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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended March 31, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to

Commission file number 001-40332

 

 

agilon health, inc.

(Exact name of registrant as specified in its charter)

 

Delaware

37-1915147

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1 World Trade Center, Suite 2000

Long Beach, CA 90831

(Address of principal executive offices)

(562) 256-3800

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value

AGL

New York Stock Exchange

 

 

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 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, smaller reporting company or an emerging growth company. See 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  

At April 30, 2021, there were 390,832,560 shares of the registrant’s $0.01 par value common stock outstanding.

 

 

 

 


 

 

agilon health, inc.

INDEX

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Unaudited Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020

4

 

 

 

 

Condensed Consolidated Statements of Contingently Redeemable Common Stock and Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2021 and 2020

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020

6

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 6.

Exhibits

34

 

 

 

Signatures

35

 

2

 


 

 

agilon health, inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

105,289

 

 

$

106,795

 

Restricted cash and equivalents

 

 

14,202

 

 

 

28,383

 

Receivables, net

 

 

288,827

 

 

 

144,555

 

Prepaid expenses and other current assets, net

 

 

9,314

 

 

 

9,639

 

Current assets held for sale and discontinued operations, net

 

 

 

 

 

4,825

 

Total current assets

 

 

417,632

 

 

 

294,197

 

Property and equipment, net

 

 

4,799

 

 

 

6,456

 

Intangible assets, net

 

 

61,609

 

 

 

60,468

 

Goodwill

 

 

41,540

 

 

 

41,540

 

Other assets, net

 

 

47,259

 

 

 

43,700

 

Non-current assets held for sale, net

 

 

1,199

 

 

 

 

Total assets

 

$

574,038

 

 

$

446,361

 

LIABILITIES, CONTINGENTLY REDEEMABLE COMMON STOCK

   AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Medical claims and related payables

 

$

276,984

 

 

$

162,868

 

Accounts payable and accrued expenses

 

 

95,122

 

 

 

97,244

 

Current portion of long-term debt

 

 

 

 

 

3,041

 

Current liabilities held for sale and discontinued operations

 

 

 

 

 

3,682

 

Total current liabilities

 

 

372,106

 

 

 

266,835

 

Long-term debt, net of current portion

 

 

99,412

 

 

 

64,665

 

Other liabilities

 

 

91,264

 

 

 

90,091

 

Total liabilities

 

 

562,782

 

 

 

421,591

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingently redeemable common stock, $0.01 par value: 76,201 shares issued

   and outstanding

 

 

309,500

 

 

 

309,500

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.01 par value: 500,000 shares authorized; 249,474 and 249,374 shares

   issued and outstanding, respectively

 

 

2,494

 

 

 

2,494

 

Additional paid-in capital

 

 

265,603

 

 

 

263,966

 

Accumulated deficit

 

 

(566,268

)

 

 

(551,190

)

Total agilon health, inc. stockholders' equity

 

 

(298,171

)

 

 

(284,730

)

Noncontrolling interests

 

 

(73

)

 

 

 

Total stockholders’ equity (deficit)

 

 

(298,244

)

 

 

(284,730

)

Total liabilities, contingently redeemable common stock and stockholders’

   equity (deficit)

 

$

574,038

 

 

$

446,361

 

 

The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities (“VIEs”) as agilon health, inc., together with its consolidated subsidiaries and variable interest entities (the “Company”), is the primary beneficiary of these VIEs. The condensed consolidated balance sheets include total assets that can only be used to settle obligations of the Company or the Company’s consolidated VIEs totaling $408.4 million and $287.9 million as of March 31, 2021 and December 31, 2020, 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 $278.8 million and $174.0 million as of March 31, 2021 and December 31, 2020, respectively. See Note 13 for additional details.

See accompanying Notes to the Condensed Consolidated Financial Statements.

