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APOLLO MEDICAL HOLDINGS, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following management's discussion and analysis should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in Part II, Item 8, "Financial Statements and Supplementary Data" of
this Annual Report on Form 10-K.
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In this section, "we," "our," "ours," and "us" refer to Apollo Medical Holdings,
Inc. ("ApolloMed") and its consolidated subsidiaries and affiliated entities, as
appropriate, including its consolidated variable interest entities ("VIEs").
Overview
Apollo Medical Holdings, Inc. is a leading physician-centric, technology-powered, risk-bearing 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. We, together with our affiliated physician groups and consolidated entities, provide coordinated outcomes-based medical care in a cost-effective manner. Through our NGACO model and our network of IPAs we were responsible for coordinating the care for approximately 1.2 million patients primarily inCalifornia as ofDecember 31, 2021 . These covered patients are comprised of managed care members whose health coverage is provided either through their employers, acquired directly from a health plan, or as a result of their eligibility for Medicaid or Medicare benefits. Our managed patients benefit from an integrated approach that places physicians at the center of patient care and utilizes sophisticated risk management techniques and clinical protocols to provide high-quality, cost-effective care. OnDecember 8, 2017 , ApolloMed completed its business combination with NMM (i.e., the "2017 Merger"). The combination of ApolloMed and NMM brought together two complementary healthcare organizations to form one of the nation's largest integrated population health management companies. As a result of the 2017 Merger, NMM became a wholly owned subsidiary of ApolloMed and the former NMM shareholders received a majority of the issued and outstanding common stock of ApolloMed. For accounting purposes, NMM was considered the accounting acquirer and accordingly, as of the closing of the 2017 Merger, NMM's historical results of operations replaced ApolloMed's historical results of operations for periods prior to the 2017 Merger, and the results of operations of both companies are included in the accompanying consolidated financial statements for periods following the 2017 Merger.
2021 Highlights
Shared Savings from
Performance Year
Following the end of each performance year and at such other times as may be required under the NGACO Participation Agreement between APAACO and CMS (the "Participation Agreement"), CMS will issue a settlement report to the Company setting forth the amount of any shared savings or shared losses and the amount of other monies. As APAACO does not have sufficient insight into the financial performance of the shared risk pool with CMS because of unknown factors related to IBNR claims, risk adjustment factors, and stop-loss provisions, among other factors, an estimate cannot be developed. Due to these limitations, APAACO cannot determine the amount of surplus or deficit that will likely be recognized in the future and therefore this shared-risk pool revenue is considered fully constrained until it is settled. The settlement for the 2020 performance year was finalized inOctober 2021 and the Company recognized$21.8 million related to savings as revenue in risk pool settlements and incentives in the accompanying consolidated statements of income for the year endedDecember 31, 2021 .
Amended and Restated Credit Agreement
OnJune 16, 2021 , the Company entered into the Amended Credit Agreement. The Amended Credit Agreement and Amended Credit Facility thereunder provides for a five-year revolving credit facility to the Company of$400.0 million , which includes a letter of credit sub-facility of up to$25.0 million and a swingline loan sub-facility of$25.0 million . The Amended Credit Facility will be used to, among other things, refinance certain existing indebtedness of the Company and certain subsidiaries, finance certain future acquisitions and investments, and provide for working capital needs and other general corporate purposes. Under the Amended Credit Agreement, the Guaranty and Security Agreement (the "Guaranty and Security Agreement") between the Company, NMM, andTruist Bank remains in effect, pursuant to which, among other things, NMM guarantees the obligations of the Company under the Amended Credit Agreement and the lenders under the Amended Credit Agreement have a security interest over all of the assets of the Company and NMM. As ofDecember 31, 2021 , the Company had$180.0 million outstanding under the Amended Credit Facility. 50 --------------------------------------------------------------------------------
Business and Asset Acquisitions
Tag 8
InDecember 2020 , using cash comprised solely of Excluded Assets, APC purchased a 50% interest inTag-8 Medical Investment Group, LLC ("Tag 8"). Tag 8 has vacant land, which they plan to develop in the future. InApril 2021 , Tag 8 entered into a loan agreement withMUFG Union Bank N.A. with APC as their guarantor, causing the Company to reevaluate the accounting for the Company's investment in Tag 8. Based on the reevaluation and in accordance with relevant accounting guidance, it was concluded that Tag 8 is a VIE and is consolidated by APC. APCMG InJuly 2021 , AP-AMH 2Medical Corporation ("AP-AMH 2"), a VIE of the Company, purchased an 80% equity interest (on a fully diluted basis) inAccess Primary Care Medical Group ("APCMG"), a primary care physicians' group focused on providing high-quality care to senior patients in the northernCalifornia cities ofDaly City andSan Francisco . As a result, APCMG is consolidated by the Company. As part of the transaction, the Company paid$1.0 million in cash and the remaining$1.0 million will be paid out in cash as a contingent consideration related to APCMG's financial performance for fiscal year 2022.
InAugust 2021 ,Apollo Medical Holdings, Inc. acquired 49% of the aggregate issued and outstanding shares of capital stock ofSun Clinical Laboratories ("Sun Labs ") for an aggregate purchase price of$4.0 million .Sun Labs is a Clinical Laboratory Improvement Amendments-certified full-service lab that operates across theSan Gabriel Valley inSouthern California . In accordance with relevant accounting guidance,Sun Labs is determined to be a VIE of the Company and is consolidated by the Company.
DMG
InOctober 2021 , DMG entered into an administrative services agreement with a subsidiary of the Company, causing the Company to reevaluate the accounting for the Company's investment in DMG. Based on the reevaluation and in accordance with relevant accounting guidance, DMG is determined to be a VIE of the Company and is consolidated by the Company. Recent Developments
InDecember 2021 , the Company announced that AP-AMH 2 has entered into a definitive agreement to acquire 100% of the capital stock ofJade Health Care Medical Group ("Jade Health "), a primary and specialty care physicians' group focused on providing high-quality care to its local communities. The Company anticipates closing this transaction by the end of the second quarter of 2022 and will fund the transaction from cash on hand.
InJanuary 2022 , the Company announced that it acquired 100% of the capital stock ofOrma Health, Inc. , andProvider Growth Solutions, LLC (together, "Orma Health ") in accordance with an agreement between ApolloMed, Orma, and certain equity holders ofOrma Health . Through its suite of AI-driven solutions,Orma Health currently serves over 4,000 aligned Medicare beneficiaries in a Direct Contracting Entity ("DCE") and over 2,500 patients inCalifornia ,Nevada ,Arizona , andTexas through its remote patient monitoring ("RPM") platform.
