| | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, |
| | | | | 2022 | | 2021 |
| | | | | | | |
| Total losses recognized on equity securities | | | | | $ | (23,713) | | | $ | (10,745) | |
| Gains recognized on equity securities sold | | | | | 2,272 | | | — | |
| Unrealized losses recognized on equity securities held at end of period | | | | | $ | (21,441) | | | $ | (10,745) | |
Receivables, Receivables – Related Parties, Other Receivables, Loan Receivable, and Loan Receivable - Related Party
The Company’s receivables are comprised of accounts receivable, capitation and claims receivable, risk pool settlements, incentive receivables, management fee income, and other receivables. Accounts receivable are recorded and stated at the amount expected to be collected.
The Company’s receivables – related parties are comprised of risk pool settlements, management fee income, incentive receivables, and other receivables. Receivables – related parties are recorded and stated at the amount expected to be collected.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The Company’s loan receivable and loan receivable - related party consists of promissory notes that accrue interest per annum. As of December 31, 2022, promissory notes are expected to be collected within 12 months.
Capitation and claims receivables relate to each health plan’s capitation and are received by the Company in the month following the month of service. Risk pool settlements and incentive receivables mainly consist of the Company’s full-risk pool receivable that is recorded quarterly based on reports received from the Company’s hospital partners and management’s estimate of the Company’s portion of the estimated risk pool surplus for open performance years. Settlement of risk pool surplus or deficits occurs approximately 18 months after the risk pool performance year is completed. Other receivables consist of recoverable claims paid related to the 2021 APAACO performance year to be administered following instructions from CMS for the NGACO program, fee-for-services (“FFS”) reimbursement for patient care, certain expense reimbursements, transportation reimbursements from the hospitals, and stop-loss insurance premium reimbursements.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends, and changes in customer payment patterns to evaluate the adequacy of these reserves. The Company also regularly analyzes the ultimate collectability of accounts receivable after certain stages of the collection cycle using a look-back analysis to determine the amount of receivables subsequently collected and adjustments are recorded when necessary. Reserves are recorded primarily on a specific identification basis.
Receivables are recorded when the Company is able to determine amounts receivable under applicable contracts and agreements based on information provided and collection is reasonably likely to occur. In regard to the credit loss standard, the Company continuously monitors its collections of receivables, and our expectation is that the historical credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses that would be estimated under the current expected credit losses (“CECL”) model.
Concentrations of Credit Risks
The Company disaggregates revenue from contracts by service type and payor type. This level of detail provides useful information pertaining to how the Company generates revenue by significant revenue stream and by type of direct contracts. The consolidated statements of income present disaggregated revenue by service type. The following table presents disaggregated revenue generated by each payor type (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Commercial | $ | 171,723 | | | $ | 138,333 | | | $ | 108,851 | |
| Medicare | 633,463 | | 307,286 | | 271,596 |
| Medicaid | 280,083 | | 283,311 | | 269,079 |
| Other third parties | 58,894 | | 44,985 | | 37,654 |
| Revenue | $ | 1,144,163 | | | $ | 773,915 | | | $ | 687,180 | |
The Company had major payors that contributed the following percentages of net revenue:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Payor A | *% | | 12.5 | % | | 12.5 | % |
| Payor B | *% | | *% | | 10.9 | % |
| Payor C | 34.2% | | 11.9 | % | | 13.1 | % |
| Payor D | *% | | 15.3 | % | | 16.9 | % |
* Less than 10% of total net revenues
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The Company had major payors that contributed to the following percentages of net receivables and receivables - related parties:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| Payor C | | 25.0 | % | | * |
| Payor E | | 50.0 | % | | 45.0 | % |
| Payor F | | ** | | 30.0 | % |
* Less than 10% of total receivables and receivables - related parties, net
** Payor E and F have been combined in 2022 under Payor E
Land, Property, and Equipment, Net
Land is carried at cost and is not depreciated as it is considered to have an indefinite useful life.
Property and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets ranging from three to thirty-nine years. Leasehold improvements are amortized on a straight-line basis over the shorter of the terms of the respective leases or the expected useful lives of those improvements.
Maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the asset cost and related accumulated depreciation and amortization is removed from the accounts, and any related gain or loss is included in the determination of consolidated net income.
Fair Value Measurements of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, fiduciary cash, investment in marketable securities, receivables, loans receivable, accounts payable, certain accrued expenses, finance lease obligations, and long-term debt. The carrying values of the financial instruments classified as current in the accompanying consolidated balance sheets are considered to be at their fair values, due to the short maturity of these instruments. The carrying amounts of finance lease obligations and long-term debt approximate fair value as they bear interest at rates that approximate current market rates for debt with similar maturities and credit quality.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”), applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. ASC 820 establishes a fair value hierarchy for disclosure of the inputs to valuations used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2 —Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 —Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2022 are presented below (in thousands):
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | |
| Money market accounts* | | $ | 135,235 | | | $ | — | | | $ | — | | | $ | 135,235 | |
| | | | | | | | |
| Marketable securities – equity securities | | 5,567 | | | — | | | — | | | 5,567 | |
| Contingent equity securities | | — | | | — | | | 1,900 | | | 1,900 | |
| Interest rate swaps | | — | | | 3,164 | | | — | | | 3,164 | |
| Total assets | | $ | 140,802 | | | $ | 3,164 | | | $ | 1,900 | | | $ | 145,866 | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| APCMG contingent consideration | | — | | | — | | | 1,000 | | | 1,000 | |
| AAMG cash contingent consideration (see Note 3) | | — | | | — | | | 5,851 | | | 5,851 | |
| VOMG contingent consideration (see Note 3) | | — | | | — | | | 17 | | | 17 | |
| Total liabilities | | $ | — | | | $ | — | | | $ | 6,868 | | | $ | 6,868 | |
The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2021 are presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | |
| Money market accounts* | | $ | 114,665 | | | $ | — | | | $ | — | | | $ | 114,665 | |
| Marketable securities – certificates of deposit | | 25,024 | | | — | | | — | | | 25,024 | |
| Marketable securities – equity securities | | 24,123 | | | 4,270 | | | — | | | 28,393 | |
| Contingent equity securities | | — | | | — | | | 4,270 | | | 4,270 | |
| Warrants | | — | | | 1,145 | | | — | | | 1,145 | |
| Total Assets | | $ | 163,812 | | | $ | 5,415 | | | $ | 4,270 | | | $ | 173,497 | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Interest rate swaps | | $ | — | | | $ | 1,071 | | | $ | — | | | $ | 1,071 | |
| APCMG contingent consideration | | $ | — | | | $ | — | | | $ | 1,000 | | | $ | 1,000 | |
| Total liabilities | | $ | — | | | $ | 1,071 | | | $ | 1,000 | | | $ | 2,071 | |
* Included in cash and cash equivalents
There have been no changes in Level 1, Level 2, or Level 3 classification and no changes in valuation techniques for these assets and liabilities for the year ended December 31, 2022.
The change in the fair value of Level 3 liabilities for the year ended December 31, 2022 was as follows (in thousands):
| | | | | |
| Amount |
| Balance at January 1, 2022 | $ | 1,000 | |
| AAMG cash contingent consideration (see Note 3) | 5,851 | |
| VOMG contingent consideration (see Note 3) | 17 | |
| Balance at December 31, 2022 | 6,868 | |
Intangible Assets and Long-Lived Assets
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Intangible assets with finite lives include network-payor relationships, management contracts, member relationships, subscriber relationships, and developed technology and are stated at cost, less accumulated amortization, and impairment losses. These intangible assets are amortized using the accelerated method based on the discounted cash flow rate or using the straight-line method.
Intangible assets with finite lives also include a patient management platform, as well as trade names and trademarks, whose valuations were determined using the cost to recreate method and the relief from royalty method, respectively. These assets are stated at cost, less accumulated amortization, and impairment losses, and are amortized using the straight-line method.
Finite-lived intangibles and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the carrying value of the asset to its estimated fair value. Fair value is determined based on appropriate valuation techniques. The company determined that there was no impairment on its finite-lived intangible or long-lived assets during the years ended December 31, 2022, 2021 and 2020.
Goodwill and Indefinite-Lived Intangible Assets
Under ASC 350, Intangibles – Goodwill and Other, goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment.
At least annually, at the Company’s fiscal year-end, or sooner if events or changes in circumstances indicate that an impairment has occurred, the Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments for each of the Company’s three reporting units (i) MSOs, (ii) IPAs, and (iii) ACOs. The Company is required to perform a quantitative goodwill impairment test only if the conclusion from the qualitative assessment is that it is more likely than not that a reporting unit’s fair value is less than the carrying value of its assets. Should this be the case, a quantitative analysis is performed to identify whether a potential impairment exists by comparing the estimated fair values of the reporting units with their respective carrying values, including goodwill.
An impairment loss is recognized if the implied fair value of the asset being tested is less than its carrying value. In this event, the asset is written down accordingly. The fair values of goodwill are determined using valuation techniques based on estimates, judgments, and assumptions management believes are appropriate in the circumstances.
At least annually, indefinite-lived intangible assets are tested for impairment. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible asset exceeds its fair value. The fair values of indefinite-lived intangible assets are determined using valuation techniques based on estimates, judgments, and assumptions management believes are appropriate in the circumstances. One reporting unit within our healthcare delivery segment had a negative carrying amount of net assets as of September 30, 2022 and goodwill of approximately $116.5 million.
The Company had no impairment of its goodwill or indefinite-lived intangible assets during the years ended December 31, 2022, 2021 and 2020.
Investments in Other Entities – Equity Method
The Company accounts for certain investments using the equity method of accounting when it is determined that the investment provides the Company with the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the investee and is recognized in the accompanying consolidated statements of income under “Income (loss) from equity method investments” and also is adjusted by contributions to and distributions from the investee.
Equity method investments are subject to impairment evaluation. There was no impairment loss recorded related to equity method investments for the years ended December 31, 2022, 2021, and 2020.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Investments in Privately Held Entities
The Company accounts for certain investments using the cost method of accounting when it is determined that the investment provides the Company with little or no influence over the investee. Under the cost method of accounting, the investment is measured at cost, adjusted for observable price changes and impairments, with changes recognized in net income. The investments in privately held entities that do not report net asset value are subject to qualitative assessment for indicators of impairments.