3

 


 

agilon health, inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

 

 

Medical services revenue

 

$

412,412

 

 

$

289,814

 

Other operating revenue

 

 

692

 

 

 

1,234

 

Total revenues

 

 

413,104

 

 

 

291,048

 

Expenses:

 

 

 

 

 

 

 

 

Medical services expense

 

 

360,354

 

 

 

247,653

 

Other medical expenses

 

 

23,661

 

 

 

18,426

 

General and administrative

 

 

37,777

 

 

 

27,605

 

Depreciation and amortization

 

 

3,427

 

 

 

3,198

 

Total expenses

 

 

425,219

 

 

 

296,882

 

Income (loss) from operations

 

 

(12,115

)

 

 

(5,834

)

Other income (expense):

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

1,336

 

 

 

122

 

Interest expense

 

 

(2,941

)

 

 

(2,149

)

Income (loss) before income taxes

 

 

(13,720

)

 

 

(7,861

)

Income tax benefit (expense)

 

 

(16

)

 

 

 

Income (loss) from continuing operations

 

 

(13,736

)

 

 

(7,861

)

Discontinued operations:

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(1,351

)

 

 

(8,089

)

Income tax benefit (expense)

 

 

(64

)

 

 

(149

)

Total discontinued operations

 

 

(1,415

)

 

 

(8,238

)

Net income (loss)

 

 

(15,151

)

 

 

(16,099

)

Noncontrolling interests’ share in earnings (loss)

 

 

73

 

 

 

 

Net income (loss) attributable to common shares

 

$

(15,078

)

 

$

(16,099

)

 

 

 

 

 

 

 

 

 

Net income (loss) per common share, basic and diluted

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.04

)

 

$

(0.02

)

Discontinued operations

 

$

(0.01

)

 

$

(0.03

)

Weighted average shares outstanding, basic and diluted

 

 

325,659

 

 

 

321,250

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

4

 


 

agilon health, inc.

CONDENSED CONSOLIDATED STATEMENTS OF CONTINGENTLY REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)

For the three months ended March 31, 2021:

 

 

 

Contingently Redeemable

Common Stock

 

 

 

Total Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Noncontrolling

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

interest

 

 

(Deficit)

 

January 1, 2021

 

 

76,201

 

 

$

309,500

 

 

 

 

249,374

 

 

$

2,494

 

 

$

263,966

 

 

$

(551,190

)

 

$

 

 

$

(284,730

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,078

)

 

 

(73

)

 

 

(15,151

)

Exercise of stock options

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

165

 

 

 

 

 

 

 

 

 

165

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,472

 

 

 

 

 

 

 

 

 

1,472

 

March 31, 2021

 

 

76,201

 

 

$

309,500

 

 

 

 

249,474

 

 

$

2,494

 

 

$

265,603

 

 

$

(566,268

)

 

$

(73

)

 

$

(298,244

)

 

For the three months ended March 31, 2020:

 

 

 

Contingently Redeemable

Common Stock

 

 

 

Total Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

(Deficit)

 

January 1, 2020

 

 

69,860

 

 

 

281,000

 

 

 

 

246,743

 

 

$

2,467

 

 

$

256,643

 

 

$

(491,138

)

 

$

(232,028

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,099

)

 

 

(16,099

)

Issuance of contingently

   redeemable common stock

 

 

6,341

 

 

 

28,500

 

 

 

 

 

 

 

 

 

 

(460

)

 

 

 

 

 

(460

)

Exercise of stock options

 

 

 

 

 

 

 

 

 

181

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,071

 

 

 

 

 

 

1,071

 

March 31, 2020

 

 

76,201

 

 

 

309,500

 

 

 

 

246,924

 

 

$

2,469

 

 

$

257,254

 

 

$

(507,237

)

 

$

(247,514

)

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

5

 


 

agilon health, inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(15,151

)

 

$

(16,099

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,481

 

 

 

3,363

 

Stock-based compensation expense

 

 

1,472

 

 

 

1,071

 

Loss on debt extinguishment

 

 

1,186

 

 

 

 

Other noncash items

 

 

1,766

 

 

 

837

 

Changes in operating assets and liabilities

 

 

(33,582

)

 

 

(15,299

)

Net cash provided by (used in) operating activities

 