Direct Contracting Model
APAACO has applied for the GPDC Model for Performance Year 2022 ("PY22") with
CMS releasing the PY22 GPDC Model Participants at
https://innovation.cms.gov/media/document/gpdc-model-participant-summary. CMS
has redesigned the GPDC Model in response to Administration priorities,
including their commitment to advancing health equity,
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stakeholder feedback, and participant experience. They have renamed the GPDC
Model to ACO Realizing Equity, Access, and Community Health ("ACO REACH") Model.
The ACO REACH Model will begin participation on January 1, 2023 .
Key Financial Measures and Indicators
Operating Revenues
Our revenue, which is recorded in the period in which services are rendered and
earned, primarily consists of capitation revenue, risk pool settlements and
incentives, NGACO AIPBP revenue, management fee income, and fee-for-services
("FFS") revenue. The form of billing and related risk of collection for such
services may vary by type of revenue and the customer.
Operating Expenses
Our largest expenses consist of the cost of: (1) patient care paid to contracted
physicians; (2) information technology equipment and software and; (3) hiring
staff to provide management and administrative support services to our
affiliated physician groups, as further described in the following sections.
These services include payroll, benefits, physician practice billing, revenue
cycle services, physician practice management, administrative oversight, coding
services, and other consulting services.
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Results of Operations
2021 Compared to 2020
Our consolidated operating results for the year ended
compared to the year ended
Apollo Medical Holdings, Inc.
Consolidated Statements of Income (in thousands)
Years Ended December 31,
2021 2020 $ Change % Change
Revenue
Capitation, net $ 593,224 $ 557,326 $ 35,898 6 %
Risk pool settlements and incentives 111,627 77,367 34,260 44 %
Management fee income 35,959 34,850 1,109 3 %
Fee-for-services, net 26,564 12,683 13,881 109 %
Other income 6,541 4,954 1,587 32 %
Total revenue 773,915 687,180 86,735 13 %
Operating expenses
Cost of services, excluding depreciation and
amortization 596,142 539,211 56,931 11 %
General and administrative expenses 62,077 49,116 12,961 26 %
Depreciation and amortization 17,517 18,350 (833) (5) %
Total expenses 675,736 606,677 69,059 11 %
Income from operations 98,179 80,503 17,676 22 %
Other (expense) income
Income (loss) from equity method investments (4,306) 3,694 (8,000) (217) %
Gain on sale of equity method investment 2,193 99,839 (97,646) (98) %
Interest expense (5,394) (9,499) 4,105 (43) %
Interest income 1,571 2,813 (1,242) (44) %
Unrealized loss on investments (10,745) - (10,745) 100 %
Other (expense) income (3,750) 1,077 (4,827) (448) %
Total other (expense) income, net (20,431) 97,924 (118,355) (121) %
Income before provision for income taxes 77,748 178,427 (100,679) (56) %
Provision for income taxes 28,454 56,107 (27,653) (49) %
Net income $ 49,294 $ 122,320 $ (73,026) (60) %
Net (loss) income attributable to noncontrolling
interests (24,564) 84,454 (109,018) (129) %
Net income attributable to Apollo Medical Holdings,
Inc. $ 73,858 $ 37,866 $ 35,992 95 %
Net Income
Our net income in 2021 was
a decrease of
Physician Groups and Patients
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As of
groups we managed were 12 groups and 14 groups, respectively, and the total
number of patients for whom we managed the delivery of healthcare services was
1.2 million and 1.1 million, respectively.
Revenue
Our total revenue in 2021 was$773.9 million , as compared to$687.2 million in 2020, an increase of$86.7 million or 13%. The increase in total revenue was primarily attributable to the following: (i) An overall increase of$35.9 million in capitation revenue primarily driven by membership growth at APC andAlpha Care and higher average capitation rate at APC. APC andAlpha Care contributed additional capitation revenue of approximately$38.2 million and$7.0 million , respectively. This was offset with a decrease in capitation revenue of$11.5 million at Accountable Health Care due to decreased membership. (ii) An increase of$34.3 million in risk pool settlements and incentives revenue due to an increase of$14.7 million in shared savings generated from our full risk pool arrangements driven by reduced utilization at ApolloMed's partner hospitals resulting from the suspension of non-emergency medical procedures in early 2020 when the COVID-19 pandemic first began, revenues from ApolloMed's partner hospitals reflect a 15-18 month lag,$13.1 million from health plan incentives and settlements from various payor partners, which was mainly attributable to increased membership and timing of settlements,$4.5 million resulting from a settlement with a health plan within our full risk pool arrangement, and a$2.0 million increase in the shared savings settlement earned from ApolloMed's participation in an ACO related to performance year 2020 as compared to prior year. (iii) An increase of$13.9 million in fee-for-services revenue attributable to fees generated fromSun Labs and DMG totaling$7.2 million due to the consolidation ofSun Labs inAugust 2021 and DMG inOctober 2021 . In addition, there was an increase of$5.4 million from increased visits to our surgery and heart centers, which were partially closed in the prior year due COVID-19.
Cost of Services, Excluding Depreciation and Amortization
Expenses related to cost of services, excluding depreciation and amortization, in 2021 were$596.1 million , as compared to$539.2 million in 2020, an increase of$56.9 million or 11%. The overall increase was due to an increase in medical claims incurred of$33.4 million ,$12.1 million in additional costs as a result of the consolidation ofSun Labs inAugust 2021 and DMG inOctober 2021 , and$8.3 million in increased sub-capitation payments due to a new oncology vendor joining inNovember 2020 .
General and Administrative Expenses
General and administrative expenses in 2021 were$62.1 million , as compared to$49.1 million in 2020, an increase of$13.0 million or 26%. This increase was primarily due to an$8.9 million increase in personnel-related costs to support the continued growth in the depth and breadth of our operations and$2.7 million in one time cost related to vendor settlement and execution of the Amended Credit Facility agreement.
Depreciation and Amortization
Depreciation and amortization expense was$17.5 million and$18.4 million for the years endedDecember 31, 2021 and 2020, respectively. These amounts included depreciation of property and equipment and the amortization of intangible assets.
