Apollo Medical(AMEH) - 2024 Q3 - Quarterly Report

Glossary The Glossary provides definitions for abbreviations and acronyms used throughout the document to ensure clarity and understanding - The Glossary provides definitions for abbreviations and acronyms used throughout the document to ensure clarity and understanding[4] Introductory Note This section clarifies company references and notes that CMS has not reviewed the report's statements regarding healthcare programs - References to 'Company,' 'we,' 'us,' 'our' refer to Astrana Health, Inc. and its consolidated subsidiaries and affiliated entities, including Variable Interest Entities (VIEs)[6] - The Centers for Medicare & Medicaid Services ('CMS') have not reviewed any statements in this Report, including those describing participation in the ACO REACH Model and Medicare Shared Savings Program ('MSSP')[7] Note About Forward-Looking Statements This report contains forward-looking statements about the company's business, financial condition, and operating results, which involve inherent risks and uncertainties - This report contains forward-looking statements regarding business, financial condition, operating results, plans, objectives, expectations, and intentions, including projections of earnings, revenue, and future liquidity[9] - Forward-looking statements involve risks and uncertainties, many of which are difficult to predict and outside the company's control, and actual results may differ materially from those projected[11] - The Company undertakes no obligation to publicly update any forward-looking statement, except as required by applicable securities laws[11] PART I FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial performance Condensed Consolidated Financial Statements This section presents Astrana Health, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of income, statements of mezzanine and stockholders' equity, and statements of cash flows, along with detailed notes explaining the company's business, accounting policies, recent acquisitions, debt structure, and other financial details for the periods ended September 30, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (Thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Total Assets | $1,285,376 | $933,361 | $352,015 | 37.7% | | Total Liabilities | $778,269 | $522,593 | $255,676 | 48.9% | | Total Equity | $709,619 | $616,651 | $92,968 | 15.1% | | Cash and cash equivalents | $347,994 | $293,807 | $54,187 | 18.4% | | Receivables, net | $132,237 | $76,780 | $55,457 | 72.2% | | Intangible assets, net | $109,108 | $71,648 | $37,460 | 52.3% | | Goodwill | $409,711 | $278,831 | $130,880 | 46.9% | | Medical liabilities | $160,279 | $106,657 | $53,622 | 50.3% | | Long-term debt, net | $423,119 | $258,939 | $164,180 | 63.4% | Condensed Consolidated Statements of Income This section details the company's revenues, expenses, and net income over specific reporting periods, reflecting operational performance Consolidated Statements of Income (Thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Change | % Change | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----- | :------- | | Total Revenue | $478,710 | $348,173 | $130,537 | 37% | | Capitation, net | $431,401 | $305,678 | $125,723 | 41% | | Total Expenses | $450,285 | $309,090 | $141,195 | 46% | | Income from operations | $28,425 | $39,083 | $(10,658) | (27)% | | Net income attributable to Astrana Health, Inc. | $16,094 | $22,059 | $(5,965) | (27)% | | Earnings per share – basic | $0.34 | $0.47 | $(0.13) | (27.7)% | | Earnings per share – diluted | $0.33 | $0.47 | $(0.14) | (29.8)% | | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change | % Change | | :-------------------------------------- | :----------------------------- | :----------------------------- | :----- | :------- | | Total Revenue | $1,369,331 | $1,033,625 | $335,706 | 32% | | Capitation, net | $1,239,885 | $906,430 | $333,455 | 37% | | Total Expenses | $1,280,701 | $945,142 | $335,559 | 36% | | Income from operations | $88,630 | $88,483 | $147 | 0% | | Net income attributable to Astrana Health, Inc. | $50,100 | $48,361 | $1,739 | 4% | | Earnings per share – basic | $1.05 | $1.04 | $0.01 | 1% | | Earnings per share – diluted | $1.04 | $1.03 | $0.01 | 1% | Condensed Consolidated Statements of Mezzanine and Stockholders' Equity This section outlines changes in the company's equity, including net income, share issuances, and distributions to non-controlling interests - Net income for the nine months ended September 30, 2024, increased retained earnings by $50.1 million[19][20] - Issuance of shares for business acquisition contributed $22.0 million to additional paid-in capital[20][73] - Share-based compensation increased additional paid-in capital by $19.3 million for the nine months ended September 30, 2024[20][123] - Dividends paid to non-controlling interests totaled $2.1 million for the nine months ended September 30, 2024[24][122] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities, reflecting the company's liquidity Consolidated Statements of Cash Flows (Thousands) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change | % Change | | :------------------------------------------------------- | :----------------------------- | :----------------------------- | :----- | :------- | | Net cash provided by operating activities | $63,146 | $48,927 | $14,219 | 29% | | Net cash used in investing activities | $(159,071) | $(54,096) | $(104,975) | 194% | | Net cash provided by (used in) financing activities | $150,413 | $(8,572) | $158,985 | * | | Net increase (decrease) in cash and cash equivalents and restricted cash | $54,488 | $(13,741) | $68,229 | (497)% | - Investing activities for the nine months ended September 30, 2024, included $115.5 million for business acquisitions, $26.0 million for promissory notes, and $6.0 million for an equity method investment[24][306] - Financing activities for the nine months ended September 30, 2024, were primarily driven by $171.9 million in borrowings on long-term debt[24][307] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Description of Business This note describes Astrana Health, Inc.'s core business as a provider-centric, technology-powered, risk-bearing healthcare company operating in three segments - Astrana Health, Inc. (formerly Apollo Medical Holdings, Inc.) is a leading provider-centric, technology-powered, risk-bearing healthcare company headquartered in Alhambra, California[29][30] - The company operates in three reportable segments: Care Partners (building and managing provider networks, RBOs, ACOs, MSSP), Care Delivery (primary, multi-specialty, and ancillary care services), and Care Enablement (comprehensive technology platform for value-based care)[31][33][34] - Astrana provides value-based care enablement services and care delivery to patients in California, Nevada, and Texas, primarily covered by Medicare, Medicaid, and commercial insurance[30] 2. Basis of Presentation and Summary of Significant Accounting Policies This note outlines the accounting principles used in preparing the financial statements, including consolidation, estimates, and recent pronouncements - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial statements and Form 10-Q instructions, and should be read in conjunction with the 2023 Annual Report on Form 10-K[35] - The financial statements include Astrana's wholly owned subsidiaries and consolidated Variable Interest Entities (VIEs)[36] - Management makes significant estimates and assumptions, including for receivables, long-lived assets, business combinations, medical liabilities, income taxes, and share-based compensation[39] - Recent accounting pronouncements, ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures), are not expected to have a significant impact on the consolidated financial statements[63][64] 3. Business Combinations and Goodwill This note details the company's acquisition activities, including purchase consideration, revenue contributions, and changes in goodwill - During the nine months ended September 30, 2024, Astrana completed several acquisitions, including Airline Complete, AHMS, PCCCV, CFC, and ADSC[65][66][67][68][71] Total Purchase Consideration for Acquisitions (Nine Months Ended Sep 30, 2024, Thousands) | Component | Amount | | :------------------------ | :----- | | Cash paid | $169,933 | | Contingent consideration | $14,187 | | Common stock issued | $21,952 | | Total | $206,072 | - These acquisitions contributed $235.9 million in total revenue and $26.4 million in net income from their respective acquisition dates through September 30, 2024[73] Goodwill Carrying Value (Thousands) | Metric | Amount | | :------------------------ | :----- | | Balance, January 1, 2024 | $278,831 | | Acquisitions | $128,271 | | Adjustments | $2,609 | | Balance, September 30, 2024 | $409,711 | 4. Intangible Assets, Net This note provides a breakdown of the company's intangible assets, including indefinite-lived and amortized assets, and associated amortization expenses Intangible Assets, Net (Thousands) | Category | Sep 30, 2024 | Dec 31, 2023 | Change | % Change | | :-------------------------------------- | :----------- | :----------- | :----- | :------- | | Indefinite lived assets (Trademarks, Licenses) | $4,050 | $2,150 | $1,900 | 88.4% | | Amortized intangible assets (Network, Management, Member relationships, etc.) | $105,058 | $69,498 | $35,560 | 51.2% | | Total Intangible Assets, Net | $109,108 | $71,648 | $37,460 | 52.3% | Amortization Expense (Thousands) | Period | 2024 | 2023 | Change | % Change | | :------------------------ | :--- | :--- | :----- | :------- | | Three months ended Sep 30 | $6,700 | $3,200 | $3,500 | 109.4% | | Nine months ended Sep 30 | $18,000 | $9,500 | $8,500 | 89.5% | Estimated Future Amortization Expense (Thousands) | Year | Amount | | :--- | :----- | | 2024 (remaining) | $6,630 | | 2025 | $22,856 | | 2026 | $18,642 | | 2027 | $15,170 | | 2028 | $12,459 | | Thereafter | $29,301 | | Total | $105,058 | 5. Investments in Other Entities This note details the company's equity method investments, including the acquisition of a 25% interest in I Health, Inc. and related income/loss - The company's total equity method investment balance increased to $34.6 million as