SEC Filing Summary
Entity and period: The supplied metadata names Astrana Health, Inc., but this filing is for Apollo Medical Holdings, Inc. (now associated with the Astrana Health name). It is a Form 10-Q for the quarter ended September 30, 2014, covering the three and six months ended on that date. The company changed its fiscal year-end from January 31 to March 31 in May 2014; the March 31, 2014 balance sheet figures are unaudited.
Business Context and Financial Results
Apollo Medical described itself as an integrated healthcare delivery and medical-management business serving Medicare, commercial and Medi-Cal patients, primarily in California. Its activities included hospitalist services, managed physician groups and clinics, and participation in the Medicare Shared Savings Program (MSSP).
| Metric | Three months ended September 30, 2014 | Six months ended September 30, 2014 |
|---|---|---|
| Revenue | $11.67 million | $15.76 million |
| Operating income | $1.86 million; 15.9% of revenue | $0.67 million; 4.3% of revenue |
| Net income (loss), consolidated | $1.54 million | $0.03 million |
| Net income (loss) attributable to Apollo | $1.38 million | ($0.30 million) |
| Operating cash flow | Not separately presented for the quarter | ($2.12 million) |
Quarterly diluted and basic earnings per share were $0.03; six-month loss per share attributable to Apollo was $0.01. The quarterly results included $5.38 million of MSSP savings revenue recognized after CMS notified the company of its 2012 award. The company recorded $1.40 million payable to participating physicians against that award. Management said it did not anticipate additional MSSP revenue in fiscal 2015; future savings for 2013 and 2014 were not estimable.
Margins and expenses: For the quarter, cost of services was 52.8% of revenue and general and administrative expense was 29.6%. For the six-month period, the respective figures were 59.8% and 34.7%. The company attributed improved operating results largely to MSSP revenue, growth in managed-care patient lives and acquisitions; higher medical costs, stock compensation, legal and professional fees, and acquisition-related depreciation and amortization partly offset the improvement.
Balance Sheet, Debt and Liquidity
- At September 30, cash and cash equivalents were $3.95 million, marketable securities $0.42 million, and restricted cash $0.04 million. Cash and marketable securities totaled about $4.37 million, down from $6.83 million of cash at March 31.
- Current assets were $13.36 million and current liabilities $5.88 million, implying working capital of approximately $7.48 million. The current-asset total included a $5.38 million MSSP receivable.
- Total liabilities were $16.56 million, compared with total assets of $16.06 million; stockholders’ deficit was $0.50 million. The filing’s MD&A reports borrowings of $7.6 million. Balance-sheet debt included $5.65 million of notes and line-of-credit borrowings and $1.95 million of convertible notes, net of discounts.
- The NNA term loan bears 8% interest, is secured by substantially all company assets, and matures in March 2019. The $2.0 million NNA 8% convertible note was drawn in July; its initial conversion price is $1.00 per share and includes down-round protection. The company reported compliance with financing covenants at September 30. A separate $94,764 unsecured credit-line balance was due June 2015.
- Six-month investing cash outflow was $1.96 million, primarily for acquisitions; financing cash inflow was $1.20 million. Cash decreased by $2.88 million during the period.
Management stated that cash balances and expected operating cash flows should meet working-capital needs for the foreseeable future, while cautioning that additional financing might not be available on acceptable terms, or at all.
Material Changes, Outlook and Risks
- Year-over-year performance: Second-quarter revenue rose 362.6% from $2.52 million; six-month revenue rose 206.8% from $5.14 million. The company moved from operating and net losses in the comparable 2013 periods to operating profit in both 2014 periods, though it remained in a six-month net loss attributable to Apollo.
- Revenue quality: The $5.38 million MSSP award was a significant, non-recurring contribution to reported revenue and earnings. Excluding it, the company reported no payor contributing more than 10% of revenue in the 2014 periods.
- Acquisitions: The company consolidated AKM Medical Group from May 2014 and Southern California Heart Centers (SCHC) from July 2014. Those businesses contributed $1.87 million in revenue and a $0.26 million net loss from their respective acquisition dates through September 30. Purchase-price allocations were preliminary. Subsequent to quarter-end, Apollo Palliative Services acquired interests in a hospice-care business and a home-health agency; Apollo guaranteed specified contingent payments.
- Litigation and contingencies: Competing physician groups brought claims alleging improper solicitation and misrepresentation; the disputes were directed to arbitration. The company said it could not assess the likelihood or estimate potential loss. It also noted ordinary-course malpractice claims and uncertainty about whether future insurance coverage will remain available at acceptable cost and terms.
- Controls: Management concluded disclosure controls and internal controls over financial reporting were ineffective at September 30, citing three material weaknesses: insufficient written control documentation, inadequate segregation of accounting duties, and lack of financial-reporting review and supervision. The company said it was taking remedial steps.
- Other developments: An October 2014 office lease amendment expanded the premises to 16,484 square feet, with first-year base rent of $37,913.20 per month and a term of approximately six years after occupancy begins. In October, the company also settled with a former counterparty, reconveying acquired shares and receiving 500,000 Apollo shares for $10,000.
- Guidance: The filing gives no quantified forward earnings or revenue guidance. Management’s outlook is limited to its liquidity statement and its expectation of no additional MSSP revenue in fiscal 2015.
Most Important Facts to Verify
- Reconcile the large MSSP award and receivable: confirm collection, physician distributions, and the non-recurring effect on earnings and cash flow.
- Assess operating cash burn, medical-liability estimates and claims development, particularly given the $5.38 million receivable and increased medical liabilities.
- Review debt terms, security, covenant compliance, dilution exposure from convertible notes and warrants, and financing capacity.
- Track the Lakeside/Regal arbitration, potential indemnification costs, and the adequacy and renewal terms of malpractice insurance.
- Monitor remediation of the three material control weaknesses and whether management reports effective controls in subsequent filings.
- Check share-count disclosures: the balance sheet reports 49,134,549 shares at September 30, while the cover reports 48,634,549 outstanding at November 14. The October settlement’s 500,000-share reconveyance may explain the difference; verify the subsequent share count and any related accounting.
- Follow final purchase-price allocations and performance or contingent-payment obligations for AKM, SCHC and the post-quarter hospice and home-health transactions.