical groups, and promotes patient comfort in communicating with care providers.
Long-Standing Relationships with Partners
We have developed long-standing relationships with and have earned trust from multiple health plans, hospitals, IPAs and other medical groups that have helped to
generate recurring contractual revenue for us.
Comprehensive and Effective Healthcare Management Programs
We offer comprehensive and effective healthcare management programs to patients. We have developed expertise in population health management and care
coordination, and in proper medical coding, which results in improved Risk Adjustment Factor (“RAF”) scores and higher payments from health plans, and in improving quality
metrics in both inpatient and outpatient settings and thus patient satisfaction and CMS scores. Using our own proprietary risk assessment scoring tool, we have also developed
our own protocol for identifying high-risk patients.
Competition
The healthcare industry is highly competitive and fragmented. We compete for customers across all of our services with other health care management companies
including MSOs and healthcare providers such as local, regional and national networks of physicians, medical groups and hospitals, many of which are substantially larger than
us and have significantly greater financial and other resources, including personnel, than we have.
IPAs
Our affiliated IPAs compete with other IPAs, medical groups and hospitals, many of which have greater financial, personnel and other resources available to them. In
the greater Los Angeles area, such competitors include Regal Medical Group and Lakeside Medical group, which are part of Heritage Provider Network (“Heritage”), as well as
Optum (f.k.a. HealthCare Partners), a subsidiary of UnitedHealth Group.
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ACOs
Our NGACO, APAACO, competes with sophisticated provider groups in the creation, administration, and management of ACOs, including MSSP ACOs and
NGACOs, many of which have greater financial, personnel and other resources available to them. In the greater Los Angeles area, major competitors of APAACO include
Heritage California ACO and DaVita Medical ACO California.
Outpatient Clinics
Our outpatient clinics compete with large ambulatory surgery centers and/or diagnostic centers such as Foothill Cardiology (California Heart Medical Group), RadNet
and Envision Healthcare, many of which have greater financial, personnel and other resources available to them, as well as smaller clinics that have ties to local communities.
Optum (f.k.a. HealthCare Partners) also has its own urgent care centers, clinics and diagnostic centers.
Hospitalists
Because individual physicians may provide hospitalist services if they have necessary credentials and privileges, the markets for hospitalist services are highly
fragmented. Our affiliated hospitalist groups face competition primarily from numerous small inpatient practices in existing and expanding markets, but also compete with large
physician groups, many of which have greater financial, personnel and other resources available to them. Some of such competitors operate on a national level, including
EmCare, Team Health and Sound Physicians.
Regulatory Matters
As a healthcare company, our operations and relationships with healthcare providers such as hospitals, other healthcare facilities, and healthcare professionals are
subject to extensive and increasing regulation by numerous federal, state, and local government agencies including the Office of Inspector General (“OIG”), the Department of
Justice, CMS and various state authorities. These laws and regulations often are interpreted broadly and enforced aggressively. Imposition of liabilities associated with a
violation of any of these healthcare laws and regulations could have a material adverse effect on our business, financial condition or results of operations. We cannot guarantee
that our practices will not be subject to government scrutiny or be found to violate certain healthcare laws. Government investigations and prosecutions, even if we are
ultimately found to be without fault, can be costly and disruptive to our business. Moreover, changes in healthcare legislation or government regulation may restrict our existing
operations, limit our expansion or impose additional compliance requirements and costs, any of which could have a material adverse effect on our business, financial condition
or results of operations. Below are brief descriptions of some, but not all, of such laws and regulations that affect our business operations.
Corporate Practice of Medicine
Our consolidated financial statements include our subsidiaries and VIEs. Some states have laws that prohibit business entities with non-physician owners, such as
ApolloMed and its subsidiaries, from practicing medicine, employing physicians to practice medicine, or exercising control over medical decisions by physicians. These laws
are generally referred to as corporate practice of medicine laws. States that have corporate practice of medicine laws permit only physicians to practice medicine, exercise
control over medical decisions or engage in certain arrangements, such as fee-splitting, with physicians. In these states, a violation of the corporate practice of medicine
prohibition constitutes the unlawful practice of medicine, which is a public offense punishable by fines and other criminal penalties. In addition, any physician who participates
in a scheme that violates the state’s corporate practice of medicine prohibition may be punished for aiding and abetting a lay entity in the unlawful practice of medicine.
California is a corporate practice of medicine state and we operate by maintaining long-term MSAs with our affiliated IPAs and medical groups, each of which is
owned and operated by physicians only, and employs or contracts with additional physicians to provide medical services. Under such MSAs, our wholly owned MSOs are
contracted to provide non-medical management and administrative services such as financial and risk management as well as information systems, marketing and
administrative support to the IPAs and medical groups. The MSAs typically have an initial term of 3-30 years and are generally not terminable by our affiliated IPAs and
medical groups except in the case of bankruptcy, gross negligence, fraud, or other illegal acts by the contracting MSO.
Through the MSAs and the relationship with the physician owners of our medical affiliates, we have exclusive authority over all non-medical decisions related to the
ongoing business operations of those affiliates. Consequently, ApolloMed consolidates the revenue and expenses of such affiliates as their primary beneficiary from the date of
execution of
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the applicable MSA. When necessary, our Co-Chief Executive Officers, Dr. Kenneth Sim and Dr. Thomas Lam, serve as nominee shareholders, of affiliated medical practices
on ApolloMed's behalf, in order to comply with corporate practice of medicine laws and certain accounting rules applicable to consolidated financial reporting by our affiliates
as VIEs.
Under these arrangements our MSOs perform only non-medical functions, do not represent to offer medical services, and do not exercise influence or control over the
practice of medicine by physicians. The California Medical Board, as well as other states' regulatory bodies, has taken the position that MSAs that confer too much control over
a physician practice to MSOs may violate the prohibition against corporate practice of medicine. Some of the relevant laws, regulations, and agency interpretations in California
and other states that have corporate practice prohibitions have been subject to limited judicial and regulatory interpretation. Moreover, state laws are subject to change and
regulatory authorities. Other parties, including our affiliated physicians, may assert that, despite these arrangements, ApolloMed and its subsidiaries are engaged in the
prohibited corporate practice of medicine or that such arrangements constitute unlawful fee-splitting between physicians and non-physicians. If this occurred, we could be
subject to civil or criminal penalties, our MSAs could be found legally invalid and unenforceable in whole or in part, and we could be required to restructure arrangements with
our affiliated IPAs and medical groups. If we were required to change our operating structures due to determination that a corporate practice of medicine violation existed, such
a restructuring might require revising our MSOs’ management fees.
False Claims Acts
The False Claims Act, 31 U.S.C. §§ 3729 - 3733, imposes civil liability on individuals or entities that submit false or fraudulent claims for payment to the federal
government. The False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly or recklessly
presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a
claim for payment approved. Private parties may initiate qui tam whistleblower lawsuits against any person or entity under the False Claims Act in the name of the federal
government and may share in the proceeds of a successful suit. The federal government has used the False Claims Act to prosecute a wide variety of alleged false claims and
fraud allegedly perpetrated against Medicare and state healthcare programs. By way of illustration, these prosecutions may be based upon alleged coding errors, billing for
services not rendered, billing services at a higher payment rate than appropriate, and billing for care that is not considered medically necessary. The federal government and a
number of courts have taken the position that claims presented in violation of certain other statutes, including the federal Anti-Kickback Statute or the Stark Law, can also be
considered a violation of the False Claims Act based on the theory that a provider impliedly certifies compliance with all applicable laws, regulations, and other rules when
submitting claims for reimbursement.
Penalties for False Claims Act violations include fines ranging from $11,665 to $23,331 for each false claim, plus up to three times the amount of damages sustained
by the government. A False Claims Act violation may provide the basis for the imposition of administrative penalties as well as exclusion from participation in governmental
healthcare programs, including Medicare and Medicaid. In addition to the provisions of the False Claims Act, which provide for civil enforcement, the federal government also
can use several criminal statutes to prosecute persons who are alleged to have submitted false or fraudulent claims to the government for payments.
A number of states including California have enacted laws that are similar to the federal False Claims Act. Under Section 6031 of the Deficit Reduction Act of 2005
(“DRA”), as amended, if a state enacts a false claims act that is at least as stringent as the federal statute and that also meets certain other requirements, the state will be eligible
to receive a greater share of any monetary recovery obtained pursuant to certain actions brought under the state’s false claims act. As a result, more states are expected to enact
laws that are similar to the federal False Claims Act in the future along with a corresponding increase in state false claims enforcement efforts. In addition, section 6032 of the
DRA requires entities that make or receive annual Medicaid payments of $5.0 million or more from any one state to provide their employees, contractors and agents with
written policies and employee handbook materials on federal and state False Claims Acts and related statues.
Anti-Kickback Statutes
The federal Anti-Kickback Statute is a provision of the Social Security Act of 1972 that prohibits as a felony offense the knowing and willful offer, payment,
solicitation or receipt of any form of remuneration in return for, or to induce, (1) the referral of a patient for items or services for which payment may be made in whole or part
under Medicare, Medicaid or other federal healthcare programs, (2) the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or
other federal healthcare programs or (3) the purchase, lease, or order or arranging or recommending the purchasing, leasing or ordering of any item or service reimbursable
under Medicare, Medicaid or other federal healthcare programs. The Patient Protection and Affordable Care Act (“ACA”) amended section 1128B of the Social Security Act to
make it clear that a person need not have actual knowledge of the statute, or specific intent to violate the statute, as a predicate for a
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violation. The OIG, which has the authority to impose administrative sanctions for violation of the statute, has adopted as its standard for review a judicial interpretation which
concludes that the statute prohibits any arrangement where even one purpose of the remuneration is to induce or reward referrals. A violation of the Anti-Kickback Statute is a
felony punishable by imprisonment, criminal fines of up to $25,000, civil fines of up to $50,000 per violation and three times the amount of the unlawful remuneration. A
violation also can result in exclusion from Medicare, Medicaid or other federal healthcare programs. In addition, pursuant to the changes of the ACA, a claim that includes items
or services resulting from a violation of the Anti-Kickback Statute is a false claim for purposes of the False Claims Act.
Due to the breadth of the Anti-Kickback Statute’s broad prohibitions, statutory exceptions exist that protect certain arrangements from prosecution. In addition, the
OIG has published safe harbor regulations that specify arrangements that are deemed protected from prosecution under the Anti-Kickback Statute, provided all applicable
criteria are met. The failure of an activity to meet all of the applicable safe harbor criteria does not necessarily mean that the particular arrangement violates the Anti-Kickback
Statute, but these arrangements may be subject to scrutiny and prosecution by enforcement agencies. We may be less willing than some competitors to take actions or enter into
arrangements that do not clearly satisfy the OIG safe harbors and suffer a competitive disadvantage.
Some states have enacted statutes and regulations similar to the Anti-Kickback Statute, but which may be applicable regardless of the payor source for the patient.
These state laws may contain exceptions and safe harbors that are different from and/or more limited than those of the federal law and that may vary from state to state. For
example, California has adopted the Physician Ownership and Referral Act of 1993 (“PORA”). PORA makes it unlawful for physicians, surgeons and other licensed
professionals to refer a person for certain health care services if they have a financial interest with the person or entity that receives the referral. While PORA also provides
certain exemptions from this prohibition, failure to fit within an exemption in violation of PORA can lead to a misdemeanor offense that may subject a physician to civil
penalties and disciplinary action by the Medical Board of California.
For example, Section 445 of the California Health and Safety Code, provides that “no person, firm, partnership, association or corporation, or agent or employee
thereof, shall for profit refer or recommend a person to a physician, hospital, health-related facility, or dispensary for any form of medical care or treatment of any ailment or
physical condition. The imposition of a fee or charge of any such referral or recommendation creates a presumption that the referral or recommendation is for profit.” A
violation of Section 445 is a misdemeanor and may subject the offender to imprisonment in the county jail for not longer than one year, or a fine of not more than $5,000, or by
both such fine and imprisonment. Further, a violation of Section 445 may be enjoined by the California Attorney General. Section 650 of the California Business and
Professions Code contains prohibitions against self-referral and kickbacks. Business & Professions Code Section 650 makes it unlawful for a “licensee,” including a physician,
to pay or receive any compensation or inducement for referring patients, clients or customers to any person or entity, irrespective of any membership or proprietary interest in or
with the person or entity receiving the referral. Violation of the statute is a public offense punishable by imprisonment, a fine of not more than $10,000, or both. Section 650
further provides that it is not unlawful for a physician to refer a patient to a health care facility solely because the physician has a proprietary interest or co-ownership in a health
care facility, provided that (1) the physician’s return on investment for that proprietary interest or co-ownership is based upon the amount of capital investment or proportional
ownership of the physician; and (2) the ownership interest is not based on the number or value of any patients referred. A violation of Section 650 is a misdemeanor and may
subject the offender to imprisonment in the county jail for not longer than six months, or a fine of not more than $2,500, or by both such fine and imprisonment.
We cannot assure that the applicable regulatory authorities will not determine that some of our arrangements with physicians violate the federal Anti-Kickback Statute
or other applicable laws. An adverse determination could subject us to different liabilities, including criminal penalties, civil monetary penalties and exclusion from
participation in Medicare, Medicaid or other health care programs, any of which could have a material adverse effect on our business, financial condition or results of
operations.
Stark Laws
The federal Stark Law, 42 U.S.C. 1395nn, also known as the physician self-referral law, generally prohibits a physician from referring Medicare and Medicaid patients
to an entity (including hospitals) providing ‘‘designated health services,’’ if the physician or a member of the physician’s immediate family has a ‘‘financial relationship’’ with
the entity, unless a specific exception applies. Designated health services include, among other services, inpatient hospital services, outpatient prescription drug services, clinical
laboratory services, certain imaging services (e.g., MRI, CT, ultrasound), and other services that our affiliated physicians may order for their patients. The prohibition applies
regardless of the reasons for the financial relationship and the referral, and therefore, unlike the federal Anti-Kickback Statute, intent to violate the law is not required. Like the
Anti-Kickback Statute, the Stark Law contains statutory and regulatory exceptions intended to protect certain
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types of transactions and arrangements. Unlike safe harbors under the Anti-Kickback Statute with which compliance is voluntary, an arrangement must comply with every
requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.
Because the Stark Law and implementing regulations continue to evolve and are detailed and complex, while we attempt to structure its relationships to meet an
exception to the Stark Law, there can be no assurance that the arrangements entered into by us with affiliated physicians and facilities will be found to be in compliance with the
Stark Law, as it ultimately may be implemented or interpreted. The penalties for violating the Stark Law can include the denial of payment for services ordered in violation of
the statute, mandatory refunds of any sums paid for such services and civil penalties of up to $25,820 for each violation, double damages, and possible exclusion from future
participation in the governmental healthcare programs. A person who engages in a scheme to circumvent the Stark Law’s prohibitions may be fined up to $172,137 for each
applicable arrangement or scheme. In November 2020, CMS issued a final rule intended to address the regulatory impact and burden of the Stark Law and impeded the health
care system’s move toward value-based reimbursement. CMS added new exceptions to attempt to address potential barriers to coordinated care and value based care. These or
other changes implemented by CMS in the future may impact our business, results of operations and financial condition.
Some states have enacted statutes and regulations against self-referral arrangements similar to the federal Stark Law, but which may be applicable to the referral of patients
regardless of their payor source and which may apply to different types of services. These state laws may contain statutory and regulatory exceptions that are different from
those of the federal law and that may vary from state to state. For example, California has adopted the Physician Ownership and Referral Act of 1993 (“PORA”). PORA makes
it unlawful for physicians, surgeons and other licensed professionals to refer a person for certain health care services if they have a financial interest with the person or entity
that receives the referral. While PORA also provides certain exemptions from this prohibition, failure to fit within an exemption in violation of PORA can lead to a
misdemeanor offense that may subject a physician to civil penalties and disciplinary action by the Medical Board of California.
An adverse determination under these state laws and/or the federal Stark Law could subject us to different liabilities, including criminal penalties, civil monetary
penalties and exclusion from participation in Medicare, Medicaid or other health care programs, any of which could have a material adverse effect on our business, financial
condition or results of operations.
Health Information Privacy and Security Standards
The privacy regulations promulgated under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended, contain detailed requirements
concerning the use and disclosure of individually identifiable patient health information (“PHI”) by entities like our MSOs and affiliated IPAs and medical groups. HIPAA
covered entities must implement certain administrative, physical, and technical security standards to protect the integrity, confidentiality and availability of certain electronic
health information received, maintained, or transmitted. HIPAA also implemented standard transaction code sets and standard identifiers that covered entities must use when
submitting or receiving certain electronic healthcare transactions, including billing and claim collection activities. New health information standards could have a significant
effect on the manner in which we do business, and the cost of complying with new standards could be significant.
Violations of the HIPAA privacy and security rules may result in civil and criminal penalties, including a tiered system of civil money penalties that range from $100
to $50,000 per violation, with a cap of $1.5 million per year for identical violations. A HIPAA covered entity must also promptly notify affected individuals where a breach
affects more than 500 individuals and report annually any breaches affecting fewer than 500 individuals.
State attorneys general may bring civil actions on behalf of state residents for violations of the HIPAA privacy and security rules, obtain damages on behalf of state
residents and enjoin further violations. Many states also have laws that protect the privacy and security of confidential, personal information, which may be similar to or even
more stringent than HIPAA. Where state laws are more protective than HIPAA, we have to comply with the stricter provisions. Some of these state laws may impose fines and
penalties on violators and may afford private rights of action to individuals who believe their personal information has been misused. California’s patient privacy laws, for
example, provide for penalties of up to $250,000 and permit injured parties to sue for damages. Both state and federal laws are subject to modification or enhancement of
privacy protection at any time.
If we fail to comply with HIPAA or similar state laws, we could incur substantial civil monetary or criminal penalties. We expect increased federal and state privacy
and security enforcement efforts.
Knox-Keene Act and State Insurance Laws
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The Knox-Keene Health Care Service Plan Act of 1975 (Health and Safety Code Section 1340, et seq.), as amended (the “Knox-Keene Act”), is the California law that
regulates managed care plans. Neither our MSOs nor their managed medical groups and IPAs hold a Knox-Keene license. Some of the medical groups and IPAs that have
entered into MSAs with our MSOs have historically contracted with health plans and other payors to receive capitation payments and assumed the financial responsibility for
professional services. In many of these cases, the health plans or other payors separately enter into contracts with hospitals that receive payments and assume some type of
contractual financial responsibility for their institutional services. In some instances, our affiliated medical groups and IPAs have been paid by their contracting payors or
hospitals for the financial outcome of managing the care costs associated with both the professional and institutional services received by patients and have recognized a
percentage of the surplus of institutional revenues less institutional expense as the medical groups’ and IPAs’ net revenues and, under certain circumstances, may be responsible
for a percentage of any short-fall in the event that institutional expenses exceed institutional revenues. While our MSOs and their managed medical groups and IPAs are not
contractually obligated to pay claims to hospitals or other institutions under these arrangements, if it is determined that our MSOs or the medical groups and IPAs have been
inappropriately taking financial risk for institutional and professional services without Knox-Keene license or regulatory exemption as a result of their hospital and physician
arrangements, we may be required to obtain a restricted Knox-Keene license to resolve such violations and we could be subject to civil and criminal liability, any of which
could have a material adverse effect on our business, financial condition or results of operations.
In addition, some states require ACOs to be registered or otherwise comply with state insurance laws. Our ACOs are not registered with any state insurance agency. If
it is determined that we have been inappropriately operating an ACO without state registration or licensure, we may be required to obtain such registration or licensure to
resolve such violations and we could be subject to liability, which could have a material adverse effect on our business, financial condition or results of operations.
Environmental and Occupational Safety and Health Administration Regulations
We are subject to federal, state and local regulations governing the storage, use and disposal of waste materials and products. Although we believe that our safety
procedures for storing, handling and disposing of these materials and products comply with the standards prescribed by law and regulation, we cannot eliminate the risk of
accidental contamination or injury from those hazardous materials. In the event of an accident, we could be held liable for any damages that result and any liability could
exceed the limits or fall outside the coverage of our insurance policies, which we may not be able to maintain on acceptable terms, or at all. We could incur significant costs and
the attention of our management could be diverted to comply with current or future environmental laws and regulations. Federal regulations promulgated by the Occupational
Safety and Health Administration impose additional requirements on us including those protecting employees from exposure to elements such as blood-borne pathogens. We
cannot predict the frequency of compliance, monitoring, or enforcement actions to which we may be subject as those regulations are being implemented, which could adversely
affect our operations.
Other Federal and State Healthcare Laws
We are also subject to other federal and state healthcare laws that could have a material adverse effect on our business, financial condition or results of operations. The
Health Care Fraud Statute prohibits any person from knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, which
can be either a government or private payor plan. Violation of this statute, even in the absence of actual knowledge of or specific intent to violate the statute, may be charged as
a felony offense and may result in fines, imprisonment or both. The Health Care False Statement Statute prohibits, in any matter involving a federal health care program, anyone
from knowingly and willfully falsifying, concealing or covering up, by any trick, scheme or device, a material fact, or making any materially false, fictitious or fraudulent
statement or representation, or making or using any materially false writing or document knowing that it contains a materially false or fraudulent statement. A violation of this
statute may be charged as a felony offense and may result in fines, imprisonment or both. Under the Civil Monetary Penalties Law of the Social Security Act, a person
(including an organization) is prohibited from knowingly presenting or causing to be presented to any United States officer, employee, agent, or department, or any state
agency, a claim for payment for medical or other items or services where the person knows or should know (a) the items or services were not provided as described in the coding
of the claim, (b) the claim is a false or fraudulent claim, (c) the claim is for a service furnished by an unlicensed physician, (d) the claim is for medical or other items or service
furnished by a person or an entity that is in a period of exclusion from the program, or (e) the items or services are medically unnecessary items or services. Violations of the
law may result in penalties of up to $20,000 per claim, treble damages, and exclusion from federal healthcare programs. In addition, the OIG may impose civil monetary
penalties against any physician who knowingly accepts payment from a hospital (as well as against the hospital making the payment) as an inducement to reduce or limit
medically necessary services provided to Medicare or Medicaid program beneficiaries. Further, except as permitted under the Civil Monetary Penalties Law, a person who
offers or transfers to a Medicare or Medicaid beneficiary any remuneration that the
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person knows or should know is likely to influence the beneficiary’s selection of a particular provider of Medicare or Medicaid payable items or services may be liable for civil
money penalties of up to $20,000 for each wrongful act.
In addition to the state laws previously described, we may also be subject to other state fraud and abuse statutes and regulations if we expand our operations beyond
California. Many states have adopted a form of anti-kickback law, self-referral prohibition, and false claims and insurance fraud prohibition. The scope of these laws and the
interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Generally, state laws reach to all
healthcare services and not just those covered under a governmental healthcare program. A determination of liability under any of these laws could result in fines and penalties
and restrictions on our ability to operate in these states. We cannot assure that our arrangements or business practices will not be subject to government scrutiny or be found to
violate applicable fraud and abuse laws.
Licensure, Certification, Accreditation and Related Laws and Guidelines
Our clinical personnel are subject to numerous federal, state and local licensing laws and regulations, relating to, among other things, professional credentialing and
professional ethics. Clinical professionals are also subject to state and federal regulation regarding prescribing medication and controlled substances. Our affiliated physicians
and hospitalists must satisfy and maintain their individual professional licensing in each state where they practice medicine, including California, and many states require that
nurse practitioners and physician assistants work in collaboration with or under the supervision of a physician. Each state defines the scope of practice of clinical professionals
through legislation and through the respective Boards of Medicine and Nursing. Activities that qualify as professional misconduct under state law may subject our clinical
personnel to sanctions, or to even lose their license and could, possibly, subject us to sanctions as well. Some state boards of medicine impose reciprocal discipline, that is, if a
physician is disciplined for having committed professional misconduct in one state where he or she is licensed, another state where he or she is also licensed may impose the
same discipline even though the conduct occurred in another state. Since we and our affiliated medical groups perform services at hospitals and other healthcare facilities, we
may indirectly be subject to laws, ethical guidelines and operating standards of professional trade associations and private accreditation commissions (such as the American
Medical Association and The Joint Commission) applicable to those entities. Penalties for non-compliance with these laws and standards include loss of professional license,
civil or criminal fines and penalties, loss of hospital admitting privileges, and exclusion from participation in various governmental and other third-party healthcare programs.
In addition, our affiliated facilities are subject to state and local licensing regulations ranging from the adequacy of medical care, to compliance with building codes and
environmental protection laws. Our ability to operate profitably will depend, in part, upon our ability and the ability of our affiliated physicians and facilities to obtain and
maintain all necessary licenses and other approvals and operate in compliance with applicable health care and other laws and regulations that evolve rapidly. We provide home
health, hospice and palliative care, which require compliance with additional regulatory requirements. Reimbursement for palliative care and house call services is generally
conditioned on clinical professionals providing the correct procedure and diagnosis codes and properly documenting both the service and the medical necessity for the service.
Incorrect or incomplete documentation and billing information, or the incorrect selection of codes for the level and type of service provided, could result in non-payment for
services rendered or lead to allegations of billing fraud. We must also comply with laws relating to hospice care eligibility, development and maintenance of care plans and
coordination with nursing homes or assisted living facilities where patients live.
Professional Liability and Other Insurance Coverage
Our business has an inherent and significant risk of claims of medical malpractice against us and our affiliated physicians. We and our affiliated physician groups pay
premiums for third-party professional liability insurance that provides indemnification on a claims-made basis for losses incurred related to medical malpractice litigation in
order to carry out our operations. Our physicians are required to carry first dollar coverage with limits of liability equal to not less than $1.0 million for claims based on
occurrence up to an aggregate of $3.0 million per year. Our IPAs purchase stop-loss insurance, which will reimburse them for claims from service providers on a per enrollee
basis. The specific retention amount per enrollee per policy period is $45,000 to $70,000 for professional coverage. We also maintain worker’s compensation, director and
officer, and other third-party insurance coverage subject to deductibles and other restrictions that we believe are in accordance with industry standards. While we believe that
our insurance coverage is adequate based upon claims experience and the nature and risks of our business, we cannot be certain that our insurance coverage will be adequate to
cover liabilities arising out of pending or future claims asserted against us or our affiliated physician groups in the future where the outcomes of such claims are unfavorable.
The ultimate resolution of pending and future claims in excess of our insurance coverage, may have a material adverse effect on our business, financial position, results of
operations or cash flows.
Human Capital
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As of December 31, 2020, ApolloMed and its subsidiaries had 630 employees and our consolidated VIEs employed 139 physicians and other staff. We had a broader
physician network which, as of December 31, 2020, comprised of 38 physicians as independent contractors to provide medical services. None of our employees are a member of
a labor union, and we have not experienced any work stoppage.
We are committed to supporting employees' professional development, providing competitive compensation and benefits and a safe and inclusive workplace. We
measure employee engagement on an ongoing basis to create a more innovative, productive and profitable company. The results from engagement surveys are used to
implement programs and processes designed to support employee retention and satisfaction. The Company believes a diverse workforce fosters innovation and cultivates an
environment filled with unique perspectives and growth. Respect for human rights is fundamental to the Company’s business and its commitment to ethical business conduct.
Available Information
We maintain a website at www.apollomed.net and make available there, free of charge, our periodic reports filed with the Securities and Exchange Commission (SEC),
as soon as is reasonably practicable after filing. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other
information regarding issuers such as us that file electronically with the SEC.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other
information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
Part II, Item 7, and our consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described
below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely
affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
Summary of Risk Factors
Our business is subject to numerous risks and uncertainties, discussed in more detail in the following section. These risks include, among others, the following key
risks:
•
The ongoing coronavirus (COVID-19) pandemic may negatively impact certain aspects of our business, financial condition, results of operations and growth.
• We may need to raise additional capital to grow, which might not be available.
•
•
Potential changes in laws, accounting principles, and regulations related to VIEs could impact our consolidation of total revenues derived from our affiliated physician
groups.
The arrangements we have with our VIEs are not as secure as direct ownership of such entities.
• We currently derive a substantial portion of our revenues in California and are vulnerable to changes in that state.
•
Our business strategy involves acquisitions and strategic partnerships, which can be costly, risky, and complex.
• We may encounter difficulties in managing our growth, and the nature of our business and rapid changes in the healthcare industry make it difficult to reliably predict
future growth and operating results.
• We could experience significant losses under capitation contracts if our expenses exceed revenues.
•
•
If our agreements with affiliated physician groups are deemed invalid or are terminated under applicable law, our results of operations and financial condition will be
materially impaired.
Our revenues and operations are dependent on a limited number of key payors.
• We may be impacted by a shift in payor mix including eligibility changes to government and private insurance programs.
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• Many of our agreements with hospitals and medical groups have limited durations, may be terminated without cause by them, and prohibit us from acquiring physicians
or patients from or competing with them.
•
•
•
•
•
•
•
Changes to federal, state, and local healthcare law, including the ACA and/or the adoption of a primarily publicly funded healthcare system, may negatively impact our
business.
The success of our emphasis on the NGACO Model is not guaranteed, due to political risks, uncertainties of NGACO administration, and the requirement of the
Company to maintain significant capital reserves.
Laws regulating the corporate practice of medicine could restrict the manner in which we are permitted to conduct our business and the failure to comply with such laws
could subject us to penalties and restructuring.
The healthcare industry is intensely regulated at the federal, state, and local levels, and government authorities may determine that we fail to comply with applicable
laws or regulations and take actions against us.
Controls designed to reduce inpatient services and associated costs may reduce our revenues.
If our affiliated physician groups are not able to satisfy California financial solvency regulations, they could become subject to sanctions and their ability to do business
in California could be limited or terminated.
Our current principal stockholders, executive officers and directors have significant influence over our operations and strategic direction and they could cause us to take
actions with which other stockholders might not agree and could delay, deter or prevent a change of control or a business combination with respect to us.
Risks Relating to Our General Business and Operations.
In 2019, the Company, AP-AMH and APC consummated a series of interrelated transactions that may expose the Company and its subsidiaries and VIEs to additional
risks including the inability to repay a significant loan made in connection with such transactions.
On September 11, 2019, the Company, AP-AMH and APC, concurrently consummated a series of interrelated transactions (collectively, the “APC Transactions”). As
disclosed elsewhere in this Annual Report on Form 10-K and in the Company’s other reports on file with the SEC, the APC Transactions included the following agreements and
transactions: (i) the Company made a $545.0 million ten-year secured loan to AP-AMH; (ii) AP-AMH used all of the proceeds of that loan to purchase 1,000,000 shares of
Series A Preferred Stock of APC; (iii) the Company obtained the funds to make the AP-AMH Loan (x) by entering into a $290.0 million senior secured credit facility (the
“Credit Facility”) with Truist Bank (f.k.a. SunTrust Bank), in its capacity as administrative agent for various lenders, and then immediately drawing down $250.0 million in
cash, and (y) by selling $300.0 million shares of the Company’s common stock to APC, the purchase price of which was offset against $300.0 million of AP-AMH’s purchase
price for its APC Preferred Stock. NMM guaranteed the obligations of the Company under the Credit Facility, and both the Company and NMM have granted the lenders a
security interest in all of their assets, including, without limitation, in all stock and other equity issued by their subsidiaries (including the shares of NMM) and all rights with
respect to the AP-AMH Loan.
The APC Transactions may expose the Company, its subsidiaries and its VIEs to additional risks, including without limitation, the following: AP-AMH may never be
able to repay the AP-AMH Loan; even if AP-AMH does not, or cannot repay the loan, the Company will be obligated to pay principal and interest on the $290.0 million Credit
Facility; in connection with the Credit Facility, the lenders were granted a first priority perfected security interest over all of the assets of the Company and its subsidiaries, and
such lenders have the right to foreclose on those assets if the Company defaults on its obligations under the Credit Facility; a disconnect could arise between APC achieving net
income, declaring and paying dividends to AP-AMH, and AP-AMH making its required payments to the Company, which disconnect could materially impact the Company's
financial results and its ability to make its required payments under the Credit Facility; APC may be prohibited from paying, or may be unable to pay the dividends on its Series
A Preferred Stock, including under the California Corporations Code; regulators could determine that the current, post-APC Transactions consolidated structure amounts to the
Company violating California’s corporate practice of medicine doctrine; and the Company may be deemed an investment company, which could impose burdensome
compliance requirements on the Company and restrict its future activities.
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The “Risk Factors” section of the definitive proxy statement of the Company’s board of directors that the Company filed with the SEC on July 31, 2019 (the “2019
Proxy Statement”) described these and certain other risks related to the APC Transactions, which are hereby incorporated herein by reference.
If our internal controls over financial reporting are not considered effective, our business and stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each fiscal
year, and to include a management report assessing the effectiveness of our internal controls over financial reporting in our annual report on Form 10-K for that fiscal year.
Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial
reporting. Our management, including our principal executive officer and principal financial officer, does not expect that our internal controls over financial reporting will
prevent 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. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud
involving a company have been, or will be, detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we
cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become ineffective because of
changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. We cannot assure you that we or our independent registered public accounting firm will not identify a
material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent
registered public accounting firm to consider our internal controls as ineffective. If our internal controls over financial reporting are not considered effective, we may
experience a loss of public confidence, which could have an adverse effect on our business and on the market price of our common stock.
We may need to raise additional capital to grow, which might not be available.
We may in the future require additional capital to grow our business and may have to raise additional funds by selling equity, issuing debt, borrowing, refinancing our
existing debt, or selling assets or subsidiaries. These alternatives may not be available on acceptable terms to us or in amounts sufficient to meet our needs. The failure to obtain
any required future financing may require us to reduce or curtail certain existing operations.
Our net operating loss carryforwards and certain other tax attributes will be subject to limitations.
If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, its net operating loss
carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, an ownership
change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds 50 percentage points over a rolling three-year period.
Similar rules may apply under state tax laws. The Merger likely resulted in an ownership change for us and, accordingly, our net operating loss carryforwards and certain other
tax attributes will be subject to use limitations after the Merger. Additional ownership changes in the future could result in additional limitations on our net operating loss
carryforwards. Consequently, we may not be able to utilize a material portion of our net operating loss carryforwards and other tax attributes, to offset our tax liabilities, which
could have a material adverse effect on our cash flows and results of operations.
Uncertain or adverse economic conditions could adversely impact us.
A downturn in economic conditions could have a material adverse effect on our results of operations, financial condition, business prospects and stock price.
Historically, government budget limitations have resulted in reduced spending. Given that Medicaid is a significant component of state budgets, an economic downturn would
put continued cost containment pressures on Medicaid outlays for healthcare services in California. The existing federal deficit and continued deficit spending by the federal
government can lead to reduced government expenditures including for government-funded programs in which we participate such as Medicare. An economic downturn and
sustained unemployment may also impact the number of enrollees in managed care programs and the profitability of managed care companies, which could result in reduced
reimbursement rates. Although we attempt to stay informed, any sustained failure to identify and respond to these trends could have a material adverse effect on our results of
operations, financial condition, business and prospects.
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The ongoing coronavirus (COVID-19) pandemic may impact certain aspects of our business, financial condition, results of operation and growth.
The global spread of the COVID-19 pandemic and measures introduced by local, state and federal governments to contain the virus and mitigate its public health
effects have created significant impact to the global economy. We expect the evolving COVID-19 pandemic to continue to impact certain aspects of our business, results of
operations, and financial condition and liquidity, but given the uncertainty around the duration and severity of the pandemic, we cannot accurately predict at this time the future
potential impact on our business, results of operations, financial condition and liquidity.
During the year ended December 31, 2020, COVID-19 impacted certain aspects of our business as community self-isolation practices and shelter-in-place
requirements reduced our inpatient visits. Continued shelter-in-place, quarantine, executive order or related measures to combat the spread of COVID-19, as well as the
perceived need by individuals to continue such practices to avoid infection, among other factors, have impacted and are expected to continue to impact certain aspects of our
results of operations, business and financial condition. These measures and practices resulted in temporary closures of outpatient clinics, and may result in delays in entry into
new markets and expansion in existing markets. Governmental authorities in California began re-opening and lifting or relaxing shelter-in-place and quarantine measures only to
revert such restrictions in the face of increases in new COVID-19 cases. In addition, due to the shelter-in-place orders across the country, we have implemented work-from-
home policies for many employees which may impact productivity and disrupt our business operations.
Health care organizations around the world, including our medical offices, have faced, and will continue to face, substantial challenges in treating patients with
COVID-19, such as the diversion of hospital staff and resources from ordinary functions to the treatment of COVID-19, supply, resource and capital shortages and
overburdening of staff and resource capacity. In the United States, governmental authorities have also recommended, and in certain cases required, that elective, specialty and
other procedures and appointments, including certain primary care services, be suspended or canceled to avoid non-essential patient exposure to medical environments and
potential infection with COVID-19 and to focus limited resources and personnel capacity toward the treatment of COVID-19. Some of these measures and challenges will likely
continue for the duration of the pandemic, which is uncertain, and will harm the results of operations, liquidity and financial condition of these health care organizations,
including certain of our health network partners. We cannot accurately predict at this time the ultimate severity or duration that the foregoing measures and challenges may
have on these health care organizations, including us and our health network partners.
The COVID-19 pandemic and similar crises could also diminish the public’s trust in healthcare facilities, especially facilities that fail to accurately or timely diagnose,
or are treating (or have treated) patients affected by infectious diseases. As certain of our medical offices treat patients with COVID-19 or other infectious disease, patients may
be discouraged from visiting our offices, including cancelling appointments.
Our affiliated physician groups also face an increased risk of infection with COVID-19, which may result in staffing shortages at our offices or increased workers’
compensation claims.
While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and
may continue to result in, significant disruption of global financial markets, potentially reducing our ability to access capital, which could in the future negatively affect our
liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
The global outbreak of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and
subject to change. We cannot at this time precisely predict what effects the COVID-19 outbreak will have on certain aspects of our business, results of operations and financial
condition, including due to uncertainties relating to the severity of the disease, the duration of the pandemic and the governmental responses to the pandemic.
We may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial
condition, results of operations and stock price.
There can be no assurances that all material issues that may be present in our operations, including from prior to the Merger, have been uncovered, or that factors
outside of our control will not later arise. As a result, we may be forced to write-down or write-off assets, restructure operations, or incur impairment or other charges that could
result in losses. Unexpected risks may arise and previously known risks may materialize in a manner not consistent with each company’s preliminary risk
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analysis. Even though these charges may not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market
perceptions about us or our securities and may make our future financing difficult to obtain on favorable terms or at all.
From time to time, our intangible assets are subject to impairment testing. Under current accounting standards, our goodwill, including acquired goodwill, is tested for
impairment on an annual basis and may be subject to impairment losses as circumstances change (e.g., after an acquisition). If we record an impairment loss, it could have a
material adverse effect on our results of operations for the year in which the impairment is recorded.
A prolonged disruption of or any actual or perceived difficulties in the capital and credit markets may adversely affect our future access to capital, our cost of
capital and our ability to continue operations.
Our operations and performance depend primarily on California and U.S. economic conditions and their impact on purchases of, or capitated rates for, our healthcare
services, and our business is significantly exposed to risks associated with government spending and private payor reimbursement rates. As a result of both the global financial
crisis that began in 2008 and the COVID-19-related 2020 recession, general economic conditions deteriorated significantly. Although the markets have improved significantly,
the overall economic recovery since that time has been uneven. Declines in consumer and business confidence as well as private and government spending, together with
significant reductions in the availability and increases in the cost of credit and volatility in the capital and credit markets, have adversely affected the business and economic
environment in which we operate and our profitability. Market disruption, increases in interest rates and/or sluggish economic growth in any future period could adversely affect
our patients’ spending habits, private payors’ access to capital and governmental budgetary processes, which, in turn, could result in reduced revenue for us. The continuation or
recurrence of any of these conditions may adversely affect our cash flows, results of operations and financial condition. As economic uncertainty may continue in future
periods, our patients, private payors and government payors may alter their purchasing activities of healthcare services. Our patients may scale back healthcare spending, and
private and government payors may reduce reimbursement rates, which may also cause delay or cancellation of consumer spending for discretionary and non-reimbursed
healthcare. This uncertainty may also affect our ability to prepare accurate financial forecasts or meet specific forecasted results, and we may be unable to adequately respond to
or forecast further changes in demand for healthcare services. Volatility and disruption of capital and credit markets may adversely affect our access to capital and increase our
cost of capital. Should current economic and market conditions deteriorate, our ability to finance ongoing operations and our expansion may be adversely affected, we may be
unable to raise necessary funds, our cost of debt or equity capital may increase significantly and future access to capital markets may be adversely affected.
If there is a change in accounting principles or the interpretation thereof affecting consolidation of VIEs, it could impact our consolidation of total revenues
derived from our affiliated physician groups.
Our financial statements are consolidated and include the accounts of our majority-owned subsidiaries and various non-owned affiliated physician groups that are
VIEs, which consolidation is effectuated in accordance with applicable accounting rules promulgated by the Financial Accounting Standards Board (“FASB”). Such accounting
rules require that, under some circumstances, the VIE consolidation model be applied when a reporting enterprise holds a variable interest (e.g., equity interests, debt
obligations, certain management and service contracts) in a legal entity. Under this model, an enterprise must assess the entity in which it holds a variable interest to determine
whether it meets the criteria to be consolidated as a VIE. If the entity is a VIE, the consolidation framework next identifies the party, if one exists, that possesses a controlling
financial interest in the VIE, and then requires that party to consolidate as the primary beneficiary. An enterprise’s determination of whether it has a controlling financial interest
in a VIE requires that a qualitative determination be made, and is not solely based on voting rights. If an enterprise determines the entity in which it holds a variable interest is
not subject to the VIE consolidation model, the enterprise should apply the traditional voting control model which focuses on voting rights.