Medical Liabilities
APC, Alpha Care, Accountable Health Care, APCMG, Jade, and AAMG (“consolidated IPAs”) and APAACO are responsible for integrated care that the associated physicians and contracted hospitals provide to their enrollees. The consolidated IPAs and APAACO provide integrated care to HMOs, Medicare, and Medi-Cal enrollees through a network of contracted providers under sub-capitation and direct patient service arrangements. Medical costs for professional and institutional services rendered by contracted providers are recorded as cost of services, excluding depreciation and amortization, in the accompanying consolidated statements of income.
An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in the accompanying consolidated balance sheets. Medical liabilities include claims reported as of the balance sheet date and estimated IBNR claims. Such estimates are developed using actuarial methods and are based on numerous variables, including the utilization of healthcare services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and other factors. The estimation methods and the resulting reserves are periodically reviewed and updated. Many of the medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such differing interpretations may not come to light until a substantial period of time has passed following the contract implementation.
Fiduciary Cash and Payable
The consolidated IPAs collect cash from health plans on behalf of their sub-IPAs and providers and pass the money through to them. The fiduciary cash balance of $8.1 million and $10.5 million as of December 31, 2022 and 2021, respectively, is presented within prepaid expenses and other current assets and the related payable is presented as fiduciary payable in the accompanying consolidated balance sheets.
Derivative Financial Instruments
Interest Rate Swap Agreements
The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. Refer to Note 10 - “Credit Facility, Bank Loans, and Lines of Credit,” for further information on our debt. Interest rate swap agreements are not designated as hedging instruments. Changes in the fair value on these contracts are recognized as unrealized gain or loss on investments in the accompanying consolidated statements of income and reflected in the accompanying consolidated statements of cash flows as unrealized gain or loss on interest rate swaps.
The estimated fair value of the interest rate swap agreements was determined using Level 2 inputs. As of December 31, 2022, the fair value of the interest rate swap was $3.2 million and is presented within other assets in the accompanying consolidated balance sheets. As of December 31, 2021, the fair value was $1.1 million and is presented within other long-term liabilities in the accompanying consolidated balance sheets.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Warrants
In September 2021, ApolloMed and Nutex entered into a stock purchase agreement in which ApolloMed purchased shares of common stock and warrants for $3.0 million. The purchased warrants are considered derivatives but are not designated as hedging instruments. Changes in the fair value on these contracts are recognized as unrealized gain or loss on investments in the accompanying consolidated statements of income and the accompanying consolidated statements of cash flows. The warrants are classified as a Level 2 instrument as the estimated fair value of the warrants were determined using the Black-Scholes option pricing model and inputs from observable market data. In May 2022, the Company exercised the warrants, and the shares were subsequently presented within investments in marketable securities on the accompanying consolidated balance sheets. The shares are classified as Level 1 since the quoted market prices from reputable third-party brokers are available in an active market and unadjusted.
Contingent Equity Securities
In addition to the common stock and warrants purchased under the stock purchase agreement between ApolloMed and Nutex, ApolloMed is entitled to additional common stock if Nutex didn’t pay NMM management fees exceeding a threshold by the end of December 31, 2022. The contingent equity securities are considered to be derivatives but are not designated as hedging instruments. Changes in the fair value on these contracts are recognized as unrealized gain or loss on investments in the accompanying consolidated statements of income and accompanying consolidated statements of cash flows. The Company determined the fair value of the contingent equity security using a probability-weighted model which includes significant unobservable inputs (Level 3). Specifically, the Company considered various scenarios of recognizing management fees and assigned probabilities to each such scenario in determining fair value. Based on the outcome, the Company determined the probability of the metric being achieved is 0%. As of December 31, 2022 and December 31, 2021, the contingent equity securities were valued at $1.9 million and $4.3 million and is presented within prepaid and other current assets in the accompanying consolidated balance sheets. For the years ended December 31, 2022 and 2021, the Company recognized unrealized loss of $2.4 million and $0, respectively.
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. 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, GPDC revenue, management fee income, and FFS revenue. Revenue is recorded in the period in which services are rendered or the period in which the Company is obligated to provide services. The form of billing and related risk of collection for such services may vary by type of revenue and the customer. The following is a summary of the principal forms of the Company’s billing arrangements and how revenue is recognized for each.
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
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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 fewer 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.
GPDC Capitation Revenue
CMS contracts with Direct Contracting Entities (“DCEs”), which are composed of healthcare providers operating under a common legal structure and accepts financial accountability for the overall quality and cost of medical care furnished to Medicare FFS beneficiaries aligned to the entity. The combination of the FFS model and the GPDC model changes the distribution of responsibilities, risks, costs, and rewards among CMS, DCEs, and providers. By entering into a contract with CMS, a DCE voluntarily takes on operational, financial, and legal responsibilities and risks that no party has, individually or collectively, under the existing FFS model. Each DCE bears the economic costs, and reaps the economic rewards, of fulfilling its responsibilities and managing its risks as a DCE. APAACO has applied, and been accepted, to participate in the GPDC Model for Performance Year 2022, beginning January 1, 2022.
For each performance year, CMS will pay a total benchmark amount, determined unilaterally by CMS in advance but subject to prospective adjustments throughout the year, for the totality of care provided to the DCE’s population of aligned beneficiaries over the course of that year. The benchmark is net of a quality withholding applied by CMS. At the end of each performance year, a portion, or all, of the quality withholding can be earned based on APAACO’s performance. GPDC capitation revenue is recognized based on the estimated transaction price to transfer the service for a distinct increment of the series (i.e., month) and is recognized net of quality incentives/penalties. GPDC capitation revenue is recognized in the accompanying consolidated statements of income under capitation, net.
Risk Pool Settlements and Incentives
APC and Accountable Health Care enter into full-risk capitation arrangements with certain health plans and local hospitals, which are administered by a third-party, where the hospital is responsible for providing, arranging and paying for institutional risk and the IPA is responsible for providing, arranging, and paying for professional risk. Under a full-risk pool-sharing agreement, the IPA generally receives a percentage of the net surplus from the affiliated hospital’s risk pools with HMOs after deductions for the affiliated hospital’s costs. Advance settlement payments are typically made quarterly in arrears if there is a surplus. The Company’s risk pool settlements under arrangements with health plans and hospitals are recognized using the most likely amount methodology and amounts are only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The assumptions for historical 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, Accountable Health Care and Alpha Care participate 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 the IPA is responsible for rendering professional services, but the health plan does not enter into a capitation arrangement with a hospital and therefore the health plan retains the institutional risk. Shared-risk deficits, if any, are not payable until and unless (and only to the extent) risk-sharing surpluses are generated. At the termination of the HMO contract, any accumulated deficit will be extinguished.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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 the IPA, the adjustments and/or the withheld amounts are unpredictable and as such APC, Accountable Health Care, and Alpha Care’s risk-share revenues are deemed to be fully constrained until they are notified of the amount by the health plan. Final settlement of risk pools for prior contract years generally occur 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
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-like AIPBP payments from CMS on a monthly basis to pay claims from in-network providers. The Company records such AIPBPs 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, while claims from APAACO’s in-network contracted providers are paid by APAACO. 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 AIPBP revenues monthly. Excess AIPBPs over claims paid, plus an estimate for the related IBNR claims are deferred and recorded as a liability until actual claims are paid or incurred. CMS will determine if there were any excess AIPBPs 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 an NGACO Participation Agreement between APAACO and CMS (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 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 will 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.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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 that will likely be recognized in the future and therefore this shared risk pool revenue is considered fully constrained. With the ending of the NGACO Model on December 31, 2021, the Company no longer receives AIPBPs but remains eligible to recognize any shared savings or loss for performance year 2021 upon issuance of the settlement report from CMS. Pursuant to the Participation Agreement, the Company recognized $48.8 million related to savings from the 2021 performance year as revenue in risk pool settlements and incentives in the accompanying consolidated statements of income for the year ended December 31, 2022.
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 gross revenue or fee collections, or amounts fixed on a monthly, quarterly, or annual basis. The revenue may include variable arrangements measuring factors, such as hours staffed, patient visits, or collections per visit, against benchmarks, and, in certain cases, may be subject to achieving quality metrics or fee collections. The Company recognizes such variable supplemental revenues in the period when such amounts are determined to be fixed and therefore contractually obligated as payable by the customer under the terms of the applicable agreement.
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 terms ranging from one to 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.
Fee-for-Service Revenue
FFS revenue represents revenue earned under contracts in which the professional component of charges for medical services rendered by the Company’s affiliated physician-owned medical groups are billed and collected from third-party payors, hospitals, and patients. 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
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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 the patients, to whom services are provided, in the period are insured and the 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 statements 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, contract assets are comprised of receivables and receivables - related parties.
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.
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, 2022, the Company’s contract liability balance was $0.5 million. Contract liability was $16.8 million as of December 31, 2021, of which $16.3 million was related to NGACO. Approximately $16.8 million of the Company’s contracted liability accrued in 2021 has been recognized as revenue during the year ended December 31, 2022. Contract liability is presented within the accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Income Taxes
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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. From time to time, the Company issues shares of its common stock to its employees, directors, and consultants, which shares may be subject to the Company’s repurchase right (but not obligation), that lapses based on time-based and performance-based vesting schedules. The value of share-based awards is recognized as compensation expense and adjusted for forfeitures as they occur. Compensation expense for time-based awards are recognized on a cumulative straight-line basis over the vesting period of the awards. Share-based awards with performance conditions are recognized to the extent the performance conditions are probable of being achieved. Compensation expense for performance-based awards are recognized on an accelerated attribution method. The fair value of options granted are determined using the Black-Scholes option pricing model and include several assumptions, including expected term, expected volatility, expected dividends, and risk-free rates. The expected term is presumed to be the midpoint between the vesting date and the end of the contractual term. The expected stock price volatility is determined based on an average of historical volatility. The expected dividend yield is based on the Company’s expected dividend payouts. The risk-free interest rate is based on the U.S. Constant Maturity curve over the expected term of the option at the time of grant.
Basic and Diluted Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income attributable to holders of the Company’s common stock by the weighted-average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed using the weighted-average number of shares of common stock outstanding, plus the effect of dilutive securities outstanding during the periods presented, using the treasury stock method. Refer to Note 17 — “Earnings Per Share” for a discussion of shares treated as treasury shares for accounting purposes.
