Mezzanine and Shareholders’ Equity

APC

As the redemption feature (see Note 2) 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 noncontrolling interests in mezzanine or temporary equity. APC’s shares were not redeemable and it was not probable that the shares would become redeemable as of December 31, 2019, 2018 and 2017.

On September 10, 2019, APC-LSMA, a holding company of APC, acquired 100% of the aggregate issued and outstanding shares of capital stock of AMG for $1.2 million in cash and $0.4 million of APC common stock.

On September 11, 2019, AP-AMH purchased 1,000,000 shares of APC Series A Preferred Stock for aggregate consideration of $545.0 million in a private placement. This investment was eliminated in consolidation. In relation to the issuance of APC Series A Preferred Stock, APC incurred $0.9 million in cost (see Note 1).

Shareholders’ Equity

Preferred Stock – Series A

On October 14, 2015, ApolloMed entered into an agreement with NMM pursuant to which ApolloMed sold to NMM, and NMM purchased from ApolloMed, in a private offering of securities, 1,111,111 units, each unit consisting of one share of ApolloMed’s Preferred Stock (the “Series A”) and a common stock warrant (a “Series A Warrant”) to purchase one share of ApolloMed’s common stock at an exercise price of $9.00 per share. NMM paid ApolloMed an aggregate of $10.0 million for the units, the proceeds of which were used by ApolloMed primarily to repay certain outstanding indebtedness owed by ApolloMed to NNA of Nevada and the balance for working capital.

As required by ASC 805-10-25-10, NMM, who was the accounting acquirer, remeasured its previously held interest in ApolloMed’s (the accounting acquiree) Series A at its acquisition-date fair value of $12.7 million and was added to the consideration transferred in the exchange. As part of the Merger between NMM and ApolloMed (see Note 3), the fair value of $12.7 million of such shares of Series A were included in purchase price consideration. The valuation methodology was based on an Option Pricing Method ("OPM") which utilized the observable publicly traded common stock price in valuing the Series A preferred stock within the context of the capital structure of the Company. OPM assumptions included an expected term of 2 years, volatility rate of 37.9%, and a risk-free rate of 1.8%.

At December 31, 2019 and 2018, this investment was eliminated in consolidation due to the merger between ApolloMed and NMM (see Note 3).

Preferred Stock – Series B

On March 30, 2016, ApolloMed entered into an agreement with NMM pursuant to which ApolloMed sold to NMM, and NMM purchased from ApolloMed, in a private offering of securities, 555,555 units, each unit consisting of one share of ApolloMed’s Series B Preferred Stock (“Series B”) and a common stock warrant (a “Series B Warrant”) to purchase one share of ApolloMed’s common stock at an exercise price of $10.00 per share. NMM paid ApolloMed an aggregate $5.0 million for the units.

As required by ASC 805-10-25-10, NMM, who was the accounting acquirer, remeasured its previously held interest in ApolloMed’s (the acquiree) Series B at its acquisition-date fair value of $6.4 million, and was added to the consideration transferred in the exchange. As part of the Merger between NMM and ApolloMed (see Note 3), the fair value of $6.4 million of such shares of Series B were included in purchase price consideration. The valuation methodology was based on an OPM which utilized the observable publicly traded common stock price in valuing the Series B preferred stock within the context of the capital structure of the Company. OPM assumptions included an expected term of 2 years, volatility rate of 37.9%, and a risk-free rate of 1.8%.

NMM recorded a gain of approximately $8.6 million to reflect the fair values of the Series A and Series B prior to the Merger date, which is included in gain from investments in the accompanying consolidated statement of income for the year ended December 31, 2017.

At December 31, 2019 and 2018, this investment was eliminated in consolidation due to the merger between ApolloMed and NMM (see Note 3).

2017 Share Issuances and Repurchases

Prior to the Merger date, NMM received cash in the aggregate amount of approximately $0.3 million from the exercise of stock options to purchase 102,199 shares of NMM common stock at $2.44 per share. In accordance with relevant accounting guidance, the amounts collected through December 7, 2017 were reflected as a long-term liability for unissued equity shares as of December 7, 2017 based on the terms of the forfeiture feature of the option, as noted above. In connection with the merger, the amount included in long-term liability of approximately $1.2 million for unissued equity shares were reclassified to equity to reflect the issuance of 508,133 shares of NMM common stock, which also resulted in the acceleration of the unvested portion of stock options in the amount of approximately $0.8 million which was recorded as share-based compensation expense in the consolidated statements of income.

