Apollo Medical Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2016. The filing identifies the registrant as Apollo Medical Holdings, Inc. (ApolloMed), not Astrana Health, Inc. The six-month period is the first half of ApolloMed’s fiscal year ending March 31, 2017.
Business context
ApolloMed operated an integrated healthcare delivery business in California, providing hospitalist, physician-group, clinic, hospice, home-health, and population-health management services. Revenue came from fee-for-service, contracted services, and capitation and other risk-based arrangements. The company reported one healthcare delivery segment.
Financial performance
| Metric | Three months ended September 30, 2016 | Six months ended September 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $14.6 million | $27.0 million | $11.4 million / $21.6 million |
| Operating loss | $2.2 million | $3.9 million | $0.4 million / $2.1 million |
| Net loss | $1.5 million | $2.4 million | $0.3 million / $2.5 million |
| Net loss attributable to ApolloMed | $1.4 million | $2.7 million | $0.5 million / $3.0 million |
| Basic and diluted loss per share | $0.23 | $0.45 | $0.11 / $0.62 |
Quarterly revenue rose 29% and six-month revenue rose 25% year over year, principally from new hospitalist contracts; six-month growth also reflected increased MMG membership. Costs grew faster than revenue: cost of services rose 47% in the quarter and 41% for six months, while general and administrative expense increased 29% and 8%, respectively. Cost of services equaled about 83% of revenue in both 2016 periods, versus about 73% in the comparable 2015 periods. Operating margins were approximately negative 14.9% for the quarter and negative 14.6% for six months, compared with negative 3.6% and negative 9.6%.
The six-month net loss improved slightly from 2015, but a $1.3 million noncash gain from remeasurement of warrant liabilities contributed to results. For the quarter, the larger operating loss outweighed favorable other income. Interest expense declined substantially after prior-year debt repayment and conversions.
Cash flow, balance sheet, and liquidity
- Cash and cash equivalents were $3.8 million at September 30, 2016, down from $9.3 million at March 31, 2016. Current assets were $9.1 million and current liabilities $6.8 million.
- Six-month operating cash use was $4.4 million; investing cash use was $0.2 million; financing cash use was $0.9 million. Financing outflows included $1.05 million distributed to a non-controlling-interest shareholder. Ending cash was $3.8 million.
- Accounts receivable increased to $4.6 million from $3.4 million. Medical liabilities were $2.1 million, down from $2.7 million.
- Outstanding lines of credit were $201,264; the company disclosed $480,000 of aggregate credit lines. Total liabilities were $9.2 million. Stockholders’ deficit was $1.3 million, with an accumulated deficit of $31.4 million.
- The company stated that operating revenue was insufficient to cover operating costs, that additional capital was being explored, and that no financing commitments or assurances existed. Management and the filing state that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
Material changes, outlook, and risks
- Preferred-stock redemption exposure: NMM’s Series A investment is redeemable if revenue for the four quarters ended September 30, 2016 was below $60 million. The threshold was not met; NMM could require redemption of the Series A securities for $10 million plus 10% annual interest from notice to redemption. No notice had been received by the filing date. The Series A and Series B preferred shares had aggregate stated liquidation preferences of approximately $15 million.
- Regulatory capital: California’s DMHC found MMG out of compliance with its positive tangible-net-equity requirement as of February 28, 2016. MMG submitted a corrective action plan under review; management projected compliance by the third quarter of fiscal 2017.
- Concentration and program risk: The business is concentrated in California and depends on private and public payors. Medicare/Medi-Cal represented 22.6% of six-month 2016 revenue. The ACO did not meet the MSSP minimum savings threshold for calendar 2015 and received no incentive payment for fiscal 2016.
- Controls: Management concluded disclosure controls and internal controls over financial reporting were ineffective, citing three material weaknesses: insufficient written control documentation, inadequate segregation of accounting duties, and inadequate review and supervision. A remediation plan was in development.
- Legal matter: A competitor-related dispute involving the company, affiliates, and CEO was settled after September 30, 2016, without adjudication or admission of liability. The filing did not quantify settlement terms.
- Subsequent acquisition: On November 4, 2016, an affiliate acquired BAHA’s outstanding stock. Consideration included $25,000 initially, up to $100,000 in contingent payments, and a warrant for 24,000 shares. The acquired business had previously been consolidated as a variable-interest entity.
- No specific financial guidance was provided. Management’s stated priorities were revenue growth, cost reduction, profitability, and securing additional financing; it cautioned that financing might not be available and operations might need to be curtailed.
Most important facts for investors to verify
- Whether NMM delivered a redemption notice and the company’s ability to fund a potential $10 million redemption plus interest.
- Available cash, operating cash burn, financing prospects, and any developments affecting the going-concern assessment.
- Progress on MMG’s DMHC corrective action plan and tangible-net-equity compliance.
- Whether revenue growth can outpace service and administrative cost growth, particularly as new hospitalist contracts scale.
- Remediation of the three disclosed material weaknesses and any subsequent changes in control effectiveness.
- BAHA’s post-acquisition performance, contingent-payment conditions, and the financial impact of the transaction.