of September 30, 2024, from $25.8 million at December 31, 2023[13][84] - On March 31, 2024, Astrana acquired a 25% equity interest in I Health, Inc. for $6.0 million, with an associated call option valued at $3.9 million to purchase additional equity[88][219] Income (Loss) from Equity Method Investments (Thousands) | Period | 2024 | 2023 | Change | % Change | | :------------------------ | :--- | :--- | :----- | :------- | | Three months ended Sep 30 | $1,353 | $(2,104) | $3,457 | (164)% | | Nine months ended Sep 30 | $2,887 | $3,104 | $(217) | (7)% | 6. Loans Receivable This note outlines the company's non-current loans receivable, including new issuances and existing convertible promissory notes Loans Receivable, Non-current (Thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | Change | % Change | | :------------------------ | :----------- | :----------- | :----- | :------- | | Loans receivable, non-current | $55,284 | $26,473 | $28,811 | 108.8% | - New loans issued in 2024 include a $20.0 million senior secured promissory note to BASS Medical Group (8.21% interest, matures 2031) and a $5.0 million secured convertible promissory note to DWGAS, Inc. (7.5% interest, matures 2029, with conversion option)[92][93] - An existing $25.0 million convertible promissory note with IntraCare (8.81% interest) matures in July 2028[91] 7. Accounts Payable and Accrued Expenses This note details the composition of accounts payable and accrued expenses, including capitation and other provider payables Accounts Payable and Accrued Expenses (Thousands) | Component | Sep 30, 2024 | Dec 31, 2023 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Accounts payable and other accruals | $36,908 | $9,075 | $27,833 | 306.7% | | Capitation payable | $13,317 | $4,503 | $8,814 | 195.7% | | Other provider payable | $14,465 | $9,322 | $5,143 | 55.2% | | Total | $94,811 | $59,949 | $34,862 | 58.2% | 8. Medical Liabilities This note presents the changes in medical liabilities, including those from business acquisitions, incurred costs, and payments Medical Liabilities (Thousands) | Metric | Sep 30, 2024 | Sep 30, 2023 | | :-------------------------------------- | :----------- | :----------- | | Medical liabilities, beginning of period | $106,657 | $81,255 | | Medical liabilities from business acquisitions | $32,106 | $6,157 | | Medical care costs incurred (current period) | $797,906 | $642,880 | | Payments for medical care costs (current period) | $(654,625) | $(547,212) | | Medical liabilities, end of period | $160,279 | $97,519 | 9. Credit Facility, Promissory Notes Payable, Bank Loans, and Lines of Credit This note details the company's debt structure, including term loans, revolving credit, promissory notes, and compliance with financial covenants Debt Balance (Thousands) | Component | Sep 30, 2024 | Dec 31, 2023 | Change | % Change | | :------------------------ | :----------- | :----------- | :----- | :------- | | Term Loan | $285,250 | $280,000 | $5,250 | 1.9% | | Revolver Loan | $146,732 | $0 | $146,732 | N/A | | Promissory Note Payable | $9,875 | $2,000 | $7,875 | 393.8% | | Total Debt | $441,857 | $282,000 | $159,857 | 56.7% | - The Amended Credit Agreement provides a $400.0 million revolving credit facility and a $300.0 million term loan, totaling $700.0 million; as of September 30, 2024, the interest rate on both the Revolver Loan and Term Loan was 7.20%[101][103][311] - The average effective interest rate on total debt for the nine months ended September 30, 2024, was 7.08%, up from 6.07% in 2023[111] - The company must comply with financial covenants, including a maximum consolidated total net leverage ratio (not greater than 3.75 to 1.00, or 4.00 to 1.00 after large acquisitions) and a minimum consolidated interest coverage ratio (not less than 3.25 to 1.00)[105] 10. Mezzanine and Stockholders' Equity This note explains the classification of non-controlling interest as mezzanine equity, details share repurchases, and reports distributions to non-controlling interests - Non-controlling interest in Allied Physicians of California ('APC') is classified as mezzanine equity due to its redemption feature not being solely within APC's control[116] - In April 2024, Astrana repurchased all outstanding Series A and Series B Preferred Stock, eliminating these series from its Restated Certificate of Incorporation[119] - Total treasury stock, including shares held by APC, was 10,598,749 shares as of September 30, 2024, compared to 10,584,340 shares at December 31, 2023[121] - Distributions to non-controlling interests were $0.2 million for the three months and $2.1 million for the nine months ended September 30, 2024[122] 11. Stock-Based Compensation This note details the company's stock-based compensation expense, including grants of stock options and restricted stock awards Stock-Based Compensation Expense (Thousands) | Component | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Stock options and ESPP | $349 | $406 | $1,125 | $1,393 | | Restricted stock awards and units | $5,814 | $5,300 | $18,176 | $11,971 | | Total | $6,163 | $5,706 | $19,301 | $13,364 | - Unrecognized compensation expense