 

(40,828

)

 

 

(26,127

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment, net

 

 

(178

)

 

 

(345

)

Purchase of intangible assets

 

 

(3,986

)

 

 

(33

)

Investment in loans receivable and other

 

 

(1,204

)

 

 

(359

)

Proceeds from repayment of loans receivable

 

 

 

 

 

1,056

 

Proceeds from sale of business, net of cash divested

 

 

(3,706

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(9,074

)

 

 

319

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from equity issuances, net

 

 

 

 

 

28,128

 

Proceeds from exercise of stock options

 

 

165

 

 

 

 

Proceeds from the issuance of long-term debt

 

 

100,000

 

 

 

 

Debt issuance costs

 

 

(1,218

)

 

 

 

Repayments of long-term borrowings

 

 

(68,649

)

 

 

(760

)

Net cash provided by (used in) financing activities

 

 

30,298

 

 

 

27,368

 

Net increase (decrease) in cash, cash equivalents and restricted cash and equivalents

 

 

(19,604

)

 

 

1,560

 

Cash, cash equivalents and restricted cash and equivalents from

   continuing operations, beginning of period

 

 

135,178

 

 

 

139,152

 

Cash, cash equivalents and restricted cash and equivalents from

   discontinued operations, beginning of period

 

 

3,917

 

 

 

6,460

 

Cash, cash equivalents and restricted cash and equivalents,

   beginning of period

 

 

139,095

 

 

 

145,612

 

Cash, cash equivalents and restricted cash and equivalents from

   continuing operations, end of period

 

 

119,491

 

 

 

142,563

 

Cash, cash equivalents and restricted cash and equivalents from

   discontinued operations, end of period

 

 

 

 

 

4,609

 

Cash, cash equivalents and restricted cash and equivalents, end of period

 

$

119,491

 

 

$

147,172

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

6

 


 

agilon health, inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  Business

Description of Business

agilon health, inc., through its purpose-built model, provides the necessary capabilities, capital, and business model for existing physician groups to create a Medicare-centric, globally capitated line of business. As of March 31, 2021, the Company, through its contracted physician networks, provided care to approximately 165,300 Medicare Advantage members enrolled with private health plans.

 

During 2020, the Company entered into a strategic partnership to further expand its operations beginning April 1, 2020 into Wilmington, North Carolina. Additionally, during 2020, the Company entered into strategic partnerships to further expand its operations beginning January 1, 2021 into: (i) Buffalo, New York; (ii) Toledo, Ohio; and (iii) Hartford, Connecticut. In December 2020, the Company entered into a strategic partnership to further expand its operations beginning January 1, 2022 into Syracuse, New York.

 

During 2021, the Company entered into strategic partnerships to further expand its operations beginning January 1, 2022 into: (i) Grand Rapids and Traverse City, Michigan; (ii) Pinehurst, North Carolina; and (iii) Longview and Texarkana, Texas, along with additional partnerships in the Company’s existing Ohio and Texas markets.

 

On April 1, 2021, the Company launched five Direct Contracting Entities (“DCE”) that, in collaboration with seven of its physician group partners, will participate in the Center for Medicare & Medicaid Innovation’s Direct Contracting Model.

See Note 13 for additional discussions related to the Company’s involvement with VIEs.

The Company is ultimately controlled by an investment fund associated with Clayton Dubilier & Rice, LLC (“CD&R”), a private equity firm headquartered in New York, New York. All funds affiliated with CD&R are considered related parties.

Initial Public Offering

On April 19, 2021, the Company completed its initial public offering ("IPO") in which it issued and sold an aggregate 53,590,000 shares of common stock at $23.00 per share. The Company received net proceeds of $1.2 billion after deducting underwriting discounts and commissions and before deducting estimated offering costs of $8.6 million. The shares and proceeds from the IPO, along with the underwriters’ exercise of their option to purchase additional shares are not reflected in the condensed consolidated financial statements as of and for the three months ended March 31, 2021. See Note 14 for additional discussions related to the Company’s IPO.

NOTE 2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information.

