Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 9, 2020

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
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 Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
1668 S. Garfield Avenue, 2nd Floor, Alhambra, California 91801
(Address of principal executive offices and zip code)
(626) 282-0288
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes     No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes     No
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share
AMEH
Nasdaq Capital Market
As of November 2, 2020, there were 54,265,602 shares of common stock of the registrant, $0.001 par value per share, issued and outstanding.



APOLLO MEDICAL HOLDINGS, INC.
INDEX TO FORM 10-Q FILING
TABLE OF CONTENTS
PAGE


2


Glossary

The following abbreviations or acronyms that may be used in this document shall have the adjacent meanings set forth below:
Accountable Health Care Accountable Health Care IPA, a Professional Medical Corporation
AHMC AHMC Healthcare Inc.
AIPBP All-Inclusive Population-Based Payments
Alpha Care Alpha Care Medical Group, Inc.
AMG AMG, a Professional Medical Corporation
AMH ApolloMed Hospitalists, a Medical Corporation
AMM Apollo Medical Management, Inc.
AP-AMH AP-AMH Medical Corporation
APAACO APA ACO, Inc.
APC Allied Physicians of California, a Professional Medical Corporation
APC-LSMA APC-LSMA Designated Shareholder Medical Corporation
BAHA Bay Area Hospitalist Associates
Bright Bright Health Company of California, Inc.
CDSC Concourse Diagnostic Surgery Center, LLC
CMS Centers for Medicare & Medicaid Services
CQMC Critical Quality Management Corporation
CSI College Street Investment LP, a California limited partnership
DMHC California Department of Managed Healthcare
DMG Diagnostic Medical Group
HSMSO Health Source MSO Inc., a California corporation
ICC AHMC International Cancer Center, a Medical Corporation
IPA independent practice association
LMA LaSalle Medical Associates
MMG Maverick Medical Group, Inc.
MPP Medical Property Partners
NGACO Next Generation Accountable Care Organization
NMM Network Medical Management, Inc.
PASC Pacific Ambulatory Health Care, LLC
PMIOC Pacific Medical Imaging and Oncology Center, Inc.
SCHC Southern California Heart Centers
UCAP Universal Care Acquisition Partners, LLC
UCI Universal Care, Inc.
VIE variable interest entity
3



INTRODUCTORY NOTE
Unless the context dictates otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” “our,” and similar words are references to Apollo Medical Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries and affiliated entities, as appropriate, including its consolidated variable interest entities (“VIEs”) and “ApolloMed” refers to Apollo Medical Holdings, Inc.
The Centers for Medicare & Medicaid Services (“CMS”) have not reviewed any statements contained in this Quarterly Report on Form 10-Q describing the participation of APA ACO, Inc. (“APAACO”) in the Next Generation Accountable Care Organization (“NGACO”) Model.
Trade names and trademarks of the Company and its subsidiaries referred to herein and their respective logos, are our property. This Quarterly Report on Form 10-Q may contain additional trade names and/or trademarks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names and/or trademarks, if any, to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.
NOTE ABOUT FORWARD-LOOKING STATEMENTS
    This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about the Company's guidance for the year ending December 31, 2020, any statements about our business (including the impact of the 2019 Novel Coronavirus (COVID-19) pandemic on our business), financial condition, operating results, plans, objectives, expectations and intentions, any guidance on, or projections of, earnings, revenue or other financial items, such as our projected capitation from CMS for the year ending December 31, 2020 or otherwise, and our future liquidity, including cash flows and any payments under the $545.0 million loan we made to our VIE, AP-AMH; any statements of any plans, strategies and objectives of management for future operations such as the material opportunities that we believe exist for our Company; any statements concerning proposed services, developments, mergers or acquisitions; any statements regarding the outlook on our NGACO Model or strategic transactions; any statements regarding management’s view of future expectations and prospects for us; any statements about prospective adoption of new accounting standards or effects of changes in accounting standards; any statements regarding future economic conditions or performance; any statements of belief; any statements of assumptions underlying any of the foregoing; and other statements that are not historical facts. Forward-looking statements may be identified by the use of forward-looking terms such as “anticipate,” “could,” “can,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “think,” “plan,” “envision,” “intend,” “continue,” “target,” “seek,” “contemplate,” “budgeted,” “will,” “would,” and the negative of such terms, other variations on such terms or other similar or comparable words, phrases or terminology. These forward-looking statements present our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q and are subject to change.
    Forward-looking statements involve risks and uncertainties and are based on the current beliefs, expectations and certain assumptions of management. Some or all of such beliefs, expectations and assumptions may not materialize or may vary significantly from actual results. Such statements are qualified by important economic, competitive, governmental and technological factors that could cause our business, strategy, or actual results or events to differ materially from those in our forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K, for the year ended December 31, 2019, filed with the SEC on March 16, 2020, including, the risk factors discussed under the heading “Risk Factors” in Part I, Item IA thereof. Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change, and significant risks and uncertainties that could cause actual conditions, outcomes and results to differ materially from those indicated by such statements.