Prior to the Merger date, an option (non-exclusivity) was exercised for the purchase of 102,641 shares of NMM common stock at $1.46 per share for gross proceeds of approximately $0.2 million.

Prior to the Merger date, NMM sold an aggregate of 129,651 shares of common stock at $14.61 per share for aggregate proceeds of approximately $1.9 million.

Prior to the Merger date, an aggregate of 109,123 shares of NMM common stock were repurchased for approximately $1.6 million at a price of $14.61 per share. An aggregate of 23,628 shares of NMM common stock were repurchased for $0.1 million at a price of $2.44 per share. Such share repurchases reduced the number of shares issued and outstanding as they were subsequently retired.

On December 8, 2017, ApolloMed completed its business combination with NMM following the satisfaction or waiver of the conditions set forth in the Merger Agreement, pursuant to which Merger Subsidiary merged with and into NMM, with NMM surviving as a wholly owned subsidiary of ApolloMed (see Note 3).

In connection with the Merger and as of the effective time of the Merger (the “Effective Time”):

•

each issued and outstanding share of NMM common stock was converted into the right to receive such number of shares of common stock of ApolloMed that results in the former NMM shareholders who did not dissent from the Merger (“former NMM Shareholders”) having a right to receive an aggregate of 30,397,489 shares of common stock of ApolloMed, subject to the 10% holdback pursuant to the Merger Agreement;


•	ApolloMed issued to former NMM Shareholders each former NMM Shareholder’s pro rata portion of (i) warrants to purchase an aggregate of 850,000 shares of common stock of ApolloMed, exercisable at $11.00 per share, and (ii) warrants to purchase an aggregate of 900,000 shares of common stock of ApolloMed, exercisable at $10.00 per share; and

•

ApolloMed held back an aggregate of 3,039,749 shares of common stock issuable to former NMM Shareholders, representing 10% of the total number of shares of ApolloMed common stock issuable to former NMM Shareholders, to secure indemnification rights of AMEH and its affiliates under the Merger Agreement (the “Holdback Shares”). The Holdback Shares were issued and outstanding as of December 31, 2019. The first tranche of 1,519,805 shares were issued in December 2018 and the remaining 1,511,380 were issued in December 2019, net of shares repurchase (see Note 13).

The shares of common stock issuable to former NMM shareholders in the exchange were 25,675,630 (net of 10% holdback and Treasury Shares) (see Note 3). The 10% holdback shares will be released to all the former NMM shareholders based on their respective pro rata ownership interest in NMM at the Effective Time without regard to whether the former NMM shareholders are providing any services to the Company at the time of this distribution. This holdback accommodation was made as indemnification protection to the accounting acquiree (ApolloMed), and as such, is not considered compensatory. At the time when these holdback shares were issued to the former NMM shareholders, the Company recorded the stock issuance with a reduction to additional paid-in capital to properly reflect the shares outstanding.

Upon consummation of the Merger, the Company issued 520,081 shares its common stock with a fair value of approximately $5.4 million from the conversion of the Alliance Note and accrued interest.

Common Stock

As of the date of this Report, 535,392 holdback shares have not been issued to certain former NMM shareholders who were NMM shareholders at the time of closing of the Merger, as they have yet to submit properly completed letters of transmittal to ApolloMed in order to receive their pro rata portion of ApolloMed common stock and warrants as contemplated under the Merger Agreement. Pending such receipt, such former NMM shareholders have the right to receive, without interest, their pro rata share of dividends or distributions with a record date after the effectiveness of the Merger. The consolidated financial statements have treated such shares of common stock as outstanding, given the receipt of the letter of transmittal is considered perfunctory and the Company is legally obligated to issue these shares in connection with the Merger.