The condensed consolidated financial statements include the accounts of agilon health, inc., its wholly-owned subsidiaries, joint ventures and VIEs that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. All adjustments (consisting of normal recurring adjustments unless otherwise indicated), which the Company considers necessary to present fairly its financial position, results of operations and cash flows, have been included. Operating results for the three months ended March 31, 2021, including the impact of COVID-19, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s prospectus (File No. 333-254435) dated April 14, 2021 filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Exchange Act of 1934, as amended, on April 16, 2021 (the “Prospectus”).

Use of Estimates

Management is required to make estimates and assumptions in the preparation of financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates can include, among other things, those used to determine revenues and related receivables from risk adjustments, medical

7

 


 

services expense and related payables (including the reserve for incurred but not reported (“IBNR”) claims), and the valuation and related recognition of impairments of long-lived assets, including goodwill. Management’s estimates for revenue recognition, medical services expense and other estimates, judgments, and assumptions, may be materially and adversely different from actual results as a result of the COVID-19 pandemic, among other things. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates.

Goodwill and Amortizable Intangible Assets

As of both March 31, 2021 and December 31, 2020, goodwill of $39.0 million was allocated to the Company’s Hawaii reporting unit, which had a negative carrying value.

As of March 31, 2021 and December 31, 2020, the Company’s gross carrying amount of amortizable intangible assets was $105.8 million and $101.9 million, with accumulated amortization of $44.2 million and $41.4 million, respectively. For the three months ended March 31, 2021 and 2020, the Company recognized $2.8 million and $2.7 million, respectively, in amortization expense, which is included in depreciation and amortization expense in the condensed consolidated statement of operations.

Property and Equipment

As of March 31, 2021 and December 31, 2020, the Company’s gross carrying amount of property and equipment was $12.6 million and $13.7 million, with accumulated depreciation of $7.8 million and $7.3 million, respectively. For the three months ended March 31, 2021 and 2020, the Company recognized $0.6 million and $0.5 million, respectively, in depreciation expense, which is included in depreciation and amortization expense in the condensed consolidated statement of operations. At March 31, 2021, a building and related land with a carrying value of $1.2 million was classified as held for sale.

Income Taxes

The Company determined the income tax provision for interim periods using an estimate of the Company’s annual effective tax rate, applied to year-to-date results, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimated annual effective tax rate, and if the estimated annual effective tax rate changes, a cumulative catch-up adjustment is recorded in that quarter. The Company applied the intra-period tax allocation rules to allocate income taxes between continuing operations and discontinued operations as prescribed in U.S. GAAP, where the tax effect of income (loss) before income taxes from continuing operations is computed without regard to the tax effects of income (loss) before income taxes from the other categories.

The Company’s income taxes from continuing operations for the three months ended March 31, 2021 and 2020 were not material. The Company’s annual estimated effective tax rate differs from the statutory rate primarily as a result of changes in the valuation allowance.

Recent Accounting Pronouncements

Adopted

Credit Losses.  In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments held at amortized cost. The amendments in ASU 2016-13 eliminate the “probable” initial threshold for recognition of credit losses in current accounting guidance and, instead, reflect an entity’s current estimate of all expected credit losses over the life of the financial instrument. When credit losses were measured under prior accounting guidance, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. A reporting entity is required to apply the amendments in ASU 2016-13 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. Upon adoption of ASU 2016-13the Company is required to reassess its financial assets measured at amortized costs and off-balance sheet credit exposures, including loan commitments. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). ASU 2019-10 amended the effective date for ASU 2016-13. ASU 2019-10 amended the effective date for ASU 2016-13. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019 for public companies, unless they qualify for an “emerging growth company.” The Company qualified as an emerging growth company prior to this filing and elected to use the extended transition period for complying with this accounting standard through fiscal years beginning after December 15, 2022. However, as the Company ceased to be an emerging growth company as of January 1, 2021, the Company adopted ASU 2016-13 effective January 1, 2021. The adoption of ASU 2016-13 did not have an impact on the Company’s condensed consolidated financial statements.

