Apollo Medical(AMEH) - 2019 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Overview of the company's financial performance and position for the period ended June 30, 2019 Item 1. Condensed Consolidated Financial Statements Unaudited financial statements show asset and liability growth, with mixed net income trends, reflecting acquisitions and new accounting standards Condensed Consolidated Balance Sheets Total assets increased to $568.3 million from $513.0 million, driven by acquisitions, while liabilities also rose Condensed Consolidated Balance Sheet Highlights (Unaudited) | Metric | June 30, 2019 ($) | December 31, 2018 ($) | | :--- | :--- | :--- | | Total Assets | $568,329,965 | $512,999,049 | | Goodwill | $209,313,824 | $185,805,880 | | Intangible assets, net | $109,069,858 | $86,875,883 | | Total Liabilities | $162,657,953 | $106,337,868 | | Lines of credit – related party | $44,600,000 | $13,000,000 | | Total Stockholders' Equity | $186,089,500 | $181,544,152 | Condensed Consolidated Statements of Income Q2 2019 revenue grew 6% to $130.0 million with increased net income, but six-month revenue declined 8% to $225.8 million Financial Performance for the Three Months Ended June 30 | Metric | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | | Total Revenue | $130,049,566 | $122,666,531 | | Income from Operations | $14,728,768 | $7,149,747 | | Net Income Attributable to AMEH | $3,545,216 | $2,664,102 | | Diluted EPS | $0.09 | $0.07 | Financial Performance for the Six Months Ended June 30 | Metric | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | | Total Revenue | $225,806,737 | $246,589,777 | | Income from Operations | $11,420,910 | $29,851,456 | | Net Income Attributable to AMEH | $3,684,880 | $4,824,557 | | Diluted EPS | $0.10 | $0.13 | Condensed Consolidated Statements of Cash Flows Net cash decreased by $50.6 million due to significant cash usage in operating and investing activities, primarily for acquisitions Cash Flow Summary for the Six Months Ended June 30 | Cash Flow Activity | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(22,018,073) | $13,415,392 | | Net cash used in investing activities | $(50,245,680) | $(20,265,484) | | Net cash provided by (used in) financing activities | $21,630,767 | $(1,731,544) | | Net decrease in cash | $(50,632,986) | $(8,581,636) | - The primary use of cash in investing activities was $41.5 million for a business acquisition, net of cash acquired[23] - Financing activities were supported by $39.6 million in borrowings on lines of credit, offset by $10.9 million in dividends paid[23][25] Notes to Condensed Consolidated Financial Statements Key notes detail the Alpha Care acquisition, ASC 842 adoption, related party transactions, and a material weakness in internal controls - On May 31, 2019, the company acquired 100% of Alpha Care for approximately $45.1 million in cash, recognizing $23.5 million in goodwill and $29.9 million in network relationship intangible assets[142][143] - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, resulting in the recognition of right-of-use assets and lease liabilities of $14.3 million on the consolidated balance sheets[134][136] - A series of transactions agreed upon on May 10, 2019, involving a $545 million loan to affiliate AP-AMH and a $300 million purchase of the company's common stock by affiliate APC, are contingent on stockholder approval and would fundamentally change the company's results[45][47][48] Revenue Concentration by Payor | Payor | Q2 2019 (% of Revenue) | Q2 2018 (% of Revenue) | | :--- | :--- | :--- | | Payor A | 13.7% | 11.3% | | Payor B | 12.6% | 16.6% | | Payor C | 10.5% | 11.6% | | Payor D | 13.7% | 17.9% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 revenue growth from the Alpha Care acquisition and six-month revenue decline due to NGACO delays and refined risk pool estimates - The acquisition of Alpha Care on May 31, 2019, for $45.0 million in cash, contributed $11.5 million in capitation revenue in Q2 2019[274][290] - Revenue for the six months ended June 30, 2019, decreased by $20.8 million (8%) compared to the prior year, primarily due to a delayed start of the 2019 NGACO performance year and a $10.6 million decrease in risk pool revenue from refined estimation assumptions[294][295] - General and administrative expenses decreased by $0.3 million (2%) for the six-month period, reflecting a $3.0 million reduction in overhead from winding down legacy ApolloMed businesses, offset by increased professional fees and costs related to the Alpha Care acquisition[301][302] - Cash and cash equivalents decreased by $50.6 million in the first six months of 2019, driven by $41.5 million (net of cash acquired) used for the Alpha Care acquisition and $22.0 million used in operating activities[316][317] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section is not applicable for the company - The company states that quantitative and qualitative disclosures about market risk are not applicable[328] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in revenue recognition from full risk pools, with remediation underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of the end of the period[329] - A material weakness was identified related to the failure to maintain effective internal controls over the review of full risk pool reports provided by an external party, which are used for revenue recognition[332] - The company is implementing a remediation plan, which includes designing new procedures to test the reliability of information in future full risk pool reports[333] PART II OTHER INFORMATION Details on legal proceedings, new risk factors related to affiliate transactions, and unregistered equity sales Item 1. Legal Proceedings The company is involved in routine medical malpractice claims, not expected to materially impact operations - The company is subject to legal actions, most of which are claims of medical malpractice related to services provided by its affiliated hospitalists[337] Item 1A. Risk Factors New significant risks arise from proposed affiliate transactions, including loan repayment, credit facility obligations, and regulatory compliance - New risks have emerged related to the proposed APC Transactions agreed upon on May 10, 2019[340] - Key risks include: AP-AMH may be unable to repay its $545 million loan from ApolloMed; ApolloMed will be obligated to repay a new $250 million senior secured credit facility; and regulators could determine the new structure violates California's corporate practice of medicine doctrine[340] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 30,067 shares of common stock from warrant exercises, generating $278,447 in proceeds - In Q2 2019, the company issued 30,067 shares of common stock and received approximately $278,447 from the exercise of warrants at prices between $9.00 and $10.00 per share[342]