On March 21, 2018, the Company issued 37,593 shares of the Company’s common stock to the Company’s Chief Operating Officer for prior services rendered. The stock price on the date of issuance was $16.80 per share, which resulted in the Company recording $0.6 million of share-based compensation expense. See options and warrants section below for common stock issued upon exercise of stock options and stock purchase warrants.

Equity Incentive Plans

In connection with the Merger (see Note 3), the Company assumed ApolloMed’s 2010 Equity Incentive Plan (the “2010 Plan”) pursuant to which 500,000 shares of the Company’s common stock were reserved for issuance thereunder. The 2010 Plan provides for awards including incentive stock options, non-qualified options, restricted common stock, and stock appreciation rights. As of December 31, 2019, there were no shares available for grant.

In connection with the Merger (see Note 3), the Company assumed ApolloMed’s 2013 Equity Incentive Plan (the “2013 Plan”), pursuant to which 500,000 shares of the Company’s common stock were reserved for issuance thereunder. The Company received approval of the 2013 Plan from the Company’s stockholders on May 19, 2013. The Company issues new shares to satisfy stock option and warrant exercises under the 2013 Plan. As of December 31, 2019, there were no shares available for future grants under the 2013 Plan.

In connection with the Merger (see Note 3), the Company assumed ApolloMed’s 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which 1,500,000 shares of the Company’s common stock were reserved for issuance thereunder. In addition, shares that are subject to outstanding grants under the Company’s 2010 Plan and 2013 Plan but that ordinarily would have been restored to such plans reserve due to award forfeitures and terminations will roll into and become available for awards under the 2015 Plan. The 2015 Plan provides for awards, including incentive stock options, non-qualified options, restricted common stock, and stock appreciation rights. The 2015 Plan was approved by ApolloMed’s stockholders at ApolloMed’s 2016 annual meeting of stockholders that was held on September 14, 2016. As of December 31, 2019, 2018 and 2017, there were approximately 0.5 million, 0.9 million and 1.0 million shares available for future grants under the 2015 Plan, respectively.

Options

The Company’s outstanding stock options consisted of the following:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)

Options outstanding at January 1, 2017	—		$	—	—	$	—
Options assumed in the Merger (see Note 3)	1,141,040		3.95		5.85	22.6
Options granted	—		—		—	—
Options exercised	—		—		—	—
Options forfeited	—		—		—	—
Options outstanding at December 31, 2017	1,141,040		$	3.95	5.79	$	22.6
Options granted	155,000		9.85		—	—
Options exercised	(639,800	)	4.11		—	9.8
Options forfeited	(9,000	)	3.41		—	—
Options outstanding at December 31, 2018	647,240		$	5.62	4.13	$	9.2
Options granted	279,698		17.24		—	—
Options exercised	(241,214	)	6.09		—	2.7
Options forfeited	(78,378	)	17.62		—	—

Options outstanding at December 31, 2019	607,346		$	9.22	3.42	$	5.6

Options exercisable at December 31, 2019	439,776		$	4.58	2.09	$	5.6

During the year ended December 31, 2019 and 2018, stock options were exercised for 241,214 and 488,464 shares, respectively, of the Company’s common stock, which resulted in proceeds of approximately $1.5 million and $1.8 million, respectively. The exercise prices ranged from $1.50 to $10.00 per share for the exercises during the year ended December 31, 2019 and ranged from $0.01 to $10.00 per share for the exercises during the year ended December 31, 2018.

During the year ended December 31, 2018, stock options were exercised pursuant to the cashless exercise provision of the option agreement, with respect to 151,346 shares of the Company’s common stock, which resulted in the Company issuing 109,438 net shares. During the year ended December 31, 2019, no stock options were exercised pursuant the cashless exercise provision.

During the year ended December 31, 2019, the Company granted 145,228 and 56,092 five year stock options to certain ApolloMed board members and executives, respectively, with exercise price ranging from $15.35 - $18.11 and $18.91, respectively, which were recognized at fair value, as determining using the Black-Scholes option pricing model and following:



December 31, 2019	Board Members		Executives
Expected Term	3.0 years		3.0 years
Expected volatility	90.50% - 100.27%		84.42		%
Risk-free interest rate	1.60% - 2.51%		1.65		%
Market value of common stock	$15.35 - $18.11		$	18.91
Annual dividend yield	—	%	—		%
Forfeiture rate	0	%	0		%

During the year ended December 31, 2019, the Company recorded approximately $0.9 million of share-based compensation expense associated with the issuance of restricted shares of common stock and vesting of stock options which is included in General and administrative expenses in the accompanying consolidated statement of income.