In our case, the VIE consolidation model applies to our controlled, but not owned, physician affiliated entities. Our determination regarding the consolidation of our
affiliates, however, could be challenged, which could have a material adverse effect on our operations. In addition, in the event of a change in accounting rules or FASB’s
interpretations thereof, or if there were an adverse determination by a regulatory agency or a court or a change in state or federal law relating to the ability to maintain present
agreements or arrangements with our affiliated physician groups, we may not be permitted to continue to consolidate the revenues of our VIEs.
Breaches or compromises of our information security systems or our information technology systems or infrastructure could result in exposure of private
information, disruption of our business and damage to our reputation, which could harm our business, results of operation and financial condition.
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As a routine part of our business, we utilize information security and information technology systems and websites that allow for the secure storage and transmission of
proprietary or private information regarding our patients, employees, vendors and others, including individually identifiable health information. A security breach of our
network, hosted service providers, or vendor systems, may expose us to a risk of loss or misuse of this information, litigation and potential liability. Hackers and data thieves are
increasingly sophisticated and operate large-scale and complex automated attacks, including on companies within the healthcare industry. Although we believe that we take
appropriate measures to safeguard sensitive information within our possession, we may not have the resources or technical sophistication to anticipate or prevent rapidly-
evolving types of cyber-attacks targeted at us, our patients, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur costs,
including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. We invest in industry standard
security technology to protect personal information. Advances in computer capabilities, new technological discoveries, or other developments may result in the technology used
by us to protect personal information or other data being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical failures.
To our knowledge, we have not experienced any material breach of our cybersecurity systems. If we or our third-party service providers systems fail to operate effectively or
are damaged, destroyed, or shut down, or there are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the
aforementioned could occur as a result of natural disasters, software or equipment failures, telecommunications failures, loss or theft of equipment, acts of terrorism,
circumvention of security systems, or other cyber-attacks, we could experience delays or decreases in service, and reduced efficiency of our operations. Additionally, any of
these events could lead to violations of privacy laws, loss of customers, or loss, misappropriation or corruption of confidential information, trade secrets or data, which could
expose us to potential litigation, regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect our business, and cause it to incur
significant losses and remediation costs.
We rely on complex software systems and hosted applications to operate our business, and our business may be disrupted if we are unable to successfully or
efficiently update these systems or convert to new systems.
We are increasingly dependent on technology systems to operate our business, reduce costs, and enhance customer service. These systems include complex software
systems and hosted applications that are provided by third parties. Software systems need to be updated on a regular basis with patches, bug fixes and other modifications.
Hosted applications are subject to service availability and reliability of hosting environments. We also migrate from legacy systems to new systems from time to time.
Maintaining existing software systems, implementing upgrades and converting to new systems are costly and require personnel and other resources. The implementation of
these systems upgrades and conversions is a complex and time-consuming project involving substantial expenditures for implementation activities, consultants, system
hardware and software, often requires transforming our current business and processes to conform to new systems, and therefore, may take longer, be more disruptive, and cost
more than forecast and may not be successful. If the implementation is delayed or otherwise is not successful, it may hinder our business operations and negatively affect our
financial condition and results of operations. There are many factors that may materially and adversely affect the schedule, cost, and execution of the implementation process,
including, without limitation, problems in the design and testing of new systems; system delays and malfunctions; the deviation by suppliers and contractors from the required
performance under their contracts with us; the diversion of management attention from our daily operations to the implementation project; reworks due to unanticipated changes
in business processes; difficulty in training employees in the operation of new systems and maintaining internal control while converting from legacy systems to new systems;
and integration with our existing systems. Some of such factors may not be reasonably anticipated or may be beyond our control.
We may be unable to renew our leases on favorable terms or at all as our leases expire, which could adversely affect our business, financial condition and results
of operations.
We operate several leased premises. There is no assurance that we will be able to continue to occupy such premises in the future. For example, we currently rent our
corporate headquarters on a month-to-month basis. We could thus spend substantial resources to meet the current landlords’ demands or look for other premises. We may be
unable to timely renew such leases or renew them on favorable terms, if at all. If any current lease is terminated or not renewed, we may be required to relocate our operations at
substantial costs or incur increased rental expenses, which could adversely affect our business, financial condition and results of operations.
We currently derive a substantial portion of our revenues in California and are vulnerable to changes in that state.
We primarily operate in California. Any material changes with respect to consumer preferences, taxation, reimbursements, financial requirements or other aspects of
the healthcare delivery in California or the state’s economic conditions could have an adverse effect on our business, results of operations and financial condition.
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Our success depends, to a significant degree, upon our ability to adapt to the ever-changing healthcare industry and continued development of additional services.
Although we expect to provide a broad and competitive range of services, there can be no assurance of acceptance of current services by the marketplace. Our ability to
procure new contracts may be dependent upon the continuing results achieved at the current facilities, upon pricing and operational considerations, and the potential need for
continuing improvement to our existing services. Moreover, the markets for our new services may not develop as expected nor can there be any assurance that we will be
successful in marketing any such services.
Risks Relating to Our Growth Strategy and Business Model.
Our growth strategy may not prove viable and we may not realize expected results.
Our business strategy is to grow rapidly by building a network of medical groups and integrated physician networks and is significantly dependent on locating and
acquiring, partnering or contracting with medical practices to provide health care delivery services. We seek growth opportunities both organically and through acquisitions of
or alliances with other medical service providers. As part of our growth strategy, we regularly review potential strategic opportunities. Identifying and establishing suitable
strategic relationships are time-consuming and costly. There can be no assurance that we will be successful. We cannot guarantee that we will be successful in pursuing such
strategic opportunities or assure the consequences of any strategic transactions. If we fail to evaluate and execute strategic transactions properly, we may not achieve anticipated
benefits and may incur increased costs.
Our strategic transactions involve a number of risks and uncertainties, including that:
• We may not be able to successfully identify suitable strategic opportunities, complete desired strategic transactions, or realize their expected benefits. In addition,
we compete for strategic transactions with other potential players, some of whom may have greater resources than we do. This competition may intensify due to the
ongoing consolidation in the healthcare industry, which may increase our costs to pursue such opportunities.
• We may not be able to establish suitable strategic relationships and may fail to integrate them into our business. We cannot be certain of the extent of any unknown,
undisclosed or contingent liabilities of any acquired business, including liabilities for failure to comply with applicable laws. We may incur material liabilities for
past activities from strategic relationships. Also, depending on the location of the strategic transactions, we may be required to comply with laws and regulations
that may differ from those of California, the state in which we currently operate.
• We may form strategic relationships with medical practices that operate with lower profit margins as compared with ours or which have a different payor mix than
our other practice groups, which would reduce our overall profit margin. Depending upon the nature of the local market, we may not be able to implement our
business model in every local market that we enter, which could negatively impact our revenues and financial condition.
• We may incur substantial costs to complete strategic transactions, integrate strategic relationships into our business, or expand our operations, including hiring more
employees and engaging other personnel, to provide services to additional patients that we are responsible for managing pursuant to the new relationships. If such
relationships terminate or diminish before we can realize their expected benefits, any costs that we have already incurred may not be recovered.
•
If we finance strategic transactions by issuing our equity securities or securities convertible thereto, our existing stockholders could be diluted. If we finance
strategic transactions with debt, it could result in higher leverage and interest costs for us.
If we are not successful in our efforts to identify and execute strategic transactions on beneficial terms, our ability to implement our business plan and achieve our targets
could be adversely affected.
The process of integrating strategic relationships also involves significant risks including:
•
•
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difficulties in coping with demands on management related to the increased size of our business;
difficulties in not diverting management’s attention from our daily operations;
difficulties in assimilating different corporate cultures and business practices;
difficulties in converting other entities’ books and records and conforming their practices to ours;
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•
•
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difficulties in integrating operating, accounting and information technology systems of other entities with ours and in maintaining uniform procedures, policies and
standards, such as internal accounting controls;
difficulties in retaining employees who may be vital to the integration of the acquired entities; and
difficulties in maintaining contracts and relationships with payors of other entities.
We may be required to make certain contingent payments in connection with strategic transactions from time to time. The fair value of such payments is re-evaluated
periodically based on changes in our estimate of future operating results and changes in market discount rates. Any changes in our estimated fair value are recognized in our
results of operations. The actual payments, however, may exceed our estimated fair value. Increases in actual contingent payments compared to the amounts recognized may
have an adverse effect on our financial condition.
There can be no assurance that we will be able to effectively integrate strategic relationships into our business, which may negatively impact our business model,
revenues, results of operations and financial condition. In addition, strategic transactions are time-intensive, requiring significant commitment of our management’s focus. If our
management spends too much time on assessing potential opportunities, completing strategic transactions and integrating strategic relationships, our management may not have
sufficient time to focus on our existing operations. This diversion of attention could have material and adverse consequences on our operations and profitability.
Obligations in our credit or loan documents could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions.
An event of default could harm our business, and creditors having security interests over our assets would be able to foreclose on our assets.
The terms of our credit agreements and other indebtedness from time to time require us to comply with a number of financial and other obligations, which may include
maintaining debt service coverage and leverage ratios and maintaining insurance coverage, that impose significant operating and financial restrictions on us, including
restrictions on our ability to take actions that may be in our interests. These obligations may limit our flexibility in our operations, and breaches of these obligations could result
in defaults under the agreements or instruments governing the indebtedness, even if we had satisfied our payment obligations. Moreover, if we defaulted on these obligations,
creditors having security interests over our assets could exercise various remedies, including foreclosing on and selling our assets. Unless waived by creditors, for which no
assurance can be given, defaulting on these obligations could result in a material adverse effect on our financial condition and ability to continue our operations.
We may encounter difficulties in managing our growth, and the nature of our business and rapid changes in the healthcare industry makes it difficult to reliably
predict future growth and operating results.
We may not be able to successfully grow and expand. Successful implementation of our business plan will require management of growth, including potentially rapid
and substantial growth, which could result in an increase in the level of responsibility for management personnel and strain on our human and capital resources. To manage
growth effectively, we will be required, among other things, to continue to implement and improve our operating and financial systems, procedures and controls and to expand,
train and manage our employee base. If we are unable to implement and scale improvements to our existing systems and controls in an efficient and timely manner or if we
encounter deficiencies, we will not be able to successfully execute our business plans. Failure to attract and retain sufficient numbers of qualified personnel could also impede
our growth. If we are unable to manage our growth effectively, it will have a material adverse effect on its business, results of operations and financial condition.
The evolving nature of our business and rapid changes in the healthcare industry makes it difficult to anticipate the nature and amount of medical reimbursements, third
party private payments and participation in certain government programs and thus to reliably predict our future growth and operating results.
We could experience significant losses under capitation contracts if our expenses exceed revenues.
Under a capitation contract, a health plan typically prospectively pays an IPA periodic capitation payments based on a percentage of the amount received by the health
plan. Capitation payments, in the aggregate, represent a prospective budget from which an IPA manages care-related expenses on behalf of the population enrolled with that
IPA. If our affiliated IPAs are able to manage care-related expenses under the capitated levels, we realize operating profits from capitation contracts. However, if care-related
expenses exceed projected levels, our affiliated IPAs may realize substantial operating deficits, which are not capped and could lead to substantial losses. Additionally, factors
beyond our control such as natural disasters, the potential effects of climate change, major epidemics, pandemics or newly emergent viruses (such as COVID-19) could reduce
our ability to effectively manage the costs of providing health care.
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If our agreements with affiliated physician groups are deemed invalid or are terminated under applicable law, our results of operations and financial condition
will be materially impaired.
There are various state laws, including laws in California, regulating the corporate practice of medicine which prohibit us from directly owning medical professional
entities. These prohibitions are intended to prevent unlicensed persons from interfering with or inappropriately influencing a physician’s professional judgment. These and other
laws may also prevent fee-splitting, which is the sharing of professional service income with non-professional or business interests. The interpretation and enforcement of these
laws vary significantly from state to state. We currently derive revenues from MSAs or similar arrangements with our affiliated IPAs, whereby we provide management and
administrative services to them. If these agreements and arrangements were held to be invalid under laws prohibiting the corporate practice of medicine and other laws or if there
are new laws that prohibit such agreements or arrangements, a significant portion of our revenues will be lost, resulting in a material adverse effect on our results of operations
and financial condition.
The arrangements we have with our VIEs are not as secure as direct ownership of such entities.
Because of corporate practice of medicine laws, we entered into contractual arrangements to manage certain affiliated physician practice groups, which allow us to
consolidate those groups for financial reporting purposes. We do not have direct ownership interests in any of our VIEs and are not able to exercise rights as an equity holder to
directly change the members of the boards of directors of these entities so as to affect changes at the management and operational level. Under our arrangements with our VIEs,
we must rely on their equity holders to exercise our control over the entities. If our affiliated entities or their equity holders fail to perform as expected, we may have to incur
substantial costs and expend additional resources to enforce such arrangements.
Any failure by our affiliated entities or their owners to perform their obligations under their agreements with us would have a material adverse effect on our
business, results of operations and financial condition.
Our affiliated physician practice groups are owned by individual physicians who could die, become incapacitated or become no longer affiliated with us. Although our
MSAs with these affiliates provide that they will be binding on successors of current owners, as the successors are not parties to the MSAs, it is uncertain in case of the death,
bankruptcy or divorce of a current owner whether his or her successors would be subject to such MSAs.
Our revenues and operations are dependent on a limited number of key payors.
Our operations are dependent on a concentrated number of payors. Four payors accounted for an aggregate of 53.4% and 51.6% of our total net revenue for the years
ended December 31, 2020 and 2019, respectively. We believe that a majority of our revenues will continue to be derived from a limited number of key payors, which may
terminate their contracts with us or our physicians credentialed by them upon the occurrence of certain events. They may also amend the material terms of the contracts under
certain circumstances. Failure to maintain such contracts on favorable terms, or at all, would materially and adversely affect our results of operations and financial condition.
An exodus of our patients could have a material adverse effect on our results of operations. We may also be impacted by a shift in payor mix including eligibility
changes to government and private insurance programs.
A material decline in the number of patients that we and our affiliated physician groups serve, whether a government or a private entity is paying for their healthcare,
could have a material adverse effect on our results of operations and financial condition, which could result from increased competition, new developments in the healthcare
industry or regulatory overhauls. In light of the repeal of the individual mandate requirement under the Patient Protection and Affordable Care Act of 2010 (also known as
Affordable Care Act or Obamacare) via the Tax Cuts and Jobs Act of 2017, starting in 2019, some people are expected to lose their health insurance and thus may not continue
to afford services by our managed medical groups. In addition, due to potential decreased availability of healthcare through private employers, the number of patients who are
uninsured or participate in governmental programs may increase. A shift in payor mix from managed care and other private payors to government payors or the uninsured may
result in a reduction in our rates of reimbursement or an increase in our uncollectible receivables or uncompensated care, with a corresponding decrease our net revenue.
Changes in the eligibility requirements for governmental programs could also change the number of patients who participate in such programs or the number of uninsured
patients. For those patients who remain with private insurance, changes in those programs could increase patient responsibility amounts, resulting in a greater risk for
uncollectible receivables. Such events could have a material adverse effect on our business, results of operations and financial condition.
Our future growth could be harmed if we lose the services of our key management personnel.
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Our success depends to a significant extent on the continued contributions of our key management personnel, particularly our Executive Chairman and Co-Chief
Executive Officer, Dr. Sim, and our Co-Chief Executive Officer and President, Dr. Lam, for the management of our business and implementation of our business strategy. The
loss of their services could have a material adverse effect on our business, financial condition and results of operations.
If having our key management personnel serving as nominee equity holders of our VIEs is invalid under applicable laws, or if we lost the services of key
management personnel for any reason, it could have a material adverse impact on our results of operations and financial condition.
There are various state laws, including laws in California, regulating the corporate practice of medicine which prohibits us from owning various healthcare entities.
These corporate practice of medicine prohibitions are intended to prevent unlicensed persons from interfering with or inappropriately influencing a physician’s professional
judgment. The interpretation and enforcement of these laws vary significantly from state to state. As a result, many of our affiliated physician practice groups are either wholly-
owned or primarily owned by Dr. Lam as the nominee shareholder for our benefit. If these arrangements were held to be invalid under applicable laws, which may change from
time to time, a significant portion of our consolidated revenues would be affected, which may result in a material adverse effect on our results of operations and financial
condition. Similarly, if Dr. Lam died, was incapacitated or otherwise was no longer affiliated with us, our relationships and arrangements with those VIEs could be in jeopardy,
and our business could be adversely affected.
We are dependent in part on referrals from third parties and preferred provider status with payors.
Our business relies in part on referrals from third parties for our services. We receive referrals from community medical providers, emergency departments, payors,
and hospitals in the same manner as other medical professionals receive patient referrals. We do not provide compensation or other remuneration to referral sources for referring
patients to us. A decrease in these referrals due to competition, concerns about our services and other factors could result in a significant decrease in our revenues and adversely
impact our financial condition. Similarly, we cannot assure that we will be able to obtain or maintain preferred provider status with significant third-party payors in the
communities where we operate. If we are unable to maintain our referral base or our preferred provider status with significant third-party payors, it may negatively impact our
revenues and financial performance.
Partner facilities may terminate agreements with our affiliated physician groups or reduce their fees.
Our hospitalist physician services net revenue is derived from contracts directly with hospitals and other inpatient and post-acute care facilities. Our current partner
facilities may decide not to renew contracts with, impose unfavorable terms on, or reduce fees paid to our affiliated physician groups. Any of these events may impact the
ability of our affiliated physician groups to operate at such facilities, which would negatively impact our revenues, results of operations and financial condition.
Many of our agreements with hospitals and medical groups have limited durations, may be terminated without cause by them, and prohibit us from acquiring
physicians or patients from or competing with them.
Many of our agreements with hospitals and medical groups are limited in their terms or may be terminated without cause by providing advance notice. If such
agreements are not renewed or terminated, we would lose the revenue generated by them. Any such events could have a material adverse effect on our results of operations,
financial condition and future business plans. Because many of such agreements with hospitals and medical groups prohibit us from acquiring physicians or patients from or
competing with them, our ability to hire physicians, attract patients or conduct business in certain areas may be limited in some cases.
Our business model depends on numerous complex management information systems, and any failure to successfully maintain these systems or implement new
systems could undermine our ability to receive payments and otherwise materially harm our operations and may result in violations of healthcare laws and regulations.
We depend on a complex, specialized, integrated management information system and standardized procedures for operational and financial information, as well as for
our billing operations. We may be unable to enhance existing management information systems or implement new management information systems when necessary. We may
experience unanticipated delays, complications or expenses in implementing, integrating and operating our systems. Our management information systems may require
modifications, improvements or replacements that may require both substantial expenditures as well as interruptions in operations. Our ability to create and implement these
systems depends on the availability of technology and skilled personnel. Our failure to successfully implement and maintain all of our systems could undermine our ability to
receive
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payments and otherwise have a material adverse effect on our business, results of operations and financial condition. Our failure to successfully operate our billing systems
could also lead to potential violations of healthcare laws and regulations.
Risks Relating to the Healthcare Industry.
The healthcare industry is highly competitive.
We compete directly with national, regional and local providers of inpatient healthcare for patients and physicians. There are many other companies and individuals
currently providing health care services, many of which have been in business longer and/or have substantially more resources. Since there are virtually no substantial capital
expenditures required for providing health care services, there are few financial barriers to entry the healthcare industry. Other companies could enter the healthcare industry in
the future and divert some or all of our business. On a national basis, our competitors include, but are not limited to, Team Health, EmCare, Optum and Heritage, each of which
has greater financial and other resources available to them. We also compete with physician groups and privately-owned health care companies in local markets. In addition, our
relationships with governmental and private third-party payors are not exclusive and our competitors have established or could seek to establish relationships with such payors
to serve their covered patients. Competitors may also seek to compete with us for acquisitions, which could have the effect of increasing the price and reducing the number of
suitable acquisitions, which would have an adverse impact on our growth strategy. Individual physicians, physician groups and companies in other healthcare industry
segments, including those with which we have contracts, and some of which have greater financial, marketing and staffing resources, may become competitors in providing
health care services, and this competition may have a material adverse effect on our business operations and financial position.
We therefore may be unable to compete successfully and even after we expend significant resources.
New physicians and other providers must be properly enrolled in governmental healthcare programs before we can receive reimbursement for their services, and
there may be delays in the enrollment process.
Each time a new physician joins us or our affiliated groups, we must enroll the physician under our applicable group identification number for Medicare and Medicaid
programs and for certain managed care and private insurance programs before we can receive reimbursement for services the physician renders to beneficiaries of those
programs. The estimated time to receive approval for the enrollment is sometimes difficult to predict and, in recent years, the Medicare program carriers often have not issued
these numbers to our affiliated physicians in a timely manner. These practices result in delayed reimbursement that may adversely affect our cash flows.
Hospitals where our affiliated physicians provide services may deny privileges to our physicians.
In general, our affiliated physicians may only provide services in a hospital where they have maintained certain credentials, also known as privileges, which are
granted by the medical staff according to the bylaws of the hospital. The medical staff could decide that our affiliated physicians can no longer receive privileges to practice
there. Such a decision would limit our ability to furnish services at the hospital, decrease the number of our affiliated physicians, or preclude us from entering new hospitals. In
addition, hospitals may attempt to enter into exclusive contracts for certain physician services, which would reduce our access to patient populations within the hospital.
Changes associated with reimbursements by third-party payors may adversely affect our operations.
The medical services industry is undergoing significant changes with government and other third-party payors that are taking measures to reduce reimbursement rates
or, in some cases, denying reimbursement altogether. There is no assurance that government or other third-party payors will continue to pay for the services provided by our
affiliated medical groups. Furthermore, there has been, and continues to be, a great deal of discussion and debate about the repeal and replacement of existing government
reimbursement programs, such as the ACA. As a result, the future of healthcare reimbursement programs is uncertain, making long-term business planning difficult and
imprecise. The failure of government or other third party payors to cover adequately the medical services provided by us could have a material adverse effect on our business,
results of operations and financial condition.
Our business may be significantly and adversely affected by legislative initiatives aimed at or having the effect of reducing healthcare costs associated with Medicare
and other government healthcare programs and changes in reimbursement policies. In order to participate in the Medicare program, we must comply with stringent and often
complex enrollment and reimbursement requirements. These programs generally provide for reimbursement on a fee-schedule basis rather than on a charge-related basis. As a
result, we cannot increase our revenue by increasing the amount that we and our affiliates charge for
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services. To the extent that our costs increase, we may not be able to recover the increased costs from these programs. In addition, cost containment measures in non-
governmental insurance plans have generally restricted our ability to recover, or shift to non-governmental payors, these increased costs. In attempts to limit federal and state
spending, there have been, and we expect that there will continue to be, a number of proposals to limit or reduce Medicare reimbursement for various services. For example, the
Medicare Access and CHIP Reauthorization Act of 2015 made numerous changes to Medicare, Medicaid, and other healthcare related programs, including new systems for
establishing annual updates to Medicare rates for physicians’ services.
We may have difficulty collecting payments from third-party payors in a timely manner.
We derive significant revenue from third-party payors, and delays in payment or refunds to payors may adversely impact our net revenue. We assume the financial
risks relating to uncollectible and delayed payments. In particular, we rely on some key governmental payors. Governmental payors typically pay on a more extended payment
cycle, which could require us to incur substantial expenses prior to receiving corresponding payments. In the current healthcare environment, as payors continue to control
expenditures for healthcare services, including through revising their coverage and reimbursement policies, we may continue to experience difficulties in collecting payments
from payors that may seek to reduce or delay such payments. If we are not timely paid in full or if we need to refund some payments, our revenues, cash flows and financial
condition could be adversely affected.
Decreases in payor rates could adversely affect us.
Decreases in payor rates, either prospectively or retroactively, could have a significant adverse effect on our revenues, cash flows and results of operations.
Federal and state laws may limit our ability to collect monies owed by patients.
We use third-party collection agencies whom we do not control to collect from patients any co-payments and other payments for services that our physicians provide.
The federal Fair Debt Collection Practices Act of 1977 (the “FDCPA”) restricts the methods that third-party collection companies may use to contact and seek payment from
consumer debtors regarding past due accounts. State laws vary with respect to debt collection practices, although most state requirements are similar to those under the FDCPA.
Therefore, such agencies may not be successful in collecting payments owed to us and our affiliated physician groups. If practices of collection agencies utilized by us are
inconsistent with these standards, we may be subject to actual damages and penalties. These factors and events could have a material adverse effect on our business, results of
operations and financial condition.
We have established reserves for our potential medical claim losses which are subject to inherent uncertainties and a deficiency in the established reserves may
lead to a reduction in our assets or net incomes.
We establish reserves for estimated IBNR claims. IBNR estimates are developed using actuarial methods and are based on many 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 our contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such
interpretations may not come to light until a substantial period of time has passed. The inherent difficulty in interpreting contracts and estimating necessary reserves could result
in significant fluctuations in our estimates from period to period. Our actual losses and related expenses therefore may differ, even substantially, from the reserve estimates
reflected in our financial statements. If actual claims exceed our estimated reserves, we may be required to increase reserves, which would lead to a reduction in our assets or
net income.
Competition for qualified physicians, employees and management personnel is intense in the healthcare industry, and we may not be able to hire and retain
qualified physicians and other personnel.
We depend on our affiliated physicians to provide services and generate revenue. We compete with many types of healthcare providers, including teaching, research
and government institutions, hospitals and other practice groups, for the services of clinicians and management personnel. The limited number of residents and other licensed
providers on the job market with the expertise necessary to provide services within our business makes it challenging to meet our hiring needs and may require us to train new
employees, contract temporary physicians, or offer more attractive wage and benefit packages to experienced professionals, which could decrease our profit margins. The
limited number of available residents and other
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licensed providers also impacts our ability to renew contracts with existing physicians on acceptable terms. As a result, our ability to provide services could be adversely
affected. Even though our physician turnover rate has remained stable over the last three years, if the turnover rate were to increase significantly, our growth could be adversely
affected. Moreover, unlike some of our competitors who sometimes pay additional compensation to physicians who agree to provide services exclusively to that competitor, our
affiliated IPAs have historically not entered into such exclusivity agreements and have allowed our affiliated physicians to affiliate with multiple IPAs. This practice may place
us at a competitive disadvantage regarding the hiring and retention of physicians relative to those competitors who do enter into such exclusivity agreements.
The healthcare industry is increasingly reliant on technology, which could increase our risks.
The role of technology is greatly increasing in the delivery of healthcare, which makes it difficult for traditional physician-driven companies, such as us, to adopt and
integrate electronic health records, databases, cloud-based billing systems and many other technology applications in the delivery of healthcare services. Additionally,
consumers are using mobile applications and care and cost research in selecting and usage of healthcare services. We may need to incur significant costs to implement these
technology applications and comply with applicable laws. For example, the nature of our business and the requirements of healthcare privacy laws impose significant
obligations on us to maintain privacy and protection of patient medical information. We rely on employees and third parties with technology knowledge and expertise and could
be at risk if technology applications are not properly established, maintained or secured. Any cybersecurity incident, even unintended, could expose us to significant fines and
remediation costs and materially impair our business operations and financial position.
If we are unable to effectively adapt to changes in the healthcare industry, including changes to laws and regulations regarding or affecting the U.S. healthcare
reform, our business may be harmed.
Due to the importance of the healthcare industry in the lives of all Americans, federal, state, and local legislative bodies frequently pass legislation and promulgate
regulations relating to healthcare reform or that affect the healthcare industry. As has been the trend in recent years, it is reasonable to assume that there will continue to be
increased government oversight and regulation of the healthcare industry in the future. We cannot assure our stockholders as to the ultimate content, timing or effect of any new
healthcare legislation or regulations, nor is it possible at this time to estimate the impact of potential new legislation or regulations on our business. It is possible that future
legislation enacted by Congress or state legislatures, or regulations promulgated by regulatory authorities at the federal or state level, could adversely affect our business or
could change the operating environment of the hospitals and other facilities where our affiliated physicians provide services. It is possible that the changes to the Medicare,
Medicaid or other governmental healthcare program reimbursements may serve as precedent to possible changes in other payors’ reimbursement policies in a manner adverse to
us. Similarly, changes in private payor reimbursements could lead to adverse changes in Medicare, Medicaid and other governmental healthcare programs which could have a
material adverse effect on our business, financial condition and results of operations.
Although we do not anticipate that a single-payer national health insurance system will be enacted by the current Congress, several legislative initiatives have been
proposed by members of Congress and presidential candidates that would establish some form of a single public or quasi-public agency that organizes healthcare financing, but
under which healthcare delivery would remain private. If enacted, such a system could adversely affect our business.
Consolidation in the health care industry could have a material adverse effect on our business, financial condition and results of operations.
Many health care industry participants and payers are consolidating to create larger and more integrated health care delivery systems with greater market power. We
expect regulatory and economic conditions to result in additional consolidation in the health care industry in the future. As consolidation accelerates, the economies of scale of
our partners’ organizations may grow. If a partner experiences sizable growth following consolidation, it may determine that it no longer needs to rely on us and may reduce its
demand for our products and services. In addition, as health care providers consolidate to create larger and more integrated health care delivery systems with greater market
power, these providers may try to use their market power to negotiate fee reductions for our products and services. Finally, consolidation may also result in the acquisition or
future development by our partners of products and services that compete with our products and services. Any of these potential results of consolidation could have a material
adverse effect on our business, financial condition and results of operations.
Risks Relating to NGACO.
The success of our emphasis on the NGACO Model is uncertain.
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In January 2017, CMS approved APAACO, our subsidiary, to participate in the NGACO Model. To position us to participate in the NGACO Model and meet its
requirements, we have invested significant resources in reshaping our business and organizations and in establishing related infrastructure, and expect to continue to devote,
significant financial and other resources to the NGACO Model. These efforts have required us to refocus away from certain other parts of our historic business and revenue
streams, which will receive less emphasis and could result in reduced revenue from these activities for us. For example, we have converted physicians and patients from our
MSSP ACOs to our NGACO. It is unknown whether this strategic decision will be eventually successful.
The NGACO Model has certain political risks and is undergoing changes.
If the Patient Protection and the ACA is amended, repealed, declared unconstitutional or replaced, or if Center for Medicare and Medicaid Innovation (“CMMI”) is
terminated, the NGACO Model program could be discontinued or significantly altered. In addition, CMS and CMMI leadership could be changed and influenced by Congress
or the current Biden Administration, and may elect to combine any existing programs, including bundled payments, which could greatly alter the NGACO Model program. The
rules regarding NGACOs have also been altered and may be further altered in the future. Any material change to the NGACO requirements and governing rules or the
discontinuation of the program as a whole could create significant uncertainties for us and alter our strategic direction, thereby increasing financial risks for our stockholders.
There are uncertainties regarding the design and administration of the NGACO Model and CMS’ initial financial reports to NGACO participants, which could
negatively impact our results of operations.
Due to the newness of the NGACO Model, and due to being the only participant in the AIPBP track, we are subject to initial program challenges including, but not
limited to, process design, data and other related aspects. We rely on CMS for design, oversight and governance of the NGACO Model. If CMS cannot provide accurate data,
claims benchmarking and calculations, make timely payments and conduct periodic process reviews, our results of operations and financial condition could be materially and
adversely affected. CMS relies on various third parties to effect the NGACO program, including other departments of the U.S. government, such as CMMI. CMS also relies on
multiple third-party contractors to manage the NGACO Model program, including claims and auditing. As a result, there is the potential for errors, delays and poor
communication among the differing entities involved, which are beyond the control of us. As CMS is implementing extensive reporting protocols for the NGACO Model, CMS
has indicated that because of inherent biases in reporting the results, its initial financial reports under the NGACO Model may not be indicative of final results of actual risk-
sharing and revenues which we receive. Were that to be the case, we might not report accurately our revenues for relevant periods, which could result in adjustment in a later
period when we receive final results from CMS. We and our contracted providers have experienced various apparent errors in the NGACO Model, resulting in some providers
terminating their relationships with us, and the resolution of these issues and impact on us remains uncertain. If we continue to experience such issues or new issues emerge, this
could have a material adverse effect on our results of operations on a consolidated basis.
We chose to participate in the AIPBP mechanism, which entails certain special risks.
Under the AIPBP mechanism, CMS estimates the total annual Part A and Part B Medicare expenditures of our assigned Medicare beneficiaries and pay us that
projected amount in per beneficiary per month payments. We chose “Risk Arrangement A,” comprising 80% risk for Part A and Part B Medicare expenditures and a shared
savings and losses cap of 5% (or a 4% effective shared savings and losses cap when factoring in 80% risk impact). Our benchmark Medicare Part A and Part B expenditures for
beneficiaries for the 2020 performance year are approximately $505.0 million, and under “Risk Arrangement A” of the AIPBP mechanism we could therefore have profits or be
liable for losses of up to 4% of such benchmarked expenditures, or approximately $20.2 million. While performance can be monitored throughout the year, end results for the
2020 performance year will not be known until mid-2021.
AIPBP operations and benchmarking calculations are complex and could result in uncertainties for us.
AIPBP operations and benchmarking calculations are complex and can lead to errors in the application of the NGACO Model, which could create reimbursement
delays to our contracted, in-network providers and adversely affect our performance and results of operations. For example, we discovered a feature in the AIPBP claim
processing system that does not allow us to break down certain claims amounts by individual patient codes. This has created confusion for our in-network providers in
reconciling payments, causing some providers to terminate their agreements with us. This feature and other complexities within the AIPBP mechanism could also create
uncertainties for our operations including under agreements with our contracted, in-network providers
We may suffer losses and may not generate savings through our participation in the NGACO Model.
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Through the NGACO Model, CMS provides an opportunity to provider groups that are willing to assume higher levels of financial risk and reward, to participate in
this new attribution-based risk sharing model. The NGACO Model uses a prospectively-set cost benchmark, which is established prior to the start of each performance year.
The benchmark is based on various factors, including baseline expenditures with the baseline updated each year to reflect the NGACO’s participant list for the given year. Our
2020 performance year baseline is based on calendar year 2019 expenditures that are risk adjusted and trended. A discount is then applied that incorporates regional and
national efficiency. The benchmarked expenditures therefore could potentially underestimate our actual expenditures for assigned Medicare beneficiaries and there can be no
assurance that we could successfully adjust such benchmarked expenditures. Under the NGACO Model, we are responsible for savings and losses related to care received by
assigned patients by covering claims from physicians, nurses and other medical professionals. If claim costs exceed the benchmarked expenditures, or the baseline years are
statistical anomalies, we could experience losses, which could be significant. Among other things, this could result from factors beyond our control such as natural disasters, the
potential effects of climate change, major epidemics, pandemics or newly emergent viruses (such as COVID-19) As we are providing care coordination through APAACO, but
do not provide direct patient care, our influence could be limited. Because of our limited influence, it is possible that we may not be able to control care providers’ behavior,
utilization, and costs. As a result, we may not be able to generate savings through our participation in the NGACO Model to cover our administrative and care coordination
operating costs, and any savings generated, if at all, will be earned in arrears and uncertain in both timing and amount.
We do not control, but are responsible for savings and losses related to, care received by assigned patients at out-of-network providers, which could negatively
impact our ability to control claim costs.
Medicare beneficiaries in the NGACO Model are not required to receive care from a specified network of contracted providers and facilities, which could make it
difficult for us to control the financial risks of those beneficiaries. CMS notified us that its Medicare beneficiaries historically had received approximately 62% of care at non-
contracted, out-of-network (“OON”) providers. While we are not responsible for directly paying claims for OON providers, we may have difficulty managing patient care and
costs in relation to such OON providers as compared to contracted, in-network providers, which, could adversely impact our financial results as we are responsible for savings
and losses of assigned beneficiaries, irrespective of whether they are using in-network or OON providers. In addition, even if we are successful in encouraging more assigned
patients to receive care from our contracted, in-network providers, there is the possibility that the monthly AIPBP from CMS will be insufficient to cover our expenditures,
since the AIPBP is generally based on historical in-network/out-of-network ratios. If CMS fails to monitor the in-network/OON provider ratio for our assigned patients on a
frequent basis or CMS’ reconciliation payments to us are not timely made, this could result in negative cash flows for us, especially if increased payments will need to be made
to our contracted, in-network providers.
Third parties used by us could hinder our performance.
We use third parties to perform certain administrative and care coordination tasks. We have contracted with participating Part A and Part B providers and sometimes
with discounted rates. This could, however, create operational and performance risk; for example, if a third party does not perform its responsibilities properly. In addition, such
providers could increase their current rates or discontinue their agreements with us.
We face competition from traditional MSSP ACOs and other NGACOs
Managed care providers experienced in coordinating care for populations of patients compete with each other to be selected by CMS to participate in the NGACO
Model. Since MSSP and pioneer ACOs began in 2012, the number of Medicare ACOs continues to rise and have grown to several hundred nationwide but there are still a
growing number of ACOs in different program types that compete with us for resources and patients.
Our continued participation in the NGACO Model cannot be guaranteed.
APAACO and CMS entered into a Next Generation ACO Model Participation Agreement (the “Participation Agreement”) with a term of four performance years
through December 31, 2020. Subsequently due to the COVID-19 Public Health Emergency (the “PHE”), CMS offered APAACO to amend the Participation Agreement to add
one additional twelve-month Performance Year, extending the term of the Participation Agreement by one calendar year, such that the final Performance Year will end on
December 31, 2021. In addition, the Participation Agreement may be terminated sooner by CMS as specified therein and CMS has the flexibility to alter or change the program
over time. Among many requirements to be eligible to participate in the NGACO Model, we must have at least 10,000 aligned Medicare beneficiaries and must maintain that
number throughout each performance year. Although we started the 2021 performance year with approximately 30,000 aligned Medicare beneficiaries, there can be no
assurance that we will maintain the required number of assigned Medicare beneficiaries. If that number were not maintained, we would become ineligible for the NGACO
Model. In addition, we are
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required to comply with all applicable laws and regulations regarding provider-based risk-bearing entities. If these laws or regulations change, for example, to require a Knox-
Keene license in California, which we do not currently have, we could be required to cease our NGACO operations. We could be terminated from the NGACO Model at any
time if we do not continue to comply with the NGACO participation requirements. In October 2017, CMS notified us that our participation in the AIPBP mechanism for
performance year 2018 would not be renewed due to alleged deficiencies in performance by us. We submitted a request for reconsideration to CMS. In December 2017, we
received the official decision on our reconsideration request that CMS reversed the prior decision against our continued participation in the AIPBP mechanism. As a result, we
were again eligible to receive monthly AIPBP from CMS. We, however, 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. If future compliance or performance issues arise, we may lose our
current eligibility and may be subject to CMS’ enforcement or contract actions, including our potential inability to participate in the AIPBP mechanism (where the payment
mechanism would default to traditional fee for service) or dismissal from the NGACO Model, which would have a material adverse effect on our revenues and cash flows. In
addition, the payments from CMS to us will decrease if the number of beneficiaries assigned to our NGACO declines, or the contracted providers terminate their relationships
with us, which could have a material adverse effect on our results of operations on a consolidated basis.
Risks Relating to Regulatory Compliance.
Laws regulating the corporate practice of medicine could restrict the manner in which we are permitted to conduct our business and the failure to comply with
such laws could subject us to penalties and restructuring.
Some states have laws that prohibit business entities from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions
by physicians (also known collectively as the corporate practice of medicine) or engaging in some arrangements, such as fee-splitting, with physicians. In some states these
prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. California is one of the states
that prohibit the corporate practice of medicine.
In California, we operate by maintaining contracts with our affiliated physician groups which are each owned and operated by physicians and which employ or contract
with additional physicians to provide physician services. Under these arrangements, we or our subsidiaries provide management services, receive a management fee for
providing management services, do not represent to offer medical services, and do not exercise influence or control over the practice of medicine by the physicians or the
affiliated physician groups.
In addition to the above management arrangements, in certain instances, we have contractual rights relating to the transfer of equity interests in our affiliated physician
groups under physician shareholder agreements that we entered into with the controlling equity holder of such affiliated physician groups. However, even in such instances, such
equity interests cannot be transferred to or held by us or by any non-professional organization. Accordingly, we do not directly own any equity interests in any affiliated
physician groups in California. In the event that any of these affiliated physician groups or their equity holders fail to comply with these management or ownership transfer
arrangements, these arrangements are terminated, we are unable to enforce such arrangements, or these arrangements are invalidated under applicable laws, there could be a
material adverse effect on our business, results of operations and financial condition and we may have to restructure our organization and change our arrangements with our
affiliated physician groups, which may not be successful.
The healthcare industry is intensely regulated at the federal, state, and local levels and government authorities may determine that we fail to comply with
applicable laws or regulations and take actions against us.
