Alignment Healthcare(ALHC) - 2023 Q2 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, cash flows, and detailed accounting policy notes for June 30, 2023 Condensed Consolidated Balance Sheets Total assets increased to $783.5 million by June 30, 2023, driven by deferred premium revenue and short-term investments, while total liabilities rose and stockholders' equity declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $395,258 | $409,549 | | Short-term investments | $122,249 | $0 | | Total assets | $783,546 | $633,863 | | Medical expenses payable | $207,198 | $170,135 | | Deferred premium revenue | $147,477 | $308 | | Total liabilities | $572,434 | $394,561 | | Total stockholders' equity | $211,112 | $239,302 | Condensed Consolidated Statements of Operations Q2 2023 net loss increased to $28.5 million due to medical expenses growing faster than total revenues, widening net loss per share to $(0.15) Q2 Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Total revenues | $462,379 | $366,474 | | Medical expenses | $410,644 | $307,269 | | Loss from operations | $(23,659) | $(6,648) | | Net loss | $(28,494) | $(11,580) | | Net loss per share | $(0.15) | $(0.06) | Six-Month Statement of Operations Highlights (in thousands, except per share data) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Total revenues | $901,534 | $712,000 | | Medical expenses | $806,959 | $611,027 | | Loss from operations | $(56,148) | $(43,123) | | Net loss | $(65,865) | $(52,397) | | Net loss per share | $(0.36) | $(0.29) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased to $211.1 million by June 30, 2023, primarily due to a $65.9 million net loss, partially offset by equity-based compensation - The accumulated deficit grew from $(732.2) million at the end of 2022 to $(798.0) million as of June 30, 2023, reflecting the ongoing net losses[24] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $122.3 million for the first six months of 2023, driven by deferred premium revenue, while investing activities used $136.6 million Six-Month Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $122,287 | $(1,284) | | Net cash used in investing activities | $(136,638) | $(11,982) | | Net cash provided by (used in) financing activities | $60 | $(100) | | Net decrease in cash | $(14,291) | $(13,366) | Notes to Unaudited Condensed Consolidated Financial Statements Detailed notes explain significant accounting policies, including revenue recognition, medical expenses payable, and fair value measurements, alongside disclosures on debt, equity compensation, and regulatory capital, notably $147.5 million in deferred premium revenue - Premium revenue is derived monthly from CMS and is recognized in the month members are entitled to services, subject to risk adjustments based on member health severity, which are estimated and recorded throughout the year[40][45] - Medical expenses payable includes estimates for claims incurred but not yet paid (IBNP), developed using an actuarial process considering factors like cost trends, historical payment patterns, and seasonality[55][56] - The company entered into a senior secured term loan agreement with Oxford Finance for up to $250 million, with an initial draw of $165 million, at a variable interest rate based on SOFR plus 6.50%[102] - Due to the early receipt of the July premium payment from CMS, the company recorded deferred premium revenue of $147.5 million as of June 30, 2023, to be recognized as revenue in July 2023[50] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2023 performance, noting 17% membership growth and 26.2% revenue increase, offset by 33.6% higher medical expenses, resulting in an 88.4% MBR and increased operating loss, while maintaining strong liquidity of $517.5 million Key Financial Metrics Q2 2023 vs Q2 2022 | Metric | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Health plan membership | 112,200 | 95,900 | 17.0% | | Revenues | $462.4M | $366.5M | 26.2% | | Medical benefits ratio | 88.4% | 83.4% | 5.0% | | Loss from Operations | $(23.7M) | $(6.6M) | NM | | Adjusted EBITDA | $(2.1M) | $10.3M | NM | Overview Alignment Healthcare, a Medicare Advantage provider, leverages its AVA platform and clinical model to serve 112,200 Health Plan Members across 52 markets in 6 states, aiming to improve outcomes and control costs - The company's business model is a "virtuous cycle" that uses data and engagement to lower healthcare costs, allowing reinvestment into richer benefits, which in turn drives membership growth[135] - As of June 30, 2023, Health Plan Membership reached 112,200, operating in 52 markets across California, North Carolina, Nevada, Arizona, Texas, and Florida[134][136] Factors Affecting Our Performance Performance is driven by membership growth, CMS Star ratings, MBR management, and AVA platform investments, with seasonality impacting member growth, medical costs, and sales and marketing expenses - Key growth drivers include capitalizing on existing market opportunities (currently only 2% market share in its 52 counties) and expanding into new markets like Florida and Texas[138][139] - The company's clinical model has demonstrated the ability to lower the Medical Benefits Ratios (MBRs) of returning members over time, which is key to its unit economics[142] - Business results are seasonal, with most member growth occurring on January 1st, higher medical costs in Q1 and Q4 (e.g., due to influenza), and greater sales and marketing investment in the second half of the year for the Annual Enrollment Period[145] Results of Operations Q2 2023 total revenues grew 26.2% to $462.4 million, but medical expenses increased 33.6% to $410.6 million, leading to an operating loss of $23.7 million - The 25.3% increase in earned premiums for the first six months of 2023 was driven by growth in Health Plan membership and higher CMS benchmark rates[162] - The 32.1% increase in medical expenses for the first six months outpaced revenue growth due to a mix shift towards ACO REACH patients, richer member benefits, seasonality of utilization, and a smaller amount of favorable prior year development[164] Liquidity and Capital Resources As of June 30, 2023, the company held $517.5 million in liquid assets, deemed sufficient for the next 12 months, and was in compliance with covenants on its $165 million term loan - The company had $517.5 million in cash, cash equivalents, and short-term investments as of June 30, 2023, including $147.5 million in deferred premium revenue from an early CMS payment[169][171] - Net cash from operations for the first six months of 2023 was $122.3 million, a significant increase from a $1.3 million use of cash in the prior year, primarily due to the timing of the deferred premium revenue payment from CMS[181][182] - The company has an outstanding term loan of $165 million from Oxford Finance and was in compliance with all financial covenants, including minimum liquidity of $23.0 million, as of June 30, 2023[175][179] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is inflation, which has not materially affected past operating results but could adversely impact future performance - The company's main market risk is inflation, which management believes has not had a material effect on results to date[189][190] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023[191] - No material changes were made to internal control over financial reporting during the quarter ended June 30, 2023[192] PART II. Other Information Item 1. Legal Proceedings The company is defending a class action lawsuit regarding employee meal and rest breaks, with no liability accrued due to an inability to estimate potential loss - A former employee filed a class action lawsuit (Dabney v. Alignment Healthcare USA, LLC) alleging failure to provide required meal and rest breaks; the company is defending the action and has not accrued a liability as of June 30, 2023[128] Item 1A. Risk Factors No material changes to previously disclosed risk factors from the Annual Report on Form 10-K were reported - No material changes to risk factors from the Annual Report were reported for this quarter[194] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred during the period, and the use of IPO proceeds remains consistent with the prospectus - There were no unregistered sales of equity securities in the period[194] - There has been no material change in the use of proceeds from the company's March 2021 IPO, which generated approximately $361.6 million in net proceeds for the company[195] Other Information (Items 3-6) The company reported no defaults on senior securities, no mine safety disclosures, and no other material information for the period, with a list of exhibits provided - The company reported no defaults on senior securities (Item 3), no mine safety issues (Item 4), and no other material information (Item 5)[195]