Stock Options Issued Under Primary Care Physician Agreements

On October 1, 2014, NMM and APC entered into an Exclusivity Amendment Agreement as part of the Primary Care Physician Agreement to issue stock options to purchase shares of NMM and APC common stock.

The medical providers agreed to exclusivity to APC for health enrollees in consideration per provider of an exclusivity incentive in the amount of $25,000 (or $15,000 if already a preferred provider). The stock options were granted from the date of agreement through May 1, 2015 and are treated as issuances to non-employees. The exercise price of the stock options was $2.44 (for NMM pre-merger) and $0.17 (for APC) per share and providers were able to exercise anytime between August 1, 2015 and October 1, 2019, as long as the providers continue to provide services pursuant to the terms of the agreement through October 1, 2019. If the agreement is terminated by the provider with or without cause, the exclusivity incentive and any capitation payment above standard rates made in accordance with the terms of the agreement shall be fully repaid to APC by the terminating medical provider. In addition, any unexercised share options held by the terminating medical provider will be forfeited on effective date of termination, and any share options that have been exercised will be bought back by NMM and APC at the original purchase price.

As of December 31, 2018 and 2017, a total of 7,110,150 APC stock options were exercised for the purchase of shares of common stock that resulted in aggregate proceeds received by APC of $1.2 million. In accordance with relevant accounting guidance the options are reflected as long-term liability for unissued equity shares as of December 31, 2018 and 2017 of $1.2 million based on the features noted above. As of December 31, 2019, the liability totaling $1.2 million was reclassified to the appropriate equity account as the contingency to repurchase these options expired on October 1, 2019.

The stock options under the Exclusivity Amendment Agreement were accounted for at fair value, as determined using the Black-Scholes option pricing model and the following assumptions:



	Years ended December 31,
	2018	2017

Expected term	0.75 years	0.93 - 1.75 years
Expected volatility	38.10% - 41.60%	38.10% - 41.60%
Risk-free interest rate	1.64% - 1.86%	1.64% - 1.86%
Market value of common stock	$0.52 - $0.76	$0.52 - $0.76
Annual dividend yield	2.23% - 3.53%	2.23% - 3.53%
Forfeiture rate	0% - 6.8%	0% - 6.8%

Outstanding stock options granted to primary care physicians to purchase shares of APC’s common stock consisted of the following:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value

Options outstanding at January 1, 2017	1,910,400		$	0.167	2.75	$	1.1
Options granted	—		—		—	—
Options exercised	(1,056,600	)	0.167		—	(0.6		)
Options forfeited	—		—		—	—
Options outstanding at December 31, 2017	853,800		$	0.167	1.75	$	0.5
Options granted	—		—		—	—
Options exercised	—		—		—	—
Options forfeited	—		—		—	—
Options outstanding at December 31, 2018	853,800		$	0.167	0.75	$	0.5
Options granted	—		—		—	—
Options exercised	—		—		—	—
Options forfeited	(853,800	)	0.167		—	(0.5		)

Options outstanding and exercisable at December 31, 2019	—		$	—	—	$	—

The aggregate intrinsic value is calculated as the difference between the exercise price and the estimated fair value of common stock as of December 31, 2018 and 2017.

Share-based compensation expense related to option awards granted to primary care physicians with Exclusivity Agreements to purchase shares of APC’s common stock, are recognized over their respective vesting periods, and consisted of the following:



	Years ended December 31,
	2019		2018		2017
Share-based compensation expense:
General and administrative	$	607,146	$	809,528	$	2,113,116
	$	607,146	$	809,528	$	2,113,116

The Company has no unrecognized share based compensation stock option awards granted in connection with the Exclusivity Amendment Agreements as of December 31, 2019.