Other (Expense) Income
Other (expense) income represents income, or loss, from equity method investments, gain, or loss, on sale of equity method investment, interest expense, interest income, unrealized loss on investments, and other (expense) income. Our total other expense in 2021 was$20.4 million compared to other income of$97.9 million in 2020, a decrease of$118.4 million . The decrease in other income was due to a decrease of$97.6 million resulting from the gain on sale of equity method investment in 2020, unrealized loss on investments of$10.7 million , and a decrease in income from equity method investments of$8.0 million . 54 --------------------------------------------------------------------------------
The
driven by a
The$10.7 million unrealized loss on investments is primarily driven by an unrealized loss of$12.1 million due to fluctuations in the stock price of a payor partner in which we hold shares in. These shares are recorded as marketable securities and deemed an Excluded Assets that are solely for the benefit of APC and its shareholders. Any resulting gain or loss does not impact net income attributable toApollo Medical Holdings, Inc. The unrealized loss was partial offset by an unrealized gain of$1.3 million due to fluctuations in the stock price of our equity holdings in Clinigence. The$8.0 million decrease in income from equity method investments was primarily due to the sale of UCI inApril 2020 . For the nine months endedSeptember 30, 2020 , UCI contributed equity earnings of$3.6 million . The additional decrease is from our investment in LMA. The Company incurred a loss of$5.8 million from LMA as a result of increased claims expense for the year endedDecember 31, 2021 as compared to equity earnings of$0.3 million for the year endedDecember 31, 2020 . The loss was partially offset by increases in income from One MSO, Tag 6, and CAIPA MSO of$0.5 million ,$0.3 million , and$0.3 million , respectively.
Provision for Income Taxes
Provision for income taxes was
million
attributable to the decrease in pre-tax income in 2021, as compared to 2020, due
to the factors described above.
Net (Loss) Income Attributable to Noncontrolling Interests
Net loss attributable to non-controlling interests was$24.6 million in 2021, as compared to net income of$84.5 million in 2020, a decrease of$109.0 million . The decrease was primarily due to unrealized loss on investment recognized for the year endedDecember 31, 2021 related to a payor partner as compared to the gain on sale of UCI inApril 2020 . 55 --------------------------------------------------------------------------------
2020 Compared to 2019
Our consolidated operating results for the year ended
compared to the year ended
Apollo Medical Holdings, Inc.
Consolidated Statements of Income (in thousands)
Years Ended December 31,
2020 2019 $ Change % Change
Revenue
Capitation, net $ 557,326 $ 454,168 $ 103,158 23 %
Risk pool settlements and incentives 77,367 51,098 26,269 51 %
Management fee income 34,850 34,668 182 1 %
Fee-for-services, net 12,683 15,475 (2,792) (18) %
Other income 4,954 5,209 (255) (5) %
Total revenue 687,180 560,618 126,562 23 %
Operating expenses
Cost of services, excluding depreciation and
amortization 539,211 467,805 71,406 15 %
General and administrative expenses 49,116 41,482 7,634 18 %
Depreciation and amortization 18,350 18,280 70 0 %
Provision for doubtful accounts - (1,363) 1,363 (100) %
Impairment of goodwill and intangibles assets - 1,994 (1,994) (100) %
Total expenses 606,677 528,198 78,479 15 %
Income from operations 80,503 32,420 48,083 148 %
Other income (expense)
Loss from equity method investments 3,694 (6,901) 10,595 (154) %
Gain on sale of equity method investment 99,839 - 99,839 100 %
Interest expense (9,499) (4,733) (4,766) 101 %
Interest income 2,813 2,024 789 39 %
Other income 1,077 3,030 (1,953) (64) %
Total other income (expense), net 97,924 (6,580) 104,504 *
Income before provision for income taxes 178,427 25,840 152,587 591 %
Provision for income taxes 56,107 8,167 47,940 587 %
Net income $ 122,320 $ 17,673 $ 104,647 592 %
Net income attributable to noncontrolling interests 84,454
3,557 80,897 *
Net income attributable to
Inc.
$ 37,866 $ 14,116 $ 23,750 168 %
* Percentage change of over 1000%
Net Income
Our net income in 2020 was
an increase of
Physician Groups and Patients
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As of
groups we managed were 14 groups and 13 groups, respectively, and the total
number of patients for whom we managed the delivery of healthcare services was
1.1 million and 0.9 million, respectively.
Revenue
Our total revenue in 2020 was$687.2 million , as compared to$560.6 million in 2019, an increase of$126.6 million or 23%. The increase in total revenue was primarily attributable to the following: (i) An overall increase of$103.2 million in capitation revenue primarily driven by the acquisition ofAlpha Care and Accountable Health Care inAugust 2019 andSeptember 2019 , respectively. For the full year endedDecember 31, 2020 ,Alpha Care and Accountable Health Care contributed additional capitation revenues of$52.4 million and$29.0 million , respectively. In addition, capitation revenue at APC increased by$16.4 million due to increased rates from incentives being met and increased patient lives under management. Lastly, capitation revenue at APAACO increased by$5.3 million as a result of organic growth and expansion of the ACO program. (ii) An increase of$26.3 million in risk pool settlements and incentives revenue due to the settlement of the 2019 ACO Performance Year, resulting in a shared-risk settlement of$19.8 million recognized during the third quarter of 2020, as compared to$0.9 million in shared-risk settlement related to the 2018 performance year and recognized during the year endedDecember 31, 2019 . In addition, during the year endedDecember 31, 2020 , risk pool revenues increased by$6.2 million primarily driven by reduced hospital costs as a result of COVID-19. (iii) A decrease in fees-for-services revenue of$2.8 million primarily due to the COVID-19 pandemic that resulted in the closure of our surgery centers and heart center fromMarch 2020 toMay 2020 and fewer procedures completed in 2020.
Cost of Services, Excluding Depreciation and Amortization
Expenses related to cost of services, excluding depreciation and amortization, in 2020 were$539.2 million , as compared to$467.8 million in 2019, an increase of$71.4 million or 15%. The increase was due primarily to the acquisitions ofAlpha Care and Accountable Health Care inMay 2019 andSeptember 2019 , respectively, which provided for a full year of costs for the year endedDecember 31, 2020 . Cost of services, excluding depreciation and amortization, related toAlpha Care and Accountable Health Care contributed$52.2 million and$28.0 million , respectively, to the overall increase. Furthermore, there was an$8.6 million increase at our APAACO entity resulting from a full year of services in the 2020 performance year as compared to nine months of services under the 2019 performance year due to the delayed commencement by CMS of APAACO's 2019 Next Generation ACO performance year fromJanuary 1, 2019 toApril 1, 2019 . Lastly, cost of sales increased by$5.6 million at NMM to support the continued growth of the Company. These increases were offset by a reduction in claims costs totaling approximately$25.1 million as a result of the COVID-19 pandemic, which caused a decrease in office visits and a reduction in non-emergency procedures. We do not expect similar decreases in claims costs as a result of COVID-19 to occur again in fiscal 2021.