Non-controlling Interests
The Company consolidates entities in which the Company has a controlling financial interest. The Company consolidates subsidiaries in which the Company holds, directly or indirectly, more than 50% of the voting rights, and VIEs in which the Company is the primary beneficiary. Non-controlling interests represent third-party equity ownership interests (including equity ownership interests held by certain VIEs) in the Company’s consolidated entities. Net income attributable to non-controlling 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 non-controlling interests in APC as mezzanine equity in the consolidated financial statements. As of December 31, 2022 and 2021, APC’s shares were not redeemable nor was it probable the shares would become redeemable.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Leases
The Company determines if an arrangement is a lease at its inception. The expected term of the lease used for computing the lease liability and right-of-use asset and determining the classification of the lease as operating or financing may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company elected practical expedients for ongoing accounting that is provided by the new standard comprised of the following: (i) the election for classes of underlying asset to not separate non-lease components from lease components, and (ii) the election for short-term lease recognition exemption for all leases under twelve month 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.
Beneficial Interest
In April 2020, when UCAP, a 100% owned subsidiary of APC, sold its 48.9% ownership interest in UCI, APC received a beneficial interest in the equity method investment sold, pursuant to the terms of the stock purchase agreement. The estimated fair value of such interest in April 2020 was $15.7 million and was included in other assets in the accompanying consolidated balance sheets. In June 2021, UCI’s gross margin for the year ended December 31, 2020, was assessed and beneficial interest was concluded to not be collectible. The $15.7 million was written off and expensed in other income (expense) in the accompanying consolidated statements of income during the year ended December 31, 2021.
Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued Accounting Standards Update (“ASU”) No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). This ASU requires the entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted ASU 2021-08 on January 1, 2022. The adoption of ASU 2021-08 did not have a material impact on the consolidated financial statements.
With the exception of the new standard 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.
Recent Accounting Pronouncements Not Yet Adopted
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.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
3. Business Combinations and Goodwill
AAMG
On October 31, 2022, AP-AMH 2, a VIE of the Company, acquired 100% of the equity interest in AAMG. AAMG is an IPA operating in Northern California. The purchase price consists of cash funded upon close of the transaction and additional cash consideration (“AAMG cash contingent consideration”) and stock consideration (“AAMG stock contingent consideration”) contingent on AAMG meeting revenue and capitated member metrics for fiscal year 2023 and 2024. The Company determined the fair value of the cash and stock contingent consideration using a probability-weighted model that includes significant unobservable inputs (Level 3). Specifically, the Company considered various scenarios of revenue and assigned probabilities to each such scenario in determining fair value. As of December 31, 2022, the cash contingent consideration is valued at $5.9 million and was included within other long term liabilities in the accompanying consolidated balance sheets. The stock contingent consideration is valued at $5.6 million and is included in additional paid in capital in the accompanying consolidated balance sheets.
VOMG
On October 14, 2022, a sole equity holder acquired 100% of the equity interest in VOMG. Under the terms of the Physician Equity Holder Agreement (the “Equity Agreement”) between ApolloMed and the equity holder, ApolloMed may designate a third party who is permitted under Nevada law to be an owner or equity holder of VOMG with the right (the “Acquisition Right”) (a) to acquire equity holder’s equity interest or (b) to acquire from VOMG. The Acquisition Right shall be exercisable by ApolloMed and equity holder shall be obligated to assign and transfer the equity interest or to cause VOMG to issue new equity interests (as applicable) to ApolloMed. As a result of the arrangement and in accordance with relevant accounting guidance, VOMG is determined to be a VIE of ApolloMed and is consolidated by the Company. VOMG owns nine primary care clinics in Nevada and Texas. The purchase price consists of cash funded upon the close of transaction and additional cash consideration (“VOMG contingent consideration”) contingent on VOMG meeting financial metrics for fiscal year 2023 and 2024. The Company determined the fair value of the contingent consideration using a probability-weighted model that includes significant unobservable inputs (Level 3). The contingent consideration is included within other long term liabilities in the accompanying consolidated balance sheets.
Jade Health Care Medical Group, Inc. (“Jade”)
On April 19, 2022, the Company acquired 100% of the capital stock of Jade. The purchase was paid in cash. Jade is a primary and specialty care physicians’ group focused on providing high-quality care to its patients in the San Francisco Bay Area in Northern California.
Orma Health, Inc., and Provider Growth Solutions LLC (together, “Orma Health”)
On January 27, 2022, the Company acquired 100% of the capital stock of Orma Health, Inc., and Provider Growth Solutions, LLC (together, “Orma Health”). The purchase was paid in cash and in the Company’s capital stock. Orma Health’s real-time Clinical AI platform ingests data from multiple sources and utilizes advanced risk-stratification models to identify patients for various clinical programs, including remote patient monitoring (“RPM”), mental health support, chronic care management, and more. Its clinical platform is also deeply integrated with Orma Health’s proprietary RPM ecosystem, which consists of smart health devices and a suite of technology tools to manage patient health.
APCMG
In July 2021, the Company acquired an 80% equity interest (on a fully diluted basis) in APCMG. As part of the transaction, the Company may pay APCMG additional consideration contingent on APCMG’s financial performance for fiscal year 2022 (“APCMG contingent consideration”). The APCMG contingent consideration will be met if gross revenue and earnings before interest, taxes, and depreciation, and amortization (“EBITDA”) targets exceed a threshold for fiscal year 2022. The Company determined the fair value of the contingent consideration using a probability-weighted model that includes significant unobservable inputs (Level 3). Specifically, the Company considered various scenarios of gross revenue and EBITDA and assigned probabilities to each such scenario in determining fair value. As of December 31, 2022, the contingent consideration is valued at $1.0 million and was included within accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Sun Labs
In August 2021, the Company acquired 49% of the aggregate issued and outstanding shares of capital stock of Sun Labs. As Sun Labs was concluded to be a VIE and the Company is the primary beneficiary, Sun Labs is consolidated by the Company. The Company is obligated to purchase the remaining equity interest within three years from the effective date. As the financing obligation is embedded in the non-controlling interest, the non-controlling interest is recognized in other long-term liabilities in the accompanying consolidated balance sheets. The Company recognized goodwill as a result of consolidating Sun Labs as a VIE.
DMG
In October 2021, DMG entered into an administrative services agreement with a subsidiary of the Company, causing the Company to reevaluate the accounting for the Company’s investment in DMG. Based on the reevaluation and in accordance with relevant accounting guidance, DMG is determined to be a VIE and the Company is the primary beneficiary; DMG is consolidated by ApolloMed. In addition, APC-LSMA is obligated to purchase the remaining equity interest within three years from the effective date. As the financing obligation is embedded in the non-controlling interest, the non-controlling interest is recognized in other long-term liabilities in the accompanying consolidated balance sheets. The Company recognized goodwill as a result of consolidating DMG as a VIE.
Pro Forma Financial Information for All 2022 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, 2021. 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 2022 acquisitions as if each acquisition had occurred on January 1, 2021 (in thousands except per share data):
| | | | | | | | | | | | | | |
| | Year Ended
December 31, 2022
(unaudited) | | Year Ended
December 31, 2021
(unaudited) |
| | | | |
| Revenue | | $ | 1,176,082 | | | $ | 825,630 | |
| Net income attributable to Apollo Medical Holdings, Inc. | | $ | 48,375 | | | $ | 73,790 | |
| EPS - basic | | $ | 1.08 | | | $ | 1.68 | |
| EPS - diluted | | $ | 1.06 | | | $ | 1.63 | |
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 was 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 acquisitions have been included in the Company’s financial statements from the date of acquisition. Transaction costs associated with business acquisitions are expensed as they are 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 one year from the date of acquisition.
Goodwill is not deductible for tax purposes.
The change in the carrying value of goodwill for the years ended December 31, 2022 and 2021 was as follows (in thousands):
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | |
| Amount |
| |
| Balance at January 1, 2021 | $ | 239,053 | |
| Acquisitions | 13,986 | |
| Balance at December 31, 2021 | 253,039 | |
| Acquisitions | 21,486 | |
| Adjustments | 1,150 | |
| Balance at December 31, 2022 | $ | 275,675 | |
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
4. Land, Property, and Equipment, Net
Land, property, and equipment, net consisted of (in thousands):
| | | | | | | | | | | | | | | | | |
| | Useful Life (Years) | | December 31, 2022 | | December 31, 2021 |
| | | | | |
| Land | N/A | | $ | 32,288 | | | $ | 20,937 | |
| Buildings | 5 - 39 | | 58,451 | | | 21,661 | |
| Computer software | 3 - 5 | | 4,731 | | | 3,589 | |
| Furniture and equipment | 3 - 7 | | 17,161 | | | 15,358 | |
| Construction in progress | N/A | | 12,801 | | | 4,901 | |
| Leasehold improvements | 3 - 39 | | 7,151 | | | 7,122 | |
| | | | | |
| | | 132,583 | | | 73,568 | |
| | | | | |
| Less accumulated depreciation and amortization | | | (24,047) | | | (20,382) | |
| | | | | |
| Land, property, and equipment, net | | | $ | 108,536 | | | $ | 53,186 | |
As of December 31, 2022 and 2021, the Company had finance leases totaling $1.8 million and $1.3 million, respectively, included in land, property, and equipment, net in the accompanying consolidated balance sheets.
Depreciation expense was $3.7 million, $2.1 million and $2.3 million for the years ended December 31, 2022, 2021, and 2020, respectively, which is included in depreciation and amortization in the accompanying consolidated statements of income.
