UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___. Commission File No. 001-37392 Apollo Medical Holdings, Inc. (Exact name of registrant as specified in its charter) Delaware 95-4472349 (State or other jurisdict ...

PART I [Business](index=7&type=section&id=Item%201.%20Business) Apollo Medical Holdings, Inc. is a California-based, physician-centric integrated population health management company providing coordinated care to over 800,000 patients through IPAs, MSOs, and an NGACO [Overview](index=7&type=section&id=Overview) The company operates as a physician-centric integrated population health management firm in California, focusing on cost-effective, coordinated medical care - The company is a physician-centric integrated population health management company providing coordinated, outcomes-based medical care in California[17](index=17&type=chunk) - Through its NGACO model and a network of IPAs with over **6,000 contracted physicians**, the company coordinates care for over **800,000 patients** in California[19](index=19&type=chunk) - In December 2017, ApolloMed completed a reverse merger with Network Medical Management (NMM), with NMM becoming the accounting acquirer[20](index=20&type=chunk) [Organization](index=9&type=section&id=Organization) The company operates through key subsidiaries and a Variable Interest Entity (VIE) structure, managing physician groups due to California's corporate practice of medicine laws - The company operates through key subsidiaries including Network Medical Management (NMM), Apollo Medical Management (AMM), APAACO (NGACO participant), and Apollo Care Connect (IT platform)[24](index=24&type=chunk) - Due to California's corporate practice of medicine laws, the company uses long-term Management Services Agreements (MSAs) with affiliated physician groups (IPAs), which are treated as Variable Interest Entities (VIEs) and consolidated in financial statements[30](index=30&type=chunk)[31](index=31&type=chunk) - Key consolidated VIEs include Allied Pacific of California IPA (APC), ApolloMed Hospitalists (AMH), and Southern California Heart Centers (SCHC)[32](index=32&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk) - The company holds strategic investments, including a **48.9% ownership interest** in Universal Care, Inc. (UCI), a Medicare Advantage health plan, and a **40% interest** in Pacific Ambulatory Surgery Center, LLC (PASC)[35](index=35&type=chunk) [Our Industry](index=11&type=section&id=Our%20Industry) The U.S. healthcare industry faces rising expenditures and a shift towards value-based, capitated payment models, favoring integrated medical systems - U.S. healthcare expenditures are projected to grow **5.5% annually** from 2017 to 2026, reaching **$6.0 trillion by 2027**, with the healthcare share of GDP rising to **19.7%**[38](index=38&type=chunk) - A major industry trend is the shift from fee-for-service reimbursement to value-based, capitated payment models that incentivize quality and cost efficiency[42](index=42&type=chunk) - Integrated medical systems are well-positioned to take advantage of industry trends by pooling large numbers of patients, leveraging data analytics, and managing costs effectively under capitated arrangements[46](index=46&type=chunk) [Our Business Operations](index=13&type=section&id=Our%20Business%20Operations) The company's operations focus on affiliated IPAs contracting with HMOs under capitated models, with its NGACO, APAACO, participating in the advanced AIPBP risk-taking model - Affiliated IPAs contract with HMOs to provide physician services under capitated payment models, assuming responsibility for patient care costs[52](index=52&type=chunk) - MSOs provide non-medical services to affiliated IPAs, including physician recruiting, contracting, medical management, and member services[53](index=53&type=chunk) - The company's NGACO, APAACO, participates in the CMS AIPBP track, the most advanced risk-taking model, where it receives a projected monthly payment to cover all Part A and Part B costs for its aligned beneficiaries[60](index=60&type=chunk) - For its NGACO, APAACO selected Risk Arrangement A (**80% of Medicare Part A and B risk**) with a shared savings and losses cap of **5%**[58](index=58&type=chunk) [Our Revenue Streams](index=17&type=section&id=Our%20Revenue%20Streams) Revenue is generated from capitation payments, risk pool settlements, management fees, NGACO per-beneficiary payments, and fee-for-service reimbursements - Capitation revenue is comprised of fixed monthly PMPM fees from HMOs for providing medical services to enrollees[64](index=64&type=chunk) - Risk pool settlements are earned by sharing in the financial surplus from managing institutional and professional medical costs below budgeted amounts[67](index=67&type=chunk)[68](index=68&type=chunk) - Management fee income is generated from providing non-medical services to IPAs