related to total share-based payments outstanding was $31.7 million as of September 30, 2024[123] - During the nine months ended September 30, 2024, the company granted 519,696 performance-based and 405,164 non-performance-based restricted stock awards and units[126] 12. Commitments and Contingencies This note outlines the company's regulatory compliance requirements, outstanding letters of credit, and ongoing legal proceedings - The company is required to comply with Department of Managed Health Care ('DMHC') regulations, including minimum working capital, tangible net equity ('TNE'), cash-to-claims ratio, and claims payment requirements[130] - Outstanding irrevocable standby letters of credit totaled $25.0 million with Truist Bank and $3.9 million with Preferred Bank as of September 30, 2024[132][133] - The company is involved in various legal proceedings, but management believes the ultimate resolution will not have a material adverse effect on its financial position, results of operations, or cash flows[134][135] 13. Related-Party Transactions This note details transactions with related parties, including management fees, provider services, and revenue/expenses with affiliated entities - The company recognized management fees from LaSalle Medical Associates – IPA line of business ('LMA') of $4.3 million (3M 2023) and $16.2 million (9M 2023) before the agreement was terminated[138] - Paid $0.8 million (3M 2024) and $2.2 million (9M 2024) to Pacific Medical Imaging & Oncology Center, Inc. ('PMIOC') for provider services[139] - Incurred $0.6 million (3M 2024) and $1.2 million (9M 2024) in management fees to I Health, with which the company has a management service agreement[141] Revenue and Expenses with AHMC, HSMSO, and Aurion (Thousands) | Metric | AHMC (3M 2024) | HSMSO (3M 2024) | Aurion (3M 2024) | AHMC (9M 2024) | HSMSO (9M 2024) | Aurion (9M 2024) | | :------- | :------------- | :-------------- | :--------------- | :------------- | :-------------- | :--------------- | | Revenue | $11,167 | $626 | $0 | $33,944 | $1,239 | $0 | | Expenses | $9,169 | $0 | $50 | $24,134 | $0 | $200 | | Net | $1,998 | $626 | $(50) | $9,810 | $1,239 | $(200) | 14. Income Taxes This note describes the company's income tax accounting policies, effective tax rate, and the absence of unrecognized tax benefits - The company uses the liability method of accounting for income taxes, estimating its anticipated annual effective tax rate quarterly[159][160] Effective Income Tax Rate | Period | 2024 | 2023 | Change | | :------------------------ | :--- | :--- | :----- | | Nine months ended Sep 30 | 30.2% | 34.8% | (4.6)% | - The decrease in the effective tax rate was primarily due to tax restructuring and income from flow-through entities[161] - As of September 30, 2024, the company does not have any unrecognized tax benefits[162] 15. Earnings Per Share This note provides a summary of basic and diluted earnings per share and the calculation of weighted average shares outstanding Earnings Per Share Summary | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Earnings per share – basic | $0.34 | $0.47 | $1.05 | $1.04 | | Earnings per share – diluted | $0.33 | $0.47 | $1.04 | $1.03 | Weighted Average Shares Outstanding (Diluted) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic shares | 47,686,841 | 46,547,502 | 47,521,368 | 46,527,350 | | Stock options | 169,785 | 253,767 | 155,309 | 254,399 | | Restricted stock awards and units | 321,348 | 88,450 | 243,806 | 89,409 | | Contingently issuable shares | 45,814 | 30,888 | 40,203 | 10,409 | | Diluted shares | 48,223,788 | 46,920,607 | 47,960,686 | 46,881,567 | - Certain stock options (155,990 for 3M 2024) and contingently issuable shares (1,085,808 for 3M 2024) were excluded from diluted EPS calculations as they were antidilutive or conditions for issuance were not met[168][169] 16. Variable Interest Entities (VIEs) This note explains the company's consolidation of VIEs, including professional corporations and IPAs, and details their assets and liabilities - Astrana consolidates VIEs where equity owners lack sufficient equity at risk or decision-making rights, or where Astrana has the power to direct activities and absorb losses or receive benefits[174] - Professional corporations with nominee shareholders and IPAs like APC are consolidated due to corporate practice of medicine laws and Astrana's role as the primary beneficiary[175][176] VIE Assets and Liabilities (Thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------------------------------------------------------------------- | :----------- | :----------- | | Total assets that can be used only to settle obligations of the Company's consolidated VIEs | $701,100 | $540,800 | | Total liabilities of the Company's consolidated VIEs for which creditors do not have recourse to the general credit of the primary beneficiary | $194,100 | $146,000 | 17. Leases This note describes the company's operating and finance leases, including total lease costs and future minimum lease payments - The company has operating and finance leases for corporate offices, physicians' offices, and equipment, with remaining