5. Intangible Assets, Net
At December 31, 2022, intangible assets, net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Useful
Life
(Years) | | Gross
January 1, 2022 | | Additions | | Impairment/
Disposal | | Gross
December 31, 2022 | | Accumulated
Amortization | | Net
December 31, 2022 |
| Indefinite lived assets: | | | | | | | | | | | | | |
| Trademarks | N/A | | $ | 2,150 | | | $ | — | | | $ | — | | | $ | 2,150 | | | $ | — | | | $ | 2,150 | |
| Amortized intangible assets: | | | | | | | | | | | | | |
| Network relationships | 11-21 | | 150,679 | | | — | | | — | | | 150,679 | | | (95,451) | | | 55,228 | |
| Management contracts | 15 | | 22,832 | | | — | | | — | | | 22,832 | | | (15,208) | | | 7,624 | |
| Member relationships | 12 | | 8,997 | | | 7,636 | | | — | | | 16,633 | | | (5,619) | | | 11,014 | |
| Patient management platform | 5 | | 2,060 | | | — | | | — | | | 2,060 | | | (2,060) | | | — | |
| Tradename/trademarks | 20 | | 1,011 | | | — | | | — | | | 1,011 | | | (257) | | | 754 | |
| Developed technology | 6 | | — | | | 107 | | | — | | | 107 | | | (16) | | | 91 | |
| | | $ | 187,729 | | | $ | 7,743 | | | $ | — | | | $ | 195,472 | | | $ | (118,611) | | | $ | 76,861 | |
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
At December 31, 2021, intangible assets, net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Useful
Life
(Years) | | Gross January 1, 2021 | | Additions | | Impairment/
Disposal | | Gross
December 31, 2021 | | Accumulated
Amortization | | Net
December 31, 2021 |
| Indefinite Lived Assets: | | | | | | | | | | | | | |
| Trademarks | N/A | | $ | — | | | $ | 2,150 | | | $ | — | | | $ | 2,150 | | | $ | — | | | $ | 2,150 | |
| Amortized intangible assets: | | | | | | | | | | | | | |
| Network relationships | 11-15 | | $ | 143,930 | | | $ | 6,749 | | | $ | — | | | $ | 150,679 | | | $ | (84,865) | | | $ | 65,814 | |
Management contracts | 15 | | 22,832 | | | — | | | — | | | 22,832 | | | (13,563) | | | 9,269 | |
| Member relationships | 12 | | 6,696 | | | 2,301 | | | — | | | 8,997 | | | (4,606) | | | 4,391 | |
| Patient management platform | 5 | | 2,060 | | | — | | | — | | | 2,060 | | | (1,682) | | | 378 | |
Tradename/trademarks | 20 | | 1,011 | | | — | | | — | | | 1,011 | | | (206) | | | 805 | |
| | | $ | 176,529 | | | $ | 11,200 | | | $ | — | | | $ | 187,729 | | | $ | (104,922) | | | $ | 82,807 | |
As of December 31, 2022, network relationships, management contracts, member relationships, tradename/trademarks, and developed technology had weighted-average remaining useful lives of 10.1 years, 7.4 years, 12.0 years, 14.8 years, and 5.1 years respectively. Total weighted-average remaining useful lives for all amortized intangible assets as of December 31, 2022 was 10.2 years. Amortization expense was $13.7 million, $15.4 million and $16.0 million for the years ended December 31, 2022, 2021, and 2020, respectively, which is included in depreciation and amortization in the accompanying consolidated statements of income.
There was no impairment loss recorded related to intangibles for the years ended December 31, 2022, 2021 and 2020.
Future amortization expense is estimated to be as follows for the years ending December 31 (in thousands):
| | | | | |
| Amount |
| |
| 2023 | $ | 11,680 | |
| 2024 | 11,521 | |
| 2025 | 10,594 | |
| 2026 | 9,354 | |
| 2027 | 8,069 | |
| Thereafter | 23,493 | |
| $ | 74,711 | |
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, 2021 | | | | Allocation of Income (Loss) | | Funding reclassified to loan receivable | | Funding | | Entity Consolidated | | Distribution | | December 31, 2022 |
| LaSalle Medical Associates – IPA Line of Business | $ | 3,034 | | | | | $ | 4,775 | | | $ | (2,125) | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,684 | |
| Pacific Medical Imaging & Oncology Center, Inc. | 1,719 | | | | | 159 | | | — | | | — | | | — | | | — | | | 1,878 | |
| 531 W. College, LLC – related party | 17,230 | | | | | (619) | | | — | | | 670 | | | — | | | — | | | 17,281 | |
| One MSO, LLC — related party | 2,910 | | | | | 408 | | | — | | | — | | | — | | | (600) | | | 2,718 | |
| Tag-6 Medical Investment Group, LLC — related party | 4,830 | | | | | 153 | | | — | | | 1,435 | | | (6,418) | | | — | | | — | |
| CAIPA MSO, LLC | 11,992 | | | | | 746 | | | — | | | — | | | — | | | — | | | 12,738 | |
| | | | | | | | | | | | | | | |
| $ | 41,715 | | | | | $ | 5,622 | | | $ | (2,125) | | | $ | 2,105 | | | $ | (6,418) | | | $ | (600) | | | $ | 40,299 | |
| | | | | | | | | | | | | | | |
LaSalle Medical Associates — IPA Line of Business
LMA was founded by Dr. Albert Arteaga in 1996 and operates as an IPA delivering high-quality care. In December 2020, the Company exercised its option to convert a 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 increased to 46.25%. In September 2021, APC-LSMA sold 21.25% of its interest in LMA back to Dr. Arteaga for $6.4 million, which resulted in APC-LSMA owning a 25% interest in LMA as of December 31, 2022. The investment is deemed Excluded Assets that are solely for the benefit of APC and its shareholders.
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, 2022, APC recorded net income of $4.8 million from its investment in LMA as compared to a net loss of $5.8 million for the year ended December 31, 2021, in the accompanying consolidated statements of income. The investment balance was $5.7 million and $3.0 million at December 31, 2022 and 2021, respectively.
LMA’s unaudited summarized balance sheets at December 31, 2022 and 2021 and unaudited summarized statements of operations for the years ended December 31, 2022, 2021, and 2020 are as follows (in thousands):
Balance Sheets
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | |
| | December 31, 2022
(unaudited) | | December 31, 2021
(unaudited) |
| | | | |
| Assets | | | | |
| Cash and cash equivalents | | $ | 15,671 | | | $ | 6,619 | |
| Receivables, net | | 5,064 | | | 2,269 | |
| Prepaid assets | | 5,032 | | | — | |
| Loan receivable | | 2,250 | | | 2,250 | |
| Restricted cash | | 700 | | | 696 | |
| | | | |
| Total assets | | $ | 28,717 | | | $ | 11,834 | |
| | | | |
Liabilities and stockholders’ deficit | | | | |
| Current liabilities | | $ | 30,331 | | | $ | 32,405 | |
Stockholders’ deficit | | (1,614) | | | (20,571) | |
| | | | |
Total liabilities and stockholders’ deficit | | $ | 28,717 | | | $ | 11,834 | |
Statements of Operations
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, 2022
(unaudited) | | Year Ended
December 31, 2021
(unaudited) | | Year Ended
December 31, 2020
(unaudited) |
| | | | | | |
| Revenues | | $ | 253,469 | | | $ | 204,061 | | | $ | 186,964 | |
| Expenses | | 239,884 | | | 220,132 | | | 185,724 | |
| | | | | | |
| Income (loss) from operations | | 13,585 | | | (16,071) | | | 1,240 | |
| | | | | | |
| Other (loss) income | | (44) | | | — | | | 8 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net income (loss) | | $ | 13,541 | | | $ | (16,071) | | | $ | 1,248 | |
Pacific Medical Imaging and Oncology Center, Inc.
APC-LSMA and PMIOC entered into a share purchase agreement whereby APC-LSMA purchased a 40% ownership interest in PMIOC. Incorporated in California in 2004, PMIOC provides comprehensive diagnostic imaging services using state-of-the-art technology. PMIOC offers high-quality diagnostic services, such as MRI/MRA, PET/CT, CT, nuclear medicine, ultrasound, digital x-rays, bone densitometry, and digital mammography, at its facilities. The investment is deemed Excluded Assets that are solely for the benefit of APC and its shareholders.
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. For the years ended December 31, 2022 and 2021, APC recognized net income from this investment of approximately $0.2 million and income of $0.3 million, respectively, in the accompanying consolidated statements of operations. The accompanying consolidated balance sheets had investment balances of $1.9 million and $1.7 million at December 31, 2022 and 2021, respectively.
531 W. College LLC
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
APC has a 50% ownership in 531 W. College LLC and 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. 531 W. College, LLC owns a former hospital campus in Los Angeles that is now leased to tenants. The investment is deemed Excluded Assets that are solely for the benefit of APC and its shareholders.
During the years ended December 31, 2022 and 2021, APC recorded losses from its investment in 531 W. College LLC of $0.6 million and loss of $0.2 million, respectively, in the accompanying consolidated statements of income. During the years ended December 31, 2022 and 2021, APC contributed $0.7 million and $0.2 million, respectively, to 531 W. College, LLC as part of its 50% interest. The accompanying consolidated balance sheets include the related investment balance of $17.3 million and $17.2 million, respectively, related to APC's investment at December 31, 2022 and 2021.
One MSO LLC
APC has a 50% interest in One MSO. One MSO owns an office building in Monterey Park, California that is leased to tenants, including NMM. During the years ended December 31, 2022 and 2021, APC recorded income from this investment of $0.4 million and $0.5 million, respectively, in the accompanying consolidated statements of income. The investment balance was $2.7 million and $2.9 million as of December 31, 2022 and 2021, respectively.
Tag-6 Medical Investment Group, LLC
APC had a 50% interest in Tag 6. Tag 6 leases its building to tenants and shares common ownership with certain board members of APC and as such is considered a related party. On August 31, 2022, using cash comprised solely of Excluded Assets, APC acquired the remaining 50% interest in Tag 6 for $4.9 million. As a result, Tag 6 is a 100% owned subsidiary of APC and is included in the consolidated financial statements.
During the years ended December 31, 2022 and 2021, and prior to consolidation of Tag 6, APC recorded income from this investment of $0.2 million and $0.3 million, respectively, in the accompanying consolidated statements of income.
CAIPA MSO, LLC
In August 2021, ApolloMed purchased a 30% interest in CAIPA MSO, LLC (“CAIPA MSO”) for $11.7 million. CAIPA MSO is a New York-based management services organization affiliated with Chinese-American IPA d.b.a. Coalition of Asian-American IPA, (“CAIPA”), a leading independent practice association serving the greater New York City area.