As a company involved in providing healthcare services, we are subject to numerous federal, state and local laws and regulations. There are significant costs involved
in complying with these laws and regulations. If we are found to have violated any applicable laws or regulations, we could be subject to civil and/or criminal damages, fines,
sanctions or penalties, including exclusion from participation in governmental healthcare programs, such as Medicare and Medicaid, and we may be required to change our
method of operations and business strategy. These consequences could be the result of our current conduct or even conduct that occurred a number of years ago, including prior
to the completion of the Merger. We could incur significant costs to defend ourselves if we become the subject of an investigation or legal proceeding alleging a violation of
these laws and regulations. We cannot predict whether a federal, state or local government will determine that we are not operating in accordance with law, or whether, when or
how the laws will change in the future and impact our business. The following is a non-exhaustive list of some of the more significant healthcare laws and regulations that could
affect us:
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the False Claims Act, that provide for penalties against entities and individuals which knowingly or recklessly make claims to Medicare, Medicaid, and other
governmental healthcare programs, as well as third-party payors, that contain or are based upon false or fraudulent information;
a provision of the Social Security Act, commonly referred to as the “Anti-Kickback Statute,” that prohibits the knowing and willful offering, payment,
solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash or in kind, in return for the referral or recommendation of patients for items
and services covered, in or in part, by federal healthcare programs such as Medicare and Medicaid;
a provision of the Social Security Act, commonly referred to as the Stark Law or physician self-referral law, that (subject to limited exceptions) prohibits
physicians from referring Medicare patients to an entity for the provision of specific “designated health services” if the physician or a member of such
physician’s immediate family has a direct or indirect financial relationship with the entity, and prohibits the entity from billing for services arising out of such
prohibited referrals;
a provision of the Social Security Act that provides for criminal penalties on healthcare providers who fail to disclose known overpayments;
a provision of the Social Security Act that provides for civil monetary penalties on healthcare providers who fail to repay known overpayments within 60 days
of identification or the date any corresponding cost report was due, if applicable, and also allows improper retention of known overpayments to serve as a basis
for False Claims Act violations;
provisions of the Social Security Act (emanating from the DRA) that require entities that make or receive annual Medicaid payments of $5 million or more
from a single Medicaid program to provide its employees, contractors and agents with written policies and employee handbook materials on federal and state
false claims acts and related statutes, that establish a new Medicaid Integrity Program designed to enhance federal and state efforts to detect Medicaid fraud,
waste, and abuse, and that increase financial incentives for both states and individuals to bring fraud and abuse claims against healthcare companies;
state law provisions pertaining to anti-kickback, self-referral and false claims issues;
provisions of, and regulations relating to, HIPAA that provide penalties for knowingly and willfully executing a scheme or artifice to defraud a health-care
benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the
delivery of or payment for healthcare benefits, items or services;
provisions of HIPAA and the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) limiting how covered entities,
business associates and business associate sub-contractors may use and disclose PHI and the security measures that must be taken in connection with protecting
that information and related systems, as well as similar or more stringent state laws;
federal and state laws that provide penalties for providers for billing and receiving payments from a governmental healthcare program for services unless the
services are medically necessary and reasonable, adequately and accurately documented, and billed using codes that accurately reflect the type and level of
services rendered;
state laws that provide for financial solvency requirements relating to risk-bearing organizations (“RBOs”), plan operations, plan-affiliate operations and
transactions, plan-provider contractual relationships and provider-affiliate operations and transactions, such as California Business & Professions Code Section
1375.4 (§ 1375.4; Cal. Code Regs., tit. 28, § 1300.75.4 et seq.);
federal laws that provide for administrative sanctions, including civil monetary penalties for, among other violations, inappropriate billing of services to federal
healthcare programs, payments by hospitals to physicians for reducing or limiting services to Medicare or Medicaid patients, or employing or contracting with
individuals or entities who/which are excluded from participation in federal healthcare programs;
federal and state laws and policies that require healthcare providers to enroll in the Medicare and Medicaid programs before submitting any claims for services,
to promptly report certain changes in its operations to the
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agencies that administer these programs, and to re-enroll in these programs when changes in direct or indirect ownership occur or in response to revalidation
requests from Medicare and Medicaid;
state laws that prohibit general business entities from practicing medicine, controlling physicians’ medical decisions or engaging in certain practices, such as
splitting fees with physicians;
state laws that require timely payment of claims, including §1371.38, et al, of the California Health & Safety Code, which imposes time limits for the payment
of uncontested covered claims and required health care service plans to pay interest on uncontested claims not paid promptly within the required time period;
laws in some states that prohibit non-domiciled entities from owning and operating medical practices in such states;
federal and state laws and regulations restricting the techniques that may be used to collect past due accounts from consumers, such as our patients, for services
provided to the consumer; and
state laws that require healthcare providers that assume professional and institutional risk (i.e., global risk) to either obtain a license under the Knox-Keene
Health Care Service Plan Act of 1975 or receive an exemption from the Department of Managed Healthcare ("DMHC") for the contract(s) under which the
entity assumes global risk.
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Any violation or alleged violation of any of these laws or regulations by us or our affiliates could have a material adverse effect on our business, financial condition
and results of operations.
Changes in healthcare laws could create an uncertain environment and materially impact us. We cannot predict the effect that the ACA (also known as
Obamacare) and its implementation, amendment, or repeal and replacement, may have on our business, results of operations or financial condition.
Any changes in healthcare laws or regulations that reduce, curtail or eliminate payments, government-subsidized programs, government-sponsored programs, and/or
the expansion of Medicare or Medicaid, among other actions, could have a material adverse effect on our business, results of operations and financial condition.
For example, the ACA dramatically changed how healthcare services are covered, delivered, and reimbursed. The ACA requires insurers to accept all applicants,
regardless of pre-existing conditions, cover an extensive list of conditions and treatments, and charge the same rates, regardless of pre-existing condition or gender. The ACA
and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Care Reform Acts”) also mandated changes specific to home health and hospice
benefits under Medicare. In 2012, the U.S. Supreme Court upheld the constitutionality of the ACA, including the “individual mandate” provisions of the ACA that generally
require all individuals to obtain healthcare insurance or pay a penalty. However, the U.S. Supreme Court also held that the provision of the ACA that authorized the Secretary of
the U.S. Department of Health and Human Services (“HHS”) to penalize states that choose not to participate in the expansion of the Medicaid program by removing all of its
existing Medicaid funding was unconstitutional. In response to the ruling, a number of state governors opposed its state’s participation in the expanded Medicaid program,
which resulted in the ACA not providing coverage to some low-income persons in those states. In addition, several bills have been, and are continuing to be, introduced in U.S.
Congress to amend all or significant provisions of the ACA, or repeal and replace the ACA with another law. In December 2017, the individual mandate was repealed via the
Tax Cuts and Jobs Act of 2017. Afterwards, legal and political challenges as to the constitutionality of the remaining provisions of the ACA resumed. Just as the fate of the
ACA is uncertain, so is the future of care organizations established under the ACA such as ACOs and NGACOs. Under its NGACO Participation Agreement with CMS, our
operations are always subject to the nation’s healthcare laws, as amended, repealed or replaced from time to time.
The net effect of the ACA on our business is subject to numerous variables, including the law’s complexity, lack of complete implementing regulations and interpretive
guidance, gradual and potentially delayed implementation or possible amendment, as well as the uncertainty as to the extent to which states will choose to participate in the
expanded Medicaid program. The continued implementation of provisions of the ACA, the adoption of new regulations thereunder and ongoing challenges thereto, also added
uncertainty about the current state of U.S. healthcare laws and could negatively impact our business, results of operations and financial condition.
Healthcare providers could be subject to federal and state investigations and payor audits.
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Due to our and our affiliates’ participation in government and private healthcare programs, we are from time to time involved in inquiries, reviews, audits and
investigations by governmental agencies and private payors of our business practices, including assessments of our compliance with coding, billing and documentation
requirements. Federal and state government agencies have active civil and criminal enforcement efforts against healthcare companies, and their executives and managers. The
DRA, which provides a financial incentive to states to enact their own false claims acts, and similar laws encourage investigations against healthcare companies by different
agencies. These investigations could also be initiated by private whistleblowers. Responding to audit and investigative activities are costly and disruptive to our business
operations, even when the allegations are without merit. If we are subject to an audit or investigation, a finding could be made that we or our affiliates erroneously billed or
were incorrectly reimbursed, and we may be required to repay such agencies or payors, may be subjected to pre-payment reviews, which can be time-consuming and result in
non-payment or delayed payments for the services we or our affiliates provide, and may be subject to financial sanctions or required to modify our operations.
Controls designed to reduce inpatient services and associated costs may reduce our revenues.
Controls imposed by Medicare, Medicaid and private payors designed to reduce admissions and lengths of stay, commonly referred to as “utilization review,” have
affected and are expected to continue to affect our operations. Federal law contains numerous provisions designed to ensure that services rendered by hospitals and other care
providers to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These
provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement organizations, which review the
appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, and the appropriateness of cases of extraordinary length of stay or
cost on a post-discharge basis. Quality improvement organizations may deny payment for services or assess fines and also have the authority to recommend to the HHS that a
provider is in substantial noncompliance with the standards of the quality improvement organization and should be excluded from participation in the Medicare program. The
ACA potentially expands the use of prepayment review by Medicare contractors by eliminating statutory restrictions on its use, and, as a result, efforts to impose more stringent
cost controls are expected to continue. Utilization review is also a requirement of most non-governmental managed care organizations and other third-party payors. Inpatient
utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-required preadmission authorization and utilization review and by third
party payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Although we are unable to predict the effect these controls
and any changes thereto may have on our operations, significant limits on the scope of our services reimbursed and on reimbursement rates and fees could have a material,
adverse effect on our business, financial position and results of operations.
We do not have a Knox-Keene license.
The Knox-Keene Health Care Service Plan Act of 1975 was passed by the California State Legislature to regulate California managed care plans and is currently
administered by the DMHC. A Knox-Keene Act license is required to operate a health care service plan, e.g., an HMO, or an organization that accepts global risk, i.e., accepts
full risk for a patient population, including risk related to institutional services, e.g., hospital, and professional services. Applying for and obtaining such a license is a time
consuming and detail-oriented undertaking. We currently do not hold any Knox-Keene license. If the DMHC were to determine that we have been inappropriately taking risk
for institutional and professional services as a result of our various hospital and physician arrangements without having any Knox-Keene license or applicable regulatory
exemption, we may be required to obtain a Knox-Keene license and could be subject to civil and criminal liability, any of which could have a material adverse effect on our
business, results of operations and financial condition.
A Knox-Keene Act license or exemption from licensure, where applicable, is required to operate a health care service plan, e.g., an HMO, or an organization that
accepts global risk, i.e., accepts full risk for a patient population, including risk related to institutional services, e.g., hospital, and professional services.
If our affiliated physician groups are not able to satisfy California financial solvency regulations, they could become subject to sanctions and their ability to do
business in California could be limited or terminated.
The DMHC has instituted financial solvency regulations. The regulations are intended to provide a formal mechanism for monitoring the financial solvency of a RBO
in California, including capitated physician groups. Under current DMHC regulations, our affiliated physician groups, as applicable, are required to, among other things:
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Maintain, at all times, a minimum “cash-to-claims ratio” (which means the organization’s cash, marketable securities, and certain qualified receivables, divided
by the organization’s total unpaid claims liability) of 0.75; and
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Submit periodic reports to the DMHC containing various data and attestations regarding their performance and financial solvency, including IBNR calculations
and documentation and attestations as to whether or not the organization (i) was in compliance with the “Knox-Keene Act” requirements related to claims
payment timeliness, (ii) had maintained positive tangible net equity (“TNE”), and (iii) had maintained positive working capital.
In the event that a physician group is not in compliance with any of the above criteria, it would be required to describe in a report submitted to the DMHC the reasons
for non-compliance and actions to be taken to bring it into compliance. Under such regulations, the DMHC can also make some of the information contained in the reports
public, including, but not limited to, whether or not a particular physician organization met each of the criteria. In the event any of our affiliated physician groups are not able to
meet certain of the financial solvency requirements, and fail to meet subsequent corrective action plans, it could be subject to sanctions, or limitations on, or removal of, its
ability to do business in California. There can be no assurance that our affiliated physician groups, such as our IPAs, will remain in compliance with DMHC requirements or be
able to timely and adequately rectify non-compliance. To the extent that we need to provide additional capital to our affiliated physician groups in the future in order to comply
with DMHC regulations, we would have less cash available for other parts of our operations.
Our revenue will be negatively impacted if our physicians fail to appropriately document their services.
We rely upon our affiliated physicians to appropriately and accurately complete necessary medical record documentation and assign appropriate reimbursement codes
for their services. Reimbursement is conditioned upon, in part, our affiliated physicians providing the correct procedure and diagnosis codes and properly documenting the
services themselves, including the level of service provided and the medical necessity for the services. If our affiliated physicians have provided incorrect or incomplete
documentation or selected inaccurate reimbursement codes, this could result in nonpayment for services rendered or lead to allegations of billing fraud. This could subsequently
lead to civil and criminal penalties, including exclusion from government healthcare programs, such as Medicare and Medicaid. In addition, third-party payors may disallow, in
whole or in part, requests for reimbursement based on determinations that certain amounts are not covered, services provided were not medically necessary, or supporting
documentation was not adequate. Retroactive adjustments may change amounts realized from third-party payors and result in recoupments or refund demands, affecting revenue
already received.
Primary care physicians may seek to affiliate with our and our competitors’ IPAs at the same time.
It is common in the medical services industry for primary care physicians to be affiliated with multiple IPAs. Our affiliated IPAs therefore may enter into agreements
with physicians who are also affiliated with our competitors. However, some of our competitors at times have agreements with physicians that require the physician to provide
exclusive services. Our affiliated IPAs often have no knowledge, and no way of knowing, whether a physician is subject to an exclusivity agreement without being informed by
the physician. Competitors have initiated lawsuits against us alleging in part interference with such exclusivity arrangements, and may do so in the future. An adverse outcome
from any such lawsuit could adversely affect our business, cash flows and financial condition.
If we inadvertently employ or contract with an excluded person, we may face government sanctions.
Individuals and entities can be excluded from participating in the Medicare and Medicaid programs for violating certain laws and regulations, or for other reasons such
as the loss of a license in any state, even if the person retains other licensure. This means that the excluded person and others are prohibited from receiving payments for such
person’s services rendered to Medicare or Medicaid beneficiaries, and if the excluded person is a physician, all services ordered (not just provided) by such physician are also
non-covered and non-payable. Entities which employ or contract with excluded individuals are prohibited from billing the Medicare or Medicaid programs for the excluded
individual’s services, and are subject to civil penalties if it does. The U.S. Department of Health and Human Services Office of the Inspector General maintains a list of excluded
persons. Although we have instituted policies and procedures to minimize such risks, there can be no assurance that we will not inadvertently hire or contract with an excluded
person, or that our employees or contracts will not become excluded in the future without our knowledge. If this occurs, we may be subject to substantial repayments and civil
penalties, and the hospitals at which we furnish services may also be subject to repayments and sanctions, for which they may seek recovery from us, which could adversely
affect our business, cash flows and financial condition.
Compliance with federal and state privacy and data security laws is expensive, and we may be subject to government or private actions due to privacy and security
breaches.
We must comply with various federal and state laws and regulations governing the collection, dissemination, access, use, security and confidentiality of PHI, including
HIPAA and HITECH. As part of our medical record keeping, third-party
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billing, and other services, we collect and maintain PHI in paper and electronic format. Privacy and data security laws and regulations thus could have a significant effect on the
manner in which we handle healthcare-related data and communicates with payors. In addition, compliance with these standards could limit our ability to offer services, thereby
negatively impacting the business opportunities available to us. Despite our efforts to prevent privacy and security breaches, it may still occur. If any non-compliance with such
laws and regulations results in privacy or security breaches, we could be subject to monetary fines, suits, penalties or sanctions. As a result of the expanded scope of HIPAA
through HITECH, we may incur significant costs in order to minimize the amount of “unsecured PHI” that we handle and retain and/or to implement improved administrative,
technical or physical safeguards to protect PHI. We may have to demonstrate and document our compliance efforts, even if there is a low probability that PHI has been
compromised, in order to overcome the presumption that an impermissible use or disclosure of PHI results in a reportable breach. We may incur significant costs to notify the
relevant individuals, government entities and, in some cases, the media, in the event of a breach and to provide appropriate remediation and monitoring to mitigate any potential
damage.
We may be subject to liability for failure to fully comply with applicable corporate and securities laws.
We are subject to various corporate and securities laws. Any failure to comply with such laws could cause government agencies to take action against us, which could
restrict our ability to issue securities and result in fines or penalties. Any claim brought by such an agency could also cause us to expend resources to defend ourselves, divert
the attention of our management from our business and could significantly harm our business, operating results and financial condition, even if the claim is resolved in our
favor.
A plaintiffs’ securities law firm announced that it was investigating ApolloMed and its pre-Merger board of directors for potential federal law violations and breaches
of fiduciary duties in connection with the Merger. This investigation purportedly focused on whether ApolloMed and its board of directors violated federal securities laws or
breached their fiduciary duties to ApolloMed’s stockholders by failing to properly value the Merger and failing to disclose all material information in connection with the
Merger. As of filing of this Annual Report on Form 10-K, no lawsuit has been filed against us by that firm.
We cannot preclude the possibility that claims or lawsuits brought relating to any alleged securities law violations or breaches of fiduciary duty in connection with the
Merger could potentially require significant time and resources to defend and/or settle and distract our management and board of directors from focusing on our business.
We may face lawsuits not covered by insurance and related expenses may be material. Our failure to avoid, defend and accrue for claims and litigation could
negatively impact our results of operations or cash flows.
We are exposed to and become involved in various litigation matters arising out of our business, including from time to time, actual or threatened lawsuits. Malpractice
lawsuits are common in the healthcare industry. The medical malpractice legal environment varies greatly by state. The status of tort reform, availability of non-economic
damages or the presence or absence of other statutes, such as elder abuse or vulnerable adult statutes, influence the incidence and severity of malpractice litigation. We may also
be subject to other types of lawsuits, such as those initiated by our competitors, stockholders, employees, service providers, contractors or by government agencies, including
when we terminate relationships with them, which may involve large claims and significant defense costs. Many states have joint and several liabilities for providers who
deliver care to a patient and are at least partially liable. As a result, if one provider is found liable for medical malpractice for the provision of care to a particular patient, all
other providers who furnished care to that same patient, including possibly us and our affiliated physicians, may also share in the liability, which could be substantial
individually or in aggregate.
The defense of litigation, including fees of legal counsel, expert witnesses and related costs, is expensive and difficult to forecast accurately. Such costs may be
unrecoverable even if we ultimately prevail in litigation and could consume a significant portion of our limited capital resources. To defend lawsuits, it may also be necessary
for us to divert officers and other employees from our normal business functions to gather evidence, give testimony and otherwise support litigation efforts. If we lose any
material litigation, we could face material judgments or awards against them. An unfavorable resolution of one or more of the proceedings in which we are involved now or in
the future could have a material adverse effect on our business, cash flows and financial condition. We may also in the future find it necessary to file lawsuits to recover
damages or protect our interests. The cost of such litigation could also be significant and unrecoverable, which may also deter us from aggressively pursuing even legitimate
claims.
We currently maintain malpractice liability insurance coverage to cover professional liability and other claims for certain hospitalists and clinic physicians. All of our
affiliated physicians are required to carry first dollar coverage with limits of coverage equal to $1.0 million for all claims based on occurrence up to an aggregate of $3.0 million
per year. We cannot be
41
certain that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us, our affiliated professional organizations or our affiliated
physicians. Liabilities incurred by us or our affiliates in excess of our insurance coverage, including coverage for professional liability and other claims, could have a material
adverse effect on our business, financial condition, and results of operations. Our professional liability insurance coverage generally must be renewed annually and may not
continue to be available to us in future years at acceptable costs and on favorable terms, which could increase our exposure to litigation.
We may also be subject to laws and regulations not specifically targeting the healthcare industry.
Certain regulations not specifically targeting the healthcare industry also could have material effects on our operations. For example, the California Finance Lenders
Law (the “CFLL”), Division 9, Sections 22000-22780 of the California Financial Code, could be applied to us as a result of our various affiliate and subsidiary loans and
similar arrangements. If a regulator were to take the position that such loans were covered by the California Finance Lenders Law, we could be subject to regulatory action
which could impair our ability to continue to operate and may have a material adverse effect on our profitability and business as we currently do not hold a CFLL licensure.
Pursuant to an exemption under the CFLL, a person may make five or fewer commercial loans in a 12-month period without a CFLL licensure if the loans are “incidental” to the
business of the person. This exemption, however, creates some uncertainty as to which loans could be deemed as incidental to our business. In addition, a person without a
CFLL licensure may also make a single commercial loan in a 12-month period without the loan being “incidental” to such person’s business but this single-loan exemption is
currently set to expire on January 1, 2022.
Risks Relating to the Ownership of ApolloMed’s Common Stock.
We have to meet certain requirements in order to remain as a NASDAQ-listed public company.
As a public company, ApolloMed is required to comply with various regulatory and reporting requirements, including those required by the SEC. After ApolloMed
uplisted to NASDAQ in December 2017, it is also subject to NASDAQ listing rules. Complying with these requirements is time-consuming and expensive. No assurance can be
given that ApolloMed can continue to meet the SEC reporting and NASDAQ listing requirements.
ApolloMed’s common stock may continue to be thinly traded and its market price may be subject to fluctuations and volatility. Stockholders may be unable to sell
their shares at a profit and might incur losses.
The trading price of ApolloMed’s common stock was volatile and may continue to be so from time to time. The price at which ApolloMed’s common stock trades
could be subject to significant fluctuation and may be affected by a variety of factors, including the trading volume, our results of operations, the announcement and
consummation of certain transactions, our ability or inability to raise additional capital and the terms thereof, and therefore could fluctuate, and decline, significantly. Other
factors that may cause the market price of ApolloMed’s common stock to fluctuate include:
•
•
•
•
•
•
variations in our operating results, such as actual or anticipated quarterly and annual increases or decreases in revenue, gross margin or earnings;
changes in our business, operations or prospects, including announcements relating to strategic relationships, mergers, acquisitions, partnerships, collaborations,
joint ventures, capital commitments, or other events by us or our competitors;
announcements of acquisitions, dispositions and other corporate transactions as well as financings and other capital raising transactions;
developments, conditions or trends in the healthcare industry;
changes in the economic performance or market valuations of other healthcare-related companies;
general market conditions or domestic or international macroeconomic and geopolitical factors unrelated to our performance or financial condition, including
economic or political instability, wars, civil unrest, terrorism, epidemics (including COVID-19) outbreak and natural disasters.
42
•
•
•
•
•
•
•
•
•
•
•
sales of stock by ApolloMed’s stockholders generally and ApolloMed’s larger stockholders, including insiders, in particular, including sale or distributions of
large blocks of common stock by our executives and directors;
volatility and limitations in trading volumes of ApolloMed’s common stock and the stock market;
approval, maintenance and withdrawal of our and our affiliates’ certificates, permits, registration, licensure, certification and accreditation by the applicable
regulatory or other oversight bodies;
our financing activities, including our ability to obtain financings and prices that we sell our equity securities, including notes convertible to and warrants to
purchase shares of ApolloMed’s common stock;
failures to meet external expectations or management guidance;
changes in our capital structure and cash position;
analyst research reports on ApolloMed’s common stock, including analysts’ recommendations and changes in recommendations, price targets, and withdrawals
of coverage;
departures and additions of our key personnel, including our officers or directors;
disputes and litigations related to intellectual properties, proprietary rights, and contractual obligations;
changes in applicable laws, rules, regulations, or accounting practices and other dynamics; and
other events or factors, many of which may be out of our control.
There may continue to be a limited trading market for ApolloMed’s common stock. A lack of an active market may contribute to stock price volatility or
supply/demand imbalances, make an investment in ApolloMed’s common stock less attractive to certain investors, impair the ability of ApolloMed’s stockholders to sell shares
at the time they desire or at a price that they consider favorable. The lack of an active market may also reduce the fair market value of ApolloMed’s common stock, impair our
ability to raise capital by selling shares of ApolloMed’s common stock or use such stock as consideration to attract and retain talent or engage in business transactions.
If analysts do not report about us, or negatively evaluate us, ApolloMed’s stock price could decline.
The trading market for ApolloMed’s common stock will rely in part on the availability of research and reports that third-party analysts publish about us. There are
many large companies active in the healthcare industry, which make it more difficult for us to receive widespread coverage. Furthermore, if one or more of the analysts who do
cover us downgrade ApolloMed’s common stock, its price would likely decline. If one or more of these analysts cease coverage of us, we could lose market visibility, which in
turn could cause ApolloMed’s stock price to decline.
Our current principal stockholders, executive officers and directors have significant influence over our operations and strategic direction and they could cause us
to take actions with which other stockholders might not agree and could delay, deter or prevent a change of control or a business combination with respect to us.
As of December 31, 2020, our executive officers, directors, five percent or greater stockholders and their respective affiliated entities in the aggregate own
approximately 33.3% of our outstanding common stock. As a result, these stockholders, who are entitled to vote their shares in their own interests, acting together, exert a
significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control, merger, consolidation, sale of all or substantially all
of our assets or other corporate transactions that other stockholders may view as beneficial, or conversely this concentrated control could result in the consummation of a
transaction that other stockholders may not support. This may harm the value of our shares and discourage investors from investing in us.
Provisions under Delaware law and ApolloMed’s charter and bylaws could deter takeover attempts or attempts to remove its board members or management that
might otherwise be beneficial to its stockholders.
43
ApolloMed is subject to Section 203 of the Delaware General Corporation Law, which makes the acquisition of ApolloMed and the removal of its incumbent officers
and directors more difficult for potential acquirers by prohibiting stockholders holding 15% or more of its outstanding voting stock from acquiring it without the consent of its
board of directors for at least three years from the date they first hold 15% or more of the voting stock. These provisions and others that could be adopted in the future could
deter unsolicited takeovers or delay or prevent changes in ApolloMed’s control or management, including transactions in which ApolloMed’s stockholders might otherwise
receive a premium for their shares over then current market prices. These provisions may also limit the ability of ApolloMed’s stockholders to approve transactions that they
may deem to be in their best interests.
Additionally, ApolloMed’s charter and bylaws contain additional provisions, such as the authorization for its board of directors to issue one or more classes of
preferred stock and determine the rights, preferences and privileges of the preferred stock, which could cause substantial dilution to a person or group that attempts to acquire
ApolloMed on terms not approved by the board, and the ownership requirement for ApolloMed’s stockholders to call special meetings, that could deter, discourage or make it
more difficult for a change in control of ApolloMed or for a third party to acquire ApolloMed, even if such a change in control could be deemed in the interest of ApolloMed’s
stockholders or if such an acquisition would provide ApolloMed’s stockholders with a substantial premium for their shares over the market price of ApolloMed’s common
stock.
As such, these provisions could discourage a potential acquirer from acquiring us or otherwise attempting to obtain our control and increase the likelihood that our
incumbent directors and officers will retain their positions.
We may issue additional equity securities in the future, which may result in dilution to existing investors.
If ApolloMed issues additional equity securities, its existing stockholders may experience substantial dilution. ApolloMed may sell equity securities and may issue
convertible notes and warrants in one or more transactions at prices and manners as we may determine from time to time, including at prices (or exercise prices) below the
market price of ApolloMed’s common stock, for capital raising purposes, including in any debt financing, registered offering or private placement, and new investors could
have superior rights such as liquidation and other preferences. To attract and retain the right talent, ApolloMed may also issue equity awards under its equity compensation
plans to its officers, other employees, directors and consultants from time to time. ApolloMed may also issue additional shares of its common stock or other securities that are
convertible into or exercisable for common stock in connection with future acquisitions or for other business purposes. In addition, the exercise or conversion of outstanding
options or warrants to purchase shares of ApolloMed’s stock may result in dilution to its existing stockholders upon any such exercise or conversion.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in Alhambra, California, where we lease approximately 35,000 square feet of office spaces in two adjacent buildings from an
entity that is wholly owned and consolidated by APC as a result of an acquisition that occurred on December 31, 2020. We also leased approximately 47,500 square feet of
office space in Monterey Park, California, from an entity that is partially owned by APC.
We maintain other offices, medical spaces and a warehouse located in Monterey Park, Alhambra, City of Industry, Arcadia, Glendale, Daly City, San Gabriel,
Pasadena and El Monte, California. These leases require monthly rental payments ranging from approximately $2,000 to $43,000 and have terms that expire between May 2021
and, subject to options to extend provided thereunder, May 2027.
We believe our existing facilities are in good condition and are suitable and adequate for our current requirements. Based on current information and subject to future
events and circumstances, we anticipate that we may extend leases on our various facilities as necessary, as they expire, and lease additional facilities to accommodate possible
future growth.
Item 3. Legal Proceedings
Certain of the pending or threatened legal proceedings or claims in which we are involved are discussed under “Note 13 - “Commitments and Contingencies,” to our
consolidated financial statements in this Annual Report on Form 10-K, which disclosure is incorporated by reference herein.
Item 4. Mine Safety Disclosures
44
Not applicable.
45
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The information presented below is our historical data and not necessarily indicative of our future financial condition or results of operations.
ApolloMed’s common stock is listed on the NASDAQ Capital Market, under the symbol, “AMEH.”
Record Holders
As of March 8, 2021, there were approximately 607 holders of record of ApolloMed’s common stock based on its transfer agent’s report. Because many shares of
ApolloMed’s common stock are held by brokers and other nominees on behalf of stockholders, including in trust, we are unable to estimate the total number of stockholders
represented by these record holders.
Dividends
To date we have not paid any cash dividends on ApolloMed’s common stock and we do not contemplate the payment of cash dividends thereon in the foreseeable
future. Our future dividend policy will depend on our earnings, capital requirements, financial condition, and other factors relevant to our ability to pay dividends.
Recent Sales of Unregistered Securities
During the three months ended December 31, 2020, the Company issued an aggregate of 345,513 shares of common stock and received approximately $3.2 million
from the exercise of certain warrants at an exercise price ranging from $9.00 –$11.00 per share.
The foregoing issuances were exempt from the registration provisions of the Securities Act, pursuant to Section 4(a)(2) thereof, and/or Regulation D promulgated
thereunder.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
46
Performance Measurement Comparison
The following chart compares the cumulative total return of our common stock with the cumulative total return of the Russell 3000 Index and the S&P 500 Healthcare Index,
from December 31, 2015 to December 31, 2020.
We believe the Russell 3000 Index is an appropriate independent broad market index, because it measures the performance of similar sized companies in numerous sectors. In
addition, we believe the S&P 500 Healthcare Index is an appropriate third party published industry index because it measures the performance of healthcare companies.
Indexed Returns for the Years Ended
Base Period
12/31/2015
1.00
1.00
1.00
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
0.58
0.13
(0.03)
4.05
0.37
0.19
3.18
0.29
0.26
2.89
0.70
0.53
2.85
1.05
0.73
Company/Index
ApolloMed
Russell 3000 Index
S&P 500 Healthcare
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Part II,
Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
47
In this section, “we,” “our,” “ours” and “us” refer to Apollo Medical Holdings, Inc.(“ApolloMed”) and its consolidated subsidiaries and affiliated entities, as appropriate,
including its consolidated variable interest entities (“VIEs”).
Overview
Apollo Medical Holdings, Inc. is a leading physician-centric, technology-powered, risk-bearing healthcare management company. Leveraging its proprietary
population health management and healthcare delivery platform, ApolloMed operates an integrated, value-based healthcare model, which aims to empower the providers in its
network to deliver the highest quality of care to its patients in a cost-effective manner. We, together with our affiliated physician groups and consolidated entities, provide
coordinated outcomes-based medical care in a cost-effective manner. The majority of our patients reside in California, most of whom are covered by private or public insurance
such as Medicare, Medicaid and health maintenance organizations (“HMOs”), with a small portion of our revenue coming from non-insured patients. We provide care
coordination services to each major constituent of the healthcare delivery system, including patients, families, primary care physicians, specialists, acute care hospitals,
alternative sites of inpatient care, physician groups and health plans. Our physician network consists of primary care physicians, specialist physicians and hospitalists. We
operate primarily through the following subsidiaries of ApolloMed: Network Medical Management, Inc. (“NMM”), Apollo Medical Management, Inc. (“AMM”), and APA
ACO, Inc. (“APAACO”), and their consolidated entities.
Through our Next Generation Accountable Care Organization (“NGACO”) model and our network of Independent Practice Associations (“IPAs”) with more than
7,000 contracted physicians, in which physician groups have agreements with various health plans, hospitals and other HMOs, we were responsible for coordinating the care for
over 1.1 million patients primarily in California as of December 31, 2020. These covered patients are comprised of managed care members whose health coverage is provided
through their employers or who have acquired health coverage directly from a health plan or as a result of their eligibility for Medicaid or Medicare benefits. Our managed
patients benefit from an integrated approach that places physicians at the center of patient care and utilizes sophisticated risk management techniques and clinical protocols to
provide high-quality, cost effective care. To implement a patient-centered, physician-centric experience, we also have other integrated and synergistic operations, including (i)
MSOs that provide management and other services to our affiliated IPAs, (ii) outpatient clinics and (iii) hospitalists.
On December 8, 2017, ApolloMed completed its business combination with NMM (i.e. the “2017 Merger”). The combination of ApolloMed and NMM brought
together two complementary healthcare organizations to form one of the nation’s largest integrated population health management companies. As a result of the Merger, NMM
became a wholly-owned subsidiary of ApolloMed and the former NMM shareholders received a majority of the issued and outstanding common stock of ApolloMed. For
accounting purposes, NMM was considered the accounting acquirer and accordingly, as of the closing of the Merger, NMM’s historical results of operations replaced
ApolloMed’s historical results of operations for periods prior to the Merger, and the results of operations of both companies are included in the accompanying consolidated
financial statements for periods following the Merger.
2020 Highlights
Universal Care Acquisition Partners, LLC (“UCAP”), a 100% owned subsidiary of APC, was formed in June 2014 for the purpose of holding an investment in Universal
Care, Inc. (“UCI”). On April 30, 2020, UCAP completed the sale of its 48.9% ownership interest in UCI to Bright Health Company of California, Inc. ("Bright") for
approximately $69.2 million in cash proceeds (including $16.5 million as repayment of indebtedness owed to APC), plus non-cash consideration consisting of shares of Bright
Health, Inc.'s preferred stock having an estimated fair value of approximately $36.2 million on the date of sale. In addition, pursuant to the terms of the stock purchase
agreement, APC has a beneficial interest in the equity method investment sold. The estimated fair value of such interest on April 30, 2020, was $15.7 million (see Note 6). As
set forth in the Company’s definitive proxy statement filed with the SEC on July 31, 2019 (the “ 2019 Proxy Statement”), the 48.9% interest in UCI is included in Excluded
Assets that remain solely for the benefit of APC and its shareholders. As such, any proceeds or gain on the sale of APC’s indirect ownership interest in UCI has no impact on the
Series A Dividend payable by APC to AP-AMH Medical Corporation as described in the 2019 Proxy Statement and consequently the sale, did not affect net income attributable
to ApolloMed.
In December 2020, APC purchased a 100% interest in Medical Property Partners LLC, AMG Properties LLC, and ZLL Partners LLC, each of which own land and
buildings leased to tenants in Alhambra and Pasadena, California. We consolidated these entities in our consolidated financial statements. APC also purchased a 50% interest in
Tag-6 Medical Investments Group LLC ("Tag 6"), Tag-8 Medical Investments Group LLC ("Tag 8"), and One MSO LLC ("One MSO"). Tag 6 and Tag 8 own land in
Alhambra, California. One MSO owns a building in Monterey Park, California, which is currently leased to tenants.
48
Recent Developments
On January 26, 2021, the Company entered into an agreement to purchase a 30% interest in CAIPA MSO. CAIPA MSO provides management, consulting,
administrative, and other support services to professional healthcare service providers, including to the Chinese American IPA d/b/a Coalition of Asian-American IPA
("CAIPA"), a leading independent practice association serving the greater New York City area. The transaction is subject to third-party consents and other customary closing
conditions. ApolloMed will fund the transaction from cash on hand. We expect this transaction will close by the end of the second quarter of 2021.
Key Financial Measures and Indicators
Operating Revenues
Our revenue primarily consists of capitation revenue, risk pool settlements and incentives, NGACO AIPBP revenue, management fee income and fee-for-services
(“FFS”) revenue. Revenue is recorded in the period in which services are rendered. The form of billing and related risk of collection for such services may vary by type of
revenue and the customer.
Operating Expenses
Our largest expenses consist of the cost of patient care paid to contracted physicians, the cost of information technology equipment and software and the cost of hiring
staff to provide management and administrative support services to our affiliated physician groups, as further described in the following sections. These services include payroll,
benefits, physician practice billing, revenue cycle services, physician practice management, administrative oversight, coding services, and other consulting services.
49
Results of Operations
2020 Compared to 2019
Our consolidated operating results for the year ended December 31, 2020, as compared to the year ended December 31, 2019 were as follows:
Apollo Medical Holdings, Inc.
Consolidated Statements of Income (in thousands)
Revenue
Capitation, net
Risk pool settlements and incentives
Management fee income
Fee-for-services, net
Other income
Total revenue
Operating expenses
Cost of services, excluding depreciation and amortization
General and administrative expenses
Depreciation and amortization
Provision for doubtful accounts
Impairment of goodwill and intangibles assets
Total expenses
Income from operations
Other (expense) income
Income (loss) from equity method investments
Interest expense
Interest income
Gain on sale of equity method investment
Other income
Total other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interests
Net income attributable to Apollo Medical Holdings, Inc.
* Percentage change of over 1000%
Net Income
Years Ended December 31,
2019
2020
$ Change
% Change
$
$
$
557,326 $
77,367
34,850
12,683
4,954
687,180
454,168 $
51,098
34,668
15,475
5,209
560,618
539,211
49,116
18,350
—
—
606,677
80,503
3,694
(9,499)
2,813
99,839
1,077
97,924
178,427
56,107
467,805
41,482
18,280
(1,363)
1,994
528,198
32,420
(6,901)
(4,733)
2,024
—
3,030
(6,580)
25,840
8,167
122,320 $
17,673 $
84,454
37,866 $
3,557
14,116 $
103,158
26,269
182
(2,792)
(255)
126,562
71,406
7,634
70
1,363
(1,994)
78,479
48,083
10,595
(4,766)
789
99,839
(1,953)
104,504
152,587
47,940
104,647
80,897
23,750
23 %
51 %
1 %
(18) %
(5) %
23 %
15 %
18 %
0 %
(100) %
(100) %
15 %
148 %
(154) %
101 %
39 %
100 %
(64) %
*
591 %
587 %
592 %
*
168 %
Our net income in 2020 was $122.3 million, as compared to $17.7 million in 2019, an increase of $104.6 million or 592%.
Physician Groups and Patients
50
As of December 31, 2020 and 2019, the total number of affiliated physician groups we managed were 14 groups and 13 groups, respectively, and the total number of
patients for whom we managed the delivery of healthcare services was 1.1 million and 0.9 million, respectively.
Revenue
Our total revenue in 2020 was $687.2 million, as compared to $560.6 million in 2019, an increase of $126.6 million or 23%. The increase in total revenue was
primarily attributable to the following:
(i) An overall increase of $103.2 million in capitation revenue primarily driven by the acquisition of Alpha Care and Accountable Health Care in August 2019 and
September 2019, respectively. For the full year ended December 31, 2020, Alpha Care and Accountable Health Care contributed additional capitation revenues of $52.4 million
and $29.0 million, respectively. In addition, capitation revenue at APC increased by $16.4 million due to increased rates from incentives being met and increased patient lives
under management. Lastly, capitation revenue at APAACO increased by $5.3 million as a result of organic growth and expansion of the ACO program.
(ii) An increase of $26.3 million in risk pool settlements and incentives revenue due to the settlement of the 2019 ACO Performance Year, resulting in a shared risk
settlement of $19.8 million recognized during the third quarter of 2020, as compared to $0.9 million in shared risk settlement related to the 2018 performance year and
recognized during the year ended December 31, 2019. In addition, during the year ended December 31, 2020, risk pool revenues increased by $6.2 million primarily driven by
reduced hospital costs as a result of COVID-19.
(iii) A decrease in fees-for-services revenue of $2.8 million primarily due to the COVID-19 pandemic that resulted in the closure of our surgery centers and heart
center from March 2020 to May 2020 and fewer procedures completed in 2020.
Cost of Services, Excluding Depreciation and Amortization
Expenses related to cost of services, excluding depreciation and amortization, in 2020 were $539.2 million, as compared to $467.8 million in 2019, an increase of
$71.4 million or 15%. The increase was due primarily to the acquisitions of Alpha Care and Accountable Health Care in May 2019 and September 2019, respectively, which
provided for a full year of costs for the year ended December 31, 2020. Cost of services, excluding depreciation and amortization, related to Alpha Care and Accountable Health
Care contributed $52.2 million and $28.0 million, respectively, to the overall increase. Furthermore, there was an $8.6 million increase at our APAACO entity resulting from a
full year of services in the 2020 performance year as compared to nine months of services under the 2019 performance year due to the delayed commencement by CMS of
APAACO’s 2019 Next Generation ACO performance year from January 1, 2019 to April 1, 2019. Lastly, cost of sales increased by $5.6 million at NMM to support the
continued growth of the Company. These increases were offset by a reduction in claims costs totaling approximately $25.1M as a result of the COVID-19 pandemic which
caused a decrease in office visits and a reduction in non-emergency procedures. We do not expect similar decreases in claims costs as a result of COVID-19 to occur again in
fiscal 2021.
General and Administrative Expenses
General and administrative expenses in 2020 were $49.1 million, as compared to $41.5 million in 2019, an increase of $7.6 million or 18%. This increase was
primarily due to $4.5 million in additional provider bonuses and $2.4 million from share based compensation related to stock options and restricted stock awards granted in
2020 and 2019.
Depreciation and Amortization
Depreciation and amortization expense was $18.4 million and $18.3 million for the years ended December 31, 2020 and 2019, respectively. These amounts included
depreciation of property and equipment and the amortization of intangible assets.
