Investments in Other Entities — Equity Method

6 Months Ended

Jun. 30, 2020

Equity Method Investments and Joint Ventures [Abstract]

Investments in Other Entities — Equity Method

Investments in Other Entities — Equity Method

Rollforward of Equity Method Investment (in thousands)

	December 31, 2019		Allocation of Income (Loss)		Contribution		Sale		June 30, 2020
LaSalle Medical Associates – IPA Line of Business	$	6,397	$	(428)	$	—	$	—	$	5,969
Pacific Medical Imaging & Oncology Center, Inc.	1,396		77		—		—		1,473
Universal Care, Inc.	1,438		3,560		—		(4,998)		—
Diagnostic Medical Group	2,334		(102)		—		—		2,232
531 W. College, LLC – related party	16,698		(231)		500		—		16,967
MWN, LLC – related party	164		12		—		—		176
	$	28,427	$	2,888	$	500	$	(4,998)	$	26,817

LaSalle Medical Associates — IPA Line of Business

LMA was founded by Dr. Albert Arteaga in 1996 and currently operates six neighborhood medical centers through its network of approximately 2,300 PCP and Specialists providers, treating children, adults and seniors in San Bernardino County, California. LMA’s patients are primarily served by Medi-Cal. LMA also accepts Blue Cross, Blue Shield, Molina, Care 1st, Health Net and Inland Empire Health Plan. LMA is also an IPA of independently contracted doctors, hospitals and clinics, delivering high-quality care to approximately 290,000 patients in Fresno, Kings, Los Angeles, Madera, Riverside, San Bernardino and Tulare Counties. During 2012, APC-LSMA and LMA entered into a share purchase agreement whereby APC-LSMA invested $5.0 million for a 25% interest in LMA’s IPA line of business. NMM has a management services agreement with LMA. APC accounts for its investment in LMA under the equity method as APC has the ability to exercise significant influence, but not control over LMA’s operations. For the three months ended June 30, 2020, APC recognized income from this investment of $0.2 million. For the three months ended June 30, 2019, APC recognized a loss from this investment of $1.3 million. For the six months ended June 30, 2020 and 2019, APC recognized losses of $0.4 million and $2.4 million, respectively, in the accompanying consolidated statements of income. The accompanying consolidated balance sheets include the related investment balance of $6.0 million and $6.4 million at June 30, 2020 and December 31, 2019, respectively.

LMA’s summarized balance sheets at June 30, 2020 and December 31, 2019, and summarized statements of operations for the six months ended June 30, 2020 and 2019, with respect to its IPA line of business are as follows (in thousands):

Balance Sheets

	June 30, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	2,852	$	6,345
Receivables, net	6,751		5,124
Other current assets	880		3,526
Loan receivable	2,250		2,250
Restricted cash	688		683
Total assets	$	13,421	$	17,928
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities	$	20,735	$	23,530
Stockholders’ deficit	(7,314)		(5,602)
Total liabilities and stockholders’ deficit	$	13,421	$	17,928

Statements of Operations

	Six Months Ended June 30,
	2020		2019
Revenues	$	92,113	$	93,434
Expenses	93,680		102,845
Net loss	$	(1,567)	$	(9,411)

Pacific Medical Imaging and Oncology Center, Inc.

Incorporated in California in 2004, PMIOC provides comprehensive diagnostic imaging services using state-of-the-art technology. PMIOC offers high-quality diagnostic services, such as MRI/MRA, PET/CT, CT, nuclear medicine, ultrasound, digital x-rays, bone densitometry and digital mammography, at its facilities.

In July 2015, APC-LSMA and PMIOC entered into a share purchase agreement whereby APC-LSMA invested $1.2 million for a 40% ownership interest in PMIOC.

APC and PMIOC have an Ancillary Service Contract together whereby PMIOC provides covered services on behalf of APC to enrollees of the plans of APC. Under the Ancillary Service Contract, APC paid PMIOC fees of approximately $0.4 million and $0.6 million, for the three months ended June 30, 2020 and 2019, respectively, and fees of approximately $1.0 million and $1.4 million for the six months ended June 30, 2020 and 2019. APC accounts for its investment in PMIOC under the equity method of accounting as APC has the ability to exercise significant influence, but not control over PMIOC’s operations. For the three months ended June 30, 2020, APC recognized a loss from this investment of $10,200. For the three months ended June 30, 2019, APC recognized income from this investment of $0.1 million. For the six months ended June 30, 2020 and 2019, APC recognized income of $0.1 million and $0.2 million, respectively, in the accompanying consolidated statements of income. The accompanying consolidated balance sheets include the related investment balance of $1.5 million and $1.4 million at June 30, 2020 and December 31, 2019, respectively.

Universal Care, Inc.

UCI is a privately held health plan that has been in operation since 1985. UCI holds a license under the California Knox-Keene Health Care Services Plan Act to operate as a full-service health plan. UCI contracts with CMS under the Medicare Advantage Prescription Drug Program.