ApolloMed accounts for its investment in CAIPA MSO under the equity method of accounting as ApolloMed has the ability to exercise significant influence, but not control over CAIPA MSO’s operations. During the years ended December 31, 2022 and 2021, ApolloMed recorded income from this investment of $0.7 million and $0.3 million, respectively, in the accompanying consolidated statements of income. The investment balance was $12.7 million and $12.0 million as of December 31, 2022 and 2021, respectively.
Investments in privately held entities that do not report net asset value
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 interest. In connection with the initial purchase, APC received a five-year warrant to purchase an additional 270,000 membership interests. A five-year option to purchase an additional 380,000 membership interests and a five-year warrant to purchase 480,000 membership interests were contingent upon the portal completion date. However, APC 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 years ended December 31, 2022 and 2021, there were no observable price changes to APC’s investment.
AchievaMed
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
In July 2019, NMM and AchievaMed, Inc., a California corporation (“AchievaMed”), entered into an agreement in which NMM would purchase 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 investments in privately held entities in the accompanying consolidated balance sheets as of December 31, 2022. 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 years ended December 31, 2022 and 2021, there were no observable price changes to NMM’s investment.
7. Loan Receivable and Loan Receivable – Related Parties
Loan receivable
Pacific6
In October 2020, NMM received a promissory note from 6 Founder LLC, a California limited liability company doing business as Pacific6 Enterprises 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 party
LaSalle Medical Associates Loan (“LMA Loan”)
LaSalle Medical Associates (“LMA”) issued a promissory note to APC-LSMA for a principal amount of $2.1 million with an August 2023 maturity date. The contractual interest rate on the LMA Loan is 1.0% above the prime rate of interest for commercial customers. APC’s investment in LMA is accounted for under the equity method based on the 25% equity ownership interest held by APC-LSMA in LMA’s IPA line of business (see Note 6 — “Investments in Other Entities — Equity Method”).
AHMC
In October 2020, AHMC Healthcare Inc. (“AHMC”) issued a promissory note to APC for a principal amount of $4.0 million with an April 2022 maturity date. The note was amended in April 2022, to extend the maturity date to April 2023. 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. In June 2022, AHMC paid the outstanding principal and interest amount to APC. One of the Company’s board members is an officer of AHMC.
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, 2022.
8. Accounts Payable and Accrued Expenses
The Company’s accounts payable and accrued expenses consisted of the following (in thousands):
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | | | |
| Accounts payable and other accruals | | $ | 10,473 | | | $ | 5,513 | |
| Capitation payable | | 4,229 | | | 2,697 | |
| Subcontractor IPA payable | | 2,415 | | | 1,587 | |
| Professional fees | | 2,709 | | | 878 | |
| Due to related parties | | 3,304 | | | 2,301 | |
| Contract liabilities | | 531 | | | 16,798 | |
| Accrued compensation | | 15,301 | | | 10,107 | |
| Other provider payable | | 10,600 | | | 4,070 | |
| Total accounts payable and accrued expenses | | $ | 49,562 | | | $ | 43,951 | |
Certain amounts disclosed in prior period notes to consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications were made between accounts payable and other accruals and other provider payable. They had no effect on balance sheet, net income, earnings per share, retained earnings, cash flows or total assets.
9. Medical Liabilities
The Company’s medical liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | | | |
| Medical liabilities, beginning of year | | $ | 55,783 | | | $ | 50,330 | |
| Acquired (see Note 3) | | 2,956 | | | 175 | |
| Components of medical care costs related to claims incurred: | | | | |
| Current period | | 646,679 | | | 347,720 | |
| Prior periods | | 5,152 | | | 553 | |
| Total medical care costs | | 651,831 | | | 348,273 | |
| Payments for medical care costs related to claims incurred: | | | | |
| Current period | | (559,751) | | | (291,243) | |
| Prior periods | | (67,149) | | | (51,231) | |
| Total paid | | (626,900) | | | (342,474) | |
| Adjustments | | 583 | | | (521) | |
| | | | |
| Medical liabilities, end of year | | $ | 84,253 | | | $ | 55,783 | |
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
10. Credit Facility, Bank Loans, and Lines of Credit
Credit Facility
The Company’s debt balance consists of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
| Revolver Loan | 180,000 | | | 180,000 | |
| Real Estate Loans | 23,168 | | | 7,396 | |
| Construction Loan | 4,159 | | | 569 | |
| Total debt | 207,327 | | | 187,965 | |
| | | |
| Less: Current portion of debt | (619) | | | (780) | |
| Less: Unamortized financing costs | (3,319) | | | (4,268) | |
| | | |
| Long-term debt | $ | 203,389 | | | $ | 182,917 | |
The estimated fair value of our long-term debt was determined using Level 2 inputs primarily related to comparable market prices. As of December 31, 2022 and 2021, the carrying value was not materially different from fair value, as the interest rates on the Company’s debt approximated rates currently available to the Company.
The following are the future commitments of the Company’s debt for the years ending December 31 (in thousands):
| | | | | |
| Amount |
| 2023 | $ | 619 | |
| 2024 | 4,800 | |
| 2025 | 7,184 | |
| 2026 | 454 | |
| 2027 | 180,472 | |
| Thereafter | 13,798 | |
| |
| Total | $ | 207,327 | |
Amended Credit Agreement
On June 16, 2021, the Company entered into an amended and restated credit agreement (the “Amended Credit Agreement” and the credit facility thereunder, the “Amended Credit Facility”) with Truist Bank, in its capacity as administrative agent for the lenders, issuing bank, swingline lender and lender, Truist Securities, Inc., JPMorgan Chase Bank, N.A., MUFG Union Bank, N.A., Preferred Bank, Royal Bank of Canada, and Fifth Third Bank, National Association, in their capacities as joint lead arrangers and/or lenders, and the lenders from time to time party thereto, to, among other things, amend and restate that certain credit agreement, dated September 11, 2019, by and among the Company, Truist Bank, and certain lenders thereto (the credit facility thereunder, the “Credit Facility”), in its entirety. The Amended Credit Agreement provides for a five-year revolving credit facility to the Company of $400 million, which includes a letter of credit sub-facility of up to $25 million and a swingline loan sub-facility of $25 million. The revolving credit facility will be used to, among other things, refinance certain existing indebtedness of the Company and certain subsidiaries, finance certain future acquisitions and investments, and provide for working capital needs and other general corporate purposes. Under the Amended Credit Agreement, the terms and conditions of the Guaranty and Security Agreement (the “Guaranty and Security Agreement”) between the Company, NMM and Truist Bank remain in effect.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The Company is required to pay an annual agent fee of $50,000 and an annual facility fee of 0.175% to 0.35% on the available commitments under the Amended Credit Agreement, regardless of usage, with the applicable fee determined on a quarterly basis based on the Company’s leverage ratio. The Company will pay fees for standby letters of credit at an annual rate equal to 1.25% to 2.50%, 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. The Company is also required to pay customary fees between the Company and Truist Bank, the lead arranger of the Amended Credit Agreement.
Generally, amounts borrowed under the Amended Credit Agreement bore 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 LIBOR, adjusted for any reserve requirement in effect, plus a spread determined on a quarterly basis or (b) a base rate, plus a spread determined on a quarterly basis. On December 20, 2022, an amendment was made to the Amended Credit Facility, in which all amounts borrowed under the Amended Credit Agreement as of the effective date shall be automatically converted from LIBOR Loans to SOFR Loans with an initial interest period of one month on and as of the amendment effective date. As such, amounts borrowed under the Amended Credit Agreement bear interest at an annual rate equal to either, at the Company’s option, (a) the Term SOFR Reference Rate, calculated two U.S. Government Securities Business Days prior to the first day of such interest period, as such rate is published by the Term SOFR Administrator (Federal Reserve Bank of New York), adjusted for any Term SOFR Adjustment, plus a spread of from 1.25% to 2.50%, as determined on a quarterly basis based on the Company’s leverage ratio, or (b) a base rate, plus a spread of 0.25% to 1.50%, as determined on a quarterly basis based on the Company’s leverage ratio. As of December 31, 2022, the interest rate on the Credit Agreement was 5.92%.
The Amended 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 total net leverage ratio of not greater than 3.75 to 1.00 as of the last day of each fiscal quarter, provided that for any fiscal quarter during which the Company or certain subsidiaries consummate a permitted acquisition or investment, the aggregate purchase price is greater than $75.0 million, the maximum consolidated total net leverage ratio may temporarily increase by 0.25 to 1.00 to 4.00 to 1.00. 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.
Pursuant to the Guaranty and Security Agreement, the Company and NMM have granted the lenders under the Amended Credit Agreement 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.
In the ordinary course of business, certain of the lenders under the Amended 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, 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.
Real Estate Loans
On December 31, 2020, the Company purchased 100% of MPP, AMG Properties, and ZLL. As a result of the purchase, the Company assumed $6.4 million, $0.7 million, and $0.7 million of existing loans held by MPP, AMG Properties, and ZLL, respectively, on the day of acquisition.
MPP
In July 2020, MPP entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2022, the principal on the loan is $5.9 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 Properties
In August 2020, AMG Properties entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2022, the principal on the loan is $0.6 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
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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
In July 2020, ZLL entered into a loan agreement with East West Bank with a maturity date of August 5, 2030. As of December 31, 2022, the principal on the loan is $0.6 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.
120 Hellman LLC
On January 25, 2022, 120 Hellman LLC (“120 Hellman”), a subsidiary of APC, entered into a loan agreement with MUFG Union Bank N.A. with the principal on the loan of $16.3 million and a maturity date of March 1, 2032. The loan was used to purchase property in Monterey Park, California. As of December 31, 2022, the principal on the loan was $16.0 million. The variable interest rate is 2.0% in excess of Daily Simple SOFR, which is the daily rate per annum equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York. If the index is not available, MUFG Union Bank N.A. may designate a substitute index after notifying 120 Hellman. Monthly payments on the principal and interest began on April 1, 2022. Should interest not be paid when due, it shall become part of the principal and bear interest. 120 Hellman must maintain a Cash Flow to Debt Service ratio (defined as net profit after taxes, to which depreciation, amortization and other non-cash items are added divided by the current portion of long-term debt and capital leases) of not less than 1.25 to 1 and 35% or more of the property must also be occupied by APC.