Provision for Doubtful Accounts
During the year ended December 31, 2019, we released reserves related to certain management fees in the amount of approximately $1.4 million as collectability of
the outstanding amount was no longer in doubt. These reserves were related to various preacquisition obligations of Accountable Health Care and were no longer necessary as a
result of our acquisition of Accountable Health Care.
51
Impairment of Goodwill and Intangible Assets
There was no impairment of goodwill and intangible assets for the year ended December 31, 2020, as compared to $2.0 million for the year ended December 31, 2019,
which related to a write-off of Medicare licenses that were acquired as part of the merger between ApolloMed and NMM.
Income (Loss) from Equity Method Investments
Income from equity method investments in 2020 was $3.7 million, as compared to a loss of $6.9 million in 2019, an increase of $10.6 million, or 154%. The increase
was primarily due to equity earnings recognized related to Universal Care Inc, of $3.6 million compared to a loss of $1.2 million in 2019. During the year ended December 31,
2020, we recognized equity earnings from our investment of LSMA of $0.3 million as compared to an equity loss of $2.8 million in 2019. Further, we recognized an equity loss
of $2.5 million related to our investment in Accountable Health Care during the year ended December 31, 2019, which was acquired in August 2019 and is now a consolidated
entity of APC.
Interest Expense
Interest expense in 2020 was $9.5 million as compared to $4.7 million in 2019. The increase was primarily due to interest incurred from a new credit facility we
secured in September 2019 to fund growth, primarily through acquisitions.
Interest Income
Interest income in 2020 was $2.8 million as compared to $2.0 million in 2019, an increase of $0.8 million or 39%. The increase in interest income is mainly related to
interest earned from money market, certificate of deposits and loan receivables.
Gain on Sale of Equity Method Investment
Gain on sale of equity method investment for the year ended December 31, 2020 was $99.8 million resulting primarily from the sale of UCI which closed on April 30,
2020.
Other Income
Other income was $1.1 million for 2020 as compared to $3.0 million in 2019, a decrease of $2.0 million or 64%. Other income for the year ended December 31, 2020
is primarily related to certain loan forgiveness. The decrease from 2019 was primarily attributable to the gain on assumption of a loan receivable as a result of the Accountable
Health Care acquisition in August 2019.
Provision for Income Taxes
Provision for income taxes was $56.1 million in 2020, as compared to $8.2 million in 2019, an increase of $47.9 million or 587%. This was primarily attributable to
the increase in pre-tax income in 2020, as compared to 2019, due to the factors described above.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $84.5 million in 2020, as compared to $3.6 million in 2019, an increase of $80.9 million. The increase was
primarily due to the sale of UCI in April 2020 where the gain, net of tax, remained strictly with the APC Excluded Assets and increased consolidated net income generated in
the current period which resulted in additional income allocated to the noncontrolling interest.
52
2019 Compared to 2018
Our consolidated operating results for the year ended December 31, 2019, as compared to the year ended December 31, 2018 were as follows:
Apollo Medical Holdings, Inc.
Consolidated Statements of Income (in thousands)
Revenue
Capitation, net
Risk pool settlements and incentives
Management fee income
Fee-for-services, net
Other income
Total revenue
Operating expenses
Cost of services, excluding depreciation and amortization
General and administrative expenses
Depreciation and amortization
Provision for doubtful accounts
Impairment of goodwill and intangibles assets
Total expenses
Income from operations
Other (expense) income
Loss from equity method investments
Interest expense
Interest income
Other income
Total other expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interests
Net income attributable to Apollo Medical Holdings, Inc.
Net Income
Years Ended December 31,
2018
2019
$ Change
% Change
$
$
$
454,168 $
51,098
34,668
15,475
5,209
560,618
344,307 $
100,928
49,743
19,704
5,226
519,908
467,805
41,482
18,280
(1,363)
1,994
528,198
32,420
(6,901)
(4,733)
2,024
3,030
(6,580)
25,840
8,167
361,132
43,354
19,303
3,888
3,799
431,476
88,432
(8,125)
(561)
1,259
1,622
(5,805)
82,627
22,360
17,673 $
60,267 $
3,557
14,116 $
49,432
10,835 $
109,861
(49,830)
(15,075)
(4,229)
(17)
40,710
106,673
(1,872)
(1,023)
(5,251)
(1,805)
96,722
(56,012)
1,224
(4,172)
765
1,408
(775)
(56,787)
(14,193)
(42,594)
(45,875)
3,281
32 %
(49) %
(30) %
(21) %
0 %
8 %
30 %
(4) %
(5) %
(135) %
(48) %
22 %
(63) %
(15) %
744 %
61 %
87 %
13 %
(69) %
(63) %
(71) %
(93) %
30 %
Our net income in 2019 was $17.7 million, as compared to $60.3 million in 2018, a decrease of $42.6 million or 71%.
Physician Groups and Patients
As of December 31, 2019 and 2018, the total number of affiliated physician groups we managed was 13 groups and 11 groups, respectively, and the total number of
patients for whom we managed the delivery of healthcare services was 0.9 million patients and 1.0 million patients, respectively.
53
Revenue
Our total revenue in 2019 was $560.6 million, as compared to $519.9 million in 2018, an increase of $40.7 million or 8%. The increase in total revenue was primarily
attributable to the following:
(i) an increase of $109.9 million in capitation revenue due to the acquisitions of Alpha Care and Accountable Health Care which were acquired as of May 31, 2019 and
August 30, 2019, respectively, resulting in our recognition of approximately $79.2 million and $17.2 million in revenue, respectively, from these acquired IPAs, in addition to
capitation revenue growth at APC of $22.4 million. These increase was offset by the delayed commencement by the Centers for Medicare & Medicaid Services ("CMS") of
APAACO's 2019 Next Generation ACO performance year from January 1, 2019, to April 1, 2019 which resulted in decreased revenue of approximately $8.9 million.
(ii) a decrease of $49.9 million in risk pool revenue due to the refinement of the assumptions used to estimate the amount of net surplus expected to be received from
the risk pool of our affiliated hospitals. Our estimated risk pool receivable is calculated based on reports received from our hospital partners and on management's estimate of
the Company's portion of any estimated risk pool surpluses in which payments have not been received. The actual risk pool surpluses are settled approximately 18 months later.
(iii) a decrease in management fee income of $15.1 million, primarily due to the acquisition of Accountable Health Care and a decrease in the number of patients
served by some of our affiliated physician groups, including Golden Shore Medical Group, which contributed approximately $3.8 million in management fee income for the
year ended December 31, 2018, that ceased operations on January 31, 2019 as their primary health plan canceled their contract.
(iv) a decrease in FFS revenue of $4.2 million, primarily due to our wind down of affiliated medical groups, Bay Area Hospitalist Associates ("BAHA"), AKM
Medical Group, Inc. ("AKM"), and Maverick Medical Group, Inc. ("MMG").
Cost of Services, Excluding Depreciation and Amortization
Expenses related to cost of services, excluding depreciation and amortization, in 2019 were $467.8 million, as compared to $361.1 million in 2018, an increase of
$106.7 million or 30%. The increase was due to a $100.4 million increase in medical claims, capitation and other health services expenses driven by the Alpha Care and
Accountable Health Care acquisitions, a $2.8 million increase in management fee expense paid to a third party MSO during Alpha Care's transition, and an increase of $3.5
million in personnel costs to support the continued growth in the depth and breadth of our operations.
General and Administrative Expenses
General and administrative expenses in 2019 were $41.5 million, as compared to $43.4 million in 2018, a decrease of $1.9 million or 4%. The decrease was primarily
due to a reduction in professional services costs of $2.0 million.
Depreciation and Amortization
Depreciation and amortization expense was $18.3 million and $19.3 million for the years ended December 31, 2019 and 2018, respectively. These amounts included
depreciation of property and equipment and the amortization of intangible assets.
Provision for Doubtful Accounts
During the year ended December 31, 2019, we released reserves related to certain management fees in the amount of $3.8 million as the collectability of the
outstanding amount was no longer in doubt. These reserves related to Accountable Health Care and were no longer necessary as a result of our acquisition of the company. As
such our provision for doubtful accounts was a negative $1.4 million.
Impairment of Goodwill and Intangible Assets
Impairment of goodwill and intangible assets was $2.0 million for the year ended December 31, 2019, as compared to $3.8 million for the year ended December 31,
2018. During 2019, we impaired intangible assets related to Medicare licenses obtained as part of the Merger. In 2018, we impaired the goodwill related to MMG. We will no
longer utilize the Medicare licenses and MMG has been wound down. Accordingly, we do not expect to receive future economic benefits from such assets and goodwill.
54
Loss from Equity Method Investments
Loss from equity method investments in 2019 was $6.9 million, as compared to $8.1 million in 2018, a decrease of $1.2 million, or 15%. The decrease was primarily
due to equity losses related to our investments in LMA's IPA line of business, Accountable Health Care, UCI, MWN Community Hospital, LLC, and 531 W. College LLC of
$2.8 million, $2.5 million, $1.2 million, $0.2 million and $0.2 million, respectively, which was offset by equity earnings of $0.3 million from our investment in Diagnostic
Medical Group ("DMG") for the year ended December 31, 2019. In addition, during the year ended December 31, 2019 we recognized an impairment loss of $0.3 million
related to our investment in Pacific Ambulatory Surgery Center, LLC ("PASC") as we do not expect to recover our investment. This is compared to equity losses of $6.0 million,
$2.4 million, $0.4 million and $0.3 million allocated from our investments in UCI, LSMA, 531 W. College, LLC and PASC, respectively, which were offset by income of $1.0
million allocated from our investment in DMG for the year ended 2018.
Interest Expense
Interest expense in 2019 was $4.7 million as compared to interest expense of $0.6 million in 2018. The increase was primarily due to interest incurred from a new
credit facility we secured in September 2019 to fund growth, primarily through acquisitions.
Interest Income
Interest income in 2019 was $2.0 million as compared to $1.3 million in 2018, an increase of $0.7 million or 61%. The increase in interest income was a result of
additional cash held in money market, certificates of deposit accounts and increased loan receivables issued in 2019.
Other Income
Other income was $3.0 million for 2019 as compared to $1.6 million in 2018, an increase of $1.4 million or 87%. The increase was primarily attributable to the
assumption of a loan receivable as a result of the Accountable Health Care acquisition.
Provision for Income Taxes
Provision for income taxes was $8.2 million in 2019, as compared to $22.4 million in 2018, a decrease of $14.2 million or 63%. This decrease was primarily
attributable to a decrease in the amount of pre-tax income in 2019 as compared to 2018.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $3.6 million for the year ended December 31, 2019, as compared to $49.4 million for the year ended December
31, 2018, a decrease of $45.8 million or 93%. This decrease was primarily due to reduced net income generated from APC mainly attributable to a decrease in risk pool revenue
as a result of the refinement of the assumptions used to estimate the amount of net surplus expected to be received from the risk pools of our affiliated hospitals and our
completion of a series of transactions with APC as further described in "2019 Highlights" above, which resulted in preferred, cumulative dividends from APC being allocated to
AP-AMH.
55
2021 Guidance
ApolloMed is providing the following guidance for total revenue, net income, net income attributable to ApolloMed, EBITDA, and Adjusted EBITDA, based on the
Company’s existing business, current view of existing market conditions and assumptions for the year ending December 31, 2021.
($ in millions)
Total revenue
Net income
Net income attributable to ApolloMed
EBITDA
Adjusted EBITDA
2021 Guidance Range
$690.0 - $710.0
$50.0 - $60.0
$35.0 - $45.0
$95.0 - $105.0
$115.0 - $125.0
See "Guidance Reconciliation of Net Income to EBITDA and Adjusted EBITDA" and "Use of Non-GAAP Financial Measures" for additional information. There can be no
assurance that actual amounts will not be materially higher or lower than these expectations. See "Forward-Looking Statements" within this Annual Report on Form 10-K.
Guidance Reconciliation of Net Income to EBITDA and Adjusted EBITDA
(in thousands)
Net income
Depreciation and amortization
Provision for income taxes
Interest expense
Interest income
EBITDA
Income from equity method investments
Provider bonus
EBITDA adjustment for recently acquired IPAs
Adjusted EBITDA
Use of Non-GAAP Financial Measures
Year Ending
December 31, 2021
Low
High
$
$
50,000 $
17,000
23,000
8,000
(3,000)
95,000
(500)
6,000
14,500
115,000 $
60,000
17,500
24,000
8,500
(5,000)
105,000
(1,000)
6,000
15,000
125,000
This Annual Report on Form 10-K contains the non-GAAP financial measures EBITDA and adjusted EBITDA, of which the most directly comparable financial
measure presented in accordance with generally accepted accounting principles ("GAAP") is net income. These measures are not in accordance with, or an alternative to, U.S.
GAAP, and may be different from other non-GAAP financial measures used by other companies. The Company uses adjusted EBITDA as a supplemental performance
measure of our operations, for financial and operational decision-making, and as a supplemental means of evaluating period-to-period comparisons on a consistent basis.
Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation, and amortization, excluding income from equity method investments, provider bonuses,
impairment of intangibles, provision of doubtful accounts and other income earned that is not related to the Company's normal operations. Adjusted EBITDA also excludes the
effect on EBITDA of certain IPAs we recently acquired.
The Company believes the presentation of these non-GAAP financial measures provides investors with relevant and useful information as it allows investors to
evaluate the operating performance of the business activities without having to account for differences recognized because of non-core or non-recurring financial information.
When GAAP financial measures are viewed in conjunction with non-GAAP financial measures, investors are provided with a more meaningful understanding of ApolloMed's
ongoing operating performance. In addition, these non-GAAP financial measures are among those indicators the
56
Company uses as a basis for evaluating operational performance, allocating resources and planning and forecasting future periods. Non-GAAP financial measures are not
intended to be considered in isolation, or as a substitute for, GAAP financial measures. To the extent this release contains historical or future non-GAAP financial measures, the
Company has provided corresponding GAAP financial measures for comparative purposes. The reconciliation between certain GAAP and non-GAAP measures is provided
above.
Liquidity and Capital Resources
Cash, cash equivalents and investment in marketable securities at December 31, 2020 totaled $261.2 million. Working capital totaled $223.6 million at December 31,
2020, compared to $223.7 million at December 31, 2019, a decrease of $0.1 million.
We have historically financed our operations primarily through internally generated funds. We generate cash primarily from capitations, risk pool settlements and
incentives, fees for medical management services provided to our affiliated physician groups, as well as FFS reimbursements. We generally invest cash in money market
accounts, which are classified as cash and cash equivalents. We believe we have sufficient liquidity to fund our operations at least through March 2022.
Our cash and cash equivalents and restricted cash increased by $90.0 million from $104.0 million at December 31, 2019 to $194.0 million at December 31, 2020. Cash
provided by operating activities during the year ended December 31, 2020 was $46.2 million, as compared to $13.7 million during the year ended December 31, 2019. The
change was due to a $104.6 million increase in net income, driven the gain on sale of equity method investments of $99.8 million, which primarily consisted of the gain on sale
of UCI, in addition to the timing of working capital. For the year ended December 31, 2020 receivable, net, receivable, net - related parties, and other receivable resulted in net
cash inflow of $15.6 million as compared to cash outflow of $5.8 million for the year ended December 31, 2019, driven by the timing of collections related to our full risk
revenue. Further, for the year ended December 31, 2020, accounts payable and accrued expenses, fiduciary accounts payable, right-of-use assets, operating lease liabilities, and
income taxes payable generated cash inflow of $15.9 million as compared to cash outflow of $11.3 million for the year ended December 31, 2019. This was partially offset by
increased net cash outflow of $6.4 million, $5.5 million, and $8.7 million related to prepaid expenses and other current assets, other assets, and medical liabilities, respectively,
for the year ended December 31, 2020 as compared to the same period in 2019 to support the continued growth of the Company.
Cash provided by investing activities during the year ended December 31, 2020 was $95.5 million, as compared to cash used in investing activities of $180.6 million
during the year ended December 31, 2019. This was primarily due to proceeds of marketable securities of $50.6 million, proceeds from sale of equity method investment
totaling $52.7 million, and proceeds from repayment of loans receivable of $16.5 million. These were offset by purchases of equity method investments of $10.0 million,
payments for business acquisitions of $11.4 million, and purchases of marketable securities of $1.8 million. This is compared to cash used in investing activities for the year
ended December 31, 2019 for the purchases of marketable securities of $115.4 million, payments for business acquisitions, net of cash acquired of $49.4 million, advances on
loans receivable of $11.4 million, investments made in our equity method investments and investments in privately held entities of $3.6 million and purchases of property and
equipment of $1.0 million, which were offset with dividends received of $0.2 million.
Cash used in financing activities during the year ended December 31, 2020 was $51.7 million, as compared to cash provided by financing activities of $163.3 million
for the year ended December 31, 2019. This decrease was primarily attributable to the payments of dividends totaling $51.3 million, repayment on our term loan totaling $9.5
million, distribution to noncontrolling interests of $1.0 million and repurchases of shares totaling $0.5 million. Cash used was offset with the proceeds from the exercise of
stock options and warrants of $10.8 million. This is compared to cash provided by financing activities for the year ended December 31, 2019 from borrowings on our line of
credit totaling $289.6 million, proceeds from the exercise of stock options and warrants of $3.1 million and proceeds from a common stock offering of $0.8 million offset with
payment of dividends, repayments on our bank loan and lines of credit, cost of debt and equity issuances, repurchase of common shares and repayments on long-term debt
totaling $61.7 million, $52.6 million, $5.8 million, $7.6 million, and $2.4 million respectively.
Excluded Assets
In September 2019, APC and AP-AMH entered into the Second Amendment to Series A Preferred Stock Purchase Agreement clarifying the term Excluded Assets.
“Excluded Assets” means (i) assets received from the sale of shares of the Series A Preferred equal to the Series A Purchase Price, (ii) the assets of the Company that are not
Healthcare Services Assets, including the Company’s equity interests in Universal Care, Inc., Apollo Medical Holdings, Inc., and any entity that is primarily engaged in the
business of owning, leasing, developing or otherwise operating real estate, (iii) any assets acquired with the
57
proceeds of the sale, assignment or other disposition of any of the assets described in clauses (i) or (ii), and (iv) any proceeds of the assets described in clauses (i), (ii) and (iii).
Excluded Assets consisted of the following (in thousands):
Cash and cash equivalents
Investment in marketable securities
Land, property and equipment, net
Loan receivable - related parties
Investments in other entities - equity method
Investment in privately held entities
Other receivable
Long term debt
Total Excluded Assets
Credit Facilities
Credit Facility
The Company's credit facility consisted of the following (in thousands):
Term Loan
Revolver Loan
Real Estate Loans
Total Debt
Less: current portion of debt
Less: unamortized financing cost
Long-term debt
58
December 31, 2020
December 31, 2019
$
$
38,773 $
66,534
24,466
4,145
25,847
36,179
15,723
(7,580)
204,087 $
23,013
116,853
5,137
—
18,360
—
—
—
163,363
December 31, 2020
$
$
178,125
60,000
7,580
245,705
(10,889)
(4,605)
230,211
The following table presents scheduled maturities of the Company's credit facility as of December 31, 2020:
2021
2022
2023
2024
2025 and thereafter
Total
Credit Agreement
Amount
10,889
14,459
15,653
197,972
6,732
245,705
$
$
In September 2019, the Company entered into a secured credit agreement (the “Credit Agreement,” and the credit facility thereunder, the “Credit Facility”) with Truist Bank
(formerly known as SunTrust Bank), in its capacity as administrative agent for the lenders (in such capacity, the “Agent”), as a lender, an issuer of letters of credit and as
swingline lender, and Preferred Bank, which is affiliated with one of the Company's board members, JPMorgan Chase Bank, N.A., MUFG Union Bank, N.A., Royal Bank of
Canada, Fifth Third Bank and City National Bank, as lenders (the “Lenders”). In connection with the closing of the Credit Agreement, the Company, its subsidiary, NMM, and
the Agent entered into a Guaranty and Security Agreement (the “Guaranty and Security Agreement”), pursuant to which, among other things, NMM guaranteed the obligations
of the Company under the Credit Agreement.
The Credit Agreement provides for a five-year revolving credit facility to the Company of $100.0 million (“Revolver Loan”), which includes a letter of credit
subfacility of up to $25.0 million. The Credit Agreement also provides for a term loan of $190.0 million, (“Term Loan A”). The unpaid principal amount of the term loan is
payable in quarterly installments on the last day of each fiscal quarter commencing on December 31, 2019. The principal payment for each of the first eight fiscal quarters is
$2.4 million, for the following eight fiscal quarters thereafter is $3.6 million and for the following three fiscal quarters thereafter is $4.8 million. The remaining principal
payment on the term loan is due on September 11, 2024.
The proceeds of the term loan and up to $60.0 million of the revolving credit facility may be used to (i) finance a portion of the $545.0 million loan made by the
Company to AP-AMH Medical Corporation, a California professional medical corporation (“AP-AMH”), concurrently with the closing of the Credit Agreement (the “AP-AMH
Loan”) as described in the May 13, 2019, Current Report and the August 29, 2019, Current Report, (ii) refinance certain indebtedness of the Company and its subsidiaries and,
indirectly, APC, (iii) pay transaction costs and expenses arising in connection with the Credit Agreement, the AP-AMH Loan and certain other related transactions and (iv)
provide for working capital, capital expenditures and other general corporate purposes. The remainder of the revolving credit facility will be used to finance future acquisitions
and investments and to provide for working capital needs, capital expenditures and other general corporate purposes.
The Company is required to pay an annual facility fee of 0.20% to 0.35% on the available commitments under the Credit Agreement, regardless of usage, with the
applicable fee determined on a quarterly basis based on the Company’s leverage ratio. The Company is also required to pay customary fees as specified in a separate fee
agreement between the Company and Truist Securities, Inc. (formerly SunTrust Robinson Humphrey, Inc.), the lead arranger of the Credit Agreement.
Amounts borrowed under the Credit Agreement will bear interest at an annual rate equal to either, at the Company’s option, (a) the rate for Eurocurrency deposits for
the corresponding deposits of U.S. dollars appearing on Reuters Screen LIBOR01 Page (“LIBOR”), adjusted for any reserve requirement in effect, plus a spread of from 2.00%
to 3.00%, as determined on a quarterly basis based on the Company’s leverage ratio, or (b) a base rate, plus a spread of 1.00% to 2.00%, as determined on a quarterly basis based
on the Company’s leverage ratio. As of December 31, 2020, the interest rate on the Credit Agreement was 2.27%. The base rate is defined in a manner such that it will not be
less than LIBOR. The Company will pay fees for standby letters of credit at an annual rate equal to 2.00% to 3.00%, as determined on a quarterly basis based on the Company’s
leverage ratio, plus facing fees and standard fees payable to the issuing bank on the respective letter of credit. Loans outstanding under the Credit Agreement may be prepaid at
any time without penalty, except for LIBOR breakage costs and expenses. If LIBOR ceases to be reported, the Credit Agreement requires the Company and the Agent to
endeavor to establish a commercially reasonable alternative rate of interest and until they are able to do so, all borrowings must be at the base rate.
59
The Credit Agreement requires the Company and its subsidiaries to comply with various affirmative covenants, including, without limitation, furnishing updated
financial and other information, preserving existence and entitlements, maintaining properties and insurance, complying with laws, maintaining books and records, requiring any
new domestic subsidiary meeting a materiality threshold specified in the Credit Agreement to become a guarantor thereunder and paying obligations. The Credit Agreement
requires the Company and its subsidiaries to comply with, and to use commercially reasonable efforts to the extent permitted by law to cause certain material associated
practices of the Company, including APC, to comply with, restrictions on liens, indebtedness and investments (including restrictions on acquisitions by the Company), subject to
specified exceptions. The Credit Agreement also contains various other negative covenants binding the Company and its subsidiaries, including, without limitation, restrictions
on fundamental changes, dividends and distributions, sales and leasebacks, transactions with affiliates, burdensome agreements, use of proceeds, maintenance of business,
amendments of organizational documents, accounting changes and prepayments and modifications of subordinated debt.
The Credit Agreement requires the Company to comply with two key financial ratios, each calculated on a consolidated basis.
Coverage Ratios
(1)
Consolidated leverage ratio
Consolidated interest coverage ratio
Requirement
Less than 3.50 to 1.00
Greater than 3.25 to 1.00
(1)
All covenant ratio titles utilize terms as defined in the respective debt agreements.
December 31, 2020
1.64
13.91
Pursuant to the Guaranty and Security Agreement, the Company and NMM have granted the Lenders a security interest in all of their assets, including, without
limitation, all stock and other equity issued by their subsidiaries (including NMM) and all rights with respect to the AP-AMH Loan. The Guaranty and Security Agreement
requires the Company and NMM to comply with various affirmative and negative covenants, including, without limitation, covenants relating to maintaining perfected security
interests, providing information and documentation to the Agent, complying with contractual obligations relating to the collateral, restricting the sale and issuance of securities
by their respective subsidiaries and providing the Agent access to the collateral.
The Credit Agreement contains events of default, including, without limitation, failure to make a payment when due, default on various covenants in the Credit
Agreement, breach of representations or warranties, cross-default on other material indebtedness, bankruptcy or insolvency, occurrence of certain judgments and certain events
under the Employee Retirement Income Security Act of 1974 aggregating more than $10.0 million, invalidity of the loan documents, any lien under the Guaranty and Security
Agreement ceasing to be valid and perfected, any change in control, as defined in the Credit Agreement, an event of default under the AP-AMH Loan, failure by APC to pay
dividends in cash for any period of two consecutive fiscal quarters, failure by AP-AMH to pay cash interest to the Company, or if any modification is made to the Certificate of
Determination or the Special Purpose Shareholder Agreement that directly or indirectly restricts, conditions, impairs, reduces or otherwise limits the payment of the Series A
Preferred dividend by APC to AP-AMH. In addition, it will constitute an event of default under the Credit Agreement if APC uses all or any portion of the consideration
received by APC from AP-AMH on account of AP-AMH’s purchase of Series A Preferred Stock for any purpose other than certain specific approved uses described in the
following sentence, unless not less than 50.01% of all holders of common stock of APC at such time approve such use; provided that APC may use up to $50.0 million in the
aggregate of such consideration for any purpose without any requirement to obtain such approval of the holders of common stock of APC. The approved uses include (i) any
permitted investment, (ii) any dividend or distribution to the holders of the common stock of APC, (iii) any repurchase of common stock of APC, (iv) paying taxes relating to
or arising from certain assets and transactions, or (v) funding losses, deficits or working capital support on account of certain non-healthcare assets in an amount not to exceed
$125.0 million. If any event of default occurs and is continuing under the Credit Agreement, the Lenders may terminate their commitments, and may require the Company and
its guarantors to repay outstanding debt and/or to provide a cash deposit as additional security for outstanding letters of credit. In addition, the Agent, on behalf of the Lenders,
may pursue remedies under the Guaranty and Security Agreement, including, without limitation, transferring pledged securities of the Company’s subsidiaries in the name of
the Agent and exercising all rights with respect thereto (including the right to vote and to receive dividends), collect on pledged accounts, instruments and other receivables
(including the AP-AMH Loan), and all other rights provided by law or under the loan documents and the AP-AMH Loan.
In the ordinary course of business, certain of the Lenders under the Credit Agreement and their affiliates have provided to the Company and its subsidiaries and the
associated practices, and may in the future provide, (i) investment banking, commercial banking (including pursuant to certain existing business loan and credit agreements
being terminated in connection with entering into the Credit Agreement), cash management, foreign exchange or other financial services, and (ii) services as a
60
bond trustee and other trust and fiduciary services, for which they have received compensation and may receive compensation in the future.
Deferred Financing Costs
The Company recorded deferred financing costs of $6.5 million related to the issuance of the Credit Facility. This amount was recorded as a direct reduction of the
carrying amount of the related debt liability. The deferred financing costs related to the term loan will be amortized over the life of the Credit Facility using the effective interest
rate method. The deferred financing costs related to the Revolver Loan will be amortized using the straight line method over the term of the revolver.
Effective Interest Rate
The Company’s average effective interest rate on its total debt during the years ended December 31, 2020, 2019 and 2018 was 3.48%, 3.39%, and 4.72%, respectively.
Interest expense in the consolidated statements of income included amortization of deferred debt issuance costs for the years ended December 31, 2020 and 2019 of $1.4 million
and, $0.5 million, respectively.
Real Estate Loans
On December 31, 2020, the Company purchased 100% of MPP, AMG Properties, and ZLL (refer to Note 4). As a result of this purchase, the Company assumed the
existing loans held by MPP, AMG Properties, and ZLL.
MPP
On July 3, 2020, MPP entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the principal on the loan
is $6.4 million with a variable interest rate of 0.50% less than the independent index which is the daily Wall Street Journal "Prime Rate." If the index is not available, East West
Bank may designate a substitute index after notifying MPP. Monthly payments on the principal and any accrued interest rate not yet paid began in September 2020. MPP must
maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1.
AMG
On August 5, 2020, AMG Properties entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the
principal on the loan is $0.7 million with a variable interest rate of 0.30% less than the independent index which is the daily Wall Street Journal "Prime Rate." If the index is not
available, East West Bank may designate a substitute index after notifying AMG Properties. Monthly payments on the principal and any accrued interest rate not yet paid began
in September 2020. AMG Properties must maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense)
of not less than 1.25 to 1.
ZLL
On July 27, 2020, ZLL entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the principal on the loan
is $0.7 million with a variable interest rate of 0.50% less than the independent index which is the daily Wall Street Journal "prime rate." If the index is not available, East West
Bank may designate a substitute index after notifying AMG Properties. Monthly payments on the principal and any accrued interest rate not yet paid began in September 2020.
ZLL must maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1.
Lines of Credit – Related Party
NMM Business Loan
On June 14, 2018, NMM amended its promissory note agreement with Preferred Bank (“NMM Business Loan Agreement”). Preferred Bank is affiliated with one of
the Company’s board members who serves as the Chairman and CEO of Preferred Bank. The NMM Business Loan Agreement provides for loan availability of up to $20.0
million with a maturity date of June 22, 2020. The NMM Business Loan Agreement was subsequently amended to temporarily increase the loan availability to $27.0 million for
the period from September 1, 2018 to October 31, 2019 to facilitate the issuance of an additional standby
61
letter of credit for the benefit of CMS. The amounts outstanding as of June 30, 2019 of $5.0 million were fully repaid on September 11, 2019.
On September 5, 2018, NMM entered into a non-revolving line of credit agreement with Preferred Bank (“NMM Line of Credit Agreement”) which provides for loan
availability of up to $20.0 million with a maturity date of September 5, 2019. This credit facility was subsequently amended in 2019 to reduce the loan availability to $2.2
million. The interest rate is based on the Wall Street Journal “Prime Rate” plus 0.125%, or 3.375%, as of December 31, 2020. Each drawdown from the line of credit is
converted into a five-year term loan with monthly principal payments plus interest based on a five-year amortization schedule.
On September 11, 2019, the NMM Business Loan Agreement, dated as of June 14, 2018, between NMM and Preferred Bank, as amended, and the Line of Credit
Agreement, dated as of September 5, 2018, between NMM and Preferred Bank, as amended, were terminated in connection with the closing of the credit facility.
APC Business Loan
On June 14, 2018, APC entered its promissory note agreement with Preferred Bank, which is affiliated with one of the Company’s board members, (“APC Business
Loan Agreement”) which provides for loan availability of up to $10.0 million with a maturity date of June 22, 2020. APC Business Loan Agreement was subsequently amended
on April 17, 2019 and June 11, 2019 to decrease the loan availability from $10.0 million to $4.1 million and extend the maturity date through December 31, 2020. On August 1,
2019 and September 10, 2019, APC Business Loan Agreement was further amended to increase loan availability from $40.0 million to $43.8 million, and decrease loan
availability from $43.8 million to $4.1 million, respectively. This decrease further limited the purpose of the indebtedness under APC Business Loan Agreement to the issuance
of standby letters of credit, and added as a permitted lien the security interest in all of its assets granted by APC in favor of NMM under a Security Agreement dated on or about
September 11, 2019 securing APC’s obligations to NMM under, and as required pursuant to, that certain Management Services Agreement dated as of July 1, 1999, as
amended. The interest rate is based on the Wall Street Journal “Prime Rate” plus 0.125%, or 3.375% and 4.875%, as of December 31, 2020 and December 31, 2019,
respectively. As of December 31, 2020 and 2019, there is no additional availability under this line of credit.
Standby Letters of Credit
APAACO established an irrevocable standby letter of credit with Preferred Bank, which is affiliated with one of the Company’s board members, (through the NMM
Business Loan Agreement) and was amended in 2019 to the amount of $14.8 million for the benefit of CMS. The letter of credit is automatically extended without amendment
for additional one-year periods from the present or any future expiration date, unless notified by the institution to terminate prior to 90 days from any expiration date. APAACO
may continue to draw from the letter of credit for one year following the bank’s notification of non-renewal. In September 2019, these letters were terminated with Preferred
Bank and reissued under the Credit Agreement. In August 2020, $14.8 million of the irrevocable standby letters of credit were released by CMS and no amounts remain
outstanding as of December 31, 2020. As of December 31, 2020 we have $25.0 million available under the letter of credit subfacility.
APC established irrevocable standby letters of credit with a financial institution for a total of $0.3 million for the benefit of certain health plans. The standby letters of
credit are automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless notified by the institution in advance
of the expiration date that the letter will be terminated.
Alpha Care established irrevocable standby letters of credit with Preferred Bank under the APC Business Loan Agreement for a total of $3.8 million for the benefit of
certain health plans. The standby letters of credit are automatically extended without amendment for additional one-year periods from the present or any future expiration date,
unless notified by the institution in advance of the expiration date that the letter will be terminated.
Intercompany Loans
Each of AMH, MMG, BAHA, ACC, AKM and SCHC has entered into an Intercompany Loan Agreement with AMM under which AMM has agreed to provide a
revolving loan commitment to each of the affiliated entities in an amount set forth in each Intercompany Loan Agreement. Each Intercompany Loan Agreement provides that
AMM’s obligation to make any advances automatically terminates concurrently with the termination of the management agreement with the applicable affiliated entity. In
addition, each Intercompany Loan Agreement provides that (i) any material breach by the shareholder of
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record of the applicable Physician Shareholder Agreement or (ii) the termination of the management agreement with the applicable affiliated entity constitutes an event of
default under the Intercompany Loan Agreement. All the intercompany loans have been eliminated in consolidation.
Entity
Intercompany Credit
Facility
Interest Rate Per
Annum
Maximum Balance
During Period
Ending Balance
Principal Paid During
Period
Interest Paid During
Period
Year Ended December 31, 2020 (in thousands)
AMH
MMG
AKM
SCHC
BAHA
$
$
10,000
3,000
5,000
5,000
250
23,250
10 % $
10 %
10 %
10 %
10 %
$
6,588 $
3,663
—
5,362
4,066
19,679 $
6,588 $
3,663
—
5,362
3,945
19,558 $
— $
—
—
—
—
— $
—
—
—
—
—
—
Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”), which require management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and to the reported amounts of revenues and expenses during the period. The Company bases its
estimates on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. Changes in estimates are recorded if and
when better information becomes available. Actual results could differ from those estimates under different assumptions and conditions. The Company believes that the
accounting policies discussed below are those that are most important to the presentation of its financial condition and results of operations and that require its management’s
most difficult, subjective and complex judgments. Our significant accounting policies are described in Note 2 – “ Basis of Presentation and Summary of Significant Accounting
Policies” to our consolidated financial statements under Item 8 in this annual report on Form 10-K.
Principles of Consolidation
The consolidated balance sheets as of December 31, 2020 and 2019 and consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 include the
accounts of ApolloMed, its consolidated subsidiaries NMM, AMM, and APAACO, including ApolloMed's consolidated VIE, AP-AMH, AMM's consolidated VIE, SCHC,
NMM’s consolidated subsidiaries, APCN-ACO and AP-ACO, and NMM’s consolidated VIE, APC, APC’s subsidiaries, UCAP, MPP, AMG Properties, ZLL and APC’s
consolidated VIEs, CDSC, APC-LSMA, and ICC, and APC-LSMA's consolidated subsidiaries Alpha Care and Accountable Health Care.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include collectability of receivables, recoverability of
long-lived and intangible assets, business combination and goodwill valuation and impairment, accrual of medical liabilities (incurred but not reported (“IBNR”) claims),
determination of full-risk and shared-risk revenue and receivables (including constraints, completion factors and historical margins), income tax valuation allowance, share-
based compensation, and right-of-use ("ROU") assets and lease liabilities. Management evaluates its estimates and assumptions on an ongoing basis using historical experience
and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be
determined with precision, actual results could differ materially from those estimates and assumptions.
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Receivables and Receivables – Related Parties
The Company’s receivables are comprised of accounts receivable, capitation and claims receivable, risk pool settlements and incentive receivables, management fee
income and other receivables. Accounts receivable are recorded and stated at the amount expected to be collected.
The Company’s receivables – related parties are comprised of risk pool settlements and incentive receivables, management fee income and other receivables.
Receivables – related parties are recorded and stated at the amount expected to be collected.
Capitation and claims receivable relate to each health plan’s capitation, which is received by the Company in the month following the month of service. Risk pool
settlements and incentive receivables mainly consist of the Company’s full risk pool receivable that is recorded quarterly based on reports received from our hospital partners
and management’s estimate of the Company’s portion of the estimated risk pool surplus for open performance years. Settlement of risk pool surplus or deficits occurs
approximately 18 months after the risk pool performance year is completed. Other receivables include fee-for-services (“FFS”) reimbursement for patient care, certain expense
reimbursements, and stop loss insurance premium reimbursements from IPAs.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these
reserves. The Company also regularly analyzes the ultimate collectability of accounts receivable after certain stages of the collection cycle using a look-back analysis to
determine the amount of receivables subsequently collected and adjustments are recorded when necessary. Reserves are recorded primarily on a specific identification basis.
Receivables are recorded when the Company is able to determine amounts receivable under applicable contracts and agreements based on information provided and
collection is reasonably likely to occur. In regards to the credit loss standard, the Company continuously monitors its collections of receivables and our expectation is that the
historical credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses that would be estimated under the current expected
credit losses ("CECL") model.
Fair Value Measurements
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, investment in marketable securities, receivables, loans receivable – related
parties, accounts payable, certain accrued expenses, capital lease obligations, bank loan, line of credit – related party, and long-term debt. The carrying values of the financial
instruments classified as current in the accompanying consolidated balance sheets are considered to be at their fair values, due to the short maturity of these instruments. The
carrying amount of the loan receivables – related parties, net of current portion, bank loan, capital lease obligations line of credit - related party, and long-term debt
approximate fair value as they bear interest at rates that approximate current market rates for debt with similar maturities and credit quality. The FASB ASC 820, Fair Value
Measurement (“ASC 820”), applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a
framework for measuring fair value and expands disclosure about fair value measurements. ASC 820 establishes a fair value hierarchy for disclosures of the inputs to valuations
used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not
active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or
corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the
best information available, including the Company’s own data.
Business Combinations
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We use the acquisition method of accounting for all business combinations, which requires assets and liabilities of the acquiree to be recorded at fair value, to measure
the fair value of the consideration transferred, including contingent consideration, to be determined on the acquisition date, and to account for acquisition related costs separately
from the business combination.
Intangible Assets and Long-Lived Assets
Intangible assets with finite lives include network-payor relationships, management contracts and member relationships and are stated at cost, less accumulated
amortization and impairment losses. These intangible assets are amortized on the accelerated method using the discounted cash flow rate. Intangible assets with finite lives also
include a patient management platform, as well as trade names and trademarks, whose valuations were determined using the cost to recreate method and the relief from royalty
method, respectively. These assets are stated at cost, less accumulated amortization and impairment losses, and are amortized using the straight-line method.
Finite-lived intangibles and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, a write-down
would be recorded to reduce the carrying value of the asset to its estimated fair value. Fair value is determined based on appropriate valuation techniques.
Goodwill and Intangible Assets
Under FASB ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment.
At least annually, at the Company’s fiscal year end, or sooner, if events or changes in circumstances indicate that an impairment has occurred, the Company performs a
qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to complete quantitative impairment assessments for each of the Company’s three reporting units, (1) management services, (2) IPA, and (3) ACO. The Company
is required to perform a quantitative goodwill impairment test only if the conclusion from the qualitative assessment is that it is more likely than not that a reporting unit’s fair
value is less than the carrying value of its assets. Should this be the case, a quantitative analysis is performed to identify whether a potential impairment exists by comparing the
estimated fair values of the reporting units with their respective carrying values, including goodwill.
An impairment loss is recognized if the implied fair value of the asset being tested is less than its carrying value. In this event, the asset is written down accordingly.
The fair values of goodwill are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the
circumstances.
At least annually, indefinite-lived intangible assets are tested for impairment. Impairment for intangible assets with indefinite lives exists if the carrying value of the
intangible asset exceeds its fair value. The fair values of indefinite-lived intangible assets are determined using valuation techniques based on estimates, judgments and
assumptions management believes are appropriate in the circumstances.
Accrual of Medical Liabilities
APC, Alpha Care, Accountable Health Care, and APAACO are responsible for integrated care that the associated physicians and contracted hospitals provide to their
enrollees. APC, Alpha Care, Accountable Health Care, and APAACO provide integrated care to HMOs, Medicare and Medi-Cal enrollees through a network of contracted
providers under sub-capitation and direct patient service arrangements. Medical costs for professional and institutional services rendered by contracted providers are recorded as
cost of services, excluding depreciation and amortization, expense in the accompanying consolidated statements of income.