In August 2015, UCAP purchased 100,000 shares of UCI class A-2 voting common stock from UCI for $10.0 million, which shares comprise 48.9% of UCI’s total outstanding shares and 50% of UCI’s voting common stock.

On April 30, 2020, UCAP completed the sale of its 48.9% ownership interest in UCI to Bright for approximately $69.2 million in cash proceeds (including $16.5 million as repayment of indebtedness owed to APC), plus non-cash consideration consisting of shares of Bright Health, Inc.’s preferred stock having an estimated fair value of approximately $36.2 million on the date of sale, included in investments in privately held entities. The fair value of the preferred shares was determined utilizing a market approach which includes significant unobservable inputs (Level 3) including forecasted revenue along with estimates of revenue multiples, volatility and time-to-liquidity. In addition, pursuant to the terms of the stock purchase agreement, APC has a beneficial interest in the equity method investment sold. The estimated fair value of such interest on April 30, 2020 was $15.7 million and is included in "Other assets" in the accompanying consolidated balance sheets. The beneficial interest is the result of a gross margin provision in the stock purchase agreement which entitles UCAP to potentially receive additional cash and preferred shares (currently held in an escrow account with cash of $15.6 million and preferred shares with an estimated fair value of $6.4 million, total estimated fair value of $22.0 million on the date of sale) based on the gross margin of UCI for calendar year 2020 as measured against a target. The amount to be received varies dependent upon the gross margin as compared to the target but cannot exceed the amounts that are in the escrow account. Additionally, the stock purchase agreement includes a tangible net equity provision that may result in the receipt or payment of additional amounts based on a comparison of final tangible net equity of UCI on the date of sale (determined with the benefit of one year of hindsight) as compared to the estimated tangible net equity at the time of sale. It is expected that settlement of the beneficial interest will begin in the second half of 2021. The Company determined the fair value of the beneficial interest using an income approach which includes significant unobservable inputs (Level 3). Specifically, the Company utilized a probability weighted discounted cash flow model using a risk-free treasury rate to estimate fair value which considered various scenarios of gross margin adjustment and the impact of each adjustment to the expected proceeds from the escrow account and assigned probabilities to each such scenario in determining fair value. The gross margin adjustment is defined as three times any deficit in actual gross margin of UCI for the year ended December 31, 2020 below a target gross margin unless such deficit is within a specific collar amount.

The gain on sale of equity method investment recognized in connection with this transaction was determined as follows:

	Amount (in '000s)
Cash proceeds (excludes proceeds to settle indebtedness owed to APC from UCI)	$	52,743
Preferred shares in Bright Health, Inc.	$	36,179
Beneficial interest in UCI	$	15,723
Less: Carrying value of equity method investment on date of sale	$	(4,998)
Gain on sale of equity method investment	$	99,647

For the three months ended June 30, 2020 and June 30, 2019 APC recorded income from this investment of approximately $0.9 million and $4.5 million. For the six months ended June 30, 2020 and June 30, 2019 APC recorded income from this investment of approximately $3.6 million and $5.5 million in the accompanying consolidated statements of income, respectively. As a result of the sale, there was no investment balance as of June 30, 2020 as compared to an investment balance of $1.4 million as of December 31, 2019.

UCI's balance sheet at December 31, 2019 and statements of income for the four months ended April 30, 2020 and six months ended June 30, 2019 are as follows (in thousands):

Balance Sheets

	December 31, 2019
Assets
Cash and cash equivalents	$	33,890
Receivables, net	63,843
Other current assets	38,280
Loan receivable	882
Restricted cash	4,021
Total assets	$	140,916
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities	$	128,330
Other liabilities	33,133
Stockholders’ deficit	(20,547)
Total liabilities and stockholders’ deficit	$	140,916

Statements of Operations

	Four Months Ended		Six Months Ended
	April 30, 2020		June 30, 2019
Revenues	$	195,308	$	247,517
Expenses	189,028		239,389
Income before benefit from income taxes	6,280		8,128
Benefit from income taxes	—		(3,167)
Net income	$	6,280	$	11,295

Diagnostic Medical Group

In May 2016, David C.P. Chen M.D., individually, and APC-LSMA, entered into a share purchase agreement whereby APC-LSMA acquired a 40% ownership interest in DMG.

APC accounts for its investment in DMG under the equity method of accounting as APC has the ability to exercise significant influence, but not control over DMG’s operations. For the three months ended June 30, 2020 and 2019, APC recognized loss and income from this investment of $0.1 million and $0.2 million, respectively, in the consolidated statements of income. For the six months ended June 30, 2020 and 2019, APC recognized loss and income from investment of $0.1 million and $0.4 million, respectively, in the consolidated statements of income. The accompanying consolidated balance sheets include the related investment balances of $2.2 million and $2.3 million as of June 30, 2020 and December 31, 2019, respectively.