General and Administrative Expenses
General and administrative expenses in 2020 were$49.1 million , as compared to$41.5 million in 2019, an increase of$7.6 million or 18%. This increase was primarily due to$4.5 million in additional provider bonuses and$2.4 million from share-based compensation related to stock options and restricted stock awards granted in 2020 and 2019.
Depreciation and Amortization
Depreciation and amortization expense was$18.4 million and$18.3 million for the years endedDecember 31, 2020 and 2019, respectively. These amounts included depreciation of property and equipment and the amortization of intangible assets.
Provision for Doubtful Accounts
During the year endedDecember 31, 2019 , we released reserves related to certain management fees in the amount of approximately$1.4 million as collectability of the outstanding amount was no longer in doubt. These reserves were related to various preacquisition obligations of Accountable Health Care and were no longer necessary as a result of our acquisition of Accountable Health Care. 57 --------------------------------------------------------------------------------
Impairment of
There was no impairment of goodwill and intangible assets for the year endedDecember 31, 2020 , as compared to$2.0 million for the year endedDecember 31, 2019 , which related to a write-off of Medicare licenses that were acquired as part of the 2017 Merger between ApolloMed and NMM.
Other Income (Expense)
Other income (expense) represents income, or loss, from equity method investments, interest expense, interest income, gain on sale of equity method investment, and other income. Total other income in 2020 was income of$97.9 million compared to other expense of$6.6 million in 2019, an increase of$104.5 million . The increase in other income was primarily due to a$99.8 million gain on sale of our UCI equity method investment and an increase of$10.6 million from income from equity method investments. This was partially offset by an increase of$4.8 million in interest expense. The increase of$10.6 million in income from equity method investments was primarily due to equity earnings recognized related toUniversal Care Inc , of$3.6 million compared to a loss of$1.2 million in 2019. During the year endedDecember 31, 2020 , we recognized equity earnings from our investment of LSMA of$0.3 million as compared to an equity loss of$2.8 million in 2019. Further, we recognized an equity loss of$2.5 million related to our investment in Accountable Health Care during the year endedDecember 31, 2019 , which was acquired inAugust 2019 and is now a consolidated entity of APC. The increase in interest expense of$4.8 million was primarily due to interest incurred from a new credit facility we secured inSeptember 2019 to fund growth, primarily through acquisitions.
Provision for Income Taxes
Provision for income taxes was
million
attributable to the increase in pre-tax income in 2020, as compared to 2019, due
to the factors described above.
Net Income Attributable to Noncontrolling Interests
Net income attributable to non-controlling interests was$84.5 million in 2020, as compared to$3.6 million in 2019, an increase of$80.9 million . The increase was primarily due to the sale of UCI inApril 2020 where the gain, net of tax, remained strictly with the APC Excluded Assets and increased consolidated net income generated in the current period, which resulted in additional income allocated to the non-controlling interest. 58 --------------------------------------------------------------------------------
2022 Guidance
ApolloMed anticipates full-year 2022 total revenue of between$1.03 billion and$1.08 billion , based on the Company's existing business, current view of existing market conditions, and assumptions for the year endingDecember 31, 2022 . The Company is providing projections for total revenue only at this time due to uncertainties related to its participation in aCenters for Medicare & Medicaid Services Innovation Center ("CMMI") innovation model, ongoing investment in staff to support future growth, and certain investments that depend on unpredictable macroeconomic factors.
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
Year Ended
December 31,
(in thousands) 2021 2020
Net (loss) income $ 49,294 $ 122,320
Interest expense 5,394 9,499
Interest income (1,571) (2,813)
(Benefit from) provision for income taxes 28,454 56,107
Depreciation and amortization 17,517 18,350
EBITDA $ 99,088 $ 203,463
Loss (income) from equity method investments $ 4,306 $
(3,694)
Other expense (income) 11,222 (1)
(1,077)
Unrealized loss on investments 12,137
-
Gain on sale of equity method investment - (99,839) Provider bonus payments 7,220 6,500 Stock-based compensation 6,745 3,383 APC excluded assets costs 10,325 2,000 Net loss adjustment for recently acquired IPAs 23,147 19,192 Adjusted EBITDA$ 174,190 $ 129,928 (1) Other expense (income) excludes the impact of fair value of certain equity securities held by the Company and the gain resulting from the consolidation of an equity method investment as ofDecember 31, 2021 .
Use of Non-GAAP Financial Measures
This Annual Report on Form 10-K contains the non-GAAP financial measures EBITDA
and adjusted EBITDA, of which the most directly comparable financial measure
presented in accordance with generally accepted accounting principles ("GAAP")
is net income. These measures are not in accordance with, or an alternative to,
U.S. GAAP, and may be different from other non-GAAP financial measures used by
other companies. The Company uses adjusted EBITDA as a supplemental performance
measure of our operations, for financial and operational decision-making, and as
a supplemental means of evaluating period-to-period comparisons on a consistent
basis. Adjusted EBITDA is calculated as earnings before interest, taxes,
depreciation, and amortization, excluding income from equity method investments,
provider bonuses, impairment of intangibles, provision of doubtful accounts, and
other income earned that is not related to the Company's normal operations.
Adjusted EBITDA also excludes the effect on EBITDA of certain IPAs we recently
acquired.
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The Company believes the presentation of these non-GAAP financial measures
provides investors with relevant and useful information as it allows investors
to evaluate the operating performance of the business activities without having
to account for differences recognized because of non-core or non-recurring
financial information. When GAAP financial measures are viewed in conjunction
with non-GAAP financial measures, investors are provided with a more meaningful
understanding of ApolloMed's ongoing operating performance. In addition, these
non-GAAP financial measures are among those indicators the Company uses as a
basis for evaluating operational performance, allocating resources, and planning
and forecasting future periods. Non-GAAP financial measures are not intended to
be considered in isolation, or as a substitute for, GAAP financial measures. To
the extent this release contains historical or future non-GAAP financial
measures, the Company has provided corresponding GAAP financial measures for
comparative purposes. The reconciliation between certain GAAP and non-GAAP
measures is provided above.