An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in the accompanying consolidated balance
sheets. Medical liabilities include claims reported as of the balance sheet date and estimated IBNR claims. Such estimates are developed using actuarial methods and are based
on numerous variables, including the utilization of healthcare services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and other
factors. The estimation methods and the resulting accrual are periodically reviewed and updated. Many of the medical contracts are complex in nature and may be subject to
differing interpretations regarding amounts due for the
65
provision of various services. Such differing interpretations may not come to light until a substantial period of time has passed following the contract implementation.
Risk Pool Settlements and Incentives
APC enters into full risk capitation arrangements with certain health plans and local hospitals, which are administered by a third party, where the hospital is responsible for
providing, arranging and paying for institutional risk and APC is responsible for providing, arranging and paying for professional risk. Under a full risk pool sharing agreement,
APC generally receives a percentage of the net surplus from the affiliated hospital’s risk pools with HMOs after deductions for the affiliated hospitals costs. Advance settlement
payments are typically made quarterly in arrears if there is a surplus. The Company's risk pool settlements under arrangements with health plans and hospitals are recognized
using the most likely amount methodology and amounts are only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not
occur once any uncertainty is resolved. The assumptions for historical MLR, IBNR completion factors and constraint percentages were used by management in applying the
most likely amount methodology.
Under capitated arrangements with certain HMOs APC participates in one or more shared risk arrangements relating to the provision of institutional services to
enrollees (shared risk arrangements) and thus can earn additional revenue or incur losses based upon the enrollee utilization of institutional services. Shared risk capitation
arrangements are entered into with certain health plans, which are administered by the health plan, where APC is responsible for rendering professional services, but the health
plan does not enter into a capitation arrangement with a hospital and therefore the health plan retains the institutional risk. Shared risk deficits, if any, are not payable until and
unless (and only to the extent of any) risk sharing surpluses are generated. At the termination of the HMO contract, any accumulated deficit will be extinguished.
The Company's risk pool settlements under arrangements with HMOs are recognized, using the most likely methodology, and only included in revenue to the extent that it is
probable that a significant reversal of cumulative revenue will not occur. Given the lack of access to the health plans’ data and control over the members assigned to APC, the
adjustments and/or the withheld amounts are unpredictable and as such APC’s risk share revenue is deemed to be fully constrained until APC is notified of the amount by the
health plan. Risk pools for the prior contract years are generally fully settled in the third or fourth quarter of the following year.
In addition to risk-sharing revenues, the Company also receives incentives under “pay-for-performance” programs for quality medical care, based on various criteria.
As an incentive to control enrollee utilization and to promote quality care, certain HMOs have designed quality incentive programs and commercial generic pharmacy incentive
programs to compensate the Company for its efforts to improve the quality of services and efficient and effective use of pharmacy supplemental benefits provided to HMO
members. The incentive programs track specific performance measures and calculate payments to the Company based on the performance measures. The Company's incentives
under “pay-for-performance” programs are recognized using the most likely methodology. However, as the Company does not have sufficient insight from the health plans on
the amount and timing of the shared risk pool and incentive payments these amounts are considered to be fully constrained and only recorded when such payments are known
and/or received.
Generally, for the foregoing arrangements, the final settlement is dependent on each distinct day’s performance within the annual measurement period but cannot be
allocated to specific days until the full measurement period has occurred and performance can be assessed. As such, this is a form of variable consideration estimated at contract
inception and updated through the measurement period (i.e. the contract year), to the extent the risk of reversal does not exist and the consideration is not constrained.
Share-Based Compensation
The Company maintains a stock-based compensation program for employees, non-employees, directors and consultants. The value of share-based awards such as
options is recognized as compensation expense on a cumulative straight-line basis over the vesting period of the awards, adjusted for expected forfeitures. From time to time, the
Company issues shares of its common stock to its employees, directors and consultants, which shares may be subject to the Company’s repurchase right (but not obligation)
that lapses based on time-based and performance-based vesting schedules.
Leases
The Company determines if an arrangement is a lease at its inception. The expected term of the lease used for computing the lease liability and right-of-use ("ROU")
asset and determining the classification of the lease as operating or financing may include options to extend or terminate the lease when it is reasonably certain that the
Company will exercise that
66
option. The Company elected practical expedients for ongoing accounting that is provided by the new standard comprised of the following: (1) the election for classes of
underlying asset to not separate non-lease components from lease components, and (2) the election for short-term lease recognition exemption for all leases under 12 months
term. The present value of the lease payments is calculated using a rate implicit in the lease, when readily determinable. However, as most of the Company's leases do not
provide an implicit rate, the Company uses its incremental borrowing rate to determine the present value of the lease payments for the majority of its leases
Variable interest model
We perform a primary beneficiary analysis on all our identified variable interest entities, which comprises a qualitative analysis based on power and economics. We
consolidate a VIE if both power and benefits belong to us – that is, we (i) have the power to direct the activities of a VIE that most significantly influence the VIE’s economic
performance (power), and (ii) have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). We
consolidate VIEs whenever it is determined that we are the primary beneficiary.
Investment in Other Entities - Equity Method
We account for certain investments using the equity method of accounting when it is determined that the investment provides us the ability to exercise significant
influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee of
between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of
accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the
investee and is recognized in the consolidated statements of income under “Income from equity method investments” and also is adjusted by contributions to and distributions
from the investee. Equity method investments are subject to impairment evaluation. During the period ended December 31, 2020, the Company recognized no impairment loss.
Noncontrolling Interests
The Company consolidates entities in which the Company has a controlling financial interest. The Company consolidates subsidiaries in which the Company holds,
directly or indirectly, more than 50% of the voting rights, and variable interest entities (VIEs) in which the Company is the primary beneficiary. Noncontrolling interests
represent third-party equity ownership interests (including certain VIEs) in the Company’s consolidated entities. The amount of net income attributable to noncontrolling
interests is disclosed in the consolidated statements of income.
Mezzanine Equity
Based on the shareholder agreements for APC, in the event of a disqualifying event, as defined in the agreements, APC could be required to repurchase the shares from
their respective shareholders based on certain triggers outlined in the shareholder agreements. As the redemption feature of the shares is not solely within the control of APC,
the equity of APC does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Accordingly, the Company recognizes noncontrolling
interests in APC as mezzanine equity in the consolidated financial statements. APC’s shares were not redeemable and it was not probable that the shares would become
redeemable as of December 31, 2020 and 2019.
Revenue Recognition
The Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, using the modified retrospective
method on January 1, 2108. Modified retrospective adoption required entities to apply the standard retrospectively to the most current period presented in the financial
statements, requiring the cumulative effect of the retrospective application as an adjustment to the opening balance of retained earnings and noncontrolling interests at the date
of initial application. Revenue from substantially all of the Company’s contracts with customers continues to be recognized over time as services are rendered.
Income Taxes
Federal and state income taxes are computed at currently enacted tax rates less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that
do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions
include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the
67
timing of when items of income and expense are recognized for financial reporting and income tax purposes, changes in the recognition of tax positions and any changes in the
valuation allowance caused by a change in judgment about the realizability of the related deferred tax assets. A valuation allowance is established when necessary to reduce
deferred tax assets to amounts expected to be realized.
The Company uses a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be
recognized in the consolidated financial statements. Once the recognition threshold is met, the tax position is then measured to determine the actual amount of benefit to
recognize in the consolidated financial statements.
Effect of New Accounting Standards
See “Recent Accounting Pronouncements” under “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies.”
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Borrowings under our Credit Agreement exposed us to interest rate risk. As of December 31, 2020, we had $238.1 million in outstanding borrowings under our Credit
Agreement. Amount borrowed under the Credit Agreement bears interest at an annual rate equal to either, at the Company's option, (a) the rate for Eurocurrency deposits for the
corresponding deposits of U.S. dollars appearing on Reuters Screen LIBOR01 Page ("LIBOR"), adjusted for any reserve requirement in effect, plus a spread of 2.00% to 3.00%,
as determined on a quarterly basis based on the Company's leverage ratio, or (b) a base rate, plus a spread of 1.00% to 2.00%, as determined on a quarterly basis based on the
Company's leverage ratio. The base rate is defined in a manner such that it will not be less than LIBOR. The Company will pay fees for standby letters of credit at an annual rate
equal to 2.00% to 3.00%, as determined on a quarterly basis based on the Company’s leverage ratio, plus facing fees and standard fees payable to the issuing bank on the
respective letter of credit. Furthermore, as of December 31, 2020, the Company had $7.6 million in outstanding borrowings for real estate loans related to ZLL, MPP, and AMG
Properties. Each agreement bears interest that is subject to change from time to time based on changes in an independent index which is the daily Wall Street Journal Prime
Rate, as quoted in the "Money Rates" column of The Wall Street Journal (Western edition) as determined by the Lender (the "Index"). On the dates of the agreement, the Index
is 3.250% per annum. Under no circumstances will the interest rate on this loan be less than 3.500% per annum or more than the maximum rate allowed by applicable law. A
hypothetical 1% change in our interest rates for our outstanding borrowings under our Credit Agreement and Business Loan agreement would have increased or decreased our
interest expense for the year ended December 31, 2020 by $2.5 million.
68
Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Mezzanine and Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to the Consolidated Financial Statements
Page
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74
77
78
79
82
69
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Apollo Medical Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Apollo Medical Holdings, Inc. (the Company) as of December 31, 2020, the related consolidated statements
of income, mezzanine and stockholders' equity and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020,
and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over
financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework), and our report dated March 12, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
70
Risk Pool Settlements and Related Receivables
Description of the Matter
How We
Addressed the Matter in Our Audit
As discussed in Note 2 of the consolidated financial statements, the Company 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 the Company is responsible for
providing, arranging and paying for professional risk. Under a full risk pool sharing agreement, the Company
generally receives a percentage of the net surplus from the affiliated hospitals’ risk pools with health plans after
deductions for the affiliated hospitals’ costs. The Company estimates risk pool settlements relating to such
arrangements using the most likely amount methodology and amounts are only included in revenues to the extent
that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved.
The amount of such risk pool settlements recorded is driven by an expected margin factor calculated by the
Company using historical utilization data, historical margin trends, constraint percentages and various data and
information provided by the affiliated hospitals.
Auditing management’s estimate of the risk pool settlements and related receivables involved a high degree of
subjectivity used by management and the nature of the significant assumptions, which include a margin factor
based on historical trends, volume data and other available information. The Company relies on data provided by
other parties in its estimation model. Additionally, judgment is used to develop the margin factor used to account
for the expected performance of the risk pools for each settlement year and is derived based on an evaluation of
historical data provided by the hospital, publicly available information, and communications between the Company
and the affiliated hospital.
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the
Company’s process for estimating risk pool settlements and related receivable amounts. This included testing
management review controls over the reasonableness of the data (including capitation revenue and related claims
and other administrative expenses) underlying the risk pool calculations provided by the affiliated hospitals, and
analyzing the historical trends and appropriateness of the method used in determining the estimated risk pool
surplus. We also reviewed relevant Service Organization Control (SOC) 1 reports to evaluate that such affiliated
hospitals and administrator have effective controls over the completeness and accuracy of the data they process
and provide to the Company. We also assessed and tested complementary user entity controls relevant to the SOC
1 reports.
Our audit procedures included, among others, confirming the external data used in the calculations of risk pools
directly with the affiliated hospitals, testing the revenue amount by comparing it to subsequent cash receipts, and
testing the margin factor used by the Company in its estimate. In order to test the margin factor, we evaluated
historical margin trends within the risk pools, reviewed the Company’s own volumes and margins, and evaluated
other publicly available information to identify any trends which may provide contrary evidence. Additionally, we
performed a hindsight analysis to assess how precise the Company’s prior year estimates were compared to the
final settled amounts.
71
Valuation of Incurred but not Reported (IBNR) Claims Liability
Description of the Matter
At December 31, 2020, the Company’s medical liabilities totaled $50.3 million. As discussed in Note 2 of the consolidated
financial statements, medical liabilities include reserves for incurred but not reported (“IBNR”) claims. The IBNR liability is an
estimate that management developed using actuarial methods and is 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.
Auditing management’s estimate of the IBNR liability involved a high degree of subjectivity due to the complexity of the
models used by management and the nature of the significant assumptions used in the estimation of the liability . We involved
our actuarial specialists to assist with the testing due to the highly judgmental nature of assumptions used in the valuation
process, including completion factor and per member per month trend factor. These assumptions have a significant effect on the
valuation of the IBNR liability.
How We Addressed the Matter in
Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the
process for estimating the IBNR liability. This included testing management review controls over completion factor and per
member per month trend factor assumptions, and management’s review of actuarial methods used to calculate the IBNR liability,
including the completeness and accuracy of data inputs and outputs of those models.
To test the IBNR liability, our audit procedures included, among others, testing the completeness and accuracy of data used in the
Company’s models by testing reconciliations of underlying claims and membership data recorded in source systems to the
actuarial reserve models, and comparing claims to source documentation. With the assistance of our actuarial specialists, we
compared management’s methods and assumptions used in their analysis with historical experience, consistency with generally
accepted actuarial methodologies used within the industry, and observable healthcare trend levels within the markets the
Company operates. With the assistance of our actuarial specialists, we used the Company’s underlying claims and membership
data to develop an independent range of IBNR estimates and compared management’s recorded IBNR liability to our range.
Additionally, we performed a hindsight review of prior period estimates using subsequent claims development, and we evaluated
management’s disclosures surrounding IBNR.
/s/ Ernst and Young, LLP
We have served as the Company’s auditor since 2020.
Los Angeles, California
March 12, 2021
72
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Apollo Medical Holdings, Inc.
Alhambra, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Apollo Medical Holdings, Inc. (the “Company”) as of December 31, 2019, the related consolidated
statements of income, mezzanine and stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of America.
Change in Accounting Method Related to Leases
As discussed in Notes 2 and 19 to the consolidated financial statements, the Company changed its method for accounting for leases effective January 1, 2019 as a result of the
adopting Accounting Standards Codification (“ASC”) 842 - Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ BDO USA, LLP
We served as the Company’s auditor from 2014 to 2020.
Los Angeles, California
March 16, 2020
73
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
Current assets
Cash and cash equivalents
Restricted cash
Investment in marketable securities
Receivables, net
Receivables, net – related parties
Other receivables
Prepaid expenses and other current assets
Loan receivable - short term
Total current assets
Noncurrent assets
Land, property and equipment, net
Intangible assets, net
Goodwill
Loans receivable
Loans receivable – related parties
Investments in other entities – equity method
Investments in privately held entities
Restricted cash
Operating lease right-of-use assets
Other assets
Total noncurrent assets
Total assets
(1)
74
December 31,
2020
December 31,
2019
$
193,470 $
—
67,695
7,058
49,260
4,297
16,747
50
338,577
29,890
86,985
239,053
480
4,145
43,292
37,075
500
18,574
18,915
478,909
103,189
75
116,539
11,004
48,136
16,885
10,315
22,925
329,068
12,130
103,012
238,505
—
—
28,427
896
746
14,248
1,681
399,645
$
817,486 $
728,713
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share data)
Liabilities, Mezzanine Equity and Stockholders’ Equity
Current liabilities
Accounts payable and accrued expenses
Fiduciary accounts payable
Medical liabilities
Income taxes payable
Dividend payable
Finance lease liabilities
Operating lease liabilities
Current portion of long-term debt
Total current liabilities
Noncurrent liabilities
Deferred tax liability
Finance lease liabilities, net of current portion
Operating lease liabilities, net of current portion
Long-term debt, net of current portion and deferred financing costs
Total noncurrent liabilities
Total liabilities
(1)
Commitments and Contingencies (Note 13)
Mezzanine equity
December 31,
2020
December 31,
2019
$
36,143 $
9,642
50,330
4,224
485
102
3,177
10,889
27,279
2,027
58,725
4,529
271
102
2,991
9,500
114,992
105,424
10,959
311
15,865
230,211
257,346
372,338
18,269
415
11,373
232,172
262,229
367,653
Noncontrolling interest in Allied Physicians of California, a Professional Medical Corporation ("APC")
114,237
168,725
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, 42,249,137 and 35,908,057 shares outstanding, excluding
12,323,164 and 17,458,810 treasury shares, at December 31, 2020 and 2019, respectively
Additional paid-in capital
Retained earnings
Noncontrolling interest
Total stockholders’ equity
—
—
42
261,011
69,771
330,824
87
—
—
36
159,608
31,905
191,549
786
330,911
192,335
75
Total liabilities, mezzanine equity and stockholders’ equity
$
817,486 $
728,713
(1)
The Company's consolidated balance sheets include the assets and liabilities of its consolidated variable interest entities ("VIEs"). The consolidated balance sheets include
total assets that can be used only to settle obligations of the Company’s consolidated VIEs totaling $ 801.3 million and $849.3 million as of December 31, 2020 and
December 31, 2019, respectively, and total liabilities of the Company’s consolidated VIEs for which creditors do not have recourse to the general credit of the primary
beneficiary of $111.3 million and $114.5 million as of December 31, 2020 and December 31, 2019, respectively. See Note 18 – Variable Interest Entities (VIEs) for further
detail.
See accompanying notes to consolidated financial statements.
76
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
2020
Years ended December 31,
2019
2018
Revenue
Capitation, net
Risk pool settlements and incentives
Management fee income
Fee-for-service, net
Other income
Total revenue
Operating expenses
Cost of services, excluding depreciation and amortization
General and administrative expenses
Depreciation and amortization
Provision for doubtful accounts
Impairment of goodwill and intangible assets
Total expenses
Income from operations
Other (expense) income
Income (loss) from equity method investments
Interest expense
Interest income
Gain on sale of equity method investment
Other income
Total other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interests
Net income attributable to Apollo Medical Holdings, Inc.
Earnings per share – basic
Earnings per share – diluted
$
$
$
$
$
557,326 $
77,367
34,850
12,683
4,954
454,168 $
51,098
34,668
15,475
5,209
687,180
560,618
539,211
49,116
18,350
—
—
606,677
80,503
3,694
(9,499)
2,813
99,839
1,077
97,924
178,427
56,107
467,805
41,482
18,280
(1,363)
1,994
528,198
32,420
(6,901)
(4,733)
2,024
—
3,030
(6,580)
25,840
8,167
122,320 $
17,673 $
84,454
3,557
37,866 $
14,116 $
1.04 $
1.01 $
0.41 $
0.39 $
344,307
100,928
49,743
19,704
5,226
519,908
361,132
43,354
19,303
3,888
3,799
431,476
88,432
(8,125)
(561)
1,259
—
1,622
(5,805)
82,627
22,360
60,267
49,432
10,835
0.33
0.29
Weighted average shares of common stock outstanding – basic
36,527,672
34,708,429
32,893,940
Weighted average shares of common stock outstanding – diluted
37,448,430
36,403,279
37,914,886
See accompanying notes to consolidated financial statements.
77
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF MEZZANINE AND STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Mezzanine
Equity –
Noncontrolling
Interest in APC
Common Stock Outstanding
Shares
Amount
Additional
Paid-in Capital
$
Balance at January 1, 2018
ASC 606 Adoption
Net income
Purchase price adjustment from Merger
Repurchase of treasury shares
Shares issued for exercise of options and
warrants
Share-based compensation
Noncontrolling interest capital change
Dividends
Acquisition of additional shares in
consolidated entity
Release of 50% holdback shares
Balance at December 31, 2018
Net income
Repurchase of treasury shares
Shares issued for exercise of options and
warrants
Share-based compensation
Stock subscription
Shares issued in connection with business
acquisition
Cost of equity issuance of preferred shares
Noncontrolling interest capital change
Dividends
Reclassification of options liability to equity
Issuance of 50% holdback shares
Balance at December 31, 2019
Net income
Purchase of treasury shares
Distribution to noncontrolling interest
Shares issued for vesting of restricted stock
awards
Shares issued for cashless exercise of warrants
Shares issued for exercise of options and
warrants
Share-based compensation
Cancellation of restricted stock awards
Dividends
Balance at December 31, 2020
$
172,130
7,351
47,890
—
(1,264)
200
810
—
(2,000)
—
—
225,117
1,808
(283)
—
607
754
414
(878)
—
(60,000)
1,185
—
168,724
83,621
—
(1,037)
—
—
—
—
—
(137,071)
114,237
32
—
—
—
—
1
—
—
—
—
2
35
—
(1)
—
—
—
—
—
—
—
2
36
—
—
—
—
—
1
—
—
5
42
$
$
$
32,304,876
—
—
—
(168,493)
884,259
37,593
—
—
—
1,519,805
34,578,040
—
(601,581)
418,619
1,599
—
—
—
—
1,511,380
35,908,057
—
(16,897)
—
66,788
66,517
1,240,622
—
—
4,984,050
42,249,137
$
78
Retained
Earnings
(Accumulated
Deficit)
$
$
1,735
1,002
10,835
—
4,216
Noncontrolling
Interest
Stockholders'
Equity
4,235
—
1,543
—
—
—
—
28
(1,975)
(2,832)
—
999
1,749
—
—
—
—
—
—
28
(1,990)
—
—
786
833
—
—
—
—
—
—
—
(1,532)
87
$
$
164,183
1,002
12,378
868
432
3,997
632
28
(1,975)
—
—
181,545
15,866
(7,287)
3,233
940
—
—
—
28
(1,990)
—
—
192,335
38,699
(301)
—
—
—
11,492
3,383
(236)
85,539
330,911
—
—
—
—
—
—
17,788
14,117
—
—
—
—
—
—
—
—
—
31,905
37,866
—
—
—
—
—
—
—
—
69,771
$
158,181
—
—
868
(3,784)
3,996
632
—
—
2,832
(2)
162,723
—
(7,286)
3,233
940
—
—
—
—
—
(2)
159,608
—
(301)
—
—
—
11,491
3,383
(236)
87,066
261,011
$
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of debt issuance cost
Loss on disposal of property and equipment
Impairment of goodwill and intangible assets
Provision for doubtful accounts
Share-based compensation
Gain on sale of equity method investment
Gain on loan assumption
Unrealized loss (gain) from investment in equity securities
(Income) loss from equity method investments
Deferred tax
Changes in operating assets and liabilities, net of acquisition amounts:
Receivables, net
Receivables, net – related parties
Other receivables
Prepaid expenses and other current assets
Right-of-use assets
Other assets
Accounts payable and accrued expenses
Fiduciary accounts payable
Capitation incentives payable
Medical liabilities
Income taxes payable
Operating lease liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of marketable securities
Proceeds from sale of marketable securities
Proceeds from repayment of loans receivable - related parties
Advances on loans receivable
Dividends received from equity method investments
Proceeds from sale of fixed assets
Payments for business acquisitions, net of cash acquired
Purchases of investments in privately held entities
Proceeds from sale of equity method investment
Purchases of investments – equity method
Purchases of property and equipment
79
2020
Years ended December 31,
2019
2018
$
122,320 $
17,673 $
60,267
18,350
1,347
91
—
—
3,383
(99,839)
—
11
(3,694)
(6,620)
4,134
(1,123)
12,589
(6,432)
3,325
(5,530)
8,204
7,615
—
(8,691)
(304)
(2,973)
46,163
(1,793)
50,625
16,500
(145)
—
50
(11,354)
—
52,743
(9,969)
(1,164)
18,280
473
—
1,994
(1,363)
1,547
—
(2,250)
(9)
6,901
(6,801)
10,714
(1,435)
(15,079)
(2,756)
2,480
(572)
(4,883)
488
—
(2,392)
(7,093)
(2,244)
13,673
(115,402)
—
—
(11,425)
240
—
(49,403)
(491)
—
(3,108)
(1,042)
19,303
—
42
3,799
3,888
1,441
—
—
25
8,125
(8,345)
(263)
(28,363)
—
(2,814)
—
2
(22,669)
—
(21,500)
4,134
8,424
—
25,496
(9)
—
—
(7,500)
607
—
—
(405)
—
(16,706)
(1,170)
Net cash provided by (used in) investing activities
95,493
(180,631)
(25,183)
Cash flows from financing activities
Dividends paid
Repayment of term loan
Change in noncontrolling interest capital
Borrowings on long-term debt
Borrowings on line of credit
Repayments on long-term debt
Repayments on bank loan and lines of credit
Payment of capital lease obligations
Proceeds from exercise of stock options and warrants
Proceeds from common stock offering
Repurchase of common shares
Distribution to noncontrolling interest
Cost of debt and equity issuances
Net cash (used in) provided by financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
(51,319)
(9,500)
—
—
—
—
—
(105)
10,802
—
(537)
(1,037)
—
(51,696)
89,960
(61,717)
—
28
250,000
39,600
(2,375)
(52,640)
(102)
3,123
755
(7,570)
—
(5,771)
163,331
(3,627)
(17,759)
—
27
8,000
—
—
(495)
(99)
3,997
200
(5,047)
—
—
(11,176)
(10,863)
Cash, cash equivalents and restricted cash, beginning of year
104,010
107,637
118,500
Cash, cash equivalents and restricted cash, end of year
Supplemental disclosures of cash flow information
Cash paid for income taxes
Cash paid for interest
Supplemental disclosures of non-cash investing and financing activities
Cashless exercise of warrants
Dividend declared included in dividend payable
APC stock issued in exchange for AMG
Deferred tax liability adjusted to goodwill
Reclassification of liability for equity shares
Purchase price adjustment for acceleration of vested stock options
Conversion of loan receivable to investment in Accountable Health Care, IPA
Reclassification of dividends related to share repurchase
Reclassification of APS noncontrolling interest to equity related to purchase of additional shares
Deferred tax liability adjustment related to warrant exercises
Preferred shares received from sale of equity method investment
Beneficial interest acquired from sale of equity method investment
$
$
$
$
193,970 $
104,010 $
107,637
62,002 $
8,510 $
20,200 $
4,258 $
23,643
462
599 $
485
—
—
—
—
—
—
—
690
36,179
15,723
— $
271
414
6,334
1,185
—
—
—
—
—
—
—
—
—
—
1,110
—
868
5,000
4,216
2,832
—
—
—
80
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total amounts of
cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows.
Cash and cash equivalents
Restricted cash – long-term - letters of credit
Restricted cash – short-term
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
2020
Years Ended December 31,
2019
2018
$
$
193,470 $
500
—
193,970 $
103,189
746
75
104,010 $
106,892
745
—
107,637
See accompanying notes to consolidated financial statements.
81
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
1. Description of Business
Apollo Medical Holdings, Inc. ("ApolloMed") is a leading physician-centric, technology-powered, risk-bearing healthcare management company. Leveraging its proprietary
population health management and healthcare delivery platform, ApolloMed operates an integrated, value-based healthcare model, which aims to empower the providers in its
network to deliver the highest quality of care to its patients in a cost-effective manner. ApolloMed was formed via its merger with Network Medical Management ("NMM") on
December 8, 2017 ("2017 Merger"). As a result of the merger, NMM became a wholly-owned subsidiary of ApolloMed, and the former NMM shareholders own a majority of
the issued and outstanding common stock of ApolloMed and maintain control of the board of directors of ApolloMed.
Headquartered in Alhambra, California, ApolloMed's subsidiaries include management services organizations ("MSOs"), affiliated independent practice associations ("IPAs")
and a Next Generation Accountable Care Organization ("NGACO"). Network Medical Management, Inc. ("NMM") and Apollo Medical Management, Inc. ("AMM") are the
administrative and managerial services companies for the professional corporations that contract with independent physicians to deliver medical services in-office and virtually.
Allied Physicians of California, a Professional Medical Corporation d.b.a. Allied Pacific of California IPA ("APC"), Alpha Care Medical Group, Inc. and Accountable Health
Care IPA are the affiliated IPA groups that provide medical services. These affiliated IPAs are supported by ApolloMed Hospitalists, a Medical Corporation ("AMH") and
Southern California Heart Centers, a Medical Corporation ("SCHC"). The Company's NGACO operates under the APA ACO, Inc. ("APAACO") brand and participates in the
Centers for Medicare & Medicaid Services program that allows provider groups to assume higher levels of financial risk and potentially achieve a higher reward from
participation in the program's attribution-based risk sharing model.
The Company provides care coordination services to each major constituent of the healthcare delivery system, including patients, families, primary care physicians, specialists,
acute care hospitals, alternative sites of inpatient care, physician groups and health plans. The Company’s physician network consists of primary care physicians, specialist
physicians, and hospitalists.
NMM was formed in 1994 as an MSO for the purposes of providing management services to medical companies and IPAs. The management services primarily include billing,
collection, accounting, administration, quality assurance, marketing, compliance, and education. Following a business combination, NMM became a wholly-owned subsidiary
of ApolloMed in December 2017.
APC was incorporated in 1992 for the purpose of arranging healthcare services as an IPA. APC has contracts with various health maintenance organizations (“HMOs”) and
other licensed healthcare service plans as defined in the California Knox-Keene Health Care Service Plan Act of 1975. Each HMO negotiates a fixed amount per member per
month (“PMPM”) that is to be paid to APC. In return, APC arranges for the delivery of healthcare services by contracting with physicians or professional medical corporations
for primary care and specialty care services. APC assumes the financial risk of the cost of delivering healthcare services in excess of the fixed amounts received. Some of the
risk is transferred to the contracted physicians or professional corporations. The risk is also minimized by stop-loss provisions in contracts with HMOs.
In July 1999, APC entered into an amended and restated management and administrative services agreement with NMM (amending an initial management services agreement
that was entered into in 1997) for an initial fixed term of 30 years. In accordance with relevant accounting guidance, APC is determined to be a variable interest entity (“VIE”)
of the Company as NMM is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect APC’s economic
performance through its majority representation on the APC Joint Planning Board; therefore APC is consolidated by NMM.
AP-AMH Medical Corporation (“AP-AMH”) was formed in May 2019, as a designated shareholder professional corporation. Dr. Thomas Lam, a shareholder, and the Chief
Executive Officer and Chief Financial Officer of APC and Co-Chief Executive Officer of ApolloMed, is the sole shareholder of AP-AMH. ApolloMed makes all the decisions
on behalf of AP-AMH and funds and receives all the distributions from its operations. ApolloMed has the right to receive benefits from the operations of AP-AMH and has the
option, but not the obligation, to cover its losses. AP-AMH's sole function and only activity is to act as the nominee shareholder for ApolloMed's investments in APC.
Therefore, AP-AMH is controlled by and consolidated by ApolloMed as the primary beneficiary of this VIE.
In September 2019, ApolloMed completed the following series of transactions with its affiliates, AP-AMH and APC:
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
1. ApolloMed loaned AP-AMH $545.0 million pursuant to a ten-year secured loan agreement (the “AP-AMH Loan”). The loan bears interest at a rate of 10% per annum
simple interest, is not prepayable (except in certain limited circumstances), requires quarterly payments of interest only in arrears, and is secured by a first priority
security interest in all of AP-AMH's assets, including the shares of APC Series A Preferred Stock to be purchased by AP-AMH. To the extent that AP-AMH is unable to
make any interest payment when due because it has received dividends on the APC Series A Preferred Stock insufficient to pay in full such interest payment, then the
outstanding principal amount of the loan will be increased by the amount of any such accrued but unpaid interest, and any such increased principal amounts will bear
interest at the rate of 10.75% per annum simple interest.
2. AP-AMH purchased 1,000,000 shares of APC Series A Preferred Stock for aggregate consideration of $545.0 million in a private placement. Under the terms of the
APC Certificate of Determination of Preferences of Series A Preferred Stock (the "Certificate of Determination"), AP-AMH is entitled to receive preferential, cumulative
dividends that accrue on a daily basis and that are equal to the sum of (i) APC's net income from Healthcare Services (as defined in the Certificate of Determination),
plus (ii) any dividends received by APC from certain of APC's affiliated entities, less (iii) any Retained Amounts (as defined in the Certificate of Determination). During
the year ended December 31, 2020 and 2019, APC distributed $30.4 million and $8.9 million, respectively, as preferred returns.
3. APC purchased 15,015,015 shares of the Company's common stock for total consideration of $300.0 million in private placement. In connection therewith, the Company
granted APC certain registration rights with respect to the Company's common stock that APC purchased, and APC agreed that APC votes in excess of 9.99% of the
Company's then outstanding shares will be voted by proxy given to the Company's management, and that those proxy holders will cast the excess votes in the same
proportion as all other votes cast on any specific proposal coming before the Company's stockholders. During the year ended December 31, 2020, APC distributed
approximately 5.0 million shares of the Company's common stock to APC shareholders.
4. ApolloMed licensed to AP-AMH the right to use certain tradenames for certain specified purposes for a fee equal to a percentage of the aggregate gross revenues of AP-
AMH. The license fee is payable out of any Series A Preferred Stock dividends received by AP-AMH from APC.
5. Through its subsidiary, NMM, the Company agreed to provide certain administrative services to AP-AMH for a fee equal to a percentage of the aggregate gross
revenues of AP-AMH. The administrative fee also is payable out of any APC Series A Preferred Stock dividends received by AP-AMH from APC.
As part of the series of transactions, in September 2019, APC and AP-AMH entered into a Second Amendment to the Series A Preferred Stock Purchase Agreement clarifying
the term excluded assets ("Excluded Assets"). Excluded Assets means (i) assets received from the sale of shares of the Series A Preferred equal to the Series A Purchase Price,
(ii) the assets of the Company that are not Healthcare Services Assets, including the Company’s equity interests in Universal Care, Inc., Apollo Medical Holdings, Inc., and any
entity that is primarily engaged in the business of owning, leasing, developing or otherwise operating real estate, (iii) any assets acquired with the proceeds of the sale,
assignment or other disposition of any of the assets described in clauses (i) or (ii), and (iv) any proceeds of the assets described in clauses (i), (ii) and (iii).
APC's ownership in ApolloMed was 22.58% and 32.50% as of December 31, 2020 and December 31, 2019, respectively.
Concourse Diagnostic Surgery Center, LLC (“CDSC”) was formed in March 2010 in the state of California. CDSC is an ambulatory surgery center in City of Industry,
California, is organized by a group of highly qualified physicians, and the surgical center utilizes some of the most advanced equipment in Eastern Los Angeles County and San
Gabriel Valley. The facility is Medicare Certified and accredited by the Accreditation Association for Ambulatory Healthcare, Inc. As of December 31, 2020, APC owned
45.01% of CDSC's capital stock. CDSC is determined to be a VIE and APC is determined to be the primary beneficiary. APC has the ability to direct the activities that most
significantly affect CDSC’s economic performance and receives the most economic benefits; therefore CDSC is consolidated by APC.
APC-LSMA Designated Shareholder Medical Corporation (“APC-LSMA”) was formed in October 2012 as a designated shareholder professional corporation. Dr. Thomas
Lam, a shareholder and the Chief Executive Officer and Chief Financial Officer of APC and Co-Chief Executive Officer of ApolloMed, is a nominee shareholder of APC-
LSMA. APC makes all investment decisions on behalf of APC-LSMA, funds all investments and receives all distributions from the investments. APC has the obligation to
absorb losses and the right to receive benefits from all investments made by APC-LSMA. APC-LSMA’s sole function is to act as the nominee shareholder for APC in other
California medical professional corporations. Therefore, APC-LSMA is controlled and consolidated by APC as the primary beneficiary of this VIE. The only activity of APC-
LSMA is
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
to hold the investments in medical corporations, including the IPA lines of business of LaSalle Medical Associates (“LMA”), Pacific Medical Imaging and Oncology Center,
Inc. (“PMIOC”), Diagnostic Medical Group (“DMG”) and AHMC International Cancer Center, a Medical Corporation (“ICC”). APC-LSMA also holds a 100% ownership
interest in Maverick Medical Group, Inc. (“MMG”), Alpha Care Medical Group, Inc. (“Alpha Care”), Accountable Health Care IPA, a Professional Medical Corporation
("Accountable Health Care"), and AMG, a Professional Medical Corporation ("AMG").
Alpha Care, an IPA, was acquired by APC-LSMA in May 2019 for an aggregate purchase price of $45.1 million in cash, has been operating in California since 1993 and is a
risk bearing organization engaged in providing professional services under capitation arrangements with its contracted health plans through a provider network consisting of
primary care and specialty care physicians. Alpha Care specializes in delivering high-quality healthcare to over 180,000 enrollees, as of December 31, 2020, and focuses on
Medi-Cal/Medicaid, Commercial, Medicare and Dual Eligible members in the Riverside and San Bernardino counties of Southern California (see Note 3).
Accountable Health Care is a California based IPA that has served the local community in the greater Los Angeles County area through a network of physicians and health care
providers for more than 20 years. As of December 31, 2020, Accountable Health Care had a network of over 336 primary care physicians and 559 specialty care physicians and
is affiliated with a community hospital and regional medical center that provide quality health care services to more than 73,000 members of three federally qualified health
plans and multiple product lines, including Medi-Cal, Commercial, Medicare and the California Healthy Families program. In August 2019, APC and APC-LSMA acquired the
remaining outstanding shares of capital stock they did not already own (comprising 75%) for $7.3 million in cash (see Note 3 and Note 6).
AMG is a network of family practice clinics operating in three main locations in Southern California. AMG provides professional and post-acute care services to Medicare,
Medi-Cal/Medicaid, and Commercial patients through its networks of doctors and nurse practitioners. On September 10, 2019, APC-LSMA acquired 100% of the aggregate
issued and outstanding shares of capital stock of AMG for $1.2 million in cash and $0.4 million of APC common stock (see Note 3).
Universal Care Acquisition Partners, LLC (“UCAP”), a 100% owned subsidiary of APC, was formed in June 2014 for the purpose of holding the investment in Universal Care,
Inc. (“UCI”). On April 30, 2020, UCAP completed the sale of its 48.9% ownership interest in UCI to Bright Health Company of California, Inc. ("Bright") for approximately
$69.2 million in cash proceeds (including $16.5 million as repayment of indebtedness owed to APC), plus non-cash consideration consisting of shares of Bright Health, Inc.'s
preferred stock having an estimated fair value of approximately $36.2 million on the date of sale. In addition, pursuant to the terms of the stock purchase agreement, APC has a
beneficial interest in the equity method investment sold. The estimated fair value of such interest on April 30, 2020 was $15.7 million (see Note 6). As set forth in the
Company’s definitive proxy statement filed with the SEC on July 31, 2019 (the “2019 Proxy Statement”), the 48.9% interest in UCI is included in Excluded Assets that remain
solely for the benefit of APC and its shareholders. As such, any proceeds or gain on the sale of APC’s indirect ownership interest in UCI has no impact on the Series A
Dividend payable by APC to AP-AMH Medical Corporation as described in the 2019 Proxy Statement and consequently the sale did not affect net income attributable to
ApolloMed.
On December 31, 2020, APC paid $12.2 million for 100% interest in three limited liability companies that own office buildings leased to tenants (see Note 4). As a result,
Medical Property Partners LLC ("MPP"), AMG Properties LLC ("AMG Properties"), and ZLL Partners LLC ("ZLL") are 100% owned subsidiaries of APC and are included in
the consolidated financial statements.
APAACO, jointly owned by NMM and AMM, began participating in the Next Generation Accountable Care Organization (“NGACO") Model of the Centers for Medicare &
Medicaid Services (“CMS”) in January 2017. The NGACO Model is a CMS program that allows provider groups to assume higher levels of financial risk and potentially
achieve a higher reward from participating in this new attribution-based risk sharing model.
AMM, a wholly-owned subsidiary of ApolloMed, manages affiliated medical groups, consisting of ApolloMed Hospitalists (“AMH”), a hospitalist company and Southern
California Heart Centers (“SCHC”). AMH provides hospitalist, intensivist and physician advisor services. SCHC is a specialty clinic that focuses on cardiac care and diagnostic
testing.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”).
Principles of Consolidation
The consolidated balance sheets as of December 31, 2020 and 2019 and consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 include the
accounts of ApolloMed; its consolidated subsidiaries, NMM, AMM, and APAACO; its consolidated VIE, AP-AMH; AMM’s consolidated VIE, SCHC; NMM’s consolidated
subsidiaries, APCN-ACO and AP-ACO; NMM’s consolidated VIE, APC; APC’s consolidated subsidiaries, UCAP, MPP, AMG Properties and ZLL, APC’s consolidated VIEs,
CDSC, APC-LSMA and ICC; and APC-LSMA’s consolidated subsidiaries, Alpha Care and Accountable Health Care.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include collectability of receivables, recoverability of
long-lived and intangible assets, business combination and goodwill valuation and impairment, accrual of medical liabilities (incurred but not reported (“IBNR”) claims),
determination of full-risk and shared-risk revenue and receivables (including constraints, completion factors and historical margins), income tax valuation allowance, share-
based compensation, and right-of-use ("ROU") assets and lease liabilities. Management evaluates its estimates and assumptions on an ongoing basis using historical experience
and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be
determined with precision, actual results could differ materially from those estimates and assumptions.
Variable Interest Entities
On an ongoing basis, as circumstances indicate the need for reconsideration, the Company evaluates each legal entity that is not wholly owned by it in accordance with the
consolidation guidance. The evaluation considers all of the Company’s variable interests, including equity ownership, as well as management services agreements (“MSA”). To
fall within the scope of the consolidation guidance, an entity must meet both of the following criteria:
•
•
The entity has a legal structure that has been established to conduct business activities and to hold assets; such entity can be in the form of a partnership, limited
liability company, or corporation, among others; and
The Company has a variable interest in the legal entity – i.e., variable interests that are contractual, such as equity ownership, or other financial interests that change
with changes in the fair value of the entity’s net assets.
If an entity does not meet both criteria above, the Company applies other accounting guidance, such as the cost or equity method of accounting. If an entity does meet both
criteria above, the Company evaluates such entity for consolidation under either the variable interest model if the legal entity meets any of the following characteristics to
qualify as a VIE, or under the voting model for all other legal entities that are not VIEs.