Construction Loans
In April 2021, Tag 8 entered into a construction loan agreement with MUFG Union Bank N.A. (“Construction Loan”). Tag 8 is a VIE consolidated by the Company.
The Construction Loan allows Tag 8 to borrow up to $10.7 million with a maturity date of December 1, 2022 (“Construction Loan Term”). Interest rate is equal to an index rate determined by the bank. Monthly interest payments began on May 1, 2021, or can become part of the principal and bear interest. If construction is completed and, there are no events of default or substantial deterioration in the financial condition of Tag 8 or APC, guarantor on the loan agreement, at the maturity date of the Construction Loan Term, the loan shall convert to an amortizing loan with an extended maturity date of December 1, 2032 (“Permanent Loan Term”). Upon conversion to the Permanent Loan Term, monthly principal and interest payments shall be made beginning January 1, 2023. From January 1, 2023 until December 1, 2023, the interest rate will be 2.0% per annum in excess of the LIBOR rate.
On December 22, 2022, the Construction loan was amended to extend the Construction Loan Term to March 1, 2024 and the Permanent Loan Term to March 1, 2034. Under the amended Construction Loan, upon conversion to the Permanent Loan Term, monthly principal and interest payments shall be made beginning April 1, 2024. The principal balance will bear interest at the SOFR reference rate. As of December 31, 2022, the likelihood of the construction being completed by the maturity date is remote. The outstanding balance as of December 31, 2022 was $4.2 million and was recorded as long-term debt, net of current portion and deferred financing costs in the accompanying consolidated balance sheets. Once the loan converts to the Permanent Loan Term, APC, as Tag 8’s guarantor, must maintain a Cash Flow Coverage Ratio (defined as consolidated EBITDA minus unfinanced capital expenditures and distributions paid divided by the sum of current portion of long-term debt, plus interest expense) of not less than 1.25 to 1.
On November 7, 2011, Tag 6 entered into a construction loan agreement with Preferred Bank (“Tag 6 Construction Loan”). On August 31, 2022, APC acquired the remaining 50% interest in Tag 6. As a result, Tag 6 is a 100% owned subsidiary of APC and is included in the consolidated financial statements. On the day of acquisition, the outstanding balance on the loan was $3.4 million with a maturity date of September 7, 2022. On September 6, 2022, APC paid off the outstanding Tag 6 Construction Loan balance of $3.4 million.
Deferred Financing Costs
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
The Company recorded deferred financing costs of $6.5 million related to the issuance of the Credit Facility. In June 2021, the Company recorded additional deferred financing costs of $0.7 million related to its entry into the Amended Credit Facility. Deferred financing costs are recorded as a direct reduction of the carrying amount of the related debt liability using straight-line amortization. The remaining unamortized deferred financing costs related Credit Facility and the costs related to the Amended Credit Facility are amortized over the life of the Amended Credit Facility. As of December 31, 2022 and 2021, unamortized deferred financing costs were $3.3 million and $4.3 million, respectively.
Effective Interest Rate
The Company’s average effective interest rate on its total debt during the years ended December 31, 2022, 2021, and 2020, was 3.22%, 2.06%, and 3.48%, respectively. Interest expense in the consolidated statements of income included amortization of deferred debt issuance costs for the years ended December 31, 2022, 2021, and 2020, of $0.9 million, $1.2 million, and $1.4 million, respectively.
Lines of Credit
APC Business Loan
In September 2019, the APC Business Loan Agreement with Preferred Bank (the “APC Business Loan Agreement”) was amended to, among other things, decrease loan availability to $4.1 million, limit the purpose of the indebtedness under the APC Business Loan Agreement to the issuance of standby letters of credit, and include as a permitted lien, the security interest in all of its assets that APC granted to NMM under a Security Agreement dated on or about September 11, 2019, securing APC’s obligations to NMM under their management services agreement dated as of July 1, 1999, as amended.
Standby Letters of Credit
The Company established irrevocable standby letters of credit with Truist Bank under the Amended Credit Agreement for a total of $21.1 million for the benefit of CMS. Unless the institution provides notification that the standby letters of credit will be terminated prior to the expiration date, the letters will be automatically extended without amendment for additional one-year periods from the present, or any future expiration date.
APC established irrevocable standby letters of credit with Preferred Bank under the APC Business Loan Agreement 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.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
11. Income Taxes
Provision for income taxes consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 | | 2020 |
| Current | | | | | |
| Federal | $ | 30,625 | | | $ | 22,801 | | | $ | 43,572 | |
| State | 13,141 | | | 11,605 | | | 19,155 | |
| 43,766 | | | 34,406 | | | 62,727 | |
| | | | | |
| Deferred | | | | | |
| Federal | (8,049) | | | (3,794) | | | (4,963) | |
| State | 368 | | | (2,158) | | | (1,657) | |
| (7,681) | | | (5,952) | | | (6,620) | |
| | | | | |
| Total provision for income taxes | $ | 36,085 | | | $ | 28,454 | | | $ | 56,107 | |
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, 2022, the Company had federal and California net operating loss carryforwards of approximately $123.0 million and $142.1 million, respectively. The federal and California net operating loss carryforwards will expire at various dates from 2027 through 2042; however, $103.7 million of the federal operating loss do not expire and can 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, 2022 and 2021, are shown below (in thousands). A valuation allowance of $33.0 million and $22.4 million as of December 31, 2022 and 2021, 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 $10.6 million in 2022.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred tax assets | | | |
| State taxes | $ | 2,848 | | | $ | 2,379 | |
| Accrued expenses | 670 | | | 1,864 | |
| Allowance for bad debts | 853 | | | 153 | |
| Investment in other entities | 2,145 | | | 3,289 | |
| Net operating loss carryforward | 35,749 | | | 28,992 | |
| Lease liability | 6,470 | | | 4,208 | |
| Unrealized gain | 8,971 | | | 3,007 | |
| Stock options | 1,011 | | | — | |
| Other | 692 | | | 705 | |
| Deferred tax assets before valuation allowance | 59,409 | | | 44,597 | |
| Valuation allowance | (32,986) | | | (22,351) | |
| Net deferred tax assets | 26,423 | | | 22,246 | |
| | | |
| Deferred tax liabilities | | | |
| Property and equipment | (1,840) | | | (777) | |
| Acquired intangible assets | (21,268) | | | (23,763) | |
| Stock options | — | | | (1,641) | |
| Right-of-use assets | (5,632) | | | (4,117) | |
| Debt issuance cost | (725) | | | (988) | |
| 481(a) adjustment | — | | | (87) | |
| Deferred tax liabilities | (29,465) | | | (31,373) | |
| | | |
| Net deferred liabilities | $ | (3,042) | | | $ | (9,127) | |
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:
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Tax provision at U.S. federal statutory rates | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes net of federal benefit | 7.2 | | | 7.8 | | | 7.7 | |
| Non-deductible permanent items | 0.6 | | | 3.7 | | | 0.3 | |
| Variable interest entities | (1.1) | | | (1.3) | | | (0.2) | |
| Stock-based compensation | (0.3) | | | (1.0) | | | 0.3 | |
| Change in valuation allowance | 11.7 | | | 8.9 | | | 3.2 | |
| Investment basis adjustment | 1.2 | | | (2.1) | | | — | |
| Other | 1.4 | | | — | | | (1.0) | |
| | | | | |
| Effective income tax rate | 41.7 | % | | 36.9 | % | | 31.3 | % |
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 net operating loss carryovers and carrybacks and modifications on the limitation of business interests. As of December 31, 2022, the Company does not expect the CARES Act to result in any material impact on the Company’s effective tax rate.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2022 and 2021, 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’s and its subsidiaries’ state and federal income tax returns are open to audit under the statute of limitations for the years ended December 31, 2018 through December 31, 2021 and for the years ended December 31, 2019 through December 31, 2021, respectively. The Company does not anticipate material unrecognized tax benefits within the next 12 months.
12. Mezzanine and Stockholders’ Equity
Mezzanine Equity
APC
As the redemption feature (see Note 2 — “Basis of Presentation and Summary of Significant Accounting Policies”) 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 non-controlling 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, 2022, 2021 and 2020.
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.
Common Stock
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 2017 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) warrants to purchase an aggregate of 900,000 shares of common stock of ApolloMed, exercisable at $10.00 per share; and
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
•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, 2022. 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 were 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.
As of December 31, 2022, 140,954 holdback shares have not been issued to certain former NMM shareholders who were NMM shareholders at the time of closing of the 2017 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 2017 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 2017 Merger.
Dividends
During the years ended December 31, 2022, 2021, and 2020, NMM did not pay any dividends.
During the years ended December 31, 2022, 2021, and 2020, APC declared dividends of $37.9 million, $29.9 million and $136.6 million, respectively.
During the years ended December 31, 2022, 2021, and 2020, CDSC paid distributions of $3.5 million, $1.5 million and $2.1 million, respectively.
Treasury Stock
APC owned 10,299,259 shares of ApolloMed’s common stock as of December 31, 2022, and 10,925,702 shares of ApolloMed’s common stock as of December 31, 2021. While such shares of ApolloMed’s common stock are legally issued and outstanding, they are treated as treasury shares for accounting purposes and excluded from shares of common stock outstanding in the consolidated financial statements.
13. Stock-Based Compensation
Equity Incentive Plans
In connection with the 2017 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, 2022, there were no shares available for future grants under the 2013 Plan.
In connection with the 2017 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
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
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, 2022, 2021, and 2020, there were approximately 1.1 million, 1.7 million and 0.1 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 2022, 2021, and 2020, and associated with the issuance of restricted shares of common stock and vesting of stock options that are included in general and administrative expenses in the accompanying consolidated statements of income recognized (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Stock options | | $ | 3,792 | | | $ | 2,480 | | | $ | 1,763 | |
| Restricted stock awards | | 12,309 | | | 4,265 | | | 1,620 | |
| | | | | | |
| Total share-based compensation expense | | $ | 16,101 | | | $ | 6,745 | | | $ | 3,383 | |
Unrecognized compensation expense related to total share-based payments outstanding as of December 31, 2022 was $24.8 million and is expected to be recognized over a weighted-average period of 2.3 years.