Liquidity and Capital Resources
Cash, cash equivalents, and investment in marketable securities atDecember 31, 2021 totaled$286.5 million . Working capital totaled$283.4 million atDecember 31, 2021 , compared to$223.6 million atDecember 31, 2020 , an increase of$59.8 million . We have historically financed our operations primarily through internally generated funds. We generate cash primarily from capitations, risk pool settlements and incentives, fees for medical management services provided to our affiliated physician groups, as well as FFS reimbursements. We generally invest cash in money market accounts, which are classified as cash and cash equivalents. We believe we have sufficient liquidity to fund our operations at least throughFebruary 2023 . Our cash and cash equivalents and restricted cash increased by$39.1 million from$194.0 million atDecember 31, 2020 to$233.1 million atDecember 31, 2021 . Cash provided by operating activities during the year endedDecember 31, 2021 was$70.3 million , as compared to$46.2 million during the year endedDecember 31, 2020 . Cash provided by operating activities during the year endedDecember 31, 2021 was due to net income of$49.3 million with adjustments to reconcile net income to net cash provided by operating activities. For the year endedDecember 31, 2021 adjustments from depreciation and amortization of$17.5 million , share-based compensation of$6.7 million , unrealized loss on investments of$10.8 million , impairment of beneficial interest of$15.7 million , loss from equity method investments of$4.3 million ,$4.1 million change in accounts payable and accrued expenses and fiduciary payable,$5.3 million change in medical liabilities, and$2.7 million change in prepaid expenses and other current assets increased cash provided by operating activities. This was offset by adjustments from gain on sale of equity method investment of$2.2 million , gain on consolidation of equity method investment of$2.8 million , gain on purchase of warrants of$1.1 million , gain on contingent equity securities of$4.3 million ,$27.0 million change in receivable, net, receivable, net - related parties, and other receivable, and$5.2 million change in other assets and income taxes payable. This is compared to cash provided by operating activities during the year endedDecember 31, 2020 as a result of net income of$122.3 million adjusted to reconcile net income to net cash provided by operating activities. Adjustments from depreciation and amortization of$18.4 million , share-based compensation of$3.4 million ,$15.6 million change in receivable, net, receivable, net - related parties, and other receivable, and$15.8 million change in accounts payable and accrued expenses and fiduciary payable increased cash provided by operating activities. This was offset by adjustments from income from equity method investments of$3.7 million , gain on sale of UCI equity method investments of$99.8 million ,$6.4 million change in prepaid expenses and other current assets,$14.5 million change in other assets, medical liabilities, and income taxes payable. Cash provided by investing activities during the year endedDecember 31, 2021 was$16.5 million , as compared to cash provided by investing activities of$95.5 million during the year endedDecember 31, 2020 . Cash provided by investing activities during the year endedDecember 31, 2021 was primarily due to proceeds from sale of marketable securities of$67.6 million , proceeds from sale of equity method investment totaling$6.4 million , and cash recognized from consolidation of VIE of$5.9 million . These were offset by purchases of equity method investments of$13.6 million , purchases of property and equipment of$19.2 million , payments for business acquisition, net of cash acquired of$2.6 million , and purchases of marketable securities of$28.0 million . This is compared to cash provided in investing activities for the year endedDecember 31, 2020 primarily due to proceeds of marketable securities of$50.6 million , proceeds from sale of equity method investment totaling$52.7 million , and proceeds from repayment of loans receivable of$16.5 million . These were offset by purchases of equity method investments of$10.0 million , payments for business acquisitions of$11.4 million , and purchases of marketable securities of$1.8 million . 60 -------------------------------------------------------------------------------- Cash used in financing activities during the year endedDecember 31, 2021 was$47.7 million , as compared to cash used in financing activities of$51.7 million for the year endedDecember 31, 2020 . Cash used in financing activities during the year endedDecember 31, 2021 was primarily attributable to repayment of Credit Facility and other debt of$238.3 million , the payments of dividends totaling$31.1 million , payment of debt issuance cost related to the Amended Credit Facility of$0.7 million , distribution to noncontrolling interests of$1.5 million , and repurchases of shares totaling$5.7 million . This was offset by proceeds from the exercise of stock options and warrants of$9.1 million , borrowings on the Amended Credit Facility of$180.0 million , borrowings on Tag 8's Construction Loan of$0.6 million , and proceeds from sale of shares of$40.1 million . This is compared to cash used in financing activities for the year endedDecember 31, 2020 for payments of dividends totaling$51.3 million , repayment on our term loan totaling$9.5 million , distribution to non-controlling interests of$1.0 million , and repurchases of shares totaling$0.5 million . Cash used was offset with the proceeds from the exercise of stock options and warrants of$10.8 million .
Excluded Assets
InSeptember 2019 , APC and AP-AMH entered into the Second Amendment to Series A Preferred Stock Purchase Agreement clarifying the term 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 inUniversal 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). The Excluded Assets as ofDecember 31, 2021 , are primarily comprised of assets and liabilities from operating real estate and proceeds from the sale of UCI. Any dividends issued to APC shareholders are paid using cash from Excluded Assets. Excluded Assets consisted of the following (in thousands): December 31, December 31, 2021 2020 Cash and cash equivalents $ 62,540$ 38,773 Investment in marketable securities 49,066 66,534 Land, property and equipment, net 42,114 24,466 Loan receivable - related parties 4,000 4,145 Investments in other entities - equity method 24,969 25,847 Investment in privately held entities - 36,179 Other receivable and assets 936 15,723 Other liabilities (1,178) - Long-term debt (7,645) (7,580) Total excluded assets $ 174,802$ 204,087 Credit Facilities
The Company's debt balance consisted of the following (in thousands):
61 --------------------------------------------------------------------------------
December 31, 2021
Revolver loan $ 180,000
Real estate loans 7,396
Construction loan 569
Total debt 187,965
Less: current portion of debt (780)
Less: unamortized financing cost (4,268)
Long-term debt $ 182,917
The following are the future commitments of the Company's debt for the years
ending December 31 (in thousands):
Amount
2022 $ 780
2023 215
2024 222
2025 6,748
2026 and thereafter 180,000
Total $ 187,965
The Amended Credit Agreement requires the Company to comply with two key
financial ratios, each calculated on a consolidated basis.
Coverage Ratios (1) Requirement December 31, 2021
Consolidated leverage ratio Less than 3.75 to 1.00
1.16
Consolidated interest coverage ratio Greater than 3.25 to 1.00
25.44
(1) All covenant ratio titles utilize terms as defined in the respective debt
agreements.