A legal entity is determined to be a VIE if it has any of the following three characteristics:
•
•
•
The entity does not have sufficient equity to finance its activities without additional subordinated financial support;
The entity is established with non-substantive voting rights (i.e., where the entity deprives the majority economic interest holder(s) of voting rights); or
The equity holders, as a group, lack the characteristics of a controlling financial interest. Equity holders meet this criterion if they lack any of the following:
•
The power, through voting rights or similar rights, to direct the activities of the entity that most significantly influence the entity’s economic performance,
as evidenced by:
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
•
•
Substantive participating rights in day-to-day management of the entity’s activities; or
Substantive kick-out rights over the party responsible for significant decisions;
•
•
The obligation to absorb the entity’s expected losses; or
The right to receive the entity’s expected residual returns.
If the Company concludes that any of the three characteristics of a VIE are met, the Company will conclude that the entity is a VIE and evaluate it for consolidation under the
variable interest model.
Variable interest model
If an entity is determined to be a VIE, the Company evaluates whether the Company is the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based
on power and economics. The Company consolidates a VIE if both power and benefits belong to the Company – that is, the Company (i) has the power to direct the activities of
a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE
that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary. Refer Note
18 – “Variable Interest Entities (VIEs)” to the consolidated financial statements for information on the Company’s consolidated VIE. If there are variable interests in a VIE but
the Company is not the primary beneficiary, the Company may account for the investment using the equity method of accounting, refer to Note 6 – “Investments in Other
Entities” for entities that qualify as VIEs but the Company is not the primary beneficiary.
Business Combinations
The Company uses the acquisition method of accounting for all business combinations, which requires assets and liabilities of the acquiree to be recorded at fair value, to
measure the fair value of the consideration transferred, including contingent consideration, to be determined on the acquisition date, and to account for acquisition related costs
separately from the business combination.
Reportable Segments
The Company operates as one reportable segment, the healthcare delivery segment, and implements and operates innovative healthcare models to create a patient-centered,
physician-centric experience. The Company reports its consolidated financial statements in the aggregate, including all activities in one reportable segment.
Reclassifications
Certain 2019 amounts disclosed in prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications were made
between depreciation and amortization and amortization of debt issuance cost on the consolidated statements of cash flows. They had no material effect on net income, earnings
per share, retained earnings, cash flows or total assets.
Cash and Cash Equivalents
The Company's cash and cash equivalents primarily consist of money market funds and certificates of deposit. The Company considers all highly liquid investments that are
both readily convertible into known amounts of cash and mature within ninety days from their date of purchase to be cash equivalents.
The Company maintains its cash in deposit accounts with several banks, which at times may exceed the insured limits of the Federal Deposit Insurance Corporation (“FDIC”).
The Company believes it is not exposed to any significant credit risk with respect to its cash, cash equivalents and restricted cash. As of December 31, 2020 and 2019, the
Company’s deposit accounts with banks exceeded the FDIC’s insured limit by approximately $ 294.9 million and $226.5 million, respectively. The Company has not
experienced any losses to date and performs ongoing evaluations of these financial institutions to limit the Company’s concentration of risk exposure.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Restricted Cash
Restricted cash consists of cash held as collateral to secure standby letters of credits as required by certain contracts. The restricted cash of $0.1 million held as of December 31,
2019 was released in 2020. As of December 31, 2020 and 2019, there was $0 and $0.1 million, respectively, included in short-term restricted cash in the accompanying
consolidated balance sheets.
Investments in Marketable Securities
The appropriate classification of investments is determined at the time of purchase and such designation is reevaluated at each balance sheet date. As of December 31, 2020 and
2019, investments in marketable securities in the amount of approximately $67.7 million and $116.5 million, respectively, consisted of equity securities and certificates of
deposit with various financial institutions, reported at fair value, with maturity dates from four months to twenty-four months (see fair value measurements of financial
instruments below). Investments in certificates of deposits are classified as Level 1 investments in the fair value hierarchy.
Receivables, Receivables – Related Parties, Loan Receivables and Loan Receivables - Related Parties
The Company’s receivables are comprised of accounts receivable, capitation and claims receivable, risk pool settlements, management fee income, incentive receivables, and
other receivables. Accounts receivable are recorded and stated at the amount expected to be collected.
The Company’s receivables – related parties are comprised of risk pool settlements and incentive receivables, management fee income and other receivables. Receivables –
related parties are recorded and stated at the amount expected to be collected.
The Company's loan receivables and loan receivables - related party consist of promissory notes from payees that are expected to be collected between 2-4 years and accrue
interest per annum.
Capitation and claims receivable relate to each health plan’s capitation and is received by the Company in the month following the month of service. Risk pool settlements and
incentive receivables mainly consist of the Company’s full risk pool receivable that is recorded quarterly based on reports received from the Company's hospital partners and
management’s estimate of the Company’s portion of the estimated risk pool surplus for open performance years. Settlement of risk pool surplus or deficits occurs approximately
18 months after the risk pool performance year is completed. Other receivables consists of recoverable claims paid related to the 2019 APAACO performance year to be
administered following instructions from CMS, fee-for-services (“FFS”) reimbursement for patient care, certain expense reimbursements, transportation reimbursements from
the hospitals, and stop loss insurance premium reimbursements.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad
debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. The
Company also regularly analyzes the ultimate collectability of accounts receivable after certain stages of the collection cycle using a look-back analysis to determine the amount
of receivables subsequently collected and adjustments are recorded when necessary. Reserves are recorded primarily on a specific identification basis.
Receivables are recorded when the Company is able to determine amounts receivable under applicable contracts and agreements based on information provided and collection is
reasonably likely to occur. In regards to the credit loss standard, the Company continuously monitors its collections of receivables and our expectation is that the historical
credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses that would be estimated under the current expected credit losses
("CECL") model.
Concentrations of Risks
The Company disaggregates revenue from contracts by service type and payor type. This level of detail provides useful information pertaining to how the Company generates
revenue by significant revenue stream and by type of direct contracts. The consolidated statements of income present disaggregated revenue by service type. The following table
presents disaggregated revenue generated by each payor type (in thousands):
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Commercial
Medicare
Medicaid
Other third parties
Revenue
The Company had major payors that contributed the following percentages of net revenue:
Payor A
Payor B
Payor C
Payor D
Payor E
2020
Years Ended December 31,
2019
2018
$
$
108,851 $
271,596
269,079
37,654
687,180 $
107,340 $
226,002
192,596
34,680
560,618 $
113,000
226,353
134,904
45,651
519,908
2020
Years Ended December 31,
2019
2018
12.5 %
10.9 %
*%
13.1 %
16.9 %
13.6 %
13.4 %
*%
11.7 %
12.9 %
14.6 %
18.7 %
14.1 %
14.1 %
*%
*
Less than 10% of total net revenues
The Company had major payors that contributed to the following percentages of net receivables and receivables - related parties :
Payor F
Payor G
Land, Property and Equipment, Net
As of December 31,
2020
2019
43.9 %
36.5 %
30.4 %
36.0 %
Land is carried at cost and is not depreciated as it is considered to have an indefinite useful life.
Property and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation is provided principally on the
straight-line method over the estimated useful lives of the assets ranging from three to thirty-nine years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the terms of the respective leases or the expected useful lives of those improvements.
Maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the asset cost and related accumulated depreciation and amortization is removed from the
accounts, and any related gain or loss is included in the determination of consolidated net income.
Fair Value Measurements of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, investment in marketable securities, receivables, loans receivable, accounts payable,
certain accrued expenses, finance lease obligations, and long-term debt. The carrying values of the financial instruments classified as current in the accompanying consolidated
balance sheets are considered to be at their fair values, due to the short maturity of these instruments. The carrying amounts of finance lease obligations and long-term debt
approximate fair value as they bear interest at rates that approximate current market rates for debt with similar maturities and credit quality.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”), applies to all financial assets and
financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosures
about fair value measurements. ASC 820 establishes a fair value hierarchy for disclosure of the inputs to valuations used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2 —Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not
active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or
corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 —Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the
best information available, including the Company’s own data.
The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2020 are presented below (in thousands):
Assets
Money market accounts*
Marketable securities – certificates of deposit
Marketable securities – equity securities
Total
Level 1
Fair Value Measurements
Level 2
Level 3
Total
$
$
115,769 $
67,637
58
183,464 $
— $
—
—
— $
— $
—
—
115,769
67,637
58
— $
183,464
The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2019 are presented below (in thousands):
Assets
Money market accounts*
Marketable securities – certificates of deposit
Marketable securities – equity securities
Total
*
Included in cash and cash equivalents
Level 1
Fair Value Measurements
Level 2
Level 3
Total
$
$
50,731 $
116,469
70
167,270 $
— $
—
—
— $
— $
—
—
50,731
116,469
70
— $
167,270
There have been no changes in Level 1, Level 2, or Level 3 classification and no changes in valuation techniques for these assets for the year ended December 31, 2020.
Intangible Assets and Long-Lived Assets
Intangible assets with finite lives include network-payor relationships, management contracts and member relationships and are stated at cost, less accumulated amortization
and impairment losses. These intangible assets are amortized on the accelerated method using the discounted cash flow rate.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Intangible assets with finite lives also include a patient management platform, as well as trade names and trademarks, whose valuations were determined using the cost to
recreate method and the relief from royalty method, respectively. These assets are stated at cost, less accumulated amortization and impairment losses, and are amortized using
the straight-line method.
Finite-lived intangibles and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, a write-down would be
recorded to reduce the carrying value of the asset to its estimated fair value. Fair value is determined based on appropriate valuation techniques. The Company determined that
there was no impairment of its finite-lived intangible or long-lived assets during the year ended December 31, 2020 and 2019.
Goodwill and Indefinite-Lived Intangible Assets
Under ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment.
At least annually, at the Company’s fiscal year end, or sooner if events or changes in circumstances indicate that an impairment has occurred, the Company performs a
qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to complete quantitative impairment assessments for each of the Company’s three reporting units (1) management services, (2) IPAs, and (3) ACOs. The
Company is required to perform a quantitative goodwill impairment test only if the conclusion from the qualitative assessment is that it is more likely than not that a reporting
unit’s fair value is less than the carrying value of its assets. Should this be the case, a quantitative analysis is performed to identify whether a potential impairment exists by
comparing the estimated fair values of the reporting units with their respective carrying values, including goodwill.
An impairment loss is recognized if the implied fair value of the asset being tested is less than its carrying value. In this event, the asset is written down accordingly. The fair
values of goodwill are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances.
At least annually, indefinite-lived intangible assets are tested for impairment. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible
asset exceeds its fair value. The fair values of indefinite-lived intangible assets are determined using valuation techniques based on estimates, judgments and assumptions
management believes are appropriate in the circumstances.
For the year ended December 31, 2019, the Company wrote off indefinite-lived intangible assets of approximately $2.0 million related to Medicare licenses, acquired as part of
the 2017 Merger between ApolloMed and NMM. The Company will no longer utilize the licenses and as such will not receive future economic benefits therefrom. For the year
ended December 31, 2018, the Company wrote off approximately $3.8 million of goodwill related to MMG. The write-offs are included in impairment of goodwill and
intangible assets in the accompanying consolidated statements of income. There was no impairment loss recorded related to goodwill and intangibles for the year ended
December 31, 2020.
Investments in Other Entities – Equity Method
The Company accounts for certain investments using the equity method of accounting when it is determined that the investment provides the Company with the ability to
exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock
of the investee of between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity
method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of net
earnings or losses of the investee and is recognized in the accompanying consolidated statements of income under “Income (loss) from equity method investments” and also is
adjusted by contributions to and distributions from the investee. Equity method investments are subject to impairment evaluation. During the years ended December 31, 2019,
the Company recognized an impairment loss of approximately $0.3 million related to its investment in PASC as the Company does not believe it will recover its investment
balance. Such impairment loss is included in loss from equity method investments in the accompanying consolidated statements of income. There was no impairment loss
recorded related to equity method investments for the years ended December 31, 2020 and 2018.
Investments in Privately Held Entities
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The Company accounts for certain investments using the cost method of accounting when it is determined that the investment provides the Company with little or no influence
over the investee. Under the cost method of accounting, the investment is measured at cost, adjusted for observable price changes and impairments, with changes recognized in
net income. The investments in privately held entities that do not report NAV are subject to qualitative assessment for indicators of impairments.
Medical Liabilities
APC, Alpha Care, Accountable Health Care, and APAACO are responsible for integrated care that the associated physicians and contracted hospitals provide to their enrollees.
APC, Alpha Care, Accountable Health Care, and APAACO provide integrated care to HMOs, Medicare and Medi-Cal enrollees through a network of contracted providers
under sub-capitation and direct patient service arrangements. Medical costs for professional and institutional services rendered by contracted providers are recorded as cost of
services, excluding depreciation and amortization, expense in the accompanying consolidated statements of income.
An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in the accompanying consolidated balance
sheets. Medical liabilities include claims reported as of the balance sheet date and estimated IBNR claims. Such estimates are developed using actuarial methods and are based
on numerous variables, including the utilization of healthcare services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and other
factors. The estimation methods and the resulting accrual are periodically reviewed and updated. Many of the medical contracts are complex in nature and may be subject to
differing interpretations regarding amounts due for the provision of various services. Such differing interpretations may not come to light until a substantial period of time has
passed following the contract implementation.
During the year ended December 31, 2017, as APAACO’s NGACO program was new and there was insufficient claims history, the medical liabilities for the NGACO program
were estimated and recorded at 100% of the revenue less actual claims processed for or paid to in-network providers. The Company was notified by CMS that under the
NGACO alternative payment arrangement the Company was paid an excess amount of approximately $34.5 million and $7.8 million related to the first performance year
(January 1, 2017 through December 31, 2017) and second performance year (February 1, 2018 through December 31, 2018) with 18 month claims run outs, respectively. The
excess amount for the first performance year was paid by the Company on December 4, 2018 and the excess for the second performance year was paid in February 2020.
Revenue Recognition
The Company receives payments from the following sources for services rendered: (i) commercial insurers; (ii) the federal government under the Medicare program
administered by CMS; (iii) state governments under the Medicaid and other programs; (iv) other third-party payors (e.g., hospitals and IPAs); and (v) individual patients and
clients.
On January 1, 2018, the Company adopted the new revenue recognition standard Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers
(Topic 606)”, using the modified retrospective method. Modified retrospective adoption requires entities to apply the standard retrospectively to the most current period
presented in the financial statements, requiring the cumulative effect of the retrospective application as an adjustment to the opening balance of retained earnings and
noncontrolling interests at the date of initial application. Revenue from substantially all of the Company’s contracts with customers continues to be recognized over time as
services are rendered. The Company has elected to apply the modified retrospective method only to contracts not completed as of January 1, 2018.
Under the new revenue standard, the Company recognizes incremental costs of obtaining a contract with amortization periods of one year or less as expense when incurred and
records within general and administrative expenses, recognizes revenue in the amount of consideration to which the Company has a right to invoice the customer if that amount
corresponds directly with the value to the customer of the Company’s services completed to date, and does not recognize an adjustment for the effects of a significant financing
component as the period between the time of service and time of payment is typically one year or less.
Nature of Services and Revenue Streams
Revenue primarily consists of capitation revenue, risk pool settlements and incentives, NGACO All-Inclusive Population-Based Payments (“AIPBP”), management fee income,
and FFS revenue. Revenue is recorded in the period in which services are rendered or the period in which the Company is obligated to provide services. The form of billing and
related risk of collection
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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.
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 sharing. The Company generally estimates the transaction price using the most likely amount
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 hospitals costs. Advance settlement
payments are typically made quarterly in arrears if there is a surplus. The Company's risk pool settlements under arrangements with health plans and hospitals are recognized
using the most likely amount methodology and amounts are only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not
occur once any uncertainty is resolved. Assumptions based on factors including but not limited to historical margin, IBNR completion factors and constraint percentages were
used by management in applying the most likely amount methodology.
Under capitated arrangements with certain HMOs, APC participates in one or more shared risk arrangements relating to the provision of institutional services to enrollees and
thus can earn additional revenue or incur losses based upon the enrollee utilization of institutional services. Shared risk arrangements are entered into with certain health plans,
which are administered by the health plan, where APC is responsible for rendering professional services, but the health plan does not enter into a capitation arrangement with a
hospital and therefore the health plan retains the institutional risk. Shared risk deficits, if any, are not payable until and unless (and only to the extent of any) risk sharing
surpluses are generated. At the termination of the HMO contract, any accumulated deficit will be extinguished.
The Company's risk pool settlements under arrangements with HMOs are recognized, using the most likely methodology, and only included in revenue to the extent that it is
probable that a significant reversal of cumulative revenue will not occur. Given the lack of access to the health plans’ data and control over the members assigned to APC, the
adjustments and/or the withheld amounts are unpredictable and as such APC’s risk share revenue is deemed to be fully constrained until APC is notified of the
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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 quality incentive programs and commercial generic pharmacy incentive
programs to compensate the Company for its efforts to improve the quality of services and efficient and effective use of pharmacy supplemental benefits provided to HMO
members. The incentive programs track specific performance measures and calculate payments to the Company based on the performance measures. The Company's incentives
under “pay-for-performance” programs are recognized using the most likely methodology. However, as the Company does not have sufficient insight from the health plans on
the amount and timing of the shared risk pool and incentive payments these amounts are considered to be fully constrained and only recorded when such payments are known
and/or received.
Generally, for the foregoing arrangements, the final settlement is dependent on each distinct day’s performance within the annual measurement period but cannot be allocated to
specific days until the full measurement period has occurred and performance can be assessed. As such, this is a form of variable consideration estimated at contract inception
and updated through the measurement period (i.e. the contract year), to the extent the risk of reversal does not exist and the consideration is not constrained.
NGACO AIPBP Revenue
APAACO and CMS entered into a NGACO Model Participation Agreement (the “Participation Agreement”) with an initial term of two performance years through
December 31, 2019, which was extended for two additional renewal years.
For each performance year, the Company must 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, 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. Excess over claims paid, plus an estimate for the related IBNR claims (see Note 9), are deferred and recorded as a liability until actual claims are
paid or incurred. CMS will determine if there was any excess capitation paid for the performance year and the excess is refunded to CMS.
For each performance year, CMS pays 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 will 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 will pay CMS in full within 30 days after the relevant settlement report is deemed final. If the
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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 claims, risk
adjustment factors, and stop loss provisions, among other factors, an estimate cannot be developed. Due to these limitations, APAACO cannot determine the amount of surplus
or deficit for the performance year and therefore this shared risk pool revenue is considered fully constrained. Pursuant to the Participation Agreement, the Company received
$19.8 million and $0.9 million in risk pool savings, related to the 2019 and 2018 performance years, respectively, and has recognized such savings as revenue in risk pool
settlements and incentives in the accompanying consolidated statements of income for the years ended December 31, 2020 and 2019, respectively.
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 under the NGACO Model for performance year 2020, with the
effective date of the performance year beginning January 1, 2020. For performance year 2020, the Company receives monthly AIPBP payments at a rate of approximately $ 7.2
million per month from CMS. The monthly AIPBP received by the Company for performance year 2019 was approximately $8.3 million per month for the period from April 1,
2019 through August 30, 2019 and subsequently adjusted to approximately $3.7 million for the period starting September 1, 2019 based on CMS' updated estimate of total
claims to be incurred. The Company has received approximately $85.9 million in total AIPBP for the year ended December 31, 2020 of which $75.1 million has been
recognized as revenue.
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 as
revenue 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 applicable
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 applicable 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.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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 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 is 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 consolidated 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 together 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.
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 healthcare 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
Revenues and receivables are recognized once the Company has satisfied its performance obligation. Accordingly, the Company does not have any contract assets since all
obligations have been performed when revenue was recognized.
The Company's billing and accounting systems provide historical trends of cash collections and contractual write-offs, accounts receivable aging 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.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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. As of December 31, 2020, the Company’s contract liability balance was $13.0 million, of which $12.6 million was
related to the Company's NGACO. Contract liability was $8.9 million as of December 31, 2019, of which $8.5 million was related to NGACO. Contract liability is presented
within the “Accounts payable and accrued expenses” line item of the accompanying consolidated balance sheets. Approximately $ 0.4 million of the Company’s contracted
liability accrued in 2019 has been recognized as revenue during the year ended December 31, 2020 and $8.5 million of contract liability from 2019 was repaid to CMS for
AIPBP capitation received and not earned.
Income Taxes
Federal and state income taxes are computed at currently enacted tax rates less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do
not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions
include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income
and expense are recognized for financial reporting and income tax purposes, changes in the recognition of tax positions and any changes in the valuation allowance caused by a
change in judgment about the realizability of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts
expected to be realized.
The Company uses a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be
recognized in the consolidated financial statements. Once the recognition threshold is met, the tax position is then measured to determine the actual amount of benefit to
recognize in the consolidated financial statements.
Share-Based Compensation
The Company maintains a stock-based compensation program for employees, non-employees, directors and consultants. The value of share-based awards such as options is
recognized as compensation expense on a cumulative straight-line basis over the vesting period of the awards, adjusted for expected forfeitures. From time to time, the Company
issues shares of its common stock to its employees, directors and consultants, which shares may be subject to the Company’s repurchase right (but not obligation) that lapses
based on time-based and performance-based vesting schedules.
Basic and Diluted Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income attributable to the 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. See Note 17 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 equity ownership interests held by certain VIEs) in the Company’s consolidated entities. 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 its 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
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
noncontrolling interests in APC as mezzanine equity in the consolidated financial statements. As of December 31, 2020 and 2019, APC’s shares were not redeemable nor was it
probable the shares would become redeemable.
Leases
The Company adopted ASC 842 effective January 1, 2019 on a modified retrospective basis 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 right-of-use assets.
The Company determines if an arrangement is a lease at its inception. The expected term of the lease used for computing the lease liability and right-of-use ("ROU") asset and
determining the classification of the lease as operating or financing may include options to extend or terminate the lease when it is reasonably certain that the Company will
exercise that option. The Company elected practical expedients for ongoing accounting that is provided by the new standard comprised of the following: (1) the election for
classes of underlying asset to not separate non-lease components from lease components, and (2) the election for short-term lease recognition exemption for all leases under 12
months term. The present value of the lease payments is calculated using a rate implicit in the lease, when readily determinable. However, as most of the Company's leases do
not provide an implicit rate, the Company uses its incremental borrowing rate to determine the present value of the lease payments for the majority of its leases.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update ("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 became effective for fiscal years beginning after December 15, 2019, with
early adoption permitted. The Company adopted ASU 2016-13 on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial
statements.
In January 2020, the FASB issued ASU No. 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815)" ("ASU 2020-01"). This ASU clarifies the interaction between accounting for equity securities, equity method investments and certain
derivative instruments. This amendment in this ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early
adoption is permitted, including early adoption in an interim period, for public business entities for periods for which financial statements have not yet been issued. The
Company early adopted ASU 2020-01 on October 1, 2020 on a prospective basis which did not have a material impact on the Company’s consolidated financial statements or
related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"). This ASU simplifies the
accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 Income Taxes related to the approach for intraperiod tax allocation, the methodology
for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently assessing the impact of that adoption of ASU 2019-12 will
have on the Company's 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. Business Combinations and Goodwill
Alpha Care Medical Group, Inc.
On May 31, 2019, APC and APC-LSMA completed their acquisition of 100% of the capital stock of Alpha Care from Dr. Kevin Tyson for an aggregate purchase price of
approximately $45.1 million in cash, subject to post-closing adjustments. As
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
part of the transaction the Company deposited $2.0 million into an escrow account for potential post-closing adjustments. As of December 31, 2020, no post-closing adjustment
is expected to be paid to Dr. Tyson and the full amount of the escrow account is expected to be returned to the Company. As such, the escrow amount is presented within Other
receivables in the accompanying consolidated balance sheet.
The following table summarizes the fair values of the assets acquired and liabilities assumed, as of the acquisition date (in thousands):
Assets acquired
Cash and cash equivalents
Accounts receivable, net
Other current assets
Network relationship intangible assets
Goodwill
Accounts payable
Deferred tax liabilities
Medical liabilities
Net assets acquired
Cash paid
Accountable Health Care, IPA
Balance Sheet
3,569
10,336
4,675
22,636
28,585
(2,795)
(6,334)
(15,616)
45,056
45,056
$
$
$
On August 30, 2019, APC and APC-LSMA, acquired the remaining outstanding shares of capital stock they did not already own (comprising 75%) in Accountable Health Care
in exchange for $7.3 million in cash. In addition to the payment of $7.3 million APC assumed all assets and liabilities of Accountable Health Care, including loans payable to
NMM and APC of $15.4 million, which has been eliminated upon consolidation. Including the 25% investment valued at $2.4 million already owned by APC the total purchase
price was $25.1 million.
The following table summarizes the fair values of the assets acquired and liabilities assumed, as of the
acquisition date (in thousands):
Assets acquired
Cash and cash equivalents
Accounts receivable, net
Other current assets
Network relationship intangible assets
Goodwill
Accounts payable
Medical liabilities
Subordinated loan
Net assets acquired
Less: equity investment contributed
Cash paid
AMG, a Professional Medical Corporation
Balance Sheet
582
5,150
198
11,411
23,566
(3,759)
(12,154)
(15,327)
9,667
2,417
7,250
$
$
$
The Company also completed one additional acquisition (AMG) on September 10, 2019 for total consideration of $1.6 million, of which $0.4 million was in the form of APC
common stock. The business combination did not meet the quantitative thresholds to require separate disclosures based on the Company's consolidated net assets, investments
and net income.
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Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Pro Forma Financial Information for All 2019 Acquisitions
The following unaudited pro forma supplemental information is based on estimates and assumptions that ApolloMed believes are reasonable. However, this information is not
necessarily indicative of the Company's consolidated results of income in future periods or the results that actually would have been realized if ApolloMed and the acquired
businesses had been combined companies during the periods presented. These pro forma results exclude any savings or synergies that would have resulted from these business
acquisitions had they occurred on January 1, 2018. This unaudited pro forma supplemental information includes incremental intangible asset amortization and other charges as
a result of the acquisitions, net of the related tax effects.
The supplemental information on an unaudited pro forma financial basis presents the combined results of ApolloMed and its 2019 acquisitions as if each acquisition had
occurred on January 1, 2018 (in thousands except per share data):
Revenue
Net income
Net income attributable to Apollo Medical Holdings, Inc.
EPS - basic
EPS - diluted
Year Ended
December 31, 2019
(unaudited)
Year Ended
December 31, 2018
(unaudited)
$
$
$
658,011 $
10,867
7,310
0.21 $
0.20 $
726,075
58,879
9,447
0.29
0.25
The acquisitions were accounted for under the acquisition method of accounting. The fair value of the consideration for the acquired companies were allocated to acquired
tangible and intangible assets and liabilities based upon their fair values. The excess of the purchase consideration over the fair value of the net tangible and identifiable
intangible assets acquired were recorded as goodwill. The determination of the fair value of assets and liabilities acquired requires the Company to make estimates and use
valuation techniques when market value is not readily available. The results of operations of the companies acquired have been included in the Company's financial statements
from the respective dates of acquisition. Transaction costs associated with business acquisitions were expensed as incurred.
At the time of acquisition, the Company estimates the amount of the identifiable intangible assets based on a valuation and the facts and circumstances available at the time. The
Company determines the final value of the identifiable intangible assets as soon as information is available, but not more than 12 months from the date of acquisition.
Goodwill is not deductible for tax purposes.
The following is a summary of goodwill activity for the years ended December 31, 2020 and 2019 (in thousands):
Balance at January 1, 2019
Acquisitions
Balance at December 31, 2019
Adjustments
Balance at December 31, 2020
99
Amount
185,806
52,699
238,505
548
239,053
$
$
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
4. Land, Property and Equipment, Net
Land, property and equipment, net consisted of (in thousands):
Land
Buildings
Computer software
Furniture and equipment
Construction in progress
Leasehold improvements
Useful Life (Years)
December 31, 2020
December 31, 2019
N/A
39
3 - 5
3 - 7
N/A
3 - 39
$
9,604 $
15,097
3,104
13,116
435
6,722
48,078
3,300
2,358
3,088
12,585
167
6,655
28,153
Less accumulated depreciation and amortization
(18,188)
(16,023)
Land, property and equipment, net
$
29,890 $
12,130
As of December 31, 2020 and 2019, the Company had finance leases totaling $0.4 million and $0.5 million, respectively, included in Land, property and equipment, net in the
accompanying consolidated balance sheets.
Depreciation expense was $2.3 million, $2.0 million and $2.2 million for the years ended December 31, 2020, 2019, and 2018, respectively, which is included in depreciation
and amortization in the accompanying consolidated statements of income.
MPP, AMG Properties, and ZLL
On December 31, 2020, APC purchased a 100% interest in MPP, AMG Properties, ZLL for $9.0 million, $1.2 million, and $2.0 million, respectively. MPP, AMG Properties,
and ZLL are limited liability companies that primarily own four buildings, in aggregate, that are leased to tenants. As these companies' main assets are land and buildings, we
determined these purchases are assets acquired at fair value. Land and buildings were valued by comparing similar properties that have been sold recently or for which listing
prices or offers are known and how much income the properties can produce based on observable inputs (Level 2). As a result of the purchase, APC acquired MPP, AMG, and
ZLL, recorded land and building for $3.7 million and $10.8 million for MPP, $1.5 million and $0.4 million for AMG Properties, and $1.2 million and $1.5 million for ZLL,
respectively, and assumed their existing loans (refer to Note 10).
5. Intangible Assets, Net
At December 31, 2020, intangible assets, net consisted of the following (in thousands):
100
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Amortized intangible assets:
Network relationships
Management contracts
Member relationships
Patient management platform
Tradename/trademarks
Useful
Life
(Years)
11-15
15
12
5
20
Gross
January 1, 2020
Additions
Impairment/
Disposal
Gross
December 31,
2020
Accumulated
Amortization
Net
December 31, 2020
143,930
22,832
6,696
2,060
1,011
176,529 $
$
—
—
—
—
—
—
$
—
—
—
—
—
—
$
143,930
22,832
6,696
2,060
1,011
176,529 $
(73,169)
(11,715)
(3,234)
(1,270)
(156)
(89,544)
$
70,761
11,117
3,462
790
855
86,985
At December 31, 2019, intangible assets, net consisted of the following (in thousands):
Indefinite lived assets:
Medicare license
Amortized intangible assets:
Network relationships
Management contracts
Member relationships
Patient management platform
Tradename/trademarks
Useful
Life
(Years)
Gross
January 1,
2019
Additions
Impairment/
Disposal
Gross
December 31, 2019
Accumulated
Amortization
Net
December 31, 2019
N/A
$
1,994 $
—
$
(1,994)
$
— $
—
$
—
11-15
15
12
5
20
$
109,883
22,832
6,696
2,060
1,011
144,476 $
34,047
—
—
—
—
34,047
$
—
—
—
—
—
(1,994)
$
143,930
22,832
6,696
2,060
1,011
176,529 $
(60,525)
(9,677)
(2,352)
(858)
(105)
(73,517)
$
83,405
13,155
4,344
1,202
906
103,012
Amortization expense was $16.0 million, $16.3 million and $17.1 million for the years ended December 31, 2020, 2019, and 2018, respectively, which is included in
depreciation and amortization in the accompanying consolidated statements of income.
During the year ended December 31, 2019, the Company wrote off indefinite-lived intangible assets of $2.0 million related to Medicare licenses it acquired as part of the
Merger. The Company will no longer utilize these licenses and as such the Company will not receive future economic benefits. There was no impairment loss recorded related to
intangibles for the year ended December 31, 2020.
Future amortization expense is estimated to be as follows for the years ending December 31 (in thousands):
2021
2022
2023
2024
2025
Thereafter
101
Amount
14,524
12,673
10,842
9,830
8,758
30,358
86,985
$
$
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
6. Investments in Other Entities
Equity Method
Investments in other entities – equity method consisted of the following (in thousands):
December 31, 2019
Allocation of Net
Income (Loss)
Additional/
Initial Investment
Contribution
Sale
December 31, 2020
LaSalle Medical Associates – IPA Line of
Business
Pacific Medical Imaging & Oncology
Center, Inc.
Universal Care, Inc.
Diagnostic Medical Group
531 W. College, LLC – related party
MWN, LLC – related party
One MSO, LLC - related party
Tag-6 Medical Investment Group, LLC -
related party
Tag-8 Medical Investment Group, LLC -
related party
$
6,396 $
276 $
6,375 $
— $
— $
1,396
1,438
2,334
16,698
165
—
—
—
17
3,560
279
(448)
10
—
—
—
—
—
—
—
—
2,395
4,516
2,108
—
—
—
950
—
—
—
—
—
(4,998)
—
—
(175)
—
—
—
13,047
1,413
—
2,613
17,200
—
2,395
4,516
2,108
$
28,427 $
3,694 $
15,394 $
950 $
(5,173) $
43,292
LaSalle Medical Associates - IPA Line of Business
LMA was founded by Dr. Albert Arteaga in 1996 and currently operates six neighborhood medical centers through its network of more than 2,300 PCP and Specialists
providers, treating children, adults and seniors in San Bernardino County. LMA’s patients are primarily served by Medi-Cal and they also accept 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
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. On December 18, 2020,
the Company exercised its option to convert the promissory note totaling $6.4 million due from Dr. Arteaga into an additional 21.25% interest in LMA's IPA line of business.
As a result, APC-LSMA's interest in LMA's IPA line of business as of December 31, 2020 was 46.25% (See Note 7). 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 year ended December 31, 2020, APC recorded net income of
$0.3 million from its investment in LMA as compared to a net loss of $2.8 million for the year ended December 31, 2019, in the accompanying consolidated statements of
income. The investment balance was $13.0 million and $6.4 million at December 31, 2020 and 2019, respectively.
LMA’s unaudited summarized balance sheets at December 31, 2020 and 2019 and unaudited summarized statements of operations for the years ended December 31, 2020 and
2019 are as follows (in thousands):
Balance Sheets
102
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2020
(unaudited)
December 31, 2019
(unaudited)
9,350 $
3,918
881
2,250
691
17,090 $
21,589 $
(4,499)
17,090 $
6,345
5,123
3,526
2,250
684
17,928
23,530
(5,602)
17,928
Year Ended
December 31, 2020
(unaudited)
Year Ended
December 31, 2019
(unaudited)
186,964 $
185,724
1,240
8
1,248
—
1,248 $
194,020
205,153
(11,133)
—
(11,133)
—
(11,133)
$
$
$
$
$
$
Assets
Cash and cash equivalents
Receivables, net
Other current assets
Loan receivable
Restricted cash
Total assets
Liabilities and Stockholders’ Deficit
Current liabilities
Stockholders’ deficit
Total liabilities and stockholders’ deficit
Statements of Operations
Revenues
Expenses
Income (loss) from operations
Other income
Income (loss) before income tax benefit
Income tax benefit
Net income (loss)
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 their 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 of $ 2.2 million and $2.7 million for the years ended December 31, 2020 and 2019, 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
103
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
the year ended December 31, 2020, APC recorded net income of $17,470 from its investment as compared to net loss of $36,384 for the year ended December 31, 2019 in the
accompanying consolidated statements of income and has an investment balance of $1.4 million and $1.4 million at December 31, 2020 and 2019, respectively.
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 the CMS under the Medicare
Advantage Prescription Drug Program.
In August 2015, UCAP purchased 100,000 shares of UCI class A-2 voting common stock from UCI for $10.0 million, which shares comprise 48.9% of UCI’s total outstanding
shares and 50% of UCI’s voting common stock.
On April 30, 2020, UCAP completed the sale of its 48.9% ownership interest in UCI to Bright for approximately $69.2 million in cash proceeds (including $16.5 million as
repayment of indebtedness owed to APC), plus non-cash consideration consisting of shares of Bright Health, Inc.’s preferred stock having an estimated fair value of
approximately $36.2 million on the date of sale, included in investments in privately held entities. The fair value of the preferred shares was determined utilizing a market
approach which includes significant unobservable inputs (Level 3) including forecasted revenue along with estimates of revenue multiples, volatility and time-to-liquidity. In
addition, pursuant to the terms of the stock purchase agreement, APC has a beneficial interest in the equity method investment sold. The estimated fair value of such interest on
April 30, 2020 was $15.7 million and is included in "Other assets" in the accompanying consolidated balance sheets. The beneficial interest is the result of a gross margin
provision in the stock purchase agreement which entitles UCAP to potentially receive additional cash and preferred shares (currently held in an escrow account with cash of
$15.6 million and preferred shares with an estimated fair value of $6.4 million, total estimated fair value of $22.0 million on the date of sale) based on the gross margin of UCI
for calendar year 2020 as measured against a target. The amount to be received varies dependent upon the gross margin as compared to the target but cannot exceed the amounts
that are in the escrow account. Additionally, the stock purchase agreement includes a tangible net equity provision that may result in the receipt or payment of additional
amounts based on a comparison of final tangible net equity of UCI on the date of sale (determined with the benefit of one year of hindsight) as compared to the estimated
tangible net equity at the time of sale. It is expected that settlement of the beneficial interest will begin in the second half of 2021. The Company determined the fair value of the
beneficial interest using an income approach which includes significant unobservable inputs (Level 3). Specifically, the Company utilized a probability weighted discounted
cash flow model using a risk-free treasury rate to estimate fair value which considered various scenarios of gross margin adjustment and the impact of each adjustment to the
expected proceeds from the escrow account and assigned probabilities to each such scenario in determining fair value. The gross margin adjustment is defined as three times any
deficit in actual gross margin of UCI for the year ended December 31, 2020 below a target gross margin unless such deficit is within a specific collar amount.
The gain on sale of equity method investment recognized in connection with this transaction was determined as follows (in thousands):
Cash proceeds (excludes proceeds to settle indebtedness owed to APC from UCI)
Preferred shares in Bright Health, Inc.
Beneficial interest in UCI
Less: Carrying value of equity method investment on date of sale
Gain on sale of equity method investment
Amount
52,743
36,179
15,723
(4,998)
99,647
$
$
During the years ended December 31, 2020 and 2019, APC recorded income from this investment of $3.6 million and loss of $1.2 million, respectively, in the accompanying
consolidated statements of income. As a result of the sale, there was no investment balance as of December 31, 2020 as compared to an investment balance of $1.4 million as of
December 31, 2019.
104
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
UCI’s unaudited balance sheet at December 31, 2019 and unaudited statements of operations for the four months ended April 30, 2020 and twelve months ended December 31,
2019 are as follows (in thousands):
Balance Sheet
Assets
Cash
Receivables, net
Other current assets
Other assets
Property and equipment, net
Total assets
Liabilities and stockholders’ deficit
Current liabilities
Other liabilities
Stockholders’ deficit
Total liabilities and stockholders’ deficit
Statements of Operations
Revenues
Expenses
Income (loss) before income tax provision
Income tax provision
Net income (loss)
Diagnostic Medical Group
December 31, 2019
(unaudited)
33,890
63,843
38,280
882
4,021
140,916
128,330
33,133
(20,547)
140,916
$
$
$
$
Four Months Ended April 30,
2020
(unaudited)
Year Ended
December 31, 2019
(unaudited)
$
$
195,308 $
189,028
6,280
—
6,280 $
500,375
502,567
(2,192)
258
(2,450)
APC accounts for its 40% investment in DMG, under the equity method of accounting as APC-LSMA, a designated shareholder professional corporation, has the ability to
exercise significant influence, but not control over DMG’s operations. APC recorded income from this investment of $ 0.3 million and $0.3 million in 2020 and 2019,
respectively, in the accompanying consolidated statements of income. During the years ended December 31, 2020 and 2019, APC received dividends of $ 0 and $0.2 million,
respectively, from DMG. The investment balance was $2.6 million and $2.3 million as of December 31, 2020 and 2019, respectively.
Accountable Health Care, IPA
105
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Accountable Health Care 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 Health Care currently has a network of over 336 primary and 559 specialty care physicians, and is
affiliated with one community regional hospital medical center that provides quality health care services to more than 73,000 members of three federally qualified health plans
and multiple product lines, including Medi-Cal, Commercial, Medicare and 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 Health Care 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 Health Care’s current enterprise value. On August 30, 2019, APC and APC-LSMA entered into separate agreements
with Dr. Jayatilaka to acquire the remaining outstanding shares of capital stock (comprising 75%) of Accountable Health Care in exchange for $7.3 million in cash. In addition
to the payment of $7.3 million, APC assumed all liabilities and assets of Accountable Health Care.
The Company recognized a gain of approximately $1.8 million as a result of the transaction, which represented the difference between the fair value of the 25% ownership held
and the Company's basis at the time of acquisition. Such gain is included in loss from equity method investment in the accompanying consolidated statements of income for the
year ended December 31, 2019.
Effective September 1, 2019, Accountable Health Care's financial results are included in the consolidated balance sheets and the consolidated statements of income for the year
ended December 31, 2019 and going forward.
531 W. College LLC
In June 2018, College Street Investment LP, a California limited partnership (“CSI”), a related party, 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.
On June 29, 2018, 531 W. College, LLC closed its purchase of a non-operational hospital located in Los Angeles from Societe Francaise De Bienfaisance Mutuelle De Los
Angeles, a California nonprofit corporation, for a total purchase price of $33.3 million. In June 2018, APC, NMM and AHMC Healthcare, Inc. ("AHMC") 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 28, 2018. 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 $16.1 million.
APC accounts for its investment in 531 W. College, LLC under the equity method of accounting as APC has the ability to exercise significant influence, but not control over the
operations of this joint venture. APC’s investment is presented as an investment of equity method in the accompanying consolidated balance sheets as of December 31, 2020
and 2019.