and hospitals, typically as a percentage of revenue or collections[72](index=72&type=chunk) - NGACO revenue is derived from monthly per-beneficiary payments from CMS under the AIPBP track, where the company is responsible for all Part A and B costs for its aligned beneficiaries[73](index=73&type=chunk) [Our Strengths and Competition](index=20&type=section&id=Our%20Strengths%20and%20Competition) The company leverages integrated capabilities, a diversified model, and a strong physician network, but faces intense competition from various healthcare providers - Key strengths include a combination of clinical, administrative, and technology capabilities, business diversification, a strong management team, and a robust physician network[79](index=79&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk)[82](index=82&type=chunk) - The company faces intense competition across its business lines. IPA competitors include Regal Medical Group and HealthCare Partners. ACO competitors include Heritage California ACO. Hospitalist competitors include EmCare and Team Health[87](index=87&type=chunk)[88](index=88&type=chunk)[89](index=89&type=chunk)[91](index=91&type=chunk) [Regulatory Matters](index=22&type=section&id=Regulatory%20Matters) The company's operations are subject to extensive federal and state healthcare regulations, including the corporate practice of medicine doctrine, anti-kickback, Stark Law, False Claims Act, and HIPAA - California's 'corporate practice of medicine' laws prohibit the company from directly owning physician practices, requiring it to operate through long-term Management Services Agreements (MSAs) with affiliated, physician-owned VIEs[93](index=93&type=chunk)[94](index=94&type=chunk) - The company is subject to federal laws including the False Claims Act, which imposes liability for fraudulent claims to government programs, and the Anti-Kickback Statute, which prohibits remuneration for referrals[97](index=97&type=chunk)[102](index=102&type=chunk) - The federal Stark Law prohibits physician self-referrals for designated health services to entities where the physician has a financial relationship, unless an exception applies[106](index=106&type=chunk) - The company must comply with HIPAA's privacy and security rules regarding patient health information, with violations carrying significant civil and criminal penalties[111](index=111&type=chunk)[112](index=112&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) Investing in the company's stock involves significant risk, including material weakness in internal controls, operational vulnerabilities, and regulatory compliance challenges [Risks Relating to Our General Business and Operations](index=30&type=section&id=Risks%20Relating%20to%20Our%20General%20Business%20and%20Operations) The company faces significant operational and financial risks, including material weaknesses in internal controls, tax limitations, and cybersecurity threats - Management concluded internal controls over financial reporting were not effective as of December 31, 2018, due to a material weakness related to the review of full risk pool reports from hospital partners, which are used for revenue recognition[130](index=130&type=chunk)[132](index=132&type=chunk) - The company's net operating loss carryforwards are subject to limitations under Section 382 of the Internal Revenue Code due to the Merger, which likely constituted an "ownership change"[136](index=136&type=chunk) - The business is vulnerable to breaches of its information security systems, which could expose private patient information, disrupt business, and result in litigation and regulatory penalties[149](index=149&type=chunk)[150](index=150&type=chunk) [Risks Relating to Our Growth Strategy and Business Model](index=37&type=section&id=Risks%20Relating%20to%20Our%20Growth%20Strategy%20and%20Business%20Model) The company's growth strategy relies on acquisitions, which carry integration risks, while its capitation model and payor concentration pose financial vulnerabilities - The growth strategy is dependent on acquiring or partnering with medical practices, which involves risks such as integration difficulties, incurring substantial costs, and potential dilution to existing stockholders[163](index=163&type=chunk)[164](index=164&type=chunk)[168](index=168&type=chunk) - The company could experience significant losses under capitation contracts if care-related expenses exceed the fixed, prospective payments received from health plans[178](index=178&type=chunk) - Operations are dependent on a concentrated number of payors. In 2018, **four payors accounted for 61.5% of total net revenue**[184](index=184&type=chunk) - The contractual arrangements with VIEs are not as secure as direct ownership and rely on the performance of their physician equity holders[181](index=181&type=chunk) [Risks Relating to the Healthcare