lease terms ranging from one month to 16 years[184] Total Lease Cost, Net (Thousands) | Period | 2024 | 2023 | Change | % Change | | :------------------------ | :--- | :--- | :----- | :------- | | Three months ended Sep 30 | $3,394 | $2,117 | $1,277 | 60.3% | | Nine months ended Sep 30 | $9,792 | $5,349 | $4,443 | 83.1% | Future Minimum Lease Payments (Thousands) | Year | Operating Leases | Finance Leases | | :------------------------------------------------------- | :--------------- | :------------- | | 2024 (excluding the nine months ended September 30, 2024) | $1,855 | $160 | | 2025 | $7,523 | $599 | | 2026 | $7,213 | $345 | | 2027 | $6,729 | $267 | | 2028 | $6,472 | $27 | | Thereafter | $16,902 | $9 | | Total future minimum lease payments | $46,694 | $1,407 | 18. Segments This note outlines the company's three reportable segments: Care Partners, Care Delivery, and Care Enablement, and their financial performance - The company operates in three reportable segments: Care Partners, Care Delivery, and Care Enablement, with performance evaluated based on segment revenue growth and operating income[189] Segment Revenue (Thousands) | Segment | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Care Partners | $455,760 | $320,885 | $1,301,355 | $957,297 | | Care Delivery | $34,728 | $28,971 | $100,304 | $79,831 | | Care Enablement | $40,930 | $36,910 | $110,376 | $102,451 | Segment Operating Income (Loss) (Thousands) | Segment | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :-------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Care Partners | $38,786 | $40,340 | $122,305 | $90,489 | | Care Delivery | $(1,357) | $(1,035) | $230 | $(1,432) | | Care Enablement | $6,314 | $6,448 | $16,736 | $19,829 | 19. Fair Value Measurements of Financial Instruments This note details the fair value hierarchy of the company's financial instruments, including marketable securities, interest rate collars, and contingent considerations - The company's financial instruments include marketable securities (Level 1), an interest rate collar (Level 2), and various contingent considerations and financing obligations (Level 3)[210][214][215][217][219][220][221] Total Level 3 Liabilities (Thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | Change | % Change | | :------------------------ | :----------- | :----------- | :----- | :------- | | Total Level 3 Liabilities | $35,658 | $21,836 | $13,822 | 63.3% | Change in Fair Value of Level 3 Liabilities (Nine Months Ended Sep 30, 2024, Thousands) | Metric | Amount | | :------------------------------------------- | :----- | | Balance at January 1, 2024 | $21,836 | | Additions | $14,202 | | Change in fair value of existing Level 3 liabilities | $3,643 | | Settlements | $(4,023) | | Balance at September 30, 2024 | $35,658 | - Contingent considerations include AAMG (2023 metric met, 78,535 shares issued; 2024 metric valued at $3.9 million), ADSC ($2.1 million each for 2023 and 2024 metrics), CFC (first metric valued at $3.7 million), and PCCCV ($2.6 million)[222][223][226][227][228] 20. Subsequent Events This note discloses significant events occurring after the reporting period, including the acquisitions of Collaborative Health Systems and Prospect Medical Holdings - On October 4, 2024, Astrana completed the acquisition of Collaborative Health Systems, LLC ('CHS') and its affiliates for $37.5 million cash plus earnout payments up to $21.5 million, expanding its Medicare member base across 17 states[230] - On November 8, 2024, the company entered into an agreement to acquire certain assets and businesses of Prospect Medical Holdings, Inc. ('Prospect') for $745.0 million, including a hospital and health plan operations[231][232] - To finance the Prospect acquisition, Astrana secured a commitment letter for up to $1.095 billion in bridge financing and a $100.0 million revolving credit facility, contingent on the transaction's closing[235] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Astrana Health, Inc.'s financial condition and results of operations for the three and nine months ended September 30, 2024. It highlights significant revenue growth driven by capitation from recent acquisitions and transitions to full-risk plans, increased operating expenses, and interest expense. The company also updated its 2024 guidance, incorporating recent acquisitions Overview This overview describes Astrana Health, Inc. as a physician-centric, technology-powered healthcare management company operating an integrated, value-based care model - Astrana Health, Inc. is a physician-centric, technology-powered, risk-bearing healthcare management company that operates an integrated, value-based healthcare model[238] - The company coordinates care for approximately 1.0 million patients, primarily in California, through its network of over 10,000 contracted physicians as of September 30, 2024[239] Recent Developments This section highlights recent strategic developments, including the acquisitions of Collaborative Health Systems and Prospect Medical Holdings, and related financing arrangements - On October 4, 2024, Astrana closed the acquisition of Collaborative