Options
The Company’s outstanding stock options consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining
Contractual
Term
(Years) | | Aggregate
Intrinsic
Value
(in millions) |
| | | | | | | |
| Options outstanding at January 1, 2022 | 813,965 | | | $ | 22.74 | | | 3.20 | | $ | 41.6 | |
| Options granted | 87,488 | | | 51.21 | | | — | | | — | |
| Options exercised | (41,603) | | | 17.81 | | | — | | | 1.0 | |
| Options canceled, forfeited or expired | — | | | — | | | — | | | — | |
| Options outstanding at December 31, 2022 | 859,850 | | | $ | 25.88 | | | 2.19 | | $ | 10.3 | |
| | | | | | | |
| Options exercisable at December 31, 2022 | 734,027 | | | $ | 17.32 | | | 1.69 | | $ | 10.0 | |
During the years ended December 31, 2022 and 2021, stock options were exercised for 41,603 and 40,000 shares, respectively, of the Company’s common stock, which resulted in proceeds of approximately $0.7 million and $0.2 million, respectively. The exercise prices ranged from $15.35 to $23.24 per share for the exercises during the year ended December 31, 2022 and $5.20 per share for the exercises during the year ended December 31, 2021. During the year ended December 31, 2022, no stock options were exercised pursuant the cashless exercise provision. The total intrinsic value of stock options exercised was $1.0 million, $2.8 million, and $1.8 million during the years ended December 31, 2022, 2021, and 2020, respectively. The intrinsic value of stock options is defined as the difference between the Company’s stock price on the exercise date and the grant date exercise price.
During the year ended December 31, 2022, the Company granted 0.1 million stock options to certain ApolloMed employees and board members with exercise price ranging from $41.59-$53.01. The weighted-average grant-date fair value of options granted during the years ended December 31, 2022, 2021, and 2020, was $22.32, $32.63, and $9.89, respectively. The options granted during the year ended December 31, 2022 were recognized at fair value, as determined using the Black-Scholes option pricing model as follows:
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | |
| December 31, 2022 | | |
| Expected term | | 1.50 years - 2.25 years |
| Expected volatility | | 71.47% - 82.05% |
| Risk-free interest rate | | 1.02% - 2.47% |
| Market value of common stock | | $17.47-$23.42 |
| | |
| | |
| | |
Restricted Stock Awards
The Company’s unvested restricted stock award activity for the year ended December 31, 2022 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Awards | | Performance Based Restricted Stock Awards |
| Number of
Shares | | Weighted Average
Grant-Date Fair Value | | Number of
Shares | | Weighted Average
Grant-Date Fair Value |
| Unvested as of January 1, 2022 | 541,507 | | $37.84 | | $ | — | | | $0.00 |
| Granted | 253,429 | | 41.07 | | 327,552 | | 42.12 |
| Vested | (244,475) | | 35.28 | | (29,289) | | 50.69 |
| Forfeited | (10,829) | | 33.42 | | (8,628) | | 45.80 |
| | | | | | | |
| Unvested as of December 31, 2022 | 539,632 | | $72.58 | | 289,635 | | $41.14 |
The Company grants restricted stock awards to employees and executives, which are earned based on service conditions. The awards will vest over a period of five months to four years in accordance with the terms of those plans. The grant date fair value of the restricted stock awards is that day’s closing market price of the Company’s common stock. During the year ended December 31, 2022, the Company granted restricted stock awards for employees totaling 580,981 shares, including 327,552 shares of restricted stock with performance conditions, with a weighted-average grant-date fair value of $41.66. Shares of restricted stock with performance conditions are recognized to the extent the performance conditions are probable of being achieved. The weighted-average grant-date fair value of restricted stock awards granted during the years ended December 31, 2021, and 2020 was $50.73 and $17.56, respectively. The total fair value of restricted stock awards, as of their respective vesting dates during the years ended December 31, 2022, 2021, and 2020, were $10.8 million, $1.1 million, and $1.4 million, respectively.
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 were subject to exercise 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 2017 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 2017 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 were subject to exercise 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 2017 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 2017 Merger date.
Common stock warrants, to purchase 850,000 shares, for $11.00 per share, and 900,000 shares, for $10.00 per share, of ApolloMed common stock, issued to former NMM shareholders on a pro-rata basis in connection with the Merger, may be exercised at any time after issuance and through December 8, 2022, subject to adjustment in the event of stock dividends and stock splits.
The Company’s warrants activity consisted of the following:
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average
Exercise
Price | | Weighted-Average
Remaining
Contractual
Term
(Years) | | Aggregate
Intrinsic
Value
(in millions) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Warrants outstanding at January 1, 2022 | 1,001,740 | | | $ | 10.49 | | | 0.94 | | 63.1 | |
| Warrants granted | — | | | — | | | — | | | — | |
| Warrants exercised | (947,174) | | | 10.49 | | | — | | | 21.1 | |
| Warrants forfeited | (54,566) | | | 10.49 | | | — | | | — | |
| | | | | | | |
| Warrants outstanding at December 31, 2022 | — | | | $ | — | | | — | | | $ | — | |
During the years ended December 31, 2022 and 2021, common stock warrants were exercised for 0.9 million and 0.9 million shares of the Company’s common stock, respectively, which resulted in proceeds of approximately $9.0 million and $8.8 million, respectively. Of the 0.9 million warrants exercised during the year ended December 31, 2022, 0.1 million of the common stock warrants were exercised by APC and are treated as treasury shares (see Note 12 — “Mezzanine and Stockholders’ Equity”). The exercise price ranged from $10.00 to $11.00 and $9.00 to $11.00 per share during years ended December 31, 2022 and 2021, respectively.
14. 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, 2022 and 2021, the consolidated IPAs 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
The Company established irrevocable standby letters of credit with Truist Bank for a total of $21.1 million for the benefit of CMS (see Note 10 — “Credit Facility, Bank Loans, and Lines of Credit — Standby Letters of Credit”).
APC and Alpha Care established irrevocable standby letters of credit with Preferred Bank for a total of $0.3 million and $3.8 million, respectively, for the benefit of certain health plans (see Note 10 — “Credit Facility, Bank Loan, and Lines of Credit”).
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.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Liability Insurance
The Company believes that its insurance coverage is appropriate based upon the Company’s claims experience and the nature and risks of the Company’s business. In addition to the known incidents that have resulted in the assertion of claims, the Company cannot be certain that its insurance coverage will be adequate to cover liabilities arising out of claims asserted against the Company, the Company’s affiliated professional organizations or the Company’s affiliated hospitalists in the future where the outcomes of such claims are unfavorable. The Company believes that the ultimate resolution of all pending claims, including liabilities in excess of the Company’s insurance coverage, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows; however, there can be no assurance that future claims will not have such a material adverse effect on the Company’s business. Contracted physicians are required to obtain their own insurance coverage.
Our contracted physicians are required to carry first dollar coverage with limits of liability equal to not less than to $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 $100,000 for professional 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.
15. Related-Party Transactions
During the years ended December 31, 2022, 2021, and 2020, NMM recognized approximately $21.2 million, $18.7 million, and $16.9 million, respectively, in management fees, of which from LMA. LMA is accounted for under the equity method based on 25% equity ownership interest held by APC (see Note 6 — “Investments in Other Entities”).
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. During the years ended December 31, 2022, 2021, and 2020, APC paid approximately $2.7 million, $2.4 million, and $2.2 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 — “Investments in Other Entities”).
During the years ended December 31, 2022, 2021, and 2020, APC paid approximately $0.6 million, $0.7 million, and $0.5 million, respectively, to Advanced Diagnostic Surgery Center for services as a provider. Advanced Diagnostic Surgery Center shares common ownership with certain board members of APC.
During the years ended December 31, 2022, 2021, and 2020, APC paid approximately $0.6 million, $2.0 million, and $0.3 million respectively, to Fulgent Genetics, Inc. for services as a provider. One of the Company’s board members is a board member of Fulgent Genetics, Inc.
During the years ended December 31, 2022 and 2021, APC paid approximately $15.4 million and $15.4 million, respectively, to Arroyo Vista Family Health Center (“Arroyo Vista”) for services as a provider. Arroyo Vista’s chief executive officer is a member of the Company’s board of directors.
During the years ended December 31, 2022, 2021, and 2020, the Company paid approximately $0.4 million, $0.3 million, and $0.2 million, respectively, to a board member of NMM for services as a provider.
During the years ended December 31, 2022, 2021, and 2020, the Company paid approximately $1.9 million, $1.3 million, and $1.2 million, respectively, to Sunny Village Care Center for services as a provider. Sunny Village Care Center shares common ownership with certain ApolloMed officers and board members of APC.
During the years ended December 31, 2022, 2021, and 2020, the Company paid approximately $0.2 million, $20,000, and $51,000, respectively, to an ApolloMed officer, who is an APC shareholder, for APC dividends.
During the years ended December 31, 2022, 2021, and 2020, NMM paid approximately $1.4 million, $1.3 million, and $1.4 million respectively, to One MSO, Inc. for an office lease which is accounted for under the equity method based on 50% equity ownership interest held by APC (see Note 6 — “Investments in Other Entities”).
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
During the years ended December 31, 2022 and 2021, Advanced Diagnostic and Surgical Center paid approximately $0.6 million and $0.6 million, respectively, to MPP for rent. In December 2020, MPP was consolidated by APC. Advanced Diagnostic Surgery Center shares common ownership with certain board members of APC.
During the year ended December 31, 2022, Sunny Village Care Center paid approximately $0.3 million to Tag 6 for rent. Tag 6 was consolidated by APC in August 2022. Sunny Village Care Center shares common ownership with certain ApolloMed officers and board members of APC.
During the year ended December 31, 2022, APC paid $9.3 million, to purchase ApolloMed’s stock from a board member.
During the year ended December 31, 2022, APC paid $4.9 million and $4.1 million, respectively, for the remaining 50% interest of Tag 6 and Tag 8. The sellers included certain ApolloMed officers and APC board of directors.
The Company has agreements with Health Source MSO Inc., a California corporation (“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 (in thousands):
| | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 |
| AHMC – Risk pool, capitation, claims payment | $ | 34,587 | | | $ | 46,908 | |
| HSMSO – Management fees, net | (465) | | | (629) | |
| Aurion – Management fees | (300) | | | (302) | |
| | | |
| Receipts, net | $ | 33,822 | | | $ | 45,977 | |
The Company and AHMC have 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, 2022, 2021, and 2020, the Company has recognized risk pool revenue under this agreement of $50.5 million, $60.1 million, and $42.6 million, respectively, of which $58.7 million and $58.4 million, remained outstanding as of December 31, 2022 and 2021, respectively.