Refer to Note 10 - "Credit Facility, Bank Loans, and Lines of Credit" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information on the Amended Credit Agreement.
Deferred Financing Costs
InSeptember 2019 , the Company recorded deferred financing costs of$6.5 million related to its entry into the Credit Facility. InJune 2021 , the Company recorded additional deferred financing costs of$0.7 million related to its entry into the Amended Credit Facility. Deferred financing costs are recorded as a direct reduction of the carrying amount of the related debt liability using straight-line amortization. The remaining unamortized deferred financing costs related to the Credit Facility and the new costs related to the Amended Credit Facility are amortized over the life of the Amended Credit Facility.
Effective Interest Rate
The Company's average effective interest rate on its total debt during the years endedDecember 31, 2021 , 2020, and 2019 was 2.06%, 3.48%, and 3.39%, respectively. Interest expense in the consolidated statements of income included amortization of deferred debt issuance costs for the years endedDecember 31, 2021 , 2020, and 2019 of$1.2 million ,$1.4 million , and$0.5 million , respectively.
Real Estate Loans
On
purchased a 100% interest in MPP,
purchase, the Company assumed
62 -------------------------------------------------------------------------------- existing loans held by MPP,AMG Properties , and ZLL, respectively, on the day of acquisition. Refer to Note 10 - "Credit Facility, Bank Loans, and Lines of Credit" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information.
Construction Loan
InApril 2021 , Tag 8 entered into a construction loan agreement withMUFG Union Bank N.A. ("Construction Loan") that allows Tag 8 to borrow up to$10.7 million . Tag 8 is a VIE consolidated by the Company. Refer to Note 10 - "Credit Facility, Bank Loans, and Lines of Credit" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information.
Lines of Credit -
OnSeptember 10, 2019 , APC amended its promissory note agreement with Preferred Bank ("APC Business Loan Agreement"), which is affiliated with one of the Company's board members, to modify loan availability to$4.1 million . This decrease further limited the purpose of the indebtedness under APC Business Loan Agreement to the issuance of standby letters of credit, and added as a permitted lien the security interest in all of its assets granted by APC in favor of NMM under a Security Agreement dated on or aboutSeptember 11, 2019 securing APC's obligations to NMM under, and as required pursuant to, that certain Management Services Agreement dated as ofJuly 1, 1999 , as amended.
Standby Letters of Credit
APC established irrevocable standby letters of credit with a financial institution for a total of$0.3 million for the benefit of certain health plans. The standby letters of credit are automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless notified by the institution in advance of the expiration date that the letter will be terminated.Alpha Care established irrevocable standby letters of credit with Preferred Bank under the APC Business Loan Agreement for a total of$3.8 million for the benefit of certain health plans. The standby letters of credit are automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless notified by the institution in advance of the expiration date that the letter will be terminated.
Intercompany Loans
Each of AMH,Maverick Medical Group, Inc. ("MMG"),Bay Area Hospitalist Associates ("BAHA"),AKM Medical Group, Inc. ("AKM"), andSCHC has entered into an Intercompany Loan Agreement with AMM under which AMM has agreed to provide a revolving loan commitment to each of the affiliated entities in an amount set forth in each Intercompany Loan Agreement. Each Intercompany Loan Agreement provides that AMM's obligation to make any advances automatically terminates concurrently with the termination of the management agreement with the applicable affiliated entity. In addition, each Intercompany Loan Agreement provides that (i) any material breach by the shareholder of record of the applicable Physician Shareholder Agreement or (ii) the termination of the management agreement with the applicable affiliated entity constitutes an event of default under the Intercompany Loan Agreement. All the intercompany loans have been eliminated in consolidation. 63 -------------------------------------------------------------------------------- Year Ended December 31, 2021 (in thousands) Maximum Balance Principal Intercompany Interest Rate Per During Ending Paid During Interest Paid Entity Credit Facility Annum Period Balance Period During Period AMH$ 10,000 10 %$ 6,588 $ 6,588 $ - $ - MMG 3,000 10 % 3,663 3,663 - - AKM 5,000 10 % - - - - SCHC 5,000 10 % 5,362 5,362 - - BAHA 250 10 % 4,066 3,945 - -$ 23,250 $ 19,679 $ 19,558 $ - $ -
Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe United States of America ("U.S. GAAP"), which require management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and to the reported amounts of revenues and expenses during the period. The Company bases its estimates on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. Changes in estimates are recorded if and when better information becomes available. Actual results could differ from those estimates under different assumptions and conditions. The Company believes that the accounting policies discussed below are those that are most important to the presentation of its financial condition and results of operations and that require its management's most difficult, subjective, and complex judgments. Our significant accounting policies are described in Note 2 - "Basis of Presentation and Summary of Significant Accounting Policies" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K.
Principles of Consolidation
The consolidated balance sheets as ofDecember 31, 2021 and 2020 and consolidated statements of income for the years endedDecember 31, 2021 , 2020, and 2019 include the accounts of (1) ApolloMed, ApolloMed's consolidated subsidiaries, NMM, AMM, and APAACO, and its VIEs, AP-AMH, AP-AMH 2,Sun Labs , and DMG; (2) AP-AMH 2's consolidated subsidiary, APCMG; (3) AMM's VIEs,SCHC and AMH; (4) NMM's VIE, APC; (5) APC's consolidated subsidiaries,Universal Care Acquisition Partners, LLC ("UCAP"), MPP,AMG Properties , ZLL, and its VIEs, CDSC, APC-LSMA, ICC, and Tag 8; and (6) APC-LSMA's consolidated subsidiaries,Alpha Care , Accountable Health Care, and AMG.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include collectability of receivables, recoverability of long-lived and intangible assets, business combination and goodwill valuation and impairment, accrual of medical liabilities (IBNR claims), determination of full-risk and shared-risk revenue and receivables (including constraints, completion factors and historical margins), income tax valuation allowance, share-based compensation, and right-of-use assets and lease liabilities. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates and assumptions.
Receivables and Receivables - Related Parties
64 -------------------------------------------------------------------------------- The Company's receivables are comprised of accounts receivable, capitation, and claims receivable, risk pool settlements and incentive receivables, management fee income, and other receivables. Accounts receivable are recorded and stated at the amount expected to be collected.