Health Systems, LLC ('CHS') and its affiliates for $37.5 million cash plus earnouts, adding over 129,000 Medicare members across 17 states[240] - On November 8, 2024, the company agreed to acquire certain assets and businesses of Prospect Medical Holdings, Inc. ('Prospect') for $745.0 million, including a hospital and health plan operations, with an anticipated closing in mid-2025[242][244] - A commitment letter was secured for up to $1.095 billion in bridge financing and a $100.0 million revolving credit facility to fund the Prospect acquisition and refinance existing debt[245] Key Financial Measures and Indicators This section identifies the company's primary revenue and expense sources and introduces Adjusted EBITDA as a supplemental performance measure - Primary revenue sources include capitation, risk pool settlements and incentives, management fee income, and fee-for-service ('FFS') revenue[247] - Largest expenses are patient care, information technology, and staff for management and administrative support services[248] - Adjusted EBITDA and Adjusted EBITDA margin are used as supplemental performance measures, excluding non-core and non-recurring financial information[249] Results of Operations This section analyzes the company's financial performance, highlighting significant increases in total revenue and cost of services, and changes in net income - Total revenue increased by 37% to $478.7 million for the three months ended September 30, 2024, and by 32% to $1.369 billion for the nine months, primarily driven by capitation from recent acquisitions and transitions to full-risk plans[254][255] - Cost of services increased by 47% to $405.2 million (3M 2024) and 34% to $1.148 billion (9M 2024), also due to recent acquisitions and full-risk transitions[256][257] - Interest expense significantly increased by 134% to $8.9 million (3M 2024) and $25.0 million (9M 2024) due to higher borrowings on the Amended Credit Facility[265][266] - Net income attributable to Astrana Health, Inc. decreased by 27% to $16.1 million for the three months but increased by 4% to $50.1 million for the nine months ended September 30, 2024[278] Segment Financial Performance This section analyzes the revenue and operating income performance of the Care Partners, Care Delivery, and Care Enablement segments - Care Partners segment revenue increased by 42% to $455.8 million (3M 2024) and 36% to $1.301 billion (9M 2024), driven by acquisitions and full-risk transitions[284][285] - Care Delivery segment revenue increased by 20% to $34.8 million (3M 2024) and 26% to $100.3 million (9M 2024), primarily due to increased patient visits[286] - Care Enablement segment revenue increased by 11% to $40.9 million (3M 2024) and 8% to $110.4 million (9M 2024), due to managing more IPAs[287][289] - Care Partners operating income increased by 35% to $122.3 million (9M 2024), while Care Delivery shifted from an operating loss to a $0.2 million income (9M 2024); Care Enablement operating income decreased by 16% to $16.7 million (9M 2024) due to increased expenses[285][286][289] 2024 Guidance This section provides the company's updated financial guidance for full-year 2024, incorporating the financial contribution from recent acquisitions - Astrana is raising its full-year 2024 revenue guidance and narrowing its net income attributable to Astrana, Adjusted EBITDA, and EPS guidance, incorporating the financial contribution from the CHS acquisition[290] Revised 2024 Guidance (Millions, except per share amounts) | Metric | Low | High | | :-------------------------------------- | :-- | :--- | | Total revenue | $1,950 | $2,030 | | Net income attributable to Astrana Health, Inc. | $52 | $58 | | Adjusted EBITDA | $165 | $175 | | EPS – diluted | $1.06 | $1.19 | EBITDA This section presents the company's EBITDA and Adjusted EBITDA, along with Adjusted EBITDA margin, for various reporting periods EBITDA and Adjusted EBITDA (Thousands) | Metric | 3M Sep 30, 2024 | 3M Sep 30, 2023 | 9M Sep 30, 2024 | 9M Sep 30, 2023 | | :------------------------ | :-------------- | :-------------- | :-------------- | :-------------- | | Net income | $18,981 | $27,973 | $57,709 | $57,943 | | EBITDA | $39,154 | $42,818 | $116,255 | $102,823 | | Adjusted EBITDA | $45,170 | $51,974 | $135,332 | $117,573 | | Adjusted EBITDA margin | 9% | 15% | 10% | 11% | Use of Non-GAAP Financial Measures This section clarifies the use of non-GAAP financial measures like EBITDA and Adjusted EBITDA as supplemental performance indicators - EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are non-GAAP financial measures used as supplemental performance indicators for financial and operational decision-making[299] - Adjusted EBITDA is calculated by excluding income/loss from equity method investments, non-recurring/non-cash transactions, stock-based compensation, and APC excluded assets costs from EBITDA[299] - These non-GAAP measures are not substitutes for GAAP financial measures and may be calculated differently by other companies[300] Liquidity and Capital Resources This section discusses the company's cash position, working capital, and financing strategies to