During the years ended December 31, 2022, 2021, and 2020, APC paid an aggregate of approximately $40.0 million, $34.8 million, and $33.1 million, respectively, to board members for provider services and dividends which included approximately $7.6 million, $8.5 million, and $9.0 million, respectively, to board members who are also officers of APC.
During the years ended December 31, 2022, 2021, and 2020, NMM paid approximately $0, $44,000, and $0.1 million to an ApolloMed board member 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 Note 6 — “Investments in Other Entities,” and Note 7 — “Loans Receivable — Related Parties,” respectively.
16. 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, 2022 and 2021 were approximately $0.5 million and $0.4 million.
17. Earnings Per Share
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Basic earnings per share is calculated using the weighted average number of shares of the Company’s common stock issued and outstanding during a certain period, and is calculated by dividing net income attributable to ApolloMed by the weighted average number of shares of the Company’s common stock issued and outstanding during such period. Diluted earnings per share is calculated using the weighted average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period, using the as-if converted method for secured convertible notes, preferred stock, and the treasury stock method for options and common stock warrants. The non-controlling 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 non-controlling 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.
As of December 31, 2022, 2021, and 2020, APC held 10,299,259, 10,925,702 and 12,323,164 shares of ApolloMed's common stock, respectively, which are treated as treasury shares for accounting purposes and not included in the number of shares of common stock outstanding used to calculate earnings per share.
For the years ended December 31, 2022, 2021, and 2020, restricted stock of 133,480, 9,137, and 212,276, respectively, were excluded from the computation of diluted weighted average common shares outstanding because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being anti-dilutive.
For the year ended December 31, 2022, 245,478 of restricted stock with performance conditions were excluded from the computation of diluted weighted average common shares outstanding because these conditions were not achieved as of December 31, 2022.
Below is a summary of the earnings per share computations:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| Earnings per share – basic | | $ | 1.09 | | | $ | 1.69 | | | $ | 1.04 | |
| Earnings per share – diluted | | $ | 1.08 | | | $ | 1.63 | | | $ | 1.01 | |
| Weighted-average shares of common stock outstanding – basic | | 44,971,143 | | | 43,828,664 | | | 36,527,672 | |
| Weighted-average shares of common stock outstanding – diluted | | 45,602,415 | | | 45,403,085 | | | 37,448,430 | |
Below is a summary of the shares included in the diluted earnings per share computations:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| Weighted-average shares of common stock outstanding – basic | | 44,971,143 | | | 43,828,664 | | | 36,527,672 | |
| | | | | | |
| Stock options | | 439,309 | | | 495,618 | | | 182,999 | |
| Warrants | | — | | | 819,151 | | | 717,029 | |
| Restricted stock awards | | 161,648 | | | 259,652 | | | 20,730 | |
| Contingently issuable shares | | 30,315 | | | — | | | — | |
| Weighted-average shares of common stock outstanding – diluted | | 45,602,415 | | | 45,403,085 | | | 37,448,430 | |
18. Variable Interest Entities (VIEs)
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE.
The Company follows guidance on the consolidation of VIEs that requires companies to utilize a qualitative approach to determine whether it is the primary beneficiary of a VIE. See Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies — Variable Interest Entities” 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 its VIEs, including Alpha Care and Accountable Health Care, and to which the creditors of ApolloMed have no recourse, and liabilities to which the creditors of APC, including Alpha Care and Accountable Health Care, have no recourse to the general credit of ApolloMed, as the primary beneficiary of the VIEs. These assets and liabilities, with the exception of the investment in a privately held entity that does not report net asset value per share and amounts due to affiliates, which are eliminated upon consolidation with NMM, are included in the accompanying consolidated balance sheets (in thousands). The assets and liabilities of the Company’s other consolidated VIEs were not considered significant.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| Assets | | | | |
| | | | |
| Current assets | | | | |
| Cash and cash equivalents | | $ | 97,669 | | | $ | 161,762 | |
| | | | |
| Investment in marketable securities | | 4,543 | | | 49,066 | |
| Receivables, net | | 11,503 | | | 7,251 | |
| Receivables, net – related party | | 62,190 | | | 62,180 | |
| Income taxes receivable | | — | | | 1,342 | |
| Other receivables | | 1,236 | | | 1,833 | |
| Prepaid expenses and other current assets | | 9,289 | | | 11,734 | |
| Loans receivable | | 22 | | | — | |
| Loans receivable — related parties | | 2,125 | | | 4,000 | |
| Amounts due from affiliates* | | 30,340 | | | 6,598 | |
| | | | |
| Total current assets | | 218,917 | | | 305,766 | |
| | | | |
| Non-current assets | | | | |
| Land, property and equipment, net | | 106,486 | | | 49,547 | |
| Intangible assets, net | | 53,964 | | | 58,282 | |
| Goodwill | | 118,161 | | | 109,656 | |
| Loans receivable – related parties | | — | | | 89 | |
| Investments in other entities – equity method | | 27,561 | | | 41,715 | |
| Investment in a privately held entity | | 405 | | | 405 | |
| Investment in affiliates* | | 304,755 | | | 802,821 | |
| Operating lease right-of-use assets | | 6,503 | | | 4,953 | |
| Other assets | | 4,169 | | | 3,219 | |
| | | | |
| Total non-current assets | | 622,004 | | | 1,070,687 | |
| | | | |
| Total assets | | $ | 840,921 | | | $ | 1,376,453 | |
| | | | |
| Current liabilities | | | | |
| Accounts payable and accrued expenses | | $ | 23,632 | | | $ | 11,591 | |
| Fiduciary accounts payable | | 7,853 | | | 10,534 | |
| Medical liabilities | | 48,100 | | | 44,000 | |
| Income taxes payable | | 1,083 | | | — | |
| Dividend payable | | 638 | | | 556 | |
| Finance lease liabilities | | 594 | | | 110 | |
| Operating lease liabilities | | 1,800 | | | 1,250 | |
| Current portion of long-term debt | | 619 | | | 780 | |
| | | | |
| Total current liabilities | | 84,319 | | | 68,821 | |
| | | | |
| Non-current liabilities | | | | |
| Deferred tax liability | | 1,465 | | | 1,982 | |
| Finance lease liabilities, net of current portion | | 1,275 | | | 193 | |
| Operating lease liabilities, net of current portion | | 7,484 | | | 3,950 | |
| Long-term debt, net of current portion | | 26,645 | | | 7,114 | |
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | |
| Other long-term liabilities | | 8,542 | | | 9,614 | |
| | | | |
| Total non-current liabilities | | 45,411 | | | 22,853 | |
| | | | |
| Total liabilities | | $ | 129,730 | | | $ | 91,674 | |
* Investment in affiliates include APC’s investment in ApolloMed, which is reflected as treasury shares and eliminated upon consolidation. Amounts due from affiliates are receivables with ApolloMed’s subsidiaries and consolidated VIEs. As a result, these balances are eliminated upon consolidation and are not reflected on ApolloMed’s consolidated balance sheets as of December 31, 2022 and 2021.
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 one month to thirteen years, some of which may include options to extend the leases for up to ten years, and some of which may include options to terminate the leases within one year. As of December 31, 2022 and 2021, assets recorded under finance leases were $1.8 million and $1.3 million, respectively, and accumulated depreciation associated with finance leases was $1.0 million and $0.6 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 consolidated balance sheets.
The components of lease expense were as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
| Operating lease cost | $ | 6,622 | | | $ | 6,025 | |
| | | |
| Finance lease cost | | | |
| Amortization of lease expense | 564 | | | 208 | |
| Interest on lease liabilities | 70 | | | 26 | |
| | | |
| Sublease income | (649) | | | (852) | |
| | | |
| Total lease cost | $ | 6,607 | | | $ | 5,407 | |
| | | |
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
Other information related to leases was as follows:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Supplemental Cash Flows Information | | | |
| | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 6,781 | | | $ | 6,083 | |
| Operating cash flows from finance leases | 70 | | | 26 | |
| Financing cash flows from finance leases | 564 | | | 208 | |
| | | |
| Right-of-use assets obtained in exchange for lease liabilities: | | | |
| | | |
| Finance leases | 576 | | | — | |
| | | |
| December 31, 2022 | | December 31, 2021 |
| Weighted-Average Remaining Lease Term | | | |
| | | |
| Operating leases | 6.66 years | | 6.27 years |
| Finance leases | 3.41 years | | 3.26 years |
| | | |
| Weighted-Average Discount Rate | | | |
| | | |
| Operating leases | 5.50 | % | | 6.10 | % |
| Finance leases | 4.92 | % | | 4.53 | % |
Future minimum lease payments under non-cancellable leases as of December 31, 2022 were as follows:
| | | | | | | | | | | |
| Years ending December 31, | Operating Leases | | Finance Leases |
| 2023 | $ | 4,786 | | | $ | 673 | |
| 2024 | 4,415 | | | 607 | |
| 2025 | 4,051 | | | 444 | |
| 2026 | 3,767 | | | 190 | |
| 2027 | 3,099 | | | 132 | |
| Thereafter | 8,407 | | | — | |
| | | |
| Total future minimum lease payments | 28,525 | | | 2,046 | |
| Less: imputed interest | 5,038 | | | 177 | |
| Total lease obligations | 23,487 | | | 1,869 | |
| Less: current portion | 3,572 | | | 594 | |
| Long-term lease obligations | $ | 19,915 | | | $ | 1,275 | |
As of December 31, 2022, the Company does not have additional operating or finance leases that have not yet commenced.
Apollo Medical Holdings, Inc.
Notes to Consolidated Financial Statements
20. Subsequent Events
ApolloMed purchase of APC-LSMA’s entities
On February 23, 2023, AP-AMH 2, a VIE of ApolloMed, purchased 100% of the equity interest in each of AMG, a Professional Medical Corporation, 1 World Medicine Urgent Care Corporation, and Eleanor Leung, M.D., a Professional Medical Corporation from APC-LSMA, a VIE of APC. As a result of the purchase, these entities will become consolidated entities of AP-AMH 2.