During the years ended December 31, 2020 and 2019, NMM and APC recorded losses from its investment in 531 W. College LLC of $0.4 million and $0.2 million,
respectively, in the accompanying consolidated statements of income. During the years ended December 31, 2020 and 2019, APC contributed $ 1.0 million and $0.7 million,
respectively to 531 W. College, LLC as part of its 50% interest. The accompanying consolidated balance sheet includes the related investment balance of $17.2 million and
$16.7 million, respectively, related to APC's investment at December 31, 2020 and 2019.
531 W. College LLC’s unaudited balance sheets at December 31, 2020 and 2019 and unaudited statements of operations for the years ended December 31, 2020 and 2019 are as
follows (in thousands):
Balance Sheets
106
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2020
(unaudited)
December 31, 2019
(unaudited)
648 $
17
70
33,697
34,432 $
32 $
34,400
34,432 $
139
17
70
33,581
33,807
1,061
32,746
33,807
Year Ended
December 31, 2020
(unaudited)
Year Ended
December 31, 2019
(unaudited)
$
—
1,053
(1,053)
64
3
(992)
$
—
1,010
(1,010)
475
—
(535)
$
$
$
$
$
$
Assets
Cash
Other current assets
Other assets
Property and equipment, net
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Statements of Operations
Revenues
Expenses
Loss from operations
Other income
Provision for Income Taxes
Net loss
MWN LLC
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 ("MWN") and the conduct of its business and to
specify their relative rights and obligations. NMM, Pacific6, and HSMSO each owns 33.3% of membership shares based on each member’s initial capital contributions of
$3,000 and working capital contributions of $30,000. NMM invested an additional $0.3 million, as part of its 33.3% interest, for working capital purpose. On October 30, 2020
NMM sold its shares in MWN to Pacific6 for $0.5 million in the form of a promissory note (see Note 7) and as a result of the sale, NMM recognized a gain of $0.2 million.
One MSO LLC
On December 31, 2020, APC purchased a 50% membership interest in One MSO LLC ("One MSO") for $2.4 million. One MSO owns an office building in Monterey Park,
California that is currently being leased to tenants including NMM.
Tag-6 Medical Investment Group, LLC and Tag-8 Medical Investment Group, LLC
107
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
On December 31, 2020, APC purchased a 50% member interest in Tag-6 Medical Investment Group, LLC ("Tag 6") for $ 4.5 million. On December 31, 2020, APC purchased
50% member interest in Tag-8 Medical Investment Group, LLC ("Tag 8") for $2.1 million. Tag 6 and Tag 8 both own vacant land in Alhambra, California with plans to develop
medical offices in the future. Both Tag 6 and Tag 8 shares common ownership with certain board members of APC and as such are considered related parties.
Investment in privately held entities
MediPortal, LLC
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 were contingent upon the portal completion date, however the Company did not
exercise the option after completion of the portal. 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. During the year ended December 31, 2020, there were no observable price changes to APC's investment.
AchievaMed
On July 1, 2019, NMM and AchievaMed, Inc., a California corporation ("AchievaMed"), entered into an agreement in which NMM would purchase up to 50% of the aggregate
shares of capital stock of AchievaMed over a period of time not to exceed five years. As a result of this transaction, NMM invested $0.5 million for a 10% interest. The related
investment balance of $0.5 million is included in "Investment in a privately held entities" in the accompanying consolidated balance sheet as of December 31, 2020. As NMM
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. During the year ended December 31, 2020,
there were no observable price changes to NMM's investment.
Bright Health, Inc.
In April 2020, UCAP completed the sale of its 48.9% ownership interest in UCI to Bright for approximately $69.2 million in cash proceeds (including $16.5 million as
repayment of indebtedness owed to APC), plus non-cash consideration consisting of shares of Bright Health, Inc.’s preferred stock having an estimated fair value on the
transaction date of approximately $36.2 million. The related investment balance of $36.2 million is included in “Investment in privately held entities” in the accompanying
consolidated balance sheet as of December 31, 2020. During the year ended December 31, 2020, there were no observable price changes to the Company's investment and no
indicators of impairment.
7. Loans Receivable and Loans Receivable – Related Parties
Loans Receivable
Dr. Albert Arteaga
On June 28, 2019, APC entered into a convertible secured promissory note with Dr. Albert H. Arteaga, M.D. ("Dr. Arteaga"), Chief Executive Officer of LMA, to loan $6.4
million to Dr. Arteaga. Interest on the loan accrues at a rate that is equal to the prime rate plus 1% (4.25% as of December 31, 2020) and payable in monthly installments of
interest only on the first day of each month until the maturity date of December 31, 2020, at which time, all outstanding principal and accrued interest thereon shall be due and
payable in full. The note is secured by certain shares of LMA common stock held by Dr. Arteaga.
At any time on or before December 31, 2020 and upon written notice by APC to Dr. Arteaga, APC has the right, but not the obligation, to convert the entire outstanding
principal amount of this note into shares of LMA common stock which equal 21.25% of the aggregate then-issued and outstanding shares of LMA common stock to be held by
APC's designee, which may include APC-LSMA. If converted, APC-LSMA and APC's designee will collectively own 46.25% of the equity of LMA with the remaining
53.75% to be owned by Dr. Arteaga. In December 2020 APC elected to convert the promissory note which resulted in an increase of 21.25% in its investment in LMA. The
additional interest was reclassified as additional equity
108
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
investment totaling $6.4 million. We further noted that there was no observable price movement and no indication of impairment as of and for the year ended December 31,
2020.
On February 28, 2020, the Company entered into an agreement to advance Dr. Arteaga $2.2 million in the ordinary course of business. As of December 31, 2020, the $2.2
million was fully repaid.
Pacific6
On October 30, 2020, NMM received a promissory note from Pacific6 totaling $0.5 million as a result of the sale of the Company's interest in MWN. Interest accrues at a rate
of 5% per annum and is payable monthly through the maturity date of December 1, 2023.
Loan Receivable - Related Parties
AHMC
In October 2020, APC entered into a promissory note with AHMC, a related party of the Company, (the “AHMC Note”) for a principal sum of $4.0 million with a maturity date
of two years from the date of the agreement. The contractual interest rate on the AHMC Note is 3.75% per annum. The AHMC Note was entered into using cash strictly related
to the Excluded Assets that were generated from the series of transactions with AP-AMH. As of December 31, 2020, the total principal of $4.0 million remains outstanding.
The Company assessed the outstanding loan receivable and loan receivable - related parties under the CECL model by assessing the party's ability to pay by reviewing their
interest payment history quarterly, financial history annually and reassessing any insolvency risk that is identified. If a failure to pay occurs, the Company assesses the terms of
the notes and estimates an expected credit loss based on the remittance schedule of the note. No losses were recorded for loan receivable and loan receivable - related parties as
of December 31, 2020.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
Accounts payable and other accruals
Capitation payable
Subcontractor IPA payable
Professional fees
Due to related parties
Contract liabilities
Accrued compensation
Total accounts payable and accrued expenses
9. Medical Liabilities
The Company's medical liabilities consisted of the following (in thousands):
109
December 31, 2020 December 31, 2019
$
$
9,554 $
3,541
1,662
1,378
50
12,988
6,970
36,143 $
6,914
2,813
3,360
1,837
225
8,892
3,238
27,279
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Medical liabilities, beginning of year
Acquired (see Note 3)
Components of medical care costs related to claims incurred:
Current period
Prior periods
Total medical care costs
Payments for medical care costs related to claims incurred:
Current period
Prior periods
Total paid
Adjustments
December 31, 2020 December 31, 2019
$
58,725 $
—
309,848
(3,258)
306,590
(261,062)
(54,056)
(315,118)
133
33,642
27,474
271,987
2,684
274,671
(218,564)
(58,633)
(277,197)
135
Medical liabilities, end of year
$
50,330 $
58,725
10. Credit Facility, Bank Loans and Lines of Credit
Credit Facility
The Company's credit facility consisted of the following (in thousands):
Term Loan
Revolver Loan
Real Estate Loans
Total Debt
Less: current portion of debt
Less: unamortized financing cost
Long-term debt
The following table presents scheduled maturities of the Company's credit facility as of December 31, 2020:
2021
2022
2023
2024
2025 and thereafter
Total
Credit Agreement
110
December 31, 2020 December 31, 2019
$
178,125 $
60,000
7,580
245,705
(10,889)
(4,605)
187,625
60,000
—
247,625
(9,500)
(5,953)
$
230,211 $
232,172
Amount
10,889
14,459
15,653
197,972
6,732
245,705
$
$
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
In September 2019, the Company entered into a secured credit agreement (the “Credit Agreement,” and the credit facility thereunder, the “Credit Facility”) with Truist Bank
(formerly known as SunTrust Bank), in its capacity as administrative agent for the lenders (in such capacity, the “Agent”), as a lender, an issuer of letters of credit and as
swingline lender, and Preferred Bank, which is affiliated with one of the Company's board members, JPMorgan Chase Bank, N.A., MUFG Union Bank, N.A., Royal Bank of
Canada, Fifth Third Bank and City National Bank, as lenders (the “Lenders”). In connection with the closing of the Credit Agreement, the Company, its subsidiary, NMM, and
the Agent entered into a Guaranty and Security Agreement (the “Guaranty and Security Agreement”), pursuant to which, among other things, NMM guaranteed the obligations
of the Company under the Credit Agreement.
The Credit Agreement provides for a five-year revolving credit facility to the Company of $100.0 million (“Revolver Loan”), which includes a letter of credit subfacility of up
to $25.0 million. The Credit Agreement also provides for a term loan of $190.0 million, (“Term Loan A”). The unpaid principal amount of the term loan is payable in quarterly
installments on the last day of each fiscal quarter commencing on December 31, 2019. The principal payment for each of the first eight fiscal quarters is $2.4 million, for the
following eight fiscal quarters thereafter is $3.6 million and for the following three fiscal quarters thereafter is $4.8 million. The remaining principal payment on the term loan is
due on September 11, 2024.
The proceeds of the term loan and up to $60.0 million of the revolving credit facility may be used to (i) finance a portion of the $545.0 million loan made by the Company to
AP-AMH Medical Corporation, a California professional medical corporation (“AP-AMH”), concurrently with the closing of the Credit Agreement (the “AP-AMH Loan”) as
described in the May 13, 2019, Current Report and the August 29, 2019, Current Report, (ii) refinance certain indebtedness of the Company and its subsidiaries and, indirectly,
APC, (iii) pay transaction costs and expenses arising in connection with the Credit Agreement, the AP-AMH Loan and certain other related transactions and (iv) provide for
working capital, capital expenditures and other general corporate purposes. The remainder of the revolving credit facility will be used to finance future acquisitions and
investments and to provide for working capital needs, capital expenditures and other general corporate purposes.
The Company is required to pay an annual facility fee of 0.20% to 0.35% on the available commitments under the Credit Agreement, regardless of usage, with the applicable
fee determined on a quarterly basis based on the Company’s leverage ratio. The Company is also required to pay customary fees as specified in a separate fee agreement
between the Company and Truist Securities, Inc. (formerly SunTrust Robinson Humphrey, Inc.), the lead arranger of the Credit Agreement.
Amounts borrowed under the Credit Agreement will bear interest at an annual rate equal to either, at the Company’s option, (a) the rate for Eurocurrency deposits for the
corresponding deposits of U.S. dollars appearing on Reuters Screen LIBOR01 Page (“LIBOR”), adjusted for any reserve requirement in effect, plus a spread of from 2.00% to
3.00%, as determined on a quarterly basis based on the Company’s leverage ratio, or (b) a base rate, plus a spread of 1.00% to 2.00%, as determined on a quarterly basis based
on the Company’s leverage ratio. As of December 31, 2020, the interest rate on the Credit Agreement was 2.27%. The base rate is defined in a manner such that it will not be
less than LIBOR. The Company will pay fees for standby letters of credit at an annual rate equal to 2.00% to 3.00%, as determined on a quarterly basis based on the Company’s
leverage ratio, plus facing fees and standard fees payable to the issuing bank on the respective letter of credit. Loans outstanding under the Credit Agreement may be prepaid at
any time without penalty, except for LIBOR breakage costs and expenses. If LIBOR ceases to be reported, the Credit Agreement requires the Company and the Agent to
endeavor to establish a commercially reasonable alternative rate of interest and until they are able to do so, all borrowings must be at the base rate.
The Credit Agreement requires the Company and its subsidiaries to comply with various affirmative covenants, including, without limitation, furnishing updated financial and
other information, preserving existence and entitlements, maintaining properties and insurance, complying with laws, maintaining books and records, requiring any new
domestic subsidiary meeting a materiality threshold specified in the Credit Agreement to become a guarantor thereunder and paying obligations. The Credit Agreement requires
the Company and its subsidiaries to comply with, and to use commercially reasonable efforts to the extent permitted by law to cause certain material associated practices of the
Company, including APC, to comply with, restrictions on liens, indebtedness and investments (including restrictions on acquisitions by the Company), subject to specified
exceptions. The Credit Agreement also contains various other negative covenants binding the Company and its subsidiaries, including, without limitation, restrictions on
fundamental changes, dividends and distributions, sales and leasebacks, transactions with affiliates, burdensome agreements, use of proceeds, maintenance of business,
amendments of organizational documents, accounting changes and prepayments and modifications of subordinated debt.
The Credit Agreement requires the Company to comply with two key financial ratios, each calculated on a consolidated basis. The Company must maintain a maximum
consolidated leverage ratio of not greater than 3.75 to 1.00 as of the last day of each fiscal quarter. The maximum consolidated leverage ratio decreases by 0.25 each year, until it
is reduced to 3.00 to 1.00 for each fiscal quarter ending after September 30, 2022. In accordance with the Credit Agreement, the Company must maintain a
111
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
maximum consolidated leverage ratio of not greater than 3.50 to 1.00 as of December 31, 2020. The Company must maintain a minimum consolidated interest coverage ratio of
not less than 3.25 to 1.00 as of the last day of each fiscal quarter. As of December 31, 2020, the Company was in compliance with the covenants relating to its credit facility.
Pursuant to the Guaranty and Security Agreement, the Company and NMM have granted the Lenders a security interest in all of their assets, including, without limitation, all
stock and other equity issued by their subsidiaries (including NMM) and all rights with respect to the AP-AMH Loan. The Guaranty and Security Agreement requires the
Company and NMM to comply with various affirmative and negative covenants, including, without limitation, covenants relating to maintaining perfected security interests,
providing information and documentation to the Agent, complying with contractual obligations relating to the collateral, restricting the sale and issuance of securities by their
respective subsidiaries and providing the Agent access to the collateral.
The Credit Agreement contains events of default, including, without limitation, failure to make a payment when due, default on various covenants in the Credit Agreement,
breach of representations or warranties, cross-default on other material indebtedness, bankruptcy or insolvency, occurrence of certain judgments and certain events under the
Employee Retirement Income Security Act of 1974 aggregating more than $ 10.0 million, invalidity of the loan documents, any lien under the Guaranty and Security
Agreement ceasing to be valid and perfected, any change in control, as defined in the Credit Agreement, an event of default under the AP-AMH Loan, failure by APC to pay
dividends in cash for any period of two consecutive fiscal quarters, failure by AP-AMH to pay cash interest to the Company, or if any modification is made to the Certificate of
Determination or the Special Purpose Shareholder Agreement that directly or indirectly restricts, conditions, impairs, reduces or otherwise limits the payment of the Series A
Preferred dividend by APC to AP-AMH. In addition, it will constitute an event of default under the Credit Agreement if APC uses all or any portion of the consideration
received by APC from AP-AMH on account of AP-AMH’s purchase of Series A Preferred Stock for any purpose other than certain specific approved uses described in the
following sentence, unless not less than 50.01% of all holders of common stock of APC at such time approve such use; provided that APC may use up to $50.0 million in the
aggregate of such consideration for any purpose without any requirement to obtain such approval of the holders of common stock of APC. The approved uses include (i) any
permitted investment, (ii) any dividend or distribution to the holders of the common stock of APC, (iii) any repurchase of common stock of APC, (iv) paying taxes relating to
or arising from certain assets and transactions, or (v) funding losses, deficits or working capital support on account of certain non-healthcare assets in an amount not to exceed
$125.0 million. If any event of default occurs and is continuing under the Credit Agreement, the Lenders may terminate their commitments, and may require the Company and
its guarantors to repay outstanding debt and/or to provide a cash deposit as additional security for outstanding letters of credit. In addition, the Agent, on behalf of the Lenders,
may pursue remedies under the Guaranty and Security Agreement, including, without limitation, transferring pledged securities of the Company’s subsidiaries in the name of
the Agent and exercising all rights with respect thereto (including the right to vote and to receive dividends), collect on pledged accounts, instruments and other receivables
(including the AP-AMH Loan), and all other rights provided by law or under the loan documents and the AP-AMH Loan.
In the ordinary course of business, certain of the Lenders under the Credit Agreement and their affiliates have provided to the Company and its subsidiaries and the associated
practices, and may in the future provide, (i) investment banking, commercial banking (including pursuant to certain existing business loan and credit agreements being
terminated in connection with entering into the Credit Agreement), cash management, foreign exchange or other financial services, and (ii) services as a bond trustee and other
trust and fiduciary services, for which they have received compensation and may receive compensation in the future.
Deferred Financing Costs
The Company recorded deferred financing costs of $6.5 million related to the issuance of the Credit Facility. This amount was recorded as a direct reduction of the carrying
amount of the related debt liability. The deferred financing costs related to the term loan will be amortized over the life of the Credit Facility using the effective interest rate
method. The deferred financing costs related to the Revolver Loan will be amortized using the straight line method over the term of the revolver.
Effective Interest Rate
The Company’s average effective interest rate on its total debt during the years ended December 31, 2020, 2019 and 2018 was 3.48%, 3.39%, and 4.72%, respectively. Interest
expense in the consolidated statements of income included amortization of deferred debt issuance costs for the years ended December 31, 2020 and 2019 of $1.4 million and,
$0.5 million, respectively.
112
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Real Estate Loans
On December 31, 2020, the Company purchased 100% of MPP, AMG Properties, and ZLL (refer to Note 4). As a result of this purchase, the Company assumed the existing
loans held by MPP, AMG Properties, and ZLL.
MPP
On July 3, 2020, MPP entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the principal on the loan is
$6.4 million with a variable interest rate of 0.50% less than the independent index which is the daily Wall Street Journal "Prime Rate." If the index is not available, East West
Bank may designate a substitute index after notifying MPP. Monthly payments on the principal and any accrued interest rate not yet paid began in September 2020. MPP must
maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1.
AMG
On August 5, 2020, AMG Properties entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the principal on the
loan is $0.7 million with a variable interest rate of 0.30% less than the independent index which is the daily Wall Street Journal "Prime Rate." If the index is not available, East
West Bank may designate a substitute index after notifying AMG Properties. Monthly payments on the principal and any accrued interest rate not yet paid began in September
2020. AMG Properties must maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense) of not less
than 1.25 to 1.
ZLL
On July 27, 2020, ZLL entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2020, the principal on the loan is
$0.7 million with a variable interest rate of 0.50% less than the independent index which is the daily Wall Street Journal "prime rate." If the index is not available, East West
Bank may designate a substitute index after notifying AMG Properties. Monthly payments on the principal and any accrued interest rate not yet paid began in September 2020.
ZLL must maintain a Debt Coverage Ratio (defined as net operating income divided by current portion of long-term debt plus interest expense) of not less than 1.25 to 1.
Lines of Credit – Related Party
NMM Business Loan
On June 14, 2018, NMM amended its promissory note agreement with Preferred Bank (“NMM Business Loan Agreement”). Preferred Bank is affiliated with one of the
Company’s board members who serves as the Chairman and CEO of Preferred Bank. The NMM Business Loan Agreement provides for loan availability of up to $ 20.0 million
with a maturity date of June 22, 2020. The NMM Business Loan Agreement was subsequently amended to temporarily increase the loan availability to $27.0 million for the
period from September 1, 2018 to October 31, 2019 to facilitate the issuance of an additional standby letter of credit for the benefit of CMS. The amounts outstanding as of June
30, 2019 of $5.0 million were fully repaid on September 11, 2019.
On September 5, 2018, NMM entered into a non-revolving line of credit agreement with Preferred Bank (“NMM Line of Credit Agreement”) which provides for loan
availability of up to $20.0 million with a maturity date of September 5, 2019. This credit facility was subsequently amended in 2019 to reduce the loan availability to $2.2
million. The interest rate is based on the Wall Street Journal “Prime Rate” plus 0.125%, or 3.375%, as of December 31, 2020. Each drawdown from the line of credit is
converted into a five-year term loan with monthly principal payments plus interest based on a five-year amortization schedule.
On September 11, 2019, the NMM Business Loan Agreement, dated as of June 14, 2018, between NMM and Preferred Bank, as amended, and the Line of Credit Agreement,
dated as of September 5, 2018, between NMM and Preferred Bank, as amended, were terminated in connection with the closing of the credit facility.
APC Business Loan
113
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
On June 14, 2018, APC entered its promissory note agreement with Preferred Bank, which is affiliated with one of the Company’s board members, (“APC Business Loan
Agreement”) which provides for loan availability of up to $10.0 million with a maturity date of June 22, 2020. APC Business Loan Agreement was subsequently amended on
April 17, 2019 and June 11, 2019 to decrease the loan availability from $10.0 million to $4.1 million and extend the maturity date through December 31, 2020. On August 1,
2019 and September 10, 2019, APC Business Loan Agreement was further amended to increase loan availability from $ 40.0 million to $43.8 million, and decrease loan
availability from $43.8 million to $4.1 million, respectively. This decrease further limited the purpose of the indebtedness under APC Business Loan Agreement to the issuance
of standby letters of credit, and added as a permitted lien the security interest in all of its assets granted by APC in favor of NMM under a Security Agreement dated on or about
September 11, 2019 securing APC’s obligations to NMM under, and as required pursuant to, that certain Management Services Agreement dated as of July 1, 1999, as
amended. The interest rate is based on the Wall Street Journal “Prime Rate” plus 0.125%, or 3.375% and 4.875%, as of December 31, 2020 and December 31, 2019,
respectively. As of December 31, 2020 and 2019, there is no additional availability under this line of credit.
Standby Letters of Credit
In September 2019, NMM held certain letters of credit issued by Preferred Bank that were terminated and reissued under the Credit Agreement. As of December 31, 2020,
there was no outstanding letters of credit and the Company has $25.0 million available under the letter of credit subfacility.
APAACO established an irrevocable standby letter of credit with Preferred Bank, which is affiliated with one of the Company’s board members, (through the NMM Business
Loan Agreement) and was amended in 2019 to the amount of $14.8 million for the benefit of CMS. The letter of credit is automatically extended without amendment for
additional one-year periods from the present or any future expiration date, unless notified by the institution to terminate prior to 90 days from any expiration date. APAACO
may continue to draw from the letter of credit for one year following the bank’s notification of non-renewal. In September 2019, these letters were terminated with Preferred
Bank and reissued under the Credit Agreement. In August 2020, $ 14.8 million of the irrevocable standby letters of credit were released by CMS and no amounts remain
outstanding as of December 31, 2020.
APC established irrevocable standby letters of credit with a financial institution for a total of $0.3 million for the benefit of certain health plans. The standby letters of credit are
automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless notified by the institution in advance of the
expiration date that the letter will be terminated.
Alpha Care established irrevocable standby letters of credit with Preferred Bank under the APC Business Loan Agreement for a total of $3.8 million for the benefit of certain
health plans. The standby letters of credit are automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless
notified by the institution in advance of the expiration date that the letter will be terminated.
114
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
11. Income Taxes
Provision for income taxes consisted of the following (in thousands):
Current
Federal
State
Deferred
Federal
State
2020
Years ended December 31,
2019
2018
$
43,572 $
19,155
62,727
9,035 $
5,925
14,960
(4,963)
(1,657)
(6,620)
(3,508)
(3,285)
(6,793)
21,059
9,646
30,705
(5,954)
(2,391)
(8,345)
Total provision for income taxes
$
56,107 $
8,167 $
22,360
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. As of December 31, 2020, the Company had Federal and California net operating
loss carryforwards of approximately $69.1 million and $89.4 million, respectively. The Federal and California net operating loss carryforwards will expire at various dates from
2027 through 2040; however, $ 49.8 million of the Federal operating loss does not expire and will be carried forward indefinitely. Pursuant to Internal Revenue Code Sections
382 and 383, use of the Company's net operating loss and credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three
years' period since the last ownership change.
Significant components of the Company's deferred tax assets (liabilities) as of December 31, 2020 and December 31, 2019 are shown below (in thousands). A valuation
allowance of $15.5 million and $8.2 million as of December 31, 2020 and December 31, 2019, respectively, has been established against the Company's deferred tax assets
related to loss entities the Company cannot consolidate under the Federal consolidation rules, as realization of these assets is uncertain. Valuation allowance increased by $7.3
million in 2020.
115
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Deferred tax assets
State taxes
Stock options
Accrued expenses
Allowance for bad debts
Investment in other entities
Net operating loss carryforward
Lease liability
Other
Deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax assets
Deferred tax liabilities
Property and equipment
Acquired intangible assets
Right-of-use assets
481(a) adjustment
Other
Deferred tax liabilities
Net deferred liabilities
$
2020
2019
3,932 $
461
3,905
351
702
20,758
4,979
665
35,753
(15,517)
20,236
(661)
(24,661)
(4,888)
(985)
—
(31,195)
1,111
1,293
2,334
544
2,977
13,850
3,568
—
25,677
(8,192)
17,485
(927)
(29,195)
(3,544)
(1,623)
(465)
(35,754)
$
(10,959) $
(18,269)
The provision for income taxes differs from the amount computed by applying the federal income tax rate as follows for the years ended December 31:
Tax provision at U.S. Federal statutory rates
State income taxes net of federal benefit
Non-deductible permanent items
Non-taxable entities
Stock-based compensation
Change in valuation allowance
Other
Effective income tax rate
2020
Years ended December 31,
2019
2018
21.0 %
7.7
0.3
(0.2)
0.3
3.2
(1.0)
31.3 %
21.0 %
8.1
3.3
(2.7)
(1.5)
3.2
0.2
31.6 %
21.0 %
6.7
1.3
(0.7)
(1.8)
—
0.6
27.1 %
The Company's effective tax rate is different from the federal statutory rate of 21% due primarily to state taxes, change in valuation allowance, and permanent adjustments. On
March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. The CARES Act, among other things, permits NOL
carryovers and carrybacks and modifications on the limitation of business interests. As of December 31, 2020, the Company does not expect the CARES Act to result in any
material impact on the Company’s effective tax rate.
116
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2020 and 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, 2016 through December 31, 2019 and for the years ended December 31, 2017 through December 31, 2019,
respectively. The Company does not anticipate material unrecognized tax benefits within the next 12 months.
12. Mezzanine and Stockholders’ Equity
APC
As the redemption feature (see Note 2) of APC's shares of common stock 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. APC’s shares were not redeemable and it was not probable that the shares would become
redeemable as of December 31, 2020, 2019 and 2018.
On September 10, 2019, APC-LSMA, a holding company of APC, acquired 100% of the aggregate issued and outstanding shares of capital stock of AMG for $1.2 million in
cash and $0.4 million of APC common stock.
On September 11, 2019, AP-AMH purchased 1,000,000 shares of APC Series A Preferred Stock for aggregate consideration of $545.0 million in a private placement. This
investment was eliminated in consolidation. In relation to the issuance of APC Series A Preferred Stock, APC incurred $0.9 million in cost (see Note 1).
Stockholders’ Equity
Preferred Stock – Series A
In October 2015, ApolloMed entered into an agreement with NMM pursuant to which ApolloMed sold to NMM, and NMM purchased from ApolloMed, in a private offering of
securities, 1,111,111 units, each unit consisting of one share of ApolloMed’s Series A Preferred Stock and a common stock warrant to purchase one share of ApolloMed’s
common stock at an exercise price of $9.00 per share. NMM paid ApolloMed an aggregate of $10.0 million for the units.
Preferred Stock – Series B
In March 2016, ApolloMed entered into an agreement with NMM pursuant to which ApolloMed sold to NMM, and NMM purchased from ApolloMed, in a private offering of
securities, 555,555 units, each unit consisting of one share of ApolloMed’s Series B Preferred Stock and a common stock warrant to purchase one share of ApolloMed’s
common stock at an exercise price of $10.00 per share. NMM paid ApolloMed an aggregate $5.0 million for the units.
2017 Share Issuances and Repurchases
In December 2017, ApolloMed completed its business combination with NMM following the satisfaction or waiver of the conditions set forth in the Merger Agreement,
pursuant to which Merger Subsidiary merged with and into NMM, with NMM surviving as a wholly owned subsidiary of ApolloMed.
In connection with the 2017 Merger and as of the effective time of the Merger (the “Effective Time”):
•
•
each issued and outstanding share of NMM common stock was converted into the right to receive such number of shares of common stock of ApolloMed that results
in the former NMM shareholders who did not dissent from the 2017 Merger (“former NMM Shareholders”) having a right to receive an aggregate of 30,397,489
shares of common stock of ApolloMed, subject to the 10% holdback pursuant to the Merger Agreement;
ApolloMed issued to former NMM Shareholders each former NMM Shareholder’s pro rata portion of (i) warrants to purchase an aggregate of 850,000 shares of
common stock of ApolloMed, exercisable at $11.00 per share, and (ii)
117
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
warrants to purchase an aggregate of 900,000 shares of common stock of ApolloMed, exercisable at $10.00 per share; and
•
ApolloMed held back an aggregate of 3,039,749 shares of common stock issuable to former NMM Shareholders, representing 10% of the total number of shares of
ApolloMed common stock issuable to former NMM Shareholders, to secure indemnification rights of AMEH and its affiliates under the Merger Agreement (the
“Holdback Shares”). The Holdback Shares were issued and outstanding as of December 31, 2020. The first tranche of 1,519,805 shares were issued in December 2018
and the remaining 1,511,380 were issued in December 2019, net of shares repurchase.
The shares of common stock issuable to former NMM shareholders in the exchange were 25,675,630 (net of 10% holdback and Treasury Shares). The 10% holdback shares will
be released to all the former NMM shareholders based on their respective pro rata ownership interest in NMM at the Effective Time without regard to whether the former NMM
shareholders are providing any services to the Company at the time of this distribution. This holdback accommodation was made as indemnification protection to the accounting
acquiree (ApolloMed), and as such, is not considered compensatory. At the time when these holdback shares were issued to the former NMM shareholders, the Company
recorded the stock issuance with a reduction to additional paid-in capital to properly reflect the shares outstanding.
Upon consummation of the 2017 Merger, the Company issued 520,081 shares of its common stock with a fair value of approximately $5.4 million from the conversion of a
convertible promissory note issued by the Company in 2017.
Common Stock
As of December 31, 2020, 276,038 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 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.
Warrants
Common stock warrants, to purchase 1,111,111 shares of ApolloMed common stock, issued to NMM in connection with the Series A Preferred Stock investment in ApolloMed
may be exercised at any time after issuance and through March 30, 2021, for $9.00 per share, subject to adjustment in the event of stock dividends and stock splits. As part of
the Merger between NMM and ApolloMed, such warrants were distributed to former NMM shareholders on a pro-rata basis utilizing the percentage of shares of NMM held by
each shareholder prior to the merger date.
Common stock warrants, to purchase 555,555 shares of ApolloMed common stock, issued to NMM in connection with the Series B Preferred Stock investment in ApolloMed
may be exercised at any time after issuance and through March 30, 2021, for $10.00 per share, subject to adjustment in the event of stock dividends and stock splits. As part of
the Merger between NMM and ApolloMed, such warrants were distributed to former NMM shareholders on a pro-rata basis utilizing the percentage of shares of NMM held by
each shareholder prior to the Merger date.
The Company’s outstanding warrants consisted of the following:
118
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Warrants outstanding at January 1, 2018
Warrants exercised
Warrants forfeited
Warrants outstanding at December 31, 2018
Warrants granted
Warrants exercised
Warrants forfeited
Warrants outstanding at December 31, 2019
Warrants granted
Warrants exercised
Warrants forfeited
Shares
3,648,541 $
(286,357)
(30,189)
3,331,995 $
—
(177,405)
—
3,154,590 $
—
(1,247,644)
(28,820)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
(in millions)
9.75
7.84
4.50
9.93
—
9.32
9.96
—
9.33
9.00
3.74 $
2.97
—
—
—
2.01
—
—
—
Warrants outstanding at December 31, 2020
1,878,126 $
10.39
1.63 $
Exercise Price Per
Share
Warrants
Outstanding
$
9.00
10.00
11.00
$9.00 – $11.00
10,810
1,115,342
751,974
1,878,126
Weighted
Average
Remaining
Contractual Life
Warrants
Exercisable
Weighted
Average
Exercise Price
Per
Share
0.24
1.44
1.93
1.63
10,810 $
1,115,342
751,974
1,878,126 $
During the years ended December 31, 2020 and 2019, common stock warrants were exercised for 1,247,644 and 177,405 shares of the Company’s common stock, respectively
which resulted in proceeds of approximately $10.5 million and $1.7 million, respectively. The exercise price ranged from $9.00 to $11.00 per share during year ended
December 31, 2020 and December 31, 2019.
Dividends
During the years ended December 31, 2020, 2019 and 2018, NMM paid dividends of $0, $0 and $13.8 million, respectively. The dividends paid in the year ended
December 31, 2019 were declared in December 2018 as part of the merger between ApolloMed and NMM and was classified as restricted cash (see Note 3).
During the years ended December 31, 2020, 2019 and 2018, APC paid dividends of $136.6 million, $60.0 million and $2.0 million, respectively.
During the years ended December 31, 2020, 2019 and 2018, CDSC paid distributions of $2.1 million, $2.6 million and $2.0 million, respectively.
119
52.0
3.0
—
33.1
—
1.6
—
26.7
—
9.8
—
14.8
9.00
10.00
11.00
10.39
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Treasury Stock
APC owned 12,323,164 shares of ApolloMed's common stock as of December 31, 2020, and 17,290,317 shares of ApolloMed’s common stock as of December 31, 2019,
respectively, which are legally issued and outstanding but excluded from shares of common stock outstanding in the consolidated financial statements, as such shares are
treated as treasury shares for accounting purposes (see Note 1).
During the year ended December 31, 2019, APC established a brokerage account to invest excess capital in the equity market. The brokerage account is managed directly by an
independent investment committee of the APC board, of which Dr. Kenneth Sim and Dr. Thomas Lam have been excluded. As of December 31, 2020 and 2019, the brokerage
account only held shares of ApolloMed, as such the brokerage account totaling $7.7 million and $7.3 million, respectively, have been recorded as treasury shares.
13. 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 a risk-bearing organization, the Company is required to follow regulations of the Department of Managed Health Care ("DMHC"). The Company must comply with a
minimum working capital requirement, tangible net equity (“TNE”) requirement, cash-to-claims ratio and claims payment requirements prescribed by the DMHC. TNE is
defined as net assets less intangibles, less non-allowable assets (which include amounts due from affiliates), plus subordinated obligations. At December 31, 2020 and 2019,
APC, Alpha Care and Accountable Health Care were 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.
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 the
Company's benchmark Medicare Part A and Part B expenditures. In August 2020, $ 14.8 million of the irrevocable standby letters of credit were released by CMS and $0
remain outstanding as of December 31, 2020.
APC and Alpha Care established irrevocable standby letters of credit with a Preferred Bank for a total of $0.3 million and $3.8 million, respectively, for the benefit of certain
health plans (see Note 10).
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.
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,
120
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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.
14. Related Party Transactions
During the years ended December 31, 2020, 2019, and 2018, NMM earned approximately $16.9 million, $17.3 million, and $21.6 million, respectively, in management fees, of
which $2.3 million and $2.0 million, remained outstanding, at December 31, 2020 and 2019 respectively, from LMA, which is accounted for under the equity method based on
25% equity ownership interest held by APC (see Note 6).
During the years ended December 31, 2020, 2019, and 2018, APC paid approximately $2.2 million, $2.7 million, and $2.5 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 6).
During the years ended December 31, 2020, 2019, and 2018, APC paid approximately $6.0 million, $7.8 million, and $7.0 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 6).
During the years ended December 31, 2020, 2019, and 2018, APC paid approximately $0.5 million, $0.4 million, $0.3 million, respectively, to Advance Diagnostic Surgery
Center for services as a provider. Advance Diagnostic Surgery Center shares common ownership with certain board members of APC.
During the years ended December 31, 2020, 2019, and 2018, APC paid approximately $0.1 million, $0.1 million, and $0.1 million respectively, to Fresenius and their
subsidiaries for services as a provider. During the year ended December 31, 2020 and 2019, APAACO paid approximately $ 0.7 million and $0, respectively, to Fresenius and
their subsidiaries for services as a provider. One of the Company's board members is an officer of Fresenius and their subsidiaries.
During the years ended December 31, 2020 and 2019, APC paid approximately $0.3 million and $0, respectively, to Fulgent Genetics, Inc. for services as a provider. Fulgent
Genetics, Inc. shares common a board member with the Company starting in 2019.
During the years ended December 31, 2020, 2019, and 2018, NMM paid approximately $1.0 million and $1.1 million, and $1.0 million to Medical Property Partners (“MPP”)
for an office lease. MPP shares common ownership with certain board members of NMM (see Note 19).
During the years ended December 31, 2020 and 2019, NMM paid approximately $1.4 million and $0.2 million, respectively, to One MSO, Inc. (“One MSO”) for an office
lease. One MSO was indirectly 50% owned by Drs. Sim and Lam in 2019, but as of December 31, 2020, Drs. Sim and Lam has sold their ownership to APC for $2.4 million.
During the years ended December 31, 2020, 2019, and 2018, the Company paid approximately $0.3 million, $0.5 million, and $0.4 million respectively, to Critical Quality
Management Corp (“CQMC”) for an office lease. CQMC shares common ownership with certain board members of APC (see Note 19).
During the years ended December 31, 2020, 2019, and 2018, SCHC paid approximately $0.4 million, $0.4 million, and $0.5 million respectively, to Numen, LLC (“Numen”)
for an office lease. Numen is owned by a shareholder of APC (see Note 19).
The Company has agreements with HSMSO, Aurion Corporation (“Aurion”), and 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 (in thousands):
121
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
AHMC – Risk pool earnings net claims payment
HSMSO – Management fees, net
Aurion – Management fees
Receipts, net
Years ended December 31,
2019
2020
$
$
28,767 $
(949)
(303)
27,515 $
40,000
(1,700)
(300)
38,000
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 years ended
December 31, 2020, 2019, and 2018, the Company has recognized risk pool revenue under this agreement of $42.6 million, $49.3 million, and $68.2 million, respectively, of
which $45.3 million and $40.4 million, remain outstanding as of December 31, 2020 and 2019, respectively.
During the years ended December 31, 2020, 2019, and 2018, APC paid an aggregate of approximately $33.1 million, $30.8 million, and $35.2 million, respectively, to
shareholders of APC for provider services, which included approximately $9.0 million, $8.8 million, and $13.5 million, respectively, to shareholders who are also officers of
APC.
During the years ended December 31, 2020 and 2019, NMM paid approximately $0.1 million and $0.2 million to an Apollo board member, Matthew Mazdyasni, for consulting
services.
In addition, affiliates wholly-owned by the Company’s officers, including Dr. Thomas Lam, ApolloMed's Co-CEO and President, are reported in the accompanying
consolidated statements 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 6, 7 and 10, respectively.
15. Employee Benefit Plan
NMM has a qualified 401(k) plan that covers substantially all employees who have completed at least six months of service and meet minimum age requirements. Participants
may contribute a portion of their compensation to the plan, up to the maximum amount permitted under Section 401(k) of the Internal Revenue Code. Participants become fully
vested after six years of service. NMM matches a portion of the participants’ contributions. NMM’s matching contributions for the years ended December 31, 2020 and 2019
were approximately $0.4 million and $0.2 million.
16. Stock-Based Compensation
Equity Incentive Plans
In connection with the Merger, the Company assumed ApolloMed’s 2013 Equity Incentive Plan (the “2013 Plan”), pursuant to which 500,000 shares of the Company’s
common stock were reserved for issuance thereunder. The Company issues new shares to satisfy stock option and warrant exercises under the 2013 Plan. As of December 31,
2020, there were no shares available for future grants under the 2013 Plan.
In connection with the Merger, the Company assumed ApolloMed’s 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which 1,500,000 shares of the Company’s
common stock were reserved for issuance thereunder. In addition, shares that are subject to outstanding grants under the Company’s 2013 Plan but that ordinarily would have
been restored to such plans reserve due to award forfeitures and terminations were rolled into and become available for awards under the 2015 Plan. The 2015 Plan provides for
awards, including incentive stock options, non-qualified options, restricted common stock, and stock appreciation rights. The 2015 Plan was approved by ApolloMed’s
stockholders at ApolloMed’s 2016 annual meeting of stockholders that was held in September 2016. As of December 31, 2020, 2019 and 2018, there were approximately 0.1
million, 0.5 million and 0.9 million shares available for future grants under the 2015 Plan, respectively.
