Astrana Health, Inc. quarterly report, Q3 FY2012

Business context and reporting period

This is Apollo Medical Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended October 31, 2011. The filing describes a California-focused medical management company providing hospitalist and integrated care management services. The registrant in this filing is Apollo Medical Holdings, Inc.; it is not identified in the filing as Astrana Health.

Financial performance and position

For the nine months, general and administrative expense rose to $706,312 from $427,720; management cited acquisition transaction costs, AHI start-up losses, growth-related costs, and noncash compensation. Cash was $249,653 at October 31, 2011, down from $397,101 at January 31, 2011. Current assets were $1.215 million and current liabilities $494,737. Convertible notes totaled $1.399 million; total liabilities were $1.894 million. Stockholders’ equity was $23,232, compared with a deficit of $83,194 at fiscal year-end.

Material changes and unusual items

• Revenue growth reflected new hospital contracts, expansion with medical groups, and the PCCM acquisition; PCCM’s consolidation added Los Angeles Lung Center activity beginning August 2, 2011.
• The company acquired Aligned Healthcare Group (AHI) and PCCM. AHI consideration included 1 million shares issued and a recorded $367,500 contingent-consideration liability; further shares may be due based on revenue and EBITDA targets. PCCM was acquired for 350,000 shares valued at $70,000.
• The nine-month loss included $83,750 of AHI start-up losses and acquisition transaction costs; the filing gives inconsistent transaction-cost totals of $64,408 and $79,408 in different sections.
• Cash-flow investing activities included $164,210 of cash received upon consolidation of a variable-interest entity. Financing activities included $150,000 of convertible-note proceeds and a $154,290 distribution to a non-controlling-interest shareholder.
• A $25,000 warrant exercise-price adjustment charge affected reported results. The company also issued $150,000 of 8% convertible notes.

Outlook, risks, and controls

The filing provides no formal revenue or earnings guidance. Management said current cash and expected operating funds would support working capital and growth, and stated it was pursuing cost savings and evaluating additional equity or debt financing. However, the company disclosed going-concern uncertainty: it had an accumulated deficit of $1.691 million and used $302,232 in operating cash during the nine months. Management said it expected to meet operating needs through January 31, 2012 and beyond, but warned that failure to raise substantial additional capital in time could force it to cease operations.

Disclosure controls and procedures were deemed ineffective as of October 31, 2011, with three reported material weaknesses: undocumented control procedures, insufficient segregation of duties, and inadequate review and supervision. The company cited steps to improve controls, including hiring additional employees. The filing also notes ordinary-course legal claims, including medical-malpractice matters; management did not expect a material adverse effect, but outcomes were uncertain.

Investor facts to verify

• Resolve the debt-term inconsistency: the 8% note table identifies a February 1, 2015 maturity, while the narrative repeatedly states January 31, 2013.
• Assess near-term cash needs, financing availability, and progress in addressing the disclosed going-concern uncertainty.
• Track AHI revenue and EBITDA milestones, contingent consideration, and potential dilution from additional acquisition shares.
• Reconcile acquisition transaction-cost disclosures ($64,408 versus $79,408) and evaluate the preliminary purchase-price allocations.
• Monitor remediation of the three material weaknesses and the effect of increased accounts receivable on cash collection.