Industry](index=43&type=section&id=Risks%20Relating%20to%20the%20Healthcare%20Industry) The company operates in a highly competitive healthcare industry, facing risks from changing reimbursement policies and uncertainties in medical claims reserves - The healthcare industry is highly competitive, with rivals including national providers like Team Health, EmCare, DaVita Medical Group, and Heritage, many of which have greater resources[196](index=196&type=chunk) - The business is vulnerable to changes in reimbursement rates and policies from third-party payors, including Medicare and Medicaid, which are implementing measures to reduce healthcare costs[201](index=201&type=chunk)[202](index=202&type=chunk) - The company establishes reserves for incurred but not reported (IBNR) medical claims, which are based on estimates. If actual claims exceed these reserves, it could lead to a reduction in net income[207](index=207&type=chunk)[209](index=209&type=chunk) [Risks Relating to NGACO](index=48&type=section&id=Risks%20Relating%20to%20NGACO) The NGACO Model, a core strategic focus, involves significant political, financial, and operational risks, including potential for substantial losses and compliance requirements - The NGACO Model program is subject to political risk and could be discontinued or significantly altered if the ACA is repealed or amended[220](index=220&type=chunk) - Under the AIPBP payment mechanism, the company assumes **80% risk** for Medicare Part A and Part B expenditures and could be liable for losses of up to approximately **$13.2 million** for the 2018 performance year[222](index=222&type=chunk)[223](index=223&type=chunk) - Participation requires a financial guarantee to CMS. For 2018, the company provided an irrecoverable standby letter of credit for **$6.6 million**[225](index=225&type=chunk) - Continued participation in the NGACO Model and its AIPBP mechanism is not guaranteed and depends on ongoing compliance with all terms, conditions, and performance requirements set by CMS[230](index=230&type=chunk) [Risks Relating to Regulatory Compliance](index=52&type=section&id=Risks%20Relating%20to%20Regulatory%20Compliance) The company faces substantial risks from the intensely regulated healthcare environment, including corporate practice of medicine laws, anti-kickback statutes, and the need for a Knox-Keene license - State laws prohibiting the corporate practice of medicine could restrict the company's business model and subject it to penalties if its MSA arrangements with physician groups are found to be invalid[231](index=231&type=chunk)[232](index=232&type=chunk) - The company is subject to numerous federal and state healthcare laws, including the Anti-Kickback Statute, Stark Law, and False Claims Act, with non-compliance carrying risks of fines, penalties, and exclusion from government programs[235](index=235&type=chunk)[238](index=238&type=chunk) - The company does not hold a Knox-Keene license in California. If regulators determine its risk-bearing arrangements require such a license, it could face civil and criminal liability and be required to restructure[246](index=246&type=chunk) - The company must comply with DMHC financial solvency regulations for its risk-bearing organizations, including maintaining minimum cash-to-claims ratios and positive tangible net equity[247](index=247&type=chunk)[248](index=248&type=chunk) [Properties](index=65&type=section&id=Item%202.%20Properties) The company's corporate headquarters is in Alhambra, California, leasing approximately 35,000 square feet, with additional significant office spaces leased in Glendale and San Gabriel - The corporate headquarters is located in Alhambra, CA, consisting of approximately **35,000 square feet** of leased office space. The current lease term is month-to-month[280](index=280&type=chunk) - Other significant leased properties include approximately **19,600 square feet** in Glendale, CA (leases expire in 2021) and **8,800 square feet** in San Gabriel, CA (lease expires in 2024)[281](index=281&type=chunk)[282](index=282&type=chunk) [Legal Proceedings](index=65&type=section&id=Item%203.%20Legal%20Proceedings) Information regarding pending or threatened legal proceedings and claims is incorporated by reference from Note 14, "Commitments and Contingencies," in the consolidated financial statements - Details on legal proceedings are incorporated by reference from Note 14 of the consolidated financial statements[285](index=285&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=66&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) ApolloMed's common stock is listed on NASDAQ under "AMEH"; the company has not paid cash dividends and repurchased shares in Q4 2018 - The company's common stock is listed on the NASDAQ Capital Market under the symbol "**AMEH**"[286](index=286&type=chunk) - The company has not paid any cash dividends on its common stock and does not