The following table summarizes the stock-based compensation expense recognized under all of the Company's stock plans in 2020, 2019, and 2018 and associated with the
issuance of restricted shares of common stock and vesting of stock options which
122
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
are included in General and administrative expenses in the accompanying consolidated statement of income recognized (in thousands):
Stock options
Restricted stock awards
APC stock options
Total share-based compensation expense
Options
The Company’s outstanding stock options consisted of the following:
Options outstanding at January 1, 2020
Options granted
Options exercised
Options canceled, forfeited or expired
Options outstanding at December 31, 2020
Options exercisable at December 31, 2020
Years ended December 31,
2020
2019
2018
$
$
1,763 $
1,620
—
3,383 $
688
252
607
1,547
$
$
—
632
810
1,442
Shares
Weighted
Average
Exercise Price
607,346 $
250,746
(120,000)
(12,228)
725,864 $
449,464 $
9.22
18.11
2.58
17.57
13.25
6.33
Weighted
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
(in millions)
3.42 $
—
—
—
3.75 $
1.94 $
5.6
—
1.8
—
3.4
3.6
During the years ended December 31, 2020 and 2019, stock options were exercised for 120,000 and 241,214 shares, respectively, of the Company’s common stock, which
resulted in proceeds of approximately $0.3 million and $1.5 million, respectively. The exercise prices ranged from $2.10 to $5.00 per share for the exercises during the year
ended December 31, 2020 and ranged from $1.50 to $10.00 per share for the exercises during the year ended December 31, 2019. During the year ended December 31, 2020, no
stock options were exercised pursuant the cashless exercise provision.
During the year ended December 31, 2020, the Company granted 191,742 and 59,004 five-year stock options to certain ApolloMed board members and executives,
respectively, with exercise price ranging from $ 18.20-$18.41 and $17.78, respectively, which were recognized at fair value, as determined using the Black-Scholes option
pricing model as follows:
December 31, 2020
Expected Term
Expected volatility
Risk-free interest rate
Market value of common stock
Annual dividend yield
Forfeiture rate
Restricted Stock Awards
Board Members
Executives
3.0 years
85.44% - 90.01%
0.23% - 1.43%
$18.20 - $18.41
0 %
0 %
3.5 years
80.95 %
0.23 %
$ 17.78
0 %
0 %
The Company grants restricted stock awards to employees and executives which are earned based on service conditions. The grant date fair value of the restricted stock awards
is that day’s closing market price of the Company’s common stock. During
123
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
the year ended December 31, 2020, the Company granted restricted stock awards for employees totaling 97,447 shares with a weighted average grant date fair value of $17.58
and for executives totaling 130,484 shares with the grant date fair value of $17.78. The grant date fair value of the restricted stock for employees was $1.6 million and will be
recognized on a straight-line basis over the awards’ vesting period of three years, of which 7,394 shares of restricted stock with grant date fair value of $0.1 million were
forfeited during the year ended December 31, 2020. The grant date fair value of restricted stock for executives was $2.3 million and will be recognized on a straight-line basis
over the awards' vesting period of three years.
The Company recorded approximately $1.6 million of share-based compensation expense associated with the issuance of restricted shares of common stock and vesting of
stock options which are included in general and administrative expenses in the accompanying consolidated statements of income for the year ended December 31, 2020.
Unrecognized compensation expense related to total share-based payments outstanding as of December 31, 2020 was $7.1 million.
APC Stock Options Issued Under Primary Care Physician Agreements
On October 1, 2014, NMM and APC entered into an Exclusivity Amendment Agreement as part of the Primary Care Physician Agreement to issue stock options to purchase
shares of NMM and APC common stock.
The medical providers agreed to exclusivity to APC for health enrollees in consideration per provider of an exclusivity incentive in the amount of $25,000 (or $15,000 if already
a preferred provider). The stock options were granted from the date of agreement through May 1, 2015 and are treated as issuances to non-employees. The exercise price of the
stock options was $2.44 (for NMM pre-merger) and $0.17 (for APC) per share and providers were able to exercise anytime between August 1, 2015 and October 1, 2019, as
long as the providers continue to provide services pursuant to the terms of the agreement through October 1, 2019. If the agreement is terminated by the provider with or without
cause, the exclusivity incentive and any capitation payment above standard rates made in accordance with the terms of the agreement shall be fully repaid to APC by the
terminating medical provider. In addition, any unexercised share options held by the terminating medical provider will be forfeited on effective date of termination, and any
share options that have been exercised will be bought back by NMM and APC at the original purchase price. As all outstanding options, and the contingency to repurchase
these options, expired on October 1, 2019, there is no expense recognized in connection with the Exclusivity Amendment Agreements during the year ended December 31,
2020.
17. Earnings Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of shares of the Company’s common stock issued and outstanding during a
certain period. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period,
using the as-if converted method for 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. The Holdback
Shares are excluded from the computation of basic earnings per share but included in diluted earnings per share. As of December 31, 2020, 2019 and 2018, APC held
12,323,164, 17,290,317 and 1,682,110 shares, respectively, of ApolloMed's common stock, 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 (see Note 12). The noncontrolling interests in APC are allocated their share of ApolloMed’s
income from APC’s ownership of ApolloMed common stock and this is included in the net income attributable to noncontrolling interests on the consolidated statements of
income. Therefore, none of the shares of ApolloMed held by APC are considered outstanding for the purposes of basic or diluted earnings per share computation.
124
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Below is a summary of the earnings per share computations:
Earnings per share – basic
Earnings per share – diluted
Weighted average shares of common stock outstanding – basic
Weighted average shares of common stock outstanding – diluted
Below is a summary of the shares included in the diluted earnings per share computations:
Weighted average shares of common stock outstanding – basic
10% shares held back pursuant to indemnification clause
Stock options
Warrants
Management restricted stock awards (dilutive)
Executive restricted stock awards (dilutive)
Weighted average shares of common stock outstanding – diluted
18. Variable Interest Entities (VIEs)
Years ended December 31,
2019
2018
2020
$
$
1.04 $
1.01 $
0.41 $
0.39 $
36,527,672
37,448,430
34,708,429
36,403,279
0.33
0.29
32,893,940
37,914,886
2020
Years ended December 31,
2019
2018
36,527,672
—
182,999
717,029
7,242
13,488
37,448,430
34,708,429
—
295,672
1,384,078
15,100
—
36,403,279
32,893,940
2,935,512
459,440
1,625,994
—
—
37,914,886
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 to the accompanying 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. These assets and liabilities,
with the exception of the investment in a privately held entity and amounts due to affiliate, which are eliminated upon consolidation with NMM, are included in the
accompanying consolidated balance sheets (in thousands).
Assets
Current assets
Cash and cash equivalents
Restricted cash – short-term
Investment in marketable securities
Receivables, net
Receivables, net – related party
125
December 31,
2020
2019
$
126,158 $
—
67,637
5,155
46,718
87,110
75
123,948
9,300
42,976
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Other receivables
Prepaid expenses and other current assets
Loans receivable
Loans receivable - related parties
Total current assets
Noncurrent assets
Land, property and equipment, net
Intangible assets, net
Goodwill
Loans receivable – related parties
Investment in affiliates*
Investments in other entities – equity method
Investment in privately held entities
Restricted cash – long-term
Operating lease right-of-use assets
Other assets
Total noncurrent assets
Total assets
Current liabilities
Accounts payable and accrued expenses
Fiduciary accounts payable
Medical liabilities
Income taxes payable
Dividend payable
Amount due to affiliate
Current portion of long-term debt
Finance lease liabilities
Operating lease liabilities
Total current liabilities
Noncurrent liabilities
Long-term debt, net of current portion
Deferred tax liability
Liability for unissued equity shares
Finance lease liabilities, net of current portion
Operating lease liabilities, net of current portion
Total noncurrent liabilities
Total liabilities
1,084
14,813
50
—
744
7,403
6,425
16,500
261,615
294,481
27,599
69,250
109,460
4,145
225,144
43,516
36,584
500
6,298
17,177
539,673
9,547
81,439
108,913
—
318,315
28,427
1,615
746
4,751
1,057
554,810
801,288 $
849,291
12,963 $
9,642
37,684
4,225
485
22,698
201
102
1,242
89,242
7,379
9,144
—
311
5,242
22,076
11,187
2,027
49,019
4,530
271
28,058
—
102
1,088
96,282
—
14,059
—
416
3,742
18,217
$
$
$
111,318 $
114,499
*Investment in affiliates include APC’s investment in ApolloMed which is reflected as treasury shares and eliminated upon consolidation. As a result this balance is not
reflected on ApolloMed’s consolidated balance sheets as of December 31, 2020 and 2019.
126
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
19. Leases
The Company has operating and finance leases for corporate offices, physicians’ offices, and certain equipment. These leases have remaining lease terms ranging from 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
December 31, 2020 and December 31, 2019, assets recorded under finance leases were $0.4 million and $0.5 million, respectively, and accumulated depreciation associated
with finance leases was $0.4 million and $0.3 million, respectively.
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 (in thousands):
Operating lease cost
Finance lease cost
Amortization of lease expense
Interest on lease liabilities
Sublease income
Total lease cost
127
December 31, 2020
December 31, 2019
6,589 $
5,437
105
14
(784)
102
17
(415)
5,924 $
5,141
$
$
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Other information related to leases was as follows:
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases
Finance leases
Weighted Average Remaining Lease Term
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
December 31, 2020
December 31, 2019
$
$
5,804
14
105
7,652
—
5,254
17
102
16,728
—
December 31, 2020
December 31, 2019
6.80 years
3.67 years
6.48 years
4.67 years
6.10 %
3.00 %
6.11 %
3.00 %
Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows:
Years ending December 31,
Operating Leases
Finance Leases
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less: imputed interest
Total lease obligations
Less: current portion
Long-term lease obligations
$
4,297 $
3,529
3,303
2,940
2,648
6,818
23,535
4,493
19,042
3,177
$
15,865 $
119
119
119
79
—
—
436
23
413
102
311
As of December 31, 2020, the Company does not have additional operating or finance leases that have not yet commenced.
128
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
20. Quarterly Financial Information (Unaudited)
The following tables represent our quarterly financial results (in thousands, except per share data):
Revenue
Income from operations
Net income
Net income attributable to ApolloMed
Earnings per share - basic
1
attributable to common stock
Earnings per share - diluted
1
attributable to common stock
First
Second
2
Third
Fourth
Annual
2020 Calendar Quarter
$
$
$
165,105 $
4,365
2,987
4,052
165,169 $
12,906
81,001
7,044
180,123 $
37,356
25,424
16,713
176,783 $
25,876
12,908
10,057
0.11 $
0.20 $
0.46 $
0.27 $
0.11 $
0.19 $
0.45 $
0.26 $
687,180
80,503
122,320
37,866
1.04
1.01
Quarterly earnings per share impacts may not add to full-year earnings per share impacts due to the difference in weighted-average common shares for the quarters versus the weighted-
1
average common shares for the year.
2
Includes a pre-tax gain of $99.6 million related to sale of UCI (Note 6).
Revenue
(Loss) income from operations
Net (loss) income
Net income attributable to ApolloMed
Earnings per share - basic
1
attributable to common stock
Earnings per share - diluted
1
attributable to common stock
2019 Calendar Quarter
First
Second
Third
Fourth
Annual
95,757 $
(3,307)
(2,450)
140
130,050 $
14,728
10,664
3,545
156,060 $
10,066
10,739
3,704
178,751 $
10,933
(1,280)
6,727
0.00 $
0.10 $
0.11 $
0.19 $
0.00 $
0.09 $
0.10 $
0.18 $
560,618
32,420
17,673
14,116
0.41
0.39
$
$
$
Quarterly earnings per share calculations may not add to full-year earnings per share calculations due to the difference in weighted-average common shares for the quarters versus the
1
weighted-average common shares for the year.
21. Subsequent Events
On January 26, 2021, the Company entered into an agreement to purchase a 30% interest in CAIPA MSO. CAIPA MSO provides management, consulting, administrative, and
other support services to professional healthcare service providers, including to Chinese American IPA d/b/a Coalition of Asian-American IPA ("CAIPA"), a leading
independent practice association serving the greater New York City area. The transaction is subject to third-party consents and other customary closing conditions. ApolloMed
will fund the transaction from cash on hand. The transaction is expected to close by the end of the second quarter of 2021.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
129
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Co-Chief Executive
Officers and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management,
including Co-Chief Executive Officers and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined
in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company's
principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company's assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of the effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Our management, with the participation of our Co-Chief Executive Officers and Chief Financial Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2020, the end of our fiscal year. Our management based its assessment on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management's assessment included evaluation and testing of the
design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Based on our management's assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2020. Our
management communicated the results of its assessment to the Audit Committee of our Board of Directors.
Our independent registered public accounting firm, Ernst & Young, LLP, audited our consolidated financial statements for the fiscal year ended December 31, 2020
included in this Annual Report on Form 10-K, and has issued an audit report with respect to the effectiveness of the Company's internal control over financial reporting, a copy
of which is included below in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during our fourth quarter of 2020 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
130
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors Apollo Medical Holdings, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Apollo Medical Holdings, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Apollo
Medical Holdings, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated financial
statements of the Company and our report dated March 12, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
/s/ Ernst and Young, LLP
Los Angeles, California
March 12, 2021
131
Item 9B. Other Information
None.
132
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item will be contained in the Company’s Proxy Statement for the 2021 Annual Meeting to be filed with the SEC not later than 120
days following the end of the Company’s fiscal year ended December 31, 2020, which information is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item will be contained in the Company’s Proxy Statement for the 2021 Annual Meeting to be filed with the SEC not later than 120
days following the end of the Company’s fiscal year ended December 31, 2020, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be contained in the Company’s Proxy Statement for the 2021 Annual Meeting to be filed with the SEC not later than 120
days following the end of the Company’s fiscal year ended December 31, 2020, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be contained in the Company’s Proxy Statement for the 2021 Annual Meeting to be filed with the SEC not later than 120
days following the end of the Company’s fiscal year ended December 31, 2020, which information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item will be contained in the Company’s Proxy Statement for the 2021 Annual Meeting to be filed with the SEC not later than 120
days following the end of the Company’s fiscal year ended December 31, 2020, which information is incorporated herein by reference.
133
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1.
Consolidated financial statements
PART IV
The consolidated financial statements and notes thereto contained herein are as listed on the “Index to Consolidated Financial Statements” in Part II, Item 8 of this
Annual Report on Form 10-K.
2.
Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Annual Report on Form 10-
K.
3.
Exhibits required by Item 601 of Regulation S-K.
Exhibit No.
Description
2.1†
2.2
2.3
2.4
2.5†
3.1
3.2
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. (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).
Amendment to the Agreement and Plan of Merger, 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).
Amendment No. 2 to the Agreement and Plan of Merger, 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).
Stock purchase agreement dated March 15, 2019 (incorporated herein by reference to Exhibit 2.4 to the Company’s Quarterly Report on Form 10-Q
filed on May 10, 2019).
Stock Purchase Agreement, dated as of December 31, 2019, among Universal Care Acquisition Partners, LLC, a Delaware limited liability
company, Bright Health Company of California, Inc., a California corporation, Bright Health, Inc., a Delaware corporation (solely for purposes of
section 13.22 thereto), Universal Care, Inc., a California corporation doing business as Brand New Day, Howard E. And Elaine H. Davis Family
Trust, Howard E. And Elaine H. Davis Grandchildren’s Trust, Jeffrey V. Davis, Jay B. Davis, Laura Davis-Loschiavo, Marc M. Davis, Peter And
Helen Lee Family Trust, and, in their respective capacities as seller representatives, Kenneth Sim, M.D., Thomas Lam, M.D., Jay Davis and Jeffrey
Davis. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 6, 2020).
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).
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).
134
Exhibit No.
3.3
Description
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
3.5
3.6
3.7
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
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).
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).
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).
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).
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).
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).
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).
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).
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).
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).
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).
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).
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*
Description of Registered Securities
135
Exhibit No.
10.1
Description
2010 Equity Incentive Plan of the Company (incorporated herein by reference to Appendix A to Schedule 14C Information Statement filed on
August 17, 2010).
10.2
10.3*
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10
10.11
10.12
10.13
10.14
10.15
2013 Equity Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed
on May 8, 2014).
2015 Equity Incentive Plan of the Company. (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed
on April 2, 2018).
Board of Directors Agreement dated May 22, 2013 by and between Apollo Medical Holdings, Inc., and David Schmidt (incorporated herein by
reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed on May 8, 2014).
Board of Directors Agreement between Apollo Medical Holdings, Inc. and Thomas S. Lam, M.D. dated January 19, 2016 (incorporated herein by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 19, 2016.
Board of Directors Agreement dated January 12, 2016 between Apollo Medical Holdings, Inc. and Mark Fawcett (incorporated herein by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on February 2, 2016).
Form of Board of Directors Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
December 13, 2017).
Form of Director Proprietary Information Agreement (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-
K filed on December 13, 2017).
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
December 13, 2017).
Investment Agreement, between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated March 28, 2014 (incorporated herein by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 31, 2014).
Registration Rights Agreement, between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated March 28, 2014 (incorporated herein by
reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on March 31, 2014).
First Amendment and Acknowledgement, dated February 6, 2015, among Apollo Medical Holdings, Inc., NNA of Nevada, Inc., Warren Hosseinion,
M.D. and Adrian Vazquez, M.D. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
February 11, 2015).
Amendment to the First Amendment and Acknowledgement, dated May 13, 2015, among Apollo Medical Holdings, Inc., NNA of Nevada, Inc.,
Warren Hosseinion, M.D. and Adrian Vazquez, M.D. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on May 15, 2015).
Amendment to the First Amendment and Acknowledgement, dated July 7, 2015, among Apollo Medical Holdings, Inc., NNA of Nevada, Inc.,
Warren Hosseinion, M.D. and Adrian Vazquez, M.D. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on July 10, 2015).
Second Amendment and Conversion Agreement dated November 17, 2015 among Apollo Medical Holdings, Inc., NNA of Nevada, Inc., Warren
Hosseinion, M.D. and Adrian Vazquez, M.D. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on November 19, 2015).
136
Exhibit No.
10.16
Description
Third Amendment between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated June 28, 2016 (incorporated herein by reference to
Exhibit 10.71 to the Company’s Annual Report on Form 10-K filed on June 29, 2016).
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
Fourth Amendment between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated April 26, 2017 (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017).
Fifth Amendment between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated July 26, 2017 (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 28, 2017).
Sixth Amendment between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated March 16, 2018 (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 20, 2018).
Stock Option Agreement, between Warren Hosseinion, M.D. and Apollo Medical Holdings, Inc., dated March 28, 2014 (incorporated herein by
reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K/A filed on April 3, 2014).
Stock Option Agreement, between Adrian Vazquez, M.D. and Apollo Medical Holdings, Inc., dated March 28, 2014 (incorporated herein by
reference to Exhibit 10.18 to the Company’s Current Report on Form 8-K/A filed on April 3, 2014).
Physician Shareholder Agreement, granted and delivered by Warren Hosseinion, M.D., in favor of Apollo Medical Management, Inc. and Apollo
Medical Holdings, Inc., for the account of ApolloMed Hospitalists, dated March 28, 2014 (incorporated herein by reference to Exhibit 10.24 to the
Company’s Current Report on Form 8-K/A filed on April 3, 2014).
Second Amendment to Lease Agreement dated October 14, 2014 by and between Apollo Medical Holdings, Inc. and EOP-700 North Brand, LLC
(incorporated herein by reference to Exhibit 10.5 on Quarterly Report on Form 10-Q filed on November 14, 2014).
Lease Agreement, dated July 22, 2014, by and between Numen, LLC and Apollo Medical Management, Inc. (incorporated herein by reference to
Exhibit 10.01 to the Company’s Current Report on Form 8-K/A filed on December 8, 2014).
Lease Agreement, dated August 1, 2002, by and between Network Medical Management, Inc. and Medical Property Partner. (incorporated herein
by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
Lease Agreement, dated August 1, 2002, by and between Network Medical Management, Inc. and Medical Property Partner. (incorporated herein
by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
Lease Agreement Addendum, dated February 1, 2013, by and between Network Medical Management, Inc. and Medical Property Partner.
(incorporated herein by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
Change in Terms Agreement and Business Loan Agreement, dated April 9, 2016, by and between Network Medical Management, Inc. and
Preferred Bank. (incorporated herein by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
137
Exhibit No.
10.29
Description
Change in Terms Agreement and Business Loan Agreement, dated April 7, 2017, by and between Network Medical Management, Inc. and Preferred
Bank. (incorporated herein by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
10.30+
10.31+
10.32
10.33
10.34
10.35+
10.36+
10.37+
10.38+
10.39
10.40
10.41
Amended and Restated Hospitalist Participation Service Agreement made as of June 29, 2016 by and between ApolloMed Hospitalists, a Medical
Corporation, and Warren Hosseinion, M.D. (incorporated herein by reference to Exhibit 10.69 to the Company’s Annual Report on Form 10-K filed
on June 29, 2016).
Amended and Restated Hospitalist Participation Service Agreement made as of June 29, 2016 by and between ApolloMed Hospitalists, a Medical
Corporation, and Adrian Vazquez, M.D. (incorporated herein by reference to Exhibit 10.70 to the Company’s Annual Report on Form 10-K filed on
June 29, 2016).
Next Generation ACO Model Participation Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on January 20, 2017).
Form of Stockholder Lock-Up Agreement (incorporated herein by reference to Annex D 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).
Convertible Secured Promissory Note made as of October 13, 2017 by George M. Jayatilaka, M.D. (incorporated herein by reference to Exhibit
10.40 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
Offer Letter, dated June 5, 2018, between Apollo Medical Holdings, Inc. and Eric Chin (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed on August 14, 2018).
Board of Directors Agreement, dated June 21, 2018, between Apollo Medical Holdings, Inc. and Ernest A. Bates, M.D. (incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 26, 2018).
Board of Directors Agreement, dated January 11, 2019, between Apollo Medical Holdings, Inc. and Linda Marsh. (incorporated herein by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 17, 2019).
Board of Directors Agreement, dated January 11, 2019, between Apollo Medical Holdings, Inc. and John Chiang. (incorporated herein by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 17, 2019).
Loan Agreement, dated May 10, 2019, by and between Apollo Medical Holdings, Inc., a Delaware corporation and AP-AMH Medical Corporation,
a California professional medical corporation (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on May 13, 2019).
Tradename Licensing Agreement, dated May 10, 2019, by and between Apollo Medical Holdings, Inc., a Delaware corporation and AP-AMH
Medical Corporation, a California professional medical corporation (incorporated herein by reference to Exhibit 10.3 to the Company’s Current
Report on Form 8-K filed on May 13, 2019).
Administrative Services Agreement, dated May 10, 2019, by and between Network Medical Management, Inc., a California corporation and AP-
AMH Medical Corporation, a California professional medical corporation (incorporated herein by reference to Exhibit 10.4 to the Company’s
Current Report on Form 8-K filed on May 13, 2019).
138
Exhibit No.
10.42
Physician Shareholder Agreement, dated May 10, 2019, by and between Thomas Lam, M.D., Apollo Medical Holdings, Inc., a Delaware
corporation, Network Medical Management, Inc., a California corporation, and AP-AMH Medical Corporation, a California professional medical
corporation (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 13, 2019).
Description
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
Series A Preferred Stock Purchase Agreement, dated May 10, 2019, by and between AP-AMH Medical Corporation, a California professional
medical corporation and Allied Physicians of California, a Professional Medical Corporation, a California professional medical corporation
(incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 13, 2019).
Special Purpose Shareholder Agreement, dated May 10, 2019, by and between Allied Physicians of California, a Professional Medical Corporation,
a California professional medical corporation and AP-AMH Medical Corporation, a California professional medical corporation (incorporated
herein by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on May 13, 2019).
Stock Purchase Agreement, dated May 10, 2019, by and between Allied Physicians of California, a Professional Medical Corporation, a California
professional medical corporation and Apollo Medical Holdings, Inc., a Delaware corporation (incorporated herein by reference to Exhibit 10.8 to the
Company’s Current Report on Form 8-K filed on May 13, 2019).
Form of Amendment to Stockholder Lock-up Agreement (incorporated herein by reference to Exhibit 10.10 to the Company’s Quarterly Report on
Form 10-Q filed on August 9, 2019).
First Amendment to the Stock Purchase Agreement dated August 26, 2019, by and between Allied Physicians of California, a California
Professional Medical Corporation and Apollo Medical Holdings, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on August 29, 2019).
First Amendment to the Series A Preferred Stock Purchase Agreement dated August 26, 2019, by and between Allied Physicians of California, a
California Professional Medical Corporation and AP-AMH Medical Corporation, a Professional Medical Corporation (incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on August 29, 2019).
First Amendment to the Loan Agreement dated August 26, 2019, by and between Apollo Medical Holdings, Inc. and AP-AMH Medical
Corporation, a Professional Medical Corporation (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K
filed on August 29, 2019).
Credit Agreement dated as of September 11, 2019, by and among Apollo Medical Holdings, Inc., as Borrower, the Lenders from time to time party
thereto, and SunTrust Bank, in its capacity as administrative agent for the Lenders, as issuing bank and as swingline lender (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 12, 2019).
Guaranty and Security Agreement dated as of September 11, 2019, by and among Apollo Medical Holdings, Inc., as Borrower, and Network
Medical Management, Inc., as Guarantor, in favor of SunTrust Bank, as administrative agent for the Secured Parties (incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on September 12, 2019).
Second Amendment to Series A Stock Purchase Agreement dated as of September 9, 2019, by and between Allied Physicians of California, a
Professional Medical Corporation and AP-AMH Medical Corporation, a California professional medical corporation (incorporated herein by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on September 12, 2019).
First Amendment to Special Purpose Shareholder Agreement, dated as of September 11, 2019, by and between Allied Physicians of California, a
Professional Medical Corporation and AP-AMH Medical Corporation, a California professional medical corporation (incorporated herein by
reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on September 12, 2019).
139
Exhibit No.
10.54
First Amendment to Tradename Licensing Agreement, dated as of September 10, 2019, by and between Apollo Medical Holdings, Inc., a Delaware
corporation, and AP-AMH Medical Corporation, a California professional medical corporation (incorporated herein by reference to Exhibit 10.5 to
the Company's Current Report on Form 8-K filed on September 12, 2019).
Description
10.55
10.56
10.57
10.58
10.59
10.60
10.61+
10.62+
10.63+
10.64+
10.65+
10.66+
First Amendment to Administrative Services Agreement, dated as of September 10, 2019, by and between Network Medical Management, Inc., a
California corporation, and AP-AMH Medical Corporation, a California professional medical corporation (incorporated herein by reference to
Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on September 12, 2019).
Security Agreement, dated as of September 11, 2019, by and between Apollo Medical Holdings, Inc., a Delaware corporation, and AP-AMH
Medical Corporation, a California professional medical corporation (incorporated herein by reference to Exhibit 10.7 to the Company’s Current
Report on Form 8-K filed on September 12, 2019).
Certificate of Determination of Preferences of Series A Preferred Stock of Allied Physicians of California, a Professional Medical Corporation
(incorporated herein by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on September 12, 2019).
Voting and Registration Rights Agreement, dated as of September 11, 2019, by and between Apollo Medical Holdings, Inc., a Delaware
corporation, and Allied Physicians of California, a Professional Medical Corporation (incorporated herein by reference to Exhibit 10.9 to the
Company’s Current Report on Form 8-K filed on September 12, 2019).
Second Amendment to Loan Agreement, dated September 11, 2019, by and between Apollo Medical Holdings, Inc., a Delaware corporation and
AP-AMH Medical Corporation, a California professional medical corporation (incorporated herein by reference to Exhibit 10.10 to the Company's
Current Report on Form 8-K filed on September 12, 2019).
Form of Amendment to Stockholder Lock-up Agreement entered into on or about September 26, 2019 (incorporated herein by reference to Exhibit
10.14 to the Company’s Quarterly Report on Form 10-Q filed on November 8, 2019).
Board of Directors Agreement, dated September 29, 2019, with Matthew Mazdyasni (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on September 30, 2019).
Employment Agreement, dated June 8, 2020, between Network Medical Management, Inc. and Kenneth Sim, M.D. (incorporated herein by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2020).
Employment Agreement, dated June 8, 2020, between Network Medical Management, Inc. and Thomas Lam, M.D. (incorporated herein by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2020).
Employment Agreement, dated June 8, 2020, between Network Medical Management, Inc. and Eric Chin (incorporated herein by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2020).
Employment Agreement, dated June 8, 2020, between Network Medical Management, Inc. and Adrian Vazquez, M.D. (incorporated herein by
reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2020).
Employment Agreement, dated June 8, 2020, between Network Medical Management, Inc. and Albert Young, M.D. (incorporated herein by
reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2020).
140
Exhibit No.
10.67+
14.1*
16.1
21.1*
23.1*
23.2*
24.1*
31.1*
31.2*
31.3*
32**
Description
Employment Agreement, dated June 8, 2020, between Network Medical Management, Inc. and Brandon Sim (incorporated herein by reference to
Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on August 10, 2020).
The Company's Code of Ethics.
Letter, dated April 27, 2020, from BDO USA, LLP to the Securities and Exchange Commission (incorporated herein by reference to Exhibit 16.1
to the Company’s Current Report on Form 8-K filed on April 28, 2020).
Subsidiaries of Apollo Medical Holdings, Inc.
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.
Power of Attorney (included on the signatures page of this Annual Report on Form 10-K).
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officers and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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 Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith
** Furnished herewith
+ Management contract or compensatory plan, contract or arrangement
† 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.
141
Item 16. Form 10-K Summary
None.
142
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 12, 2021
By:
/s/ Kenneth Sim
APOLLO MEDICAL HOLDINGS, INC.
Date: March 12, 2021
By:
/s/ Thomas Lam
Kenneth Sim, M.D.
Executive Chairman and Co-Chief Executive Officer
(Principal Executive Officer)
Thomas Lam, M.D., M.P.H.
Co-Chief Executive Officer and President
(Principal Executive Officer)
143
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Kenneth Sim, M.D., and
Thomas Lam, M.D., M.P.H., and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
SIGNATURE
/s/ Kenneth Sim
Kenneth Sim, M.D
/s/ Thomas Lam
Thomas Lam, M.D., M.P.H.
/s/ Eric Chin
Eric Chin
/s/ Ernest Bates
Ernest Bates, M.D.
/s/ John Chiang
John Chiang
/s/ Michael Eng
Michael Eng
/s/ Mark Fawcett
Mark Fawcett
/s/ Mitchell Kitayama
Mitchell Kitayama
/s/ Linda Marsh
Linda Marsh
/s/ Matthew Mazdyasni
Matthew Mazdyasni
/s/ David Schmidt
David Schmidt
/s/ Li Yu
Li Yu
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
TITLE
Executive Chairman, Co-Chief Executive Officer (Principal
Executive Officer) and Director
DATE
March 12, 2021
Co-Chief Executive Officer (Principal Executive Officer),
President, and Director
March 12, 2021
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
March 12, 2021
Director
Director
Director
Director
Director
Director
Director
Director
Director
144
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
March 12, 2021
145
APOLLO MEDICAL HOLDINGS, INC.
CODE OF ETHICS
(adopted April 19, 2018)
Introduction
The Board of Directors of Apollo Medical Holdings, Inc. (the “Company”) has adopted this Code of Ethics (this “Code”) for its directors, officers and other employees
(individually, an “Apollo Party” and collectively, “Apollo Parties”). As used herein, any principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions are sometimes also referred to as the “Senior Financial Officers.”
This Code has been reasonably designed to deter wrongdoing and to promote:
• Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
• Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the Securities and Exchange
Commission and in other public communications made by the Company;
• Compliance with applicable governmental laws, rules and regulations;
• The prompt internal reporting to an appropriate person or persons identified in this
Code of violations of this Code; and
• Accountability for adherence to this Code.
I. Honest and Ethical Conduct
Apollo Parties are expected to act and perform their duties ethically, honestly and with the utmost integrity. Honest conduct is free from fraud and deception. Ethical
conduct conforms to accepted professional standards and includes the ethical handling of actual and apparent conflicts of interest between personal and professional
relationships, as discussed in greater detail below.
II. Compliance with Laws, Rules and Regulations
It is the policy of the Company to comply with all applicable laws, rules and regulations, and it is the personal responsibility of each Apollo Party to adhere to all
standards and restrictions imposed by these laws, rules and regulations. In particular, each Apollo Party will adhere to all laws, rules and regulations relating to accounting and
auditing matters. Any Apollo Party with questions about applicability or interpretation of any law, rule or regulation should contact a member of the Company’s upper
management.
In performing their job duties, Apollo Parties are expected to use good judgment to act, at all times and in all ways, in the best interests of the Company. A “conflict of
interest” exists where an Apollo Party’s personal interest, or the interest of a family member, comes into conflict with or interferes with the best interests of the Company. For
example, a conflict of interest may occur when an Apollo Party or family member receives a personal
III. Conflicts of Interest
benefit as a result of the Apollo Party’s position with the Company. A conflict of interest may also arise from an Apollo Party’s business or personal relationship with a
competitor, supplier, customer, business partner or other Apollo Party if the relationship impairs the Apollo Party’s objective business judgment, or from the receipt of gifts or
services in certain situations.
Any Apollo Party who is aware of a conflict of interest, or is concerned that a conflict of interest might develop, must discuss the matter with a supervisor or a member
of the Company’s upper management promptly. Senior Financial Officers may, in addition, discuss the matter with the Audit Committee of the Board of Directors of the
Company (the “Audit Committee”).
IV. Insider Trading
Federal and state laws prohibit trading in securities by persons who have material information that is not generally known or available to the public. Apollo Parties
may not (a) trade in stock or other securities while in possession of material nonpublic information, (b) pass such information on to others without the express authorization of
the Company, or (c) recommend to others that they trade in stock or other securities of any company based on material nonpublic information.
The Company has adopted an Insider Trading Policy to implement this policy and assist in compliance with insider trading laws. All Apollo Parties are required to
review and follow the Company’s Insider Trading Policy, and certain Apollo Parties must comply with designated blackout periods for trading described in the Insider Trading
Policy when trading in Company securities.
The Company provides equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind.
V. Discrimination and Harassment
VI. Health and Safety
The Company strives to provide a clean, safe and healthy work environment to all Apollo
Parties. Each Apollo Party is responsible for maintaining a safe and healthy workplace for all other Apollo Parties by following safety and health rules and practices, and
reporting any accidents or injuries, and any unsafe equipment, practices or conditions.
VII. Bribery; Payments to Government Personnel
Apollo Parties may not bribe anyone for any reason, whether in dealings with governments or in the private sector. The United States Foreign Corrupt Practices Act,
and similar laws in other countries, prohibit offering or giving anything of value to government officials in order to secure business. Apollo Parties may not make any illegal
payments to government personnel, whether directly or through a third party, and should contact a member of upper management for guidance when conducting business with
government officials of any country.
VIII. Recordkeeping, Reporting and Financial Integrity
The Company’s books, records, accounts and financial statements must be appropriately maintained in reasonable detail at all times, and must properly reflect the
Company’s transactions and conform to the Company’s system of internal controls and applicable law. The Company’s public financial reports must contain full, fair, accurate,
timely and understandable disclosure, as required by law.
IX. Additional Provisions Applicable to Senior Financial Officers
Senior Financial Officers are responsible for ensuring that the disclosures in the Company’s periodic reports are full, fair, accurate, timely, and understandable, as
required by law. In doing so, Senior Financial Officers must take all such action reasonably necessary to (I) establish and comply with disclosure controls and procedures, as
well a s accounting and financial controls, that are designed t o ensure that all material information related t o the Company is made known to them; (ii) confirm that the
Company’s periodic reports comply with the requirements of Sections 13(a) and/or 15(d) of the Securities Exchange Act of 1934; and (iii) ensure that the information in the
Company’s periodic reports fairly presents in all material respects the financial condition and results of operations of the Company.
Senior Financial Officers shall not knowingly (I) make, or permit or direct any other person to make, materially false or misleading entries in the financial statements
or records of the Company or any of its subsidiaries; (ii) sign, or permit or direct another person to sign, a document containing materially false and misleading information; or
(iv) falsely respond, or fail to respond, to specific inquiries from the Company’s independent auditor or outside counsel.
X. Internal Reporting
Apollo Parties shall take all appropriate actions to stop known misconduct by fellow
Apollo Parties that violate this Code. Apollo Parties shall report any known or suspected misconduct to their supervisors or a member of the Company’s upper management, or,
in the case of misconduct by a Senior Financial Officer, to the Chair of the Audit Committee.
Apollo Parties are encouraged to report any breach of this Code. The Company will not retaliate or allow retaliation for any reports made in good faith.
XI. Accountability
All Apollo Parties will be held strictly accountable for adherence to this Code. Questions concerning this Code may be directed to a member of upper management or
the Audit Committee. Violations of this Code may result in disciplinary action, including termination, and if warranted, legal proceedings. This Code is a statement of certain
fundamental principles that govern the Apollo Parties in the conduct of the Company’s business. It does not create any rights in any employee, customer, supplier, competitor,
stockholder or any other person or entity. The Audit Committee will investigate violations and appropriate action will be taken in the event of any violation of this Code.
The Board of Directors shall have the sole authority to approve any waiver or deviation from this Code for any Apollo Party, and any amendment or waiver of this
Code shall be promptly disclosed as required by law. Specifically, any waiver or modification of this Code for a Senior Financial Officer will be promptly disclosed to
stockholders as required by law, regulation or rule of a stock exchange on which the Company’s securities are traded.
XII. Waivers and Amendments
Subsidiaries
Exhibit 21.1
Entity
Jurisdiction of Incorporation
Network Medical Management, Inc.
Apollo Medical Management, Inc.
APAACO, Inc.
Apollo Care Connect, Inc.
ApolloMed Accountable Care Organization, Inc.*
Allied Pacific Hospice, LLC
Allied Physicians ACO, LLC
APCN-ACO, Inc.
99 Medical Equipment, Healthcare Supplies & Wheelchair Center
Apollo Palliative Services, LLC
Best Choice Hospice Care, LLC
Holistic Care Home Health Agency, Inc.
Pulmonary Critical Care Management, Inc.
Verdugo Medical Management, Inc.
*
80% ownership
California
Delaware
Delaware
Delaware
California
California
California
California
California
California
California
California
California
California
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
a. Registration Statement (Form S-3 No. 333-231109) of Apollo Medical Holdings, Inc.,
b. Registration Statement (Form S-3 No. 333-228432) of Apollo Medical Holdings, Inc.,
c. Registration Statement (Form S-3 No. 333-229895) of Apollo Medical Holdings, Inc.,
d. Registration Statement (Form S-4 No. 333-219898) of Apollo Medical Holdings, Inc.,
e. Registration Statement (Form S-8 No. 333-153138) pertaining to the 2008 Professional/Consultant Stock Compensation Plan of Apollo Medical Holdings, Inc.,
f. Registration Statement (Form S-8 No. 333-217719) pertaining to the 2010 Equity Incentive Plan and 2015 Equity Incentive Plan of Apollo Medical Holdings, Inc.,
g. Registration Statement (Form S-8 No. 333-221900) pertaining to the 2013 Equity Incentive Plan of Apollo Medical Holdings, Inc., and
h. Registration Statement (Form S-8 No. 333-221915) pertaining to Written Compensation Contracts Between the Registrant and Certain Directors, Employees and
Consultants of Apollo Medical Holdings, Inc.;
of our reports dated March 12, 2021, with respect to the consolidated financial statements of Apollo Medical Holdings, Inc. and the effectiveness of internal control over
financial reporting of Apollo Medical Holdings, Inc. included in this Annual Report (Form 10-K) of Apollo Medical Holdings, Inc. for the year ended December 31, 2020.
/s/ Ernst & Young LLP
Los Angeles, California
March 12, 2021
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
Apollo Medical Holdings, Inc.
Alhambra, California
We consent to the incorporation by reference in the following Registration Statements on Form S-4 (No. 333-219898), Form S-8 (No. 333-153138, No. 333-217719, No. 333-
221900, No. 333-221915) and Form S-3 (No. 333-231109, No. 333-228432, and No. 333-229895) of Apollo Medical Holdings, Inc. (“Company”) of our report dated March 16,
2020, relating to the consolidated financial statements, which appears in this Form 10-K.
/s/ BDO USA, LLP
Los Angeles, California
March 12, 2021
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Kenneth Sim, M.D., certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
I have reviewed this annual report on Form 10-K of Apollo Medical Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
DATE:
March 12, 2021
/s/ Kenneth Sim
Kenneth Sim, M.D.
Executive Chairman and
Co-Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Thomas Lam, M.D., M.P.H., certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
I have reviewed this annual report on Form 10-K of Apollo Medical Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
DATE:
March 12, 2021
/s/ Thomas Lam
Thomas Lam, M.D., M.P.H.
Co-Chief Executive Officer and President
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.3
I, Eric Chin, certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
I have reviewed this annual report on Form 10-K of Apollo Medical Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
DATE:
March 12, 2021
/s/ Eric Chin
Eric Chin
Chief Financial Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERS AND PRINCIPAL FINANCIAL OFFICER
Exhibit 32
PURSUANT TO
18 U.S.C. SECTION 1350.
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth Sim, M.D., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on
Form 10-K of Apollo Medical Holdings, Inc. for the year ended December 31, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Apollo
Medical Holdings, Inc.
DATE:
March 12, 2021
/s/ Kenneth Sim
Kenneth Sim, M.D.
Executive Chairman and
Co-Chief Executive Officer
(Principal Executive Officer)
I, Thomas Lam, M.D., M.P.H., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report on Form 10-K of Apollo Medical Holdings, Inc. for the year ended December 31, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of
Apollo Medical Holdings, Inc.
DATE:
March 12, 2021
/s/ Thomas Lam
Thomas Lam, M.D., M.P.H.
Co-Chief Executive Officer and President
(Principal Executive Officer)
I, Eric Chin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K
of Apollo Medical Holdings, Inc. for the year ended December 31, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Apollo Medical
Holdings, Inc.
DATE:
March 12, 2021
/s/ Eric Chin
Eric Chin
Chief Financial Officer
(Principal Financial Officer)