8

 


 

NOTE 3.  Revenue, Receivables, and Concentration of Credit Risk

Medical Services Revenue

Medical services revenue consists of capitation fees under contracts with various Medicare Advantage payors (“payors”). Under the typical capitation arrangement, the Company is entitled to monthly per-member, per-month (“PMPM”) fees to provide a defined range of healthcare services for Medicare Advantage health plan members (“members”) attributed to the Company’s contracted primary care physicians. PMPM fees are determined as a percent of the premium payors receive from the Centers for Medicare & Medicaid Services’ (“CMS”) for these members. The Company generally accepts full financial risk for members attributed to its contracted primary care physicians and therefore is responsible for the cost of all healthcare services required by those members. Fees are recorded gross in revenue because the Company is acting as a principal in coordinating and controlling the range of services provided (other than clinical decisions) under its capitation contracts with payors. Capitation contracts with payors are generally multi-year arrangements and have a single performance obligation that constitutes a series, as defined by Accounting Standards Codification 606, Revenue From Contracts With Customers, to stand ready on a monthly basis to provide all aspects of necessary medical care to members for the contracted period. The Company recognizes revenue in the month in which eligible members are entitled to receive healthcare benefits during the contract term.

The transaction price for the Company’s capitation contracts is variable, as the PMPM fees to which the Company is entitled are subject to periodic adjustment under CMS’s risk adjustment payment methodology. CMS deploys a risk adjustment model that determines premiums paid to all payors according to each member’s health status and certain demographic factors. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from various settings. The Company and healthcare providers collect and submit the accurate diagnosis data to payors and such data is utilized by the Company to estimate risk adjustment payments to be received in subsequent periods. Risk adjustment-related revenues are estimated 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. PMPM fees are also subject to adjustment for incentives or penalties based on the achievement of certain quality metrics defined in the Company’s contracts with payors. The Company recognizes incentive revenue as earned using the most likely amount methodology and only to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved.

Receivables

Receivables primarily consist of amounts due under capitation contracts with various payors. Receivables due under capitation contracts are recorded monthly based on reports received from payors and management’s estimate of risk adjustment payments to be received in subsequent periods for open performance years. Receivables are recorded and stated at the amount expected to be collected.  

Concentration

The Company is economically dependent on maintaining a base of primary care and specialty care physicians as well as capitation contracts with payors. The loss of certain of those contracts could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

The Company contracts with various payors whereby the Company is entitled to monthly PMPM fees to provide a defined range of healthcare services for members attributed to its contracted primary care physicians. The Company generally accepts full financial risk for such members and therefore is responsible for the cost of all healthcare services required by them. Substantially all of the Company’s receivable balances are from a small number of payors.

Revenue from Medicare Advantage constitutes substantially all of the Company’s total revenue, accounting for nearly 100% of the Company’s total revenues for the three months ended March 31, 2021 and 2020.

The following table provides the Company’s revenue concentrations with respect to major payors as a percentage of the Company’s total revenues:

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Payor A

 

 

28

%

 

 

38

%

Payor B

 

 

21

%

 

 

20

%

Payor C

 

 

12

%

 

 

12

%

Payor D

 

 

10

%

 

*

 

 

*

Less than 10% of total revenues.

9

 


 

 

The following table provides the Company’s concentrations of credit risk with respect to major payors as a percentage of receivables, net:

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Payor A

 

 

19

%

 

 

38

%

Payor B

 

 

26

%

 

 

27

%

Payor D

 

 

14

%

 

*

 

 

*

Less than 10% of total receivables.

NOTE 4.  Other Assets

The following table summarizes the Company’s other assets (in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Indemnification assets

 

$

10,072

 

 

$

10,009

 

Health plan deposits

 

 

11,523

 

 

 

11,523

 

Right-of-use assets

 

 

9,600

 

 

 

9,585

 

Other

 

 

16,064

 

 

 

12,583

 

 

 

$

47,259

 

 

$

43,700

 

 

Indemnification assets have been established to offset certain pre-closing liabilities for which the prior owners of some of the Company’s California subsidiaries are obligated to indemnify the Company. The Company deems the amounts receivable under the indemnification agreements to be fully collectible should indemnification claims arise and, as such, a valuation allowance is not deemed necessary.