The Company's receivables - related parties are comprised of risk pool
settlements and incentive receivables, management fee income, and other
receivables. Receivables - related parties are recorded and stated at the amount
expected to be collected.
Capitation and claims receivable relate to each health plan's capitation, which
is received by the Company in the month following the month of service. Risk
pool settlements and incentive receivables mainly consist of the Company's
full-risk pool receivable that is recorded quarterly based on reports received
from our hospital partners and management's estimate of the Company's portion of
the estimated risk pool surplus for open performance years. Settlement of risk
pool surplus or deficits occurs approximately 18 months after the risk pool
performance year is completed. Other receivables include FFS reimbursement for
patient care, certain expense reimbursements, and stop-loss insurance premium
reimbursements from IPAs.
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends, and changes in customer payment patterns to
evaluate the adequacy of these reserves. The Company also regularly analyzes the
ultimate collectability of accounts receivable after certain stages of the
collection cycle using a look-back analysis to determine the amount of
receivables subsequently collected and adjustments are recorded when necessary.
Reserves are recorded primarily on a specific identification basis.
Receivables are recorded when the Company is able to determine amounts
receivable under applicable contracts and agreements based on information
provided and collection is reasonably likely to occur. In regards to the credit
loss standard, the Company continuously monitors its collections of receivables
and our expectation is that the historical credit loss experienced across our
receivable portfolio is materially similar to any current expected credit losses
that would be estimated under the current expected credit losses ("CECL") model.
Fair Value Measurements
The Company's financial instruments include cash and cash equivalents,
restricted cash, investment in marketable securities, receivables, loans
receivable - related parties, accounts payable, certain accrued expenses,
capital lease obligations, bank loan, line of credit - related party, and
long-term debt. The carrying values of the financial instruments classified as
current in the accompanying consolidated balance sheets are considered to be at
their fair values, due to the short maturity of these instruments. The carrying
amount of the loan receivables - related parties, net of current portion, bank
loan, capital lease obligations line of credit - related party, and long-term
debt approximate fair value as they bear interest at rates that approximate
current market rates for debt with similar maturities and credit quality. The
FASB ASC 820, Fair Value Measurement ("ASC 820"), applies to all financial
assets and financial liabilities that are measured and reported on a fair value
basis and requires disclosure that establishes a framework for measuring fair
value and expands disclosure about fair value measurements. ASC 820 establishes
a fair value hierarchy for disclosures of the inputs to valuations used to
measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical
assets or liabilities that can be accessed at the measurement date.
Level 2-Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3-Unobservable inputs that reflect assumptions about what market
participants would use in pricing the asset or liability. These inputs would be
based on the best information available, including the Company's own data.
Business Combinations
65 -------------------------------------------------------------------------------- We use the acquisition method of accounting for all business combinations, which requires assets and liabilities of the acquiree to be recorded at fair value, to measure the fair value of the consideration transferred, including contingent consideration, to be determined on the acquisition date, and to account for acquisition-related costs separately from the business combination.
Intangible Assets and Long-Lived Assets
Intangible assets with finite lives include network-payor relationships, management contracts, and member relationships and are stated at cost, less accumulated amortization and impairment losses. These intangible assets are amortized on the accelerated method using the discounted cash flow rate. Intangible assets with finite lives also include a patient management platform, as well as trade names and trademarks, whose valuations were determined using the cost to recreate method and the relief from royalty method, respectively. These assets are stated at cost, less accumulated amortization and impairment losses, and are amortized using the straight-line method. Finite-lived intangibles and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the carrying value of the asset to its estimated fair value. Fair value is determined based on appropriate valuation techniques.
Under FASB ASC 350, Intangibles -
indefinite-lived intangible assets are reviewed at least annually for
impairment.
At least annually, at the Company's fiscal year-end, or sooner, if events or changes in circumstances indicate that an impairment has occurred, the Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments for each of the Company's three reporting units, (1) management services, (2) IPA, and (3) ACO. The Company is required to perform a quantitative goodwill impairment test only if the conclusion from the qualitative assessment is that it is more likely than not that a reporting unit's fair value is less than the carrying value of its assets. Should this be the case, a quantitative analysis is performed to identify whether a potential impairment exists by comparing the estimated fair values of the reporting units with their respective carrying values, including goodwill. An impairment loss is recognized if the implied fair value of the asset being tested is less than its carrying value. In this event, the asset is written down accordingly. The fair values of goodwill are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances. At least annually, indefinite-lived intangible assets are tested for impairment. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible asset exceeds its fair value. The fair values of indefinite-lived intangible assets are determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances.
Accrual of Medical Liabilities
APC,Alpha Care , Accountable Health Care, and APAACO are responsible for integrated care that the associated physicians and contracted hospitals provide to their enrollees. APC,Alpha Care , Accountable Health Care, and APAACO provide integrated care to HMOs, Medicare andMedi-Cal enrollees through a network of contracted providers under sub-capitation and direct patient service arrangements. Medical costs for professional and institutional services rendered by contracted providers are recorded as cost of services, excluding depreciation and amortization, expense in the accompanying consolidated statements of income. 66 -------------------------------------------------------------------------------- An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in the accompanying consolidated balance sheets. Medical liabilities include claims reported as of the balance sheet date and estimated IBNR claims. Such estimates are developed using actuarial methods and are based on numerous variables, including the utilization of healthcare services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and other factors. The estimation methods and the resulting accrual are periodically reviewed and updated. Many of the medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such differing interpretations may not come to light until a substantial period of time has passed following the contract implementation.