PART I FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
September 30,
2020
December 31,
2019
Assets
Current assets
Cash and cash equivalents $ 166,082  $ 103,189 
Restricted cash   75 
Investment in marketable securities 118,309  116,539 
Receivables, net 18,257  11,004 
Receivables, net – related parties 41,518  48,136 
Other receivables 3,988  16,885 
Prepaid expenses and other current assets 12,119  10,315 
Loan receivable 6,425  6,425 
Loan receivable – related parties   16,500 
Total current assets
366,698  329,068 
Noncurrent assets
Restricted cash 746  746 
Land, property and equipment, net 10,929  12,130 
Intangible assets, net 90,781  103,012 
Goodwill 239,053  238,505 
Investment in other entities – equity method 27,220  28,427 
Investments in privately held entities 37,075  896 
Operating lease right-of-use assets 19,298  14,248 
Other assets 22,473  1,681 
Total noncurrent assets
447,575  399,645 
Total assets (1)
$ 814,273  $ 728,713 
Liabilities, mezzanine equity and stockholders’ equity
Current liabilities
Accounts payable and accrued expenses $ 40,474  $ 27,279 
Fiduciary accounts payable 3,986  2,027 
Medical liabilities 57,455  58,725 
Income taxes payable 16,169  4,529 
Dividend payable 485  271 
Finance lease liabilities 102  102 
Operating lease liabilities 3,290  2,990 
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September 30,
2020
December 31,
2019
Current portion of long-term debt 9,500  9,500 
Total current liabilities
131,461  105,423 
Noncurrent liabilities
Deferred tax liability 11,659  18,269 
Finance lease liabilities, net of current portion 337  416 
Operating lease liabilities, net of current portion 16,616  11,373 
Long-term debt, net of current portion and deferred financing costs 226,051  232,172 
Total noncurrent liabilities
254,663  262,230 
Total liabilities (1)
386,124  367,653 
Commitments and contingencies (Note 11)


Mezzanine equity
Noncontrolling interest in Allied Physicians of California, a Professional Medical Corporation 198,731  168,725 
Stockholders’ equity
Series A Preferred stock, $0.001 par value per share; 5,000,000 shares authorized (inclusive of all preferred stock, including Series B Preferred stock); 1,111,111 issued and zero outstanding
   
Series B Preferred stock, $0.001 par value per share; 5,000,000 shares authorized (inclusive of all preferred stock, including Series A Preferred stock); 555,555 issued and zero outstanding
   