NOTE 5.  Medical Claims and Related Payables

Medical services expense represents costs incurred for medical services provided to members by physicians, hospitals and other ancillary providers for which the Company is financially responsible and which are paid either directly by the Company or by payors with whom the Company has contracted. Medical services expenses are recognized in the period in which services are provided and include estimates of the Company’s obligations for medical services that have been rendered by third parties, but for which claims have either not yet been received, processed, or paid.

Such estimates are based on many variables, including utilization trends, membership volumes, and historical claim payment patterns which are used to develop “completion factors” used to determine the amount of incurred but unpaid services using an actuarial process that is consistently applied each reporting period and that is commonly used by health insurance actuaries. Generally, for the most recent months, the Company estimates claim costs incurred by applying observed medical cost trend factors to the average PMPM medical costs incurred in prior months for which more complete claims data are available.

Each period, the Company re-examines previously established medical claims payable estimates based on actual claim submissions and other changes in facts and circumstances. As more complete claims information becomes available, the Company adjusts its estimates and recognizes those changes in estimates in the period in which the change is identified. The difference between the estimated liability and the actual settlements of claims is recognized in the period the claims are settled. The Company’s medical claims payable balance represents management’s best estimate of its liability for unpaid medical costs as of March 31, 2021 and December 31, 2020. The Company uses judgment to determine the appropriate assumptions for developing the required estimates.

10

 


 

The following table presents the components of changes in medical claims and related payables (in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Medical claims and related payables, beginning of the year

 

$

164,161

 

 

$

121,779

 

Components of incurred costs related to:

 

 

 

 

 

 

 

 

Current year

 

 

359,988

 

 

 

1,026,940

 

Prior years

 

 

366

 

 

 

(5,063

)

Discontinued operations - current year

 

 

1,229

 

 

 

85,732

 

Discontinued operations - prior years

 

 

(591

)

 

 

(1,543

)

 

 

 

360,992

 

 

 

1,106,066

 

Claims paid related to:

 

 

 

 

 

 

 

 

Current year

 

 

(112,968

)

 

 

(870,979

)

Prior years

 

 

(131,363

)

 

 

(94,868

)

Discontinued operations - current year

 

 

(298

)

 

 

(80,754

)

Discontinued operations - prior year(1)

 

 

(3,540

)

 

 

(17,083

)

 

 

 

(248,169

)

 

 

(1,063,684

)

Medical claims and related payables, end of the period

 

$

276,984

 

 

$

164,161

 

 

(1)

Includes $1.5 million that was disposed in February 2021.

 

Beginning and ending balances of medical claims and related payables disclosed above for December 31, 2020, include $1.1 million and $1.3 million, respectively, of claims liabilities that are presented as current liabilities held for sale and discontinued operations. The beginning balance of medical claims and related payables disclosed above for March 31, 2021, includes $1.3 million that is presented as current liabilities held for sale and discontinued operations. As of March 31, 2021 and December 31, 2020, medical claims and related payables also include $2.2 million and $4.1 million, respectively, of claims liabilities associated with certain divested California businesses for which the Company has retained the liability for claims incurred prior to the date of divestiture.

NOTE 6.  Other Liabilities

The following table summarizes the Company’s other liabilities (in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Other long-term contingencies

 

$

73,266

 

 

$

71,693

 

Reserve for uncertain tax positions

 

 

10,072

 

 

 

10,009

 

Lease liabilities, long-term

 

 

5,548

 

 

 

5,508

 

Other

 

 

2,378

 

 

 

2,881

 

 

 

$

91,264

 

 

$

90,091

 

 

As of March 31, 2021 and December 31, 2020, the Company had contingent liabilities of $73.3 million and $71.7 million, respectively, related to unasserted claims. While the Company intends to vigorously defend its position, the Company has established a liability for the potential exposure, including interest and penalties. Additionally, the Company estimated the range of reasonably possible losses in excess of reserves accrued on the condensed consolidated balance sheets to be $0 to $18.6 million as of March 31, 2021.