Risk Pool Settlements and Incentives
APC enters into full-risk capitation arrangements with certain health plans and local hospitals, which are administered by a third party, where the hospital is responsible for providing, arranging and paying for institutional risk and APC is responsible for providing, arranging and paying for professional risk. Under a full-risk pool-sharing agreement, APC generally receives a percentage of the net surplus from the affiliated hospital's risk pools with HMOs after deductions for the affiliated hospitals costs. Advance settlement payments are typically made quarterly in arrears if there is a surplus. The Company's risk pool settlements under arrangements with health plans and hospitals are recognized using the most likely amount methodology and amounts are only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The assumptions for historical MLR, IBNR completion factors, and constraint percentages were used by management in applying the most likely amount methodology. Under capitated arrangements with certain HMOs APC participates in one or more shared-risk arrangements relating to the provision of institutional services to enrollees (shared-risk arrangements) and thus can earn additional revenue or incur losses based upon the enrollee utilization of institutional services. Shared-risk capitation arrangements are entered into with certain health plans, which are administered by the health plan, where APC is responsible for rendering professional services, but the health plan does not enter into a capitation arrangement with a hospital and therefore the health plan retains the institutional risk. Shared-risk deficits, if any, are not payable until and unless (and only to the extent of any) risk-sharing surpluses are generated. At the termination of the HMO contract, any accumulated deficit will be extinguished. The Company's risk pool settlements under arrangements with HMOs are recognized, using the most likely methodology, and only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur. Given the lack of access to the health plans' data and control over the members assigned to APC, the adjustments and/or the withheld amounts are unpredictable and as such APC's risk-share revenue is deemed to be fully constrained until APC is notified of the amount by the health plan. Risk pools for the prior contract years are generally fully settled in the third or fourth quarter of the following year. In addition to risk-sharing revenues, the Company also receives incentives under "pay-for-performance" programs for quality medical care, based on various criteria. As an incentive to control enrollee utilization and to promote quality care, certain HMOs have designed quality incentive programs and commercial generic pharmacy incentive programs to compensate the Company for its efforts to improve the quality of services and efficient and effective use of pharmacy supplemental benefits provided to HMO members. The incentive programs track specific performance measures and calculate payments to the Company based on the performance measures. The Company's incentives under "pay-for-performance" programs are recognized using the most likely methodology. However, as the Company does not have sufficient insight from the health plans on the amount and timing of the shared-risk pool and incentive payments these amounts are considered to be fully constrained and only recorded when such payments are known and/or received. Generally, for the foregoing arrangements, the final settlement is dependent on each distinct day's performance within the annual measurement period but cannot be allocated to specific days until the full measurement period has occurred and performance can be assessed. As such, this is a form of variable consideration estimated at contract inception and updated through the measurement period (i.e., the contract year), to the extent the risk of reversal does not exist and the consideration is not constrained.
Share-Based Compensation
67 -------------------------------------------------------------------------------- The Company maintains a stock-based compensation program for employees, non-employees, directors and consultants. The value of share-based awards, such as options, is recognized as compensation expense on a cumulative straight-line basis over the vesting period of the awards, adjusted for forfeitures as they occur. From time to time, the Company issues shares of its common stock to its employees, directors, and consultants, which shares may be subject to the Company's repurchase right (but not obligation) that lapses based on time-based and performance-based vesting schedules. The fair value of options granted are determined using the Black-Scholes option pricing model and include several assumptions, including expected term, expected volatility, expected dividends, and risk-free rates. The expected term is presumed to be the midpoint between the vesting date and the end of the contractual term. The expected stock price volatility is determined based on an average of historical volatility. The expected dividend yield is based on the Company's expected dividend payouts. The risk-free interest rate is based on theU.S. Constant Maturity curve over the expected term of the option at the time of grant.
Leases
The Company determines if an arrangement is a lease at its inception. The expected term of the lease used for computing the lease liability and right-of-use asset and determining the classification of the lease as operating or financing may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company elected practical expedients for ongoing accounting that is provided by the new standard comprised of the following: (1) the election for classes of underlying asset to not separate non-lease components from lease components, and (2) the election for short-term lease recognition exemption for all leases under 12 months term. The present value of the lease payments is calculated using a rate implicit in the lease, when readily determinable. However, as most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate to determine the present value of the lease payments for the majority of its leases
Variable interest model
We perform a primary beneficiary analysis on all our identified variable interest entities, which comprises a qualitative analysis based on power and economics. We consolidate a VIE if both power and benefits belong to us - that is, we (i) have the power to direct the activities of a VIE that most significantly influence the VIE's economic performance (power), and (ii) have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). We consolidate VIEs whenever it is determined that we are the primary beneficiary.
Investment in Other Entities - Equity Method
We account for certain investments using the equity method of accounting when it is determined that the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee's board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the consolidated statements of income under "Income from equity method investments" and also is adjusted by contributions to and distributions from the investee. Equity method investments are subject to impairment evaluation. During the period endedDecember 31, 2021 , the Company recognized no impairment loss. Non-controlling Interests The Company consolidates entities in which the Company has a controlling financial interest. The Company consolidates subsidiaries in which the Company holds, directly or indirectly, more than 50% of the voting rights, and VIEs in which the Company is the primary beneficiary. Non-controlling interests represent third-party equity ownership interests (including certain VIEs) in the Company's consolidated entities. The amount of net income attributable to non-controlling interests is disclosed in the consolidated statements of income.
Mezzanine Equity
Based on the shareholder agreements for APC, in the event of a disqualifying event, as defined in the agreements, APC could be required to repurchase the shares from their respective shareholders based on certain triggers outlined in the shareholder agreements. As the redemption feature of the shares is not solely within the control of APC, the equity of APC does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Accordingly, the Company recognizes non-controlling interests in APC as mezzanine equity in the consolidated financial statements. APC's shares were not redeemable and it was not probable that the shares would become redeemable as ofDecember 31, 2021 and 2020. 68 --------------------------------------------------------------------------------
Revenue Recognition
The Company adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from
Contracts with Customers (Topic 606)," using the modified retrospective method
on January 1, 2018 . Modified retrospective adoption required entities to apply
the standard retrospectively to the most current period presented in the
financial statements, requiring the cumulative effect of the retrospective
application as an adjustment to the opening balance of retained earnings and
non-controlling interests at the date of initial application. Revenue from
substantially all of the Company's contracts with customers continues to be
recognized over time as services are rendered.
Income Taxes
Federal and state income taxes are computed at currently enacted tax rates less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, changes in the recognition of tax positions, and any changes in the valuation allowance caused by a change in judgment about the realizability of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. The Company uses a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be recognized in the consolidated financial statements. Once the recognition threshold is met, the tax position is then measured to determine the actual amount of benefit to recognize in the consolidated financial statements.
Effect of New Accounting Standards
Refer to "Recent Accounting Pronouncements" under Note 2 - "Basis of
Presentation and Summary of Significant Accounting Policies" to our consolidated
financial statements under Item 8 in this Annual Report on Form 10-K for
additional information.
Researchers from Pennsylvania State University (Penn State) Report Details of New Studies and Findings in the Area of Preventive Medicine (Health Savings Plans and Disparities In Access To Care By Race and Ethnicity): Health and Medicine – Preventive Medicine
OLD REPUBLIC INTERNATIONAL CORP – 10-K – Management Analysis of Financial Position and Results of Operations ($ in Millions, Except Share Data)
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