anticipate doing so in the foreseeable future[288](index=288&type=chunk) Issuer Purchases of Equity Securities (December 2018) | Security | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Common Stock | 168,493 | $20.64 | | Warrants | 18,939 | $15.94 (weighted avg) | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=67&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses the company's financial performance for 2018 vs. 2017, highlighting revenue growth, liquidity, and critical accounting policies including ASC 606 adoption [Results of Operations](index=69&type=section&id=Results%20of%20Operations) For 2018, total revenue increased 46% to $519.9 million, driven by capitation and risk pool settlements, while net income rose 32% to $60.3 million Consolidated Statements of Income Summary (2018 vs. 2017) | Metric | 2018 | 2017 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | **$519.9M** | **$356.4M** | **$163.5M** | **46%** | | Capitation, net | $344.3M | $272.9M | $71.4M | 26% | | Risk pool settlements | $100.9M | $44.6M | $56.3M | 126% | | Management fee income | $49.7M | $27.0M | $22.7M | 84% | | **Total Expenses** | **$431.5M** | **$321.2M** | **$110.3M** | **34%** | | Cost of services | $361.1M | $273.5M | $87.6M | 32% | | G&A expenses | $43.4M | $26.2M | $17.2M | 65% | | **Income from Operations** | **$88.4M** | **$35.1M** | **$53.3M** | **152%** | | **Net Income** | **$60.3M** | **$45.8M** | **$14.5M** | **32%** | | Net Income Attributable to AMEH | $10.8M | $25.8M | ($15.0M) | -58% | - The **$163.5 million revenue increase** was driven by higher capitation due to membership growth, favorable risk pool settlements, and increased management fees. The legacy ApolloMed operations acquired in the Merger accounted for **$91.7 million** of this increase[308](index=308&type=chunk) - Cost of services increased by **$87.6 million (32%)**, primarily due to higher medical claims from APAACO and MMG, increased personnel costs, and outsourced labor, partially offset by a **$35.7 million decrease** in discretionary provider bonuses[310](index=310&type=chunk) [Liquidity and Capital Resources](index=73&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2018, the company had $108.0 million in cash and equivalents, with working capital of $100.8 million, primarily financing operations through internally generated funds and credit facilities Cash and Working Capital (as of Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Cash, Cash Equivalents & Marketable Securities | $108.0M | $100.9M | | Working Capital | $100.8M | $34.6M | Summary of Cash Flows (Year Ended Dec 31) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $25.5M | $51.8M | | Net Cash (Used in) / from Investing Activities | ($25.2M) | $26.7M | | Net Cash Used in Financing Activities | ($11.2M) | ($15.0M) | - NMM has a credit facility of up to **$20.0 million** (temporarily increased to **$27.0 million**), with **$13.0 million** outstanding as of year-end 2018. APC has a separate **$10.0 million** credit facility with no amount drawn[329](index=329&type=chunk)[331](index=331&type=chunk) [Critical Accounting Policies and Estimates](index=75&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's financial statements rely on significant estimates for medical liabilities and revenue, consolidate VIEs, and adopted ASC 606 in 2018, impacting risk pool revenue recognition - Significant estimates are required for accruing medical liabilities (including IBNR), determining full-risk and shared-risk revenue, and assessing goodwill for impairment[339](index=339&type=chunk) - The company consolidates VIEs when it has both the power to direct the VIE's significant economic activities and the right to receive benefits or the obligation to absorb losses[350](index=350&type=chunk) - On January 1, 2018, the company adopted the new revenue recognition standard (ASC 606) using the modified retrospective method. This resulted in an adjustment to opening retained earnings and noncontrolling interests[354](index=354&type=chunk) - Goodwill is tested for impairment at least annually at the level of its three main reporting units: management services, IPA, and ACO[363](index=363&type=chunk) [Financial Statements and Supplementary Data](index=82&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for 2018 and 2017, including the auditor's report with an unqualified opinion on financials but an adverse opinion on internal controls - The independent auditor, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements but an adverse opinion on the company's internal control over financial reporting as of December 31, 2018[370](index=370&type=chunk)[371](index=371&type=chunk) Consolidated Balance Sheet Summary (as of Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | **Total Assets** | **$513.0M** | **$490.6M** | | Cash and cash equivalents | $106.9M | $99.7M | | Goodwill | $185.8M | $189.8M | | **Total Liabilities** | **$106.3M** | **$154.3M** | | Medical liabilities | $33.6M | $64.0M | | **Total Shareholders' Equity** | **$181.5M** | **$164.2M** | Consolidated Income Statement Summary (Year Ended Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Total Revenue | $519.9M | $356.4M | | Income from Operations | $88.4M | $35.1M | | Net Income | $60.3M | $45.8M | | Net Income Attributable to AMEH | $10.8M | $25.8M | | Diluted EPS | $0.29 | $0.90 | [Notes to Consolidated Financial Statements](index=90&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, the 2017 reverse merger, the 2018 adoption of ASC 606 with a $10.2 million adjustment, and disclosures on commitments and contingencies - The December 2017 merger with NMM was treated as a reverse acquisition for accounting purposes, with NMM as the accounting acquirer. The purchase consideration was valued at **$86.4 million**[391](index=391&type=chunk)[519](index=519&type=chunk)[525](index=525&type=chunk) - The adoption of revenue recognition standard ASC 606 on Jan 1, 2018, resulted in a cumulative-effect adjustment of **$10.2 million**, primarily increasing receivables and noncontrolling interests due to earlier recognition of full risk pool revenue[676](index=676&type=chunk) - The company is a party to a Demand for Arbitration filed by Prospect Medical Group alleging damages in excess of **$5.0 million**. The company disputes the allegations and the outcome is currently uncertain[656](index=656&type=chunk) - As of Dec 31, 2018, the company had future minimum rental payments under non-cancelable operating leases of approximately **$7.1 million**[645](index=645&type=chunk)[646](index=646&type=chunk) [Controls and Procedures](index=154&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls were ineffective as of December 31, 2018, due to a material weakness in reviewing external risk pool reports, a finding concurred by the independent auditor - Management concluded that disclosure controls and procedures were not effective as of December 31, 2018, due to a material weakness in internal control over financial reporting[693](index=693&type=chunk) - The identified material weakness is that the company did not maintain effective controls over the review of completeness and accuracy of data in full risk pool reports provided by an external party, which are used to recognize material amounts of revenue[698](index=698&type=chunk) - The company has initiated a remediation plan, which involves designing new procedures to test the reliability of the information included in future full risk pool reports, expected to be implemented in 2019[701](index=701&type=chunk) - The independent registered public accounting firm issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2018, concurring with management's assessment of a material weakness[705](index=705&type=chunk)[710](index=710&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=159&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) Information concerning directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2019 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2019 Proxy Statement[714](index=714&type=chunk) [Executive Compensation](index=159&type=section&id=Item%2011.%20Executive%20Compensation) Information concerning executive compensation is incorporated by reference from the forthcoming 2019 Proxy Statement - Information regarding executive compensation is incorporated by reference from the forthcoming 2019 Proxy Statement[715](index=715&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=160&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information concerning security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the forthcoming 2019 Proxy Statement - Information regarding security ownership is incorporated by reference from the forthcoming 2019 Proxy Statement[717](index=717&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=160&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) Information concerning certain relationships, related transactions, and director independence is incorporated by reference from the forthcoming 2019 Proxy Statement - Information regarding related party transactions and director independence is incorporated by reference from the forthcoming 2019 Proxy Statement[718](index=718&type=chunk) [Principal Accounting Fees and Services](index=160&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information concerning principal accounting fees and services is incorporated by reference from the forthcoming 2019 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the forthcoming 2019 Proxy Statement[719](index=719&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=160&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financial statements and an index of all exhibits - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K[720](index=720&type=chunk)