fund operations and future growth Cash and Working Capital (Thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | Change | % Change | | :------------------------------------------------ | :----------- | :----------- | :----- | :------- | | Cash, cash equivalents, and investment in marketable securities | $350,300 | $296,300 | $54,000 | 18.2% | | Working capital | $284,100 | $242,800 | $41,300 | 17.0% | - Operations are primarily financed through internally generated funds, supplemented by a $700.0 million Amended Credit Agreement and a shelf registration statement for future securities offerings[302][311] - The company believes it has sufficient liquidity to fund its operations for at least the next 12 months and the foreseeable future[302] Cash Flow Activities This section analyzes the changes in cash flows from operating, investing, and financing activities for the nine months ended September 30, 2024 - Net cash provided by operating activities increased by $14.2 million to $63.1 million for the nine months ended September 30, 2024, driven by adjusted net income and changes in working capital[305] - Net cash used in investing activities significantly increased by $105.0 million to $159.1 million, primarily due to $115.5 million for business acquisitions and $26.0 million for loan issuances[306] - Net cash provided by financing activities shifted to $150.4 million (from $8.6 million used in 2023), mainly due to $171.9 million in borrowings on long-term debt[307] Credit Facilities This section details the company's credit facilities, including the Amended Credit Agreement's term loan and revolving credit, and future debt commitments Debt Balance (Thousands) as of September 30, 2024 | Component | Amount | | :------------------------ | :----- | | Term Loan | $285,250 | | Revolver Loan | $146,732 | | Promissory Note Payable | $9,875 | | Total Debt | $441,857 | - The Amended Credit Agreement provides a $400.0 million revolving credit facility and a $300.0 million term loan, totaling $700.0 million[311] Future Debt Commitments (Thousands) | Year | Amount | | :--- | :----- | | 2024 (remaining) | $3,750 | | 2025 | $16,875 | | 2026 | $169,232 | | 2027 | $34,250 | | 2028 | $217,750 | | Total | $441,857 | Commitment Letter This section describes the commitment letter secured for bridge financing and a revolving credit facility to fund the Prospect acquisition and refinance existing debt - In connection with the Prospect acquisition, Astrana secured a commitment letter for a 364-day senior secured bridge term loan of up to $1.095 billion and a five-year senior secured revolving credit facility of up to $100.0 million[312] - The proceeds are intended to fund the Prospect acquisition, refinance existing credit facilities, and cover associated fees and expenses[312] - Funding is contingent on the execution of definitive documentation and the consummation of the Prospect acquisition[312] Promissory Note Payable This section details the I Health Promissory Note payable, including its increased balance, interest rate, and maturity date - The I Health Promissory Note payable increased to $9.9 million as of September 30, 2024, following an amendment in July 2024[314] - The note has an interest rate of 4.30% per annum and matures on March 31, 2027, with an acceleration clause if the I Health Call Option is not exercised[314] Critical Accounting Policies and Estimates This section emphasizes that financial statement preparation involves significant judgments and estimates, which are subject to change - The preparation of financial statements requires significant judgments, assumptions, and estimates that can materially affect reported amounts, and these are subject to change[315] - Key accounting policies are summarized in Note 2 to the condensed consolidated financial statements and further detailed in the Annual Report on Form 10-K[315] Off-Balance Sheet Arrangements This section confirms the absence of any material off-balance sheet arrangements that could significantly impact the company's financial condition - As of September 30, 2024, the company had no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on its financial condition or results of operations[316] Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk from its floating-rate debt. It quantifies the potential impact of interest rate changes and notes the use of an interest rate collar to mitigate this risk Interest Rate Risk This section details the company's exposure to interest rate fluctuations on its floating-rate debt and the use of an interest rate collar to manage this risk - The company is exposed to interest rate risk from its floating-rate Term Loan ($285.3 million) and Revolver Loan ($146.7 million) under the Amended Credit Agreement[318] - A hypothetical 1% change in interest rates would have increased or decreased interest expense by $4.4 million for the three months ended September 30, 2024[318] - An interest rate collar agreement is in place for the Revolver Loan to reduce the variability of cash flows in interest payments[318] Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting. Management concluded that