Common stock, $0.001 par value per share; 100,000,000 shares authorized, 36,775,817 and 35,908,057 shares outstanding, excluding 17,475,707 and 17,458,810 treasury shares, as of September 30, 2020 and December 31, 2019, respectively
37  36 
Additional paid-in capital
168,653  159,608 
Retained earnings
59,714  31,905 
228,404  191,549 
Noncontrolling interest
1,014  786 
Total stockholders’ equity
229,418  192,335 
Total liabilities, mezzanine equity and stockholders’ equity
$ 814,273  $ 728,713 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
(1) The Company's consolidated balance sheets include the assets and liabilities of its consolidated variable interest entities ("VIEs"). The consolidated balance sheets include total assets that can be used only to settle obligations of the Company’s consolidated VIEs totaling $877.6 million and $849.3 million as of September 30, 2020 and December 31, 2019, respectively, and total liabilities of the Company’s consolidated VIEs for which creditors do not have recourse to the general credit of the primary beneficiary of $113.0 million and $114.5 million as of September 30, 2020 and December 31, 2019, respectively. See Note 15 – Variable Interest Entities (VIEs) for further detail.
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
September 30,
Nine Months Ended September 30,
2020 2019 2020 2019
Revenue
Capitation, net $ 135,032  $ 130,807  $ 416,402  $ 305,548 
Risk pool settlements and incentives 30,916  11,355  54,155  32,640 
Management fee income 8,707  8,518  26,212  27,867 
Fee-for-service, net 3,737  4,100  9,434  12,059 
Other income 1,731  1,280  4,194  3,753 
Total revenue 180,123  156,060  510,397  381,867 
Operating expenses
Cost of services 121,823  131,130  402,106  315,925 
General and administrative expenses 16,270  7,950  39,660  30,031 
Depreciation and amortization 4,674  4,920  14,004  13,793 
Provision for doubtful accounts       (1,363)
Impairment of intangibles   1,994    1,994 
Total expenses 142,767  145,994  455,770  360,380 
Income from operations 37,356  10,066  54,627  21,487 
Other (expense) income
Income from equity method investments 403  2,054  3,291  1,162 
Gain on sale of equity method investment     99,647   
Interest expense (2,466) (828) (8,007) (1,350)
Interest income 752  509  2,544  1,305 
Other income 130  2,620  1,514  2,832 
Total other (expense) income, net (1,181) 4,355  98,989  3,949 
Income before provision for income taxes 36,175  14,421  153,616  25,436 
Provision for income taxes 10,751  3,682  44,204  6,483 
Net income 25,424  10,739  109,412  18,953 
Net income attributable to noncontrolling interest 8,711  7,035  81,603  11,564 
Net income attributable to Apollo Medical Holdings, Inc. $ 16,713  $ 3,704  $ 27,809  $ 7,389 
Earnings per share – basic $ 0.46  $ 0.11  $ 0.77  $ 0.21 
Earnings per share – diluted $ 0.45  $ 0.10  $ 0.75  $ 0.20 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF MEZZANINE AND STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Mezzanine
Equity –
Noncontrolling
Interest in APC
Retained
Earnings
Common Stock Outstanding
Additional
Paid-in Capital
Noncontrolling
Interest
Shareholders’
Equity
Shares
Amount
Balance at January 1, 2020 $ 168,725  35,908,057  $ 36  $ 159,608  $ 31,905  $ 786  $ 192,335 
Net (loss) income (1,161) —  —  —  4,052  95  4,147 
Purchase of treasury shares
—  (16,897) —  (301) —  —  (301)
Purchase of noncontrolling interest (125) —  —  —  —  —   
Shares issued for exercise of options and warrants —  151,601  —  722  —  —  722 
Share-based compensation —  —  —  1,058  —  —  1,058 
Dividends (10,000) —  —  —  —  —   
Balance at March 31, 2020 $ 157,439  36,042,761  $ 36  $ 161,087  $ 35,957  $ 881  $ 197,961 
Net income 73,667  —  —  —  7,044  291  7,335 
Purchase of noncontrolling interest (126) —  —  —  —  —   
Shares issued for vesting of restricted stock awards —  24,453  —  —  —  —   
Shares issued for exercise of options and warrants —  242,299  —  2,283  —  —  2,283 
Share-based compensation —  —  —  852  —  —  852 
Cancellation of restricted stock awards —  —  —  (236) —  —  (236)
Dividends (20,000) —  —  —  —  (347) (347)
Balance at June 30, 2020 $ 210,980  36,309,513  $ 36  $ 163,986  $ 43,001  $ 825  $ 207,848 
Net income 8,522  —  —  —  16,713  189  16,902 
Purchase of noncontrolling interest (771) —  —  —  —  —   
Shares issued for cashless exercise of warrants —  66,517  —  —  —  —   
Shares issued for exercise of options and warrants —  399,787  1  4,019  —  —  4,020 
Share-based compensation —  —  —  648  —  —  648 
Dividends (20,000) —  —  —  —  —   
Balance at September 30, 2020 $ 198,731  36,775,817  $ 37  $ 168,653  $ 59,714  $ 1,014  $ 229,418 
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Mezzanine
Equity –
Noncontrolling
Interest in APC
Retained
Earnings
Common Stock Outstanding
Additional
Paid-in Capital
Noncontrolling
Interest
Shareholders’
Equity
Shares
Amount
Balance at January 1, 2019 $ 225,117  34,578,000  $ 35  $ 162,723  $ 17,788  $ 998  $ 181,544 
Net (loss) income