NOTE 7.  Debt

On February 18, 2021, the Company executed a credit facility agreement (as amended by the First Amendment to Credit Agreement, dated as of March 1, 2021, the “2021 Credit Facilities”). The 2021 Credit Facilities include: (i) a $100.0 million secured term loan (the “2021 Secured Term Loan Facility”) and (ii) a $100.0 million senior secured revolving credit facility (the “2021 Secured Revolving Facility”) with a capacity to issue standby letters of credit in certain circumstances up to a maximum of $80.0 million. Subject to specified conditions and receipt of commitments, the 2021 Secured Term Loan Facility may be expanded (or a new term loan facility, revolving credit facility or letter of credit facility added) by up to (i) $50.0 million plus (ii) an additional amount determined in accordance with a formula tied to repayment of certain of the Company’s indebtedness. The proceeds from the 2021 Secured Term Loan Facility were used to refinance an aggregate of $68.6 million of outstanding indebtedness under the prior credit facility and unsecured debt, with the remaining $30.1 million net proceeds used for working capital and other general corporate purposes. The maturity date of the 2021 Credit Facilities was February 18, 2024 or, following the completion of an IPO, February 18, 2026 with

11

 


 

mandated periodic payments. In connection with the refinance of the existing debt, the Company recognized $1.1 million of additional interest expense for the write off of the related debt issuance costs.

 

As of March 31, 2021, the Company had $100.0 million outstanding under the 2021 Secured Term Loan Facility and availability under the 2021 Secured Revolving Facility was $81.5 million as the Company had outstanding letters of credit totaling $18.5 million. The standby letters of credit are automatically extended without amendment for one-year periods, unless the Company notifies the institution in advance of the expiration date that the letter will be terminated. No amounts have been drawn on the outstanding letters of credit as of March 31, 2021.

At the Company’s option, borrowings under the 2021 Credit Facilities, as defined in the credit agreement, can be either: (i) LIBO Rate Loans or (ii) Base Rate Loans. LIBO Rate Loans bear interest at a rate equal to the sum of 4.00% (stepping down to 3.50% on and following October 1, 2023) and the higher of (a) LIBO, as defined in the credit agreement, and (b) 0%. Base Rate Loans bear interest at a rate equal to the sum of 3.00% (stepping down to 2.50% on and following October 1, 2023) and the highest of: (a) 0.50% in excess of the overnight federal funds rate, (b) the prime rate established by the administrative agent from time to time, (c) the one-month LIBO rate (adjusted for maximum reserves) plus 1.00% and (d) 0%. Additionally, the Company pays a commitment fee on the unfunded 2021 Secured Revolving Facility amount of 0.50% (stepping down to 0.375% on and following October 1, 2023). The Company must also pay customary letter of credit fees. As of March 31, 2021, the weighted average effective interest rate on the 2021 Secured Term Loan Facility was 4.40%.

The 2021 Credit Facilities are guaranteed by certain of the Company’s subsidiaries, including those identified as VIEs, and contain customary covenants including, among other things, limitations on restricted payments including: (i) dividends and distributions from restricted subsidiaries, (ii) requirements of minimum financial ratios, and (iii) limitation on additional borrowings based on certain financial ratios.

The 2021 Credit Facilities contain customary covenants including, among other things, limitations on restricted payments including: (i) dividends and distributions from restricted subsidiaries, (ii) requirements of minimum financial ratios, and (iii) limitation on additional borrowings based on certain financial ratios. Failure to meet any of these covenants could result in an event of default under the agreement. If an event of default occurs, the lenders could elect to declare all amounts outstanding under the agreement to be immediately due and payable. As of March 31, 2021, the Company was in compliance with all covenants under the 2021 Credit Facilities.

On April 26, 2021, the Company repaid $50.0 million of the 2021 Secured Term Loan Facility in connection with the IPO, see Note 14.