disclosure controls were effective as of September 30, 2024, with no material changes to internal control during the quarter Evaluation of Disclosure Controls and Procedures This section confirms that management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective as of September 30, 2024 - Management, including the Chief Executive Officer and Chief Financial and Operating Officer, evaluated the effectiveness of disclosure controls and procedures[320] - Based on the evaluation, disclosure controls and procedures were concluded to be effective as of September 30, 2024[320] Changes in Internal Control Over Financial Reporting This section states that there were no material changes in internal control over financial reporting during the quarter ended September 30, 2024 - There were no changes in internal control over financial reporting during the quarter ended September 30, 2024, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[321] PART II OTHER INFORMATION This part provides additional information beyond the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Legal Proceedings The company is routinely involved in legal proceedings and claims arising in the normal course of business. While outcomes are inherently uncertain, management assesses liabilities and accrues for probable and estimable losses, not expecting a material adverse effect on financial results - The company is, from time to time, party to lawsuits, threatened lawsuits, disputes, and other claims arising in the normal course of business[323] - Liabilities for claims are recorded when a loss is probable and can be reasonably estimated; otherwise, no accrual is made[323] - Management believes the ultimate liability from these matters is not expected to have a material adverse effect on results of operations, financial position, or cash flows, though legal proceedings are inherently uncertain[323] Risk Factors This section updates the risk factors, emphasizing new risks associated with the proposed acquisition of Prospect Medical Holdings, Inc. These include uncertainties regarding the transaction's completion, potential negative impacts if it fails, increased indebtedness, and challenges in integrating the acquired operations - The completion of the proposed acquisition of Prospect Medical Holdings, Inc. is subject to conditions, including regulatory approvals, making its timing and occurrence uncertain[327][328] - Failure to complete the transaction could adversely affect the company's business, financial condition, and stock price, leading to potential market decline, transaction costs, and diversion of management resources[330][331] - Financing the transaction will result in a significant increase in indebtedness, which could reduce business flexibility and increase interest expense[332][334] - There is no assurance that the company will achieve the intended benefits of the transaction or successfully integrate the acquired operations, potentially leading to operational challenges, higher costs, and failure to realize anticipated synergies[335][337] Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended September 30, 2024, the company did not repurchase shares under its publicly announced share repurchase plan, which still has $40.5 million available. However, it did repurchase shares to satisfy tax withholding obligations and issued shares for contingent consideration related to an acquisition, which was exempt from registration - No shares were repurchased under the company's $50.0 million share repurchase plan during the three months ended September 30, 2024, with $40.5 million remaining available[339] - The company repurchased 22,202 shares to satisfy tax withholding obligations upon vesting of restricted stock awards and units, including 14,409 shares from a board member[340] - 157,059 shares of common stock were issued for the AAMG contingent consideration, which was deemed exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933[340] Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities[341] Mine Safety Disclosures This item is not applicable to the company - Not applicable[341] Other Information This section reports that no directors or executive officers adopted, modified, or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the quarter ended September 30, 2024 Rule 10b5-1 Trading Plans This section confirms that no directors or executive officers adopted, modified, or terminated any Rule 10b5-1 trading plans during the quarter - None of the company's directors or executive officers adopted, modified, or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the quarter ended September 30, 2024[343] Exhibits This section lists all exhibits incorporated by reference into or filed/furnished with this Quarterly Report on Form 10-Q, including various agreements related to mergers, stock purchases, credit facilities, and certifications - The exhibits include agreements such as the Agreement and Plan of Merger, Stock Purchase Agreements, Asset and Equity Purchase Agreement, and Commitment Letter[345][346] - Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act are also included[345]