(3,000) —  —  —  140  410  550 
Purchase of treasury shares (40) (93,000) —  —  —  —   
Shares issued for exercise of options and warrants 155  17,000  —  140  —  —  140 
Share-based compensation 202  2,000  —  143  —  —  143 
Dividends (10,000) —  —  —  —  —   
Balance at March 31, 2019 $ 212,434  34,504,000  $ 35  $ 163,006  $ 17,928  $ 1,408  $ 182,377 
Net income 6,896  —  —  —  3,545  223  3,768 
Shares issued for exercise of options and warrants 50  135,000  —  758  —  —  758 
Share-based compensation 203  —  —  128  —  —  128 
Dividends —  —  —  —  —  (942) (942)
Balance at June 30, 2019 $ 219,583  34,639,000  $ 35  $ 163,892  $ 21,473  $ 689  $ 186,089 
Net income 6,285  —  —  —  3,704  751  4,455 
Shares issued for exercise of options and warrants —  184,000  —  1,502  —  —  1,502 
Share-based compensation 202  —  —  128  —  —  128 
Stock subscriptions 550  —  —  —  —  —   
Stock issued in connection with a business combination 414  —  —  —  —  —   
Cost related to issuance of preferred shares (804) —  —  —  —  —   
Dividends (50,000) —  —  —  —  —   
Balance at September 30, 2019 $ 176,230  34,823,000  $ 35  $ 165,522  $ 25,177  $ 1,440  $ 192,174 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30,
2020 2019
Cash flows from operating activities
Net income $ 109,412  $ 18,953 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
14,004  13,793 
Impairment of intangibles   1,994 
Amortization of debt issuance costs 1,004   
Provision for doubtful accounts
  (1,363)
Share-based compensation
2,558  1,006 
Unrealized loss (gain) from investment in equity securities 23  (6)
Income from equity method investments (3,291) (1,162)
Gain on sale of equity method investments (99,647)  
Gain on loan assumption   (2,250)
Deferred tax
(6,137) (186)
Changes in operating assets and liabilities, net of business combinations:
Receivables, net (6,953) 1,904 
Receivables, net – related parties 6,618  5,864 
Other receivables
12,898  (13,719)
Prepaid expenses and other current assets
(1,804) (2,914)
Right-of-use assets
2,601  1,877 
Other assets
(5,090) (525)
Accounts payable and accrued expenses
12,644  4,868 
Fiduciary accounts payable
1,958  196 
Medical liabilities
(1,566) (6,226)
Income taxes payable
11,642  (10,229)
Operating lease liabilities
(2,110) (1,790)
Net cash provided by operating activities 48,764  10,085 
Cash flows from investing activities
Payments for business acquisition, net of cash acquired   (49,403)
Proceeds from repayment of loans receivable – related parties 16,500   
Advances on loans receivable   (7,425)
Purchases of marketable securities
(1,793) (20)
Purchases of investments – equity method (500) (2,949)
Proceeds from sale of equity method investment 52,743   
Purchases of property and equipment
(553) (807)
Dividend received   240 
Net cash provided by (used in) investing activities 66,397  (60,364)
Cash flows from financing activities
Repayment of bank loan and lines of credit
  (52,640)
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Nine Months Ended September 30,
2020 2019
Dividends paid
(50,133) (60,670)
Repayment of term loan
(7,125)  
Payment of finance lease obligations
(78) (76)
Proceeds from the exercise of stock options and warrants
6,552  2,400 
Repurchase of shares
(1,559) (40)
Borrowings on line of credit   289,600 
Proceeds from common stock offering
  755 
Cost of debt and equity issuance costs   (5,622)
Net cash (used in) provided by financing activities (52,343) 173,707 
Net increase in cash, cash equivalents and restricted cash 62,818  123,428 
Cash, cash equivalents and restricted cash, beginning of period
104,010  107,637 
Cash, cash equivalents and restricted cash, end of period
$ 166,828  $ 231,065 
Supplementary disclosures of cash flow information:
Cash paid for income taxes $ 37,900  $ 17,900 
Cash paid for interest
6,961  1,000 
Supplemental disclosures of non-cash investing and financing activities
Dividend declared included in dividend payable
$ 485  $ 271 
Deferred tax liability adjustment to goodwill $   $ 11,540 
Deferred tax liability adjustment related to warrant exercises $ 473  $  
APC stock issued in exchange for AMG $   $ 414 
Preferred shares received from sale of equity method investment $ 36,179  $  
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total amounts of cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows (in thousands):
December 31,
2019 2018
Cash and cash equivalents $ 103,189  $ 106,892 
Restricted cash – current 75   
Restricted cash – non-current 746  745 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows $ 104,010  $ 107,637 
September 30,
2020 2019
Cash and cash equivalents $ 166,082  $ 230,299 
Restricted cash – current   20 
Restricted cash – non-current 746  746 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows $ 166,828  $ 231,065 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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APOLLO MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.    Description of Business
Overview