Warrants

Common stock warrants, to purchase 1,111,111 shares of ApolloMed common stock, issued to NMM in connection with the Series A Preferred Stock investment in ApolloMed may be exercised at any time after issuance and through October 14, 2020, for $9.00 per share, subject to adjustment in the event of stock dividends and stock splits. As part of the Merger between NMM and ApolloMed (see Note 3), such warrants were distributed to former NMM shareholders on a pro-rata basis utilizing the percentage of shares of NMM held by each shareholder prior to the merger date.

Common stock warrants, to purchase 555,555 shares of ApolloMed common stock, issued to NMM in connection with the Series B Preferred Stock investment in ApolloMed may be exercised at any time after issuance and through March 30, 2021, for $10.00 per share, subject to adjustment in the event of stock dividends and stock splits. As part of the Merger between NMM and ApolloMed (see Note 3), such warrants were distributed to former NMM shareholders on a pro-rata basis utilizing the percentage of shares of NMM held by each shareholder prior to the Merger date.

The Company’s outstanding warrants consisted of the following:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In Millions)
Warrants outstanding at January 1, 2017	—		$	—	—	$	—
Warrants assumed in the Merger	1,898,541		9.06		2.69	1.8
Warrants granted (see Note 3)	1,750,000		10.49		5.00	—
Warrants outstanding at December 31, 2017	3,648,541		$	9.75	3.74	$	52.0
Warrants granted	—		—		—	—
Warrants exercised	(286,357	)	7.84		—	3.0
Warrants forfeited	(30,189	)	4.50		—	—
Warrants outstanding at December 31, 2018	3,331,995		$	9.93	2.97	$	33.1
Warrants granted	—		—		—	—
Warrants exercised	(177,405	)	9.32		—	1.60
Warrants forfeited	—		—		—	—

Warrants outstanding at December 31, 2019	3,154,590		$	9.96	2.01	$	26.7



Exercise Price Per Share		Warrants Outstanding	Weighted Average Remaining Contractual Life	Warrants Exercisable	Weighted Average Exercise Price Per Share

$	9.00	948,498	0.79	948,498	$	9.00
10.00		1,386,083	2.30	1,386,083	10.00
11.00		820,009	2.94	820,009	11.00

$ 9.00 –11.00		3,154,590	2.01	3,154,590	$	9.96

During the years ended December 31, 2019 and 2018, common stock warrants were exercised for 177,405 and 286,357 shares of the Company’s common stock, respectively which resulted in proceeds of approximately $1.7 million and $2.2 million, respectively. The exercise price ranged from $9.00 to $11.00 per share during year ended December 31, 2019 and $4.00 to $11.00 per share during year ended December 31, 2018.

Dividends

During the years ended December 31, 2019, 2018 and 2017, NMM paid dividends of $0, $13.8 million and $0, respectively. The dividends paid in the year ended December 31, 2018 was declared in December 31, 2017 as part of the merger between ApolloMed and NMM and was classified as restricted cash (see Note 3).

During the years ended December 31, 2019, 2018 and 2017, APC paid dividends of $60 million, $2.0 million and $8.75 million, respectively.

During the years ended December 31, 2019, 2018 and 2017, CDSC paid distributions of $2.6 million, $2.0 million and $1.7 million, respectively.

Treasury Stock

APC owns 17,290,317 shares of ApolloMed's common stock as of December 31, 2019 and 1,682,110 shares of ApolloMed’s common stock as of December 31, 2018 and 2017, respectively, which are legally issued and outstanding but excluded from shares of common stock outstanding in the consolidated financial statements, as such shares are treated as treasury shares for accounting purposes (see Note 1).

During the year ended December 31, 2019, APC established a brokerage account to invest excess capital in the equity market. The brokerage account is managed directly by an independent investment committee of the APC board, for which Dr. Kenneth Sim and Dr. Thomas Lam has been excluded. As of December 31, 2019 the brokerage account only held shares of ApolloMed, as such the brokerage account totaling $7.3 million has been recorded as treasury shares.

On December 18, 2018 the Company entered into a settlement agreement and mutual release with former APCN shareholders to repurchase all the equity interests in ApolloMed and APC previously held by these shareholders pursuant to the stipulation. Total common shares repurchased was 168,493 and 1,662,571 from ApolloMed and APC, respectively (See Note 13).