531 W. College LLC – Related Party

In June 2018, College Street Investment LP, a California limited partnership (“CSI”), APC and NMM entered into an operating agreement to govern the limited liability company, 531 W. College, LLC and the conduct of its business, and to specify their relative rights and obligations. CSI, APC and NMM, each owns 50%, 25% and 25%, respectively, of member units based on initial capital contributions of $16.7 million, $8.3 million, and $8.3 million, respectively.

In June 2018, 531 W. College, LLC closed its purchase of a non-operational hospital located in Los Angeles from Societe Francaise De Bienfaisance Mutuelle De Los Angeles, a California nonprofit corporation, for a total purchase price of $33.3 million. On April 23, 2019, NMM and APC entered into an agreement whereby NMM assigned and APC assumed NMM’s 25% membership interest in 531 W. College, LLC for approximately $8.3 million. Subsequently, APC has a 50% ownership in 531 W. College LLC with a total investment balance of approximately $17.0 million.

APC accounts for its investment in 531 W. College, LLC under the equity method of accounting as APC has the ability to exercise significant influence, but not control over the operations of this joint venture. For the three months ended June 30, 2020 and 2019, APC recognized loss and income of $0.1 million and $12,649, respectively. For the six months ended June 30, 2020 and 2019, APC recorded losses of $0.2 million and $34,319 in the accompanying consolidated statements of income, respectively. During the period ended June 30, 2020, the Company contributed $0.5 million to 531 W. College LLC as part of its 50% interest and had investment balances of $17.0 million and $16.7 million, respectively, at June 30, 2020 and December 31, 2019.

531 W. College LLC’s balance sheets at June 30, 2020 and December 31, 2019, and statements of operations for the six months ended June 30, 2020 and 2019, are as follows (in thousands):

Balance sheets

	June 30, 2020		December 31, 2019
Assets
Cash	$	126	$	139
Other current assets	—		17
Other assets	70		70
Property and equipment, net	33,697		33,581
Total assets	$	33,893	$	33,807
Liabilities and Members’ Equity
Current liabilities	$	1,109	$	1,062
Stockholders’ equity	32,784		32,745
Total liabilities and members’ equity	$	33,893	$	33,807

Statements of Operation

	Six Months Ended June 30,
	2020		2019
Revenues	—		—
Expenses	579		538
Loss from operations	(579)		(538)
Other income	$	21	$	385
Net loss	$	(558)	$	(153)

MWN LLC – Related Party

In December 2018, NMM, 6 Founders LLC, a California limited liability company doing business as Pacific6 Enterprises (“Pacific6”), and Health Source MSO Inc., a California corporation (“HSMSO”) entered into an operating agreement to govern

MWN Community Hospital, LLC and the conduct of its business and to specify their relative rights and obligations. NMM, Pacific6, and HSMSO each own 33.3% of the membership shares based on each member’s initial capital contributions of $3,000 and working capital contributions of $30,000. NMM invested an additional $0.3 million for working capital purposes in August 2019. For the three and six months ended June 30, 2020, NMM recorded loss and income from its investment in MWN LLC of $43,000 and $12,000, respectively, in the accompanying consolidated statements of income and had an investment balance of $0.2 million as of June 30, 2020 and December 31, 2019.

Investments in privately held entities that do not report net asset value

MediPortal, LLC

In May 2018, APC purchased 270,000 membership interests of MediPortal LLC, a New York limited liability company, for $0.4 million or $1.50 per membership interest, which represented an approximately 2.8% ownership interest. In connection with the initial purchase, APC received a five-year warrant to purchase an additional 270,000 membership interests. Additionally, APC received a five-year option to purchase an additional 380,000 membership interests and a five-year warrant to purchase 480,000 membership interests, which MediPortal LLC will grant APC upon completion of its health portal. As of June 30, 2020, the health portal has not been completed. As APC does not have the ability to exercise significant influence, and lacks control, over the investee, this investment is accounted for using a measurement alternative which allows the investment to be measured at cost, adjusted for observable price changes and impairments, with changes recognized in net income.

AchievaMed

On July 1, 2019, NMM and AchievaMed, Inc., a California corporation (“AchievaMed”), entered into an agreement in which NMM would purchase 50% of the aggregate shares of capital stock of AchievaMed over a period of time not to exceed five years. As a result of this transaction NMM invested $0.5 million for a 10% interest. The related investment balance of $0.5 million is included in “Investment in privately held entities” in the accompanying consolidated balance sheets as of June 30, 2020.

Bright Health, Inc.

In April 2020, UCAP completed the sale of its 48.9% ownership interest in UCI to Bright for approximately $69.2 million in cash proceeds (including $16.5 million as repayment of indebtedness owed to APC), plus non-cash consideration consisting of shares of Bright Health, Inc.’s preferred stock having an estimated fair value of approximately $36.2 million on the date of sale. The related investment balance of $36.2 million is included in “Investment in privately held entities” in the accompanying consolidated balance sheets as of June 30, 2020.