Apollo Medical Holdings, Inc. ("ApolloMed") together with its affiliated physician groups and consolidated entities (collectively, the “Company”) is a leading physician-centric, technology-enabled healthcare management company. Leveraging its proprietary population health management and healthcare delivery platform, ApolloMed operates an integrated, value-based healthcare model, which aims to empower the providers in its network to deliver the highest quality of care to its patients in a cost-effective manner.

Headquartered in Alhambra, California, ApolloMed's subsidiaries include management services organizations ("MSOs"), affiliated independent practice associations ("IPAs") and a Next Generation Accountable Care Organization ("NGACO"). Network Medical Management, Inc. ("NMM") and Apollo Medical Management, Inc. ("AMM") are the administrative and managerial services companies for the affiliated physician owned professional corporations that contract with independent physicians to deliver medical services in-office and virtually under the Allied Physicians of California, a Professional Medical Corporation d.b.a. Allied Pacific of California IPA ("APC"), Alpha Care Medical Group, Inc. and Accountable Health Care IPA brands. These affiliates are supported by ApolloMed Hospitalists, a Medical Corporation ("AMH") and Southern California Heart Centers, a Medical Corporation ("SCHC"). The Company's NGACO operates under the APA ACO, Inc. ("APAACO") brand and participates in the Centers for Medicare & Medicaid Services program that allows provider groups to assume higher levels of financial risk and potentially achieve a higher reward from participation in the program's attribution-based risk sharing model.