 

NOTE 8.  Commitments and Contingencies

Legal Proceedings

From time to time, the Company is a party to, or has a significant relationship to, legal proceedings, lawsuits, and other claims. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred.

COVID-19

The Company continues to monitor and assess the estimated operating and financial impact of the COVID-19 pandemic, and as it evolves, the Company continues to process, assemble, and assess member utilization information. The Company believes that its cash resources, funds from the IPO in April 2021, borrowing capacity available under the 2021 Secured Revolving Facility, and cash flow generated from operations will continue to be sufficient to withstand the financial impact of the pandemic, and will enable the Company to continue to support its operations, regulatory requirements, debt repayment obligations, and geography expansion for the foreseeable future.

Regulatory Matters

The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. Violations of these laws and regulations could result in expulsion from government healthcare programs, together with the imposition of significant fines and penalties. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

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The healthcare regulatory landscape is constantly changing. It is difficult to predict which final rules may be adopted and implemented by federal and state authorities, and if such final rules would result in any material adverse effect on the Company’s business, consolidated financial condition, results of operations or cash flows. Management is unable to determine how any future government spending cuts will affect Medicare reimbursement. There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare that, if adopted, could have a material adverse effect on the Company’s condensed consolidated financial statements.

See Note 11 for additional discussion relating to matters with the California Department of Managed Health Care (“DMHC”).

Contractual Obligations

The Company’s capital commitments to physician partners to support physician partner expansion and related purposes increased by $25.1 million, to $43.8 million at March 31, 2021 when compared to December 31, 2020. There have been no other material changes, outside of the ordinary course of business and indebtedness (see Note 7), to the Company’s commitments during the three months ended March 31, 2021.

NOTE 9.  Common Stock

Common Stock

As of both March 31, 2021 and December 31, 2020, the Company’s authorized capital stock consisted of 500.0 million shares of common stock, par value $0.01 per share. See Note 14 for impact of the Company’s IPO.

2021.  During the quarter ended March 31, 2021, the Company issued approximately 100,000 shares of common stock in connection with exercises and vesting of stock-based awards.

2020.  During 2020, the Company issued and sold approximately 1.2 million shares of common stock to certain officers and directors at a purchase price of $4.49 per share and received aggregate proceeds of $5.6 million.

In August 2020, the Company issued approximately 333,800 shares of common stock to settle provider incentive liabilities of $1.5 million.

Also in 2020, the Company repurchased 1.5 million shares of common stock for $6.7 million and issued approximately 2.3 million shares of common stock in connection with exercises and vesting of stock-based awards.

Contingently Redeemable Common Stock

2020.  During 2020, the Company closed private placements to third-party investors in which it issued and sold 6.3 million shares of contingently redeemable common stock at a purchase price of $4.49 per share and received aggregate proceeds of $28.5 million.

The private placements of contingently redeemable common stock have a redemption feature that may require the Company, in certain limited circumstances, to repurchase stock. Because the redemption feature is outside the control of the Company, the related capital contribution does not qualify as permanent equity and has been classified as temporary equity in the mezzanine section of the condensed consolidated balance sheet. The redemption feature terminates upon the completion of an initial public offering of the Company’s common stock. The common stock classified as temporary equity was recorded at an initial carrying value equal to the gross proceeds received, which represented their fair value at the date of issuance. As the events requiring redemption were not probable of occurring, it is not probable that the common stock will become redeemable and therefore no subsequent remeasurement has been required at March 31, 2021. See Note 14 for the impact of the Company’s IPO.

NOTE 10.  Net Income (Loss) Per Common Share

Basic net income (loss) per common share (“EPS”) is computed based upon the weighted average number of common shares outstanding. Diluted net income (loss) per common share is computed based upon the weighted average number of common shares outstanding plus the impact of common shares issuable from the assumed conversion of stock options, certain performance restricted stock units and unvested restricted stock units. Only those instruments having a dilutive impact on basic loss per share are included in diluted loss per share during the periods presented.

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