The Company provides care coordination services to each major constituent of the healthcare delivery system, including patients, families, primary care physicians, specialists, acute care hospitals, alternative sites of inpatient care, physician groups and health plans. The Company’s physician network consists of primary care physicians, specialist physicians, and hospitalists.
NMM was formed in 1994 as an MSO for the purposes of providing management services to medical companies and IPAs. The management services primarily include billing, collection, accounting, administration, quality assurance, marketing, compliance, and education. Following a business combination, NMM became a wholly-owned subsidiary of ApolloMed in December 2017.
APC was incorporated in 1992, for the purpose of arranging healthcare services as an IPA. APC has contracts with various health maintenance organizations (“HMOs”) and other licensed healthcare service plans as defined in the California Knox-Keene Health Care Service Plan Act of 1975. Each HMO negotiates a fixed amount per member per month (“PMPM”) that is to be paid to APC. In return, APC arranges for the delivery of healthcare services by contracting with physicians or professional medical corporations for primary care and specialty care services. APC assumes the financial risk of the cost of delivering healthcare services in excess of the fixed amounts received. Some of the risk is transferred to the contracted physicians or professional corporations. The risk is also minimized by stop-loss provisions in contracts with HMOs.
In July 1999, APC entered into an amended and restated management and administrative services agreement with NMM (the initial management services agreement was entered into in 1997) for an initial fixed term of 30 years. In accordance with relevant accounting guidance, APC is determined to be a variable interest entity (“VIE”) of the Company as NMM is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect APC’s economic performance through its majority representation on the APC Joint Planning Board; therefore APC is consolidated by NMM.
AP-AMH Medical Corporation (“AP-AMH”) was formed in May 2019, as a designated shareholder professional corporation. Dr. Thomas Lam, a shareholder, and the Chief Executive Officer and Chief Financial Officer of APC and Co-Chief Executive Officer of ApolloMed, is the sole shareholder of AP-AMH. ApolloMed makes all the decisions on behalf of AP-AMH and funds and receives all the distributions from its operations. ApolloMed has the rights to receive benefits from the operations of AP-AMH and has the option, but not the obligation, to cover losses. Therefore, AP-AMH is controlled and consolidated by ApolloMed as the primary beneficiary of this VIE.
In September 2019, ApolloMed completed the following series of transactions with its affiliates, AP-AMH and APC;
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1.ApolloMed loaned AP-AMH $545.0 million pursuant to a 10-year secured loan agreement (the “AP-AMH Loan”). The loan bears interest at a rate of 10% per annum simple interest, is not prepayable (except in certain limited circumstances), requires quarterly payments of interest only in arrears, and is secured by a first priority security interest in all of AP-AMHs assets, including the shares of APC Series A Preferred Stock purchased by AP-AMH, as described below. To the extent that AP-AMH is unable to make any interest payment when due because it has received dividends on the APC Series A Preferred Stock insufficient to pay in full such interest payment, then the outstanding principal amount of the loan will be increased by the amount of any such accrued but unpaid interest, and any such increased principal amounts will bear interest at the rate of 10.75% per annum simple interest.
2.AP-AMH purchased 1,000,000 shares of APC Series A Preferred Stock for aggregate consideration of $545.0 million in a private placement. Under the terms of the APC Certificate of Determination of Preferences of Series A Preferred Stock (the “Certificate of Determination”), AP-AMH is entitled to receive preferential, cumulative dividends that accrue on a daily basis and that are equal to the sum of (i) APC’s net income from healthcare services (as defined in the Certificate of Determination), plus (ii) any dividends received by APC from certain of APC’s affiliated entities, less (iii) any Retained Amounts (as defined in the Certificate of Determination).
3.APC purchased 15,015,015 shares of ApolloMed’s common stock for total consideration of $300.0 million in private placement. In connection therewith, ApolloMed granted APC certain registration rights with respect to ApolloMed’s common stock that APC purchased, and APC agreed that APC votes in excess of 9.99% of ApolloMed’s then outstanding shares will be voted by proxy given to ApolloMed’s management, and that those proxy holders will cast the excess votes in the same proportion as all other votes cast on any specific proposal coming before ApolloMed’s stockholders.
4.ApolloMed licensed to AP-AMH the right to use certain trade names for certain specified purposes for a fee equal to a percentage of the aggregate gross revenues of AP-AMH. The license fee is payable out of any Series A Preferred Stock dividends received by AP-AMH from APC.
5.Through its subsidiary, NMM, the Company agreed to provide certain administrative services to AP-AMH for a fee equal to a percentage of the aggregate gross revenues of AP-AMH. The administrative fee also is payable out of any APC Series A Preferred Stock dividends received by AP-AMH from APC.
As part of the series of transaction, APC and AP-AMH entered into Second Amendment to Series A Preferred Stock Purchase Agreement clarifying the term excluded assets ("Excluded Assets"). Excluded Assets means (i) assets received from the sale of shares of the Series A Preferred equal to the Series A Purchase Price, (ii) the assets of the Company that are not Healthcare Services Assets, including the Company’s equity interests in Universal Care, Inc., Apollo Medical Holdings, Inc., and any entity that is primarily engaged in the business of owning, leasing, developing or otherwise operating real estate, (iii) any assets acquired with the proceeds of the sale, assignment or other disposition of any of the assets described in clauses (i) or (ii), and (iv) any proceeds of the assets described in clauses (i), (ii) and (iii).