Astrana Health, Inc. (then Apollo Medical Holdings, Inc.) — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017. The filing is by Apollo Medical Holdings, Inc.; the supplied company metadata identifies Astrana Health, Inc.
Business context
The company provided physician-led healthcare management and care coordination in California, serving Medicare, Medicaid, HMO and other patients. Its operations included hospitalist services, medical groups, hospice and home health, and accountable care organizations. The filing reports one operating segment. Revenue growth was primarily driven by APAACO’s CMS Next Generation ACO (NGACO) contract, which began receiving capitation in April 2017.
Financial performance and position
| Metric | Three months ended Sept. 30, 2017 | Six months ended Sept. 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $40.5 million | $82.1 million | $14.6 million; $27.0 million |
| Operating loss | $4.1 million | $7.8 million | $2.2 million; $3.9 million |
| Net loss | $4.2 million | $8.1 million | $1.5 million; $2.4 million |
| Net loss attributable to Apollo Medical Holdings | $3.9 million | $7.5 million | $1.4 million; $2.7 million |
| Basic and diluted loss per share | $0.64 | $1.24 | $0.23; $0.45 |
- Revenue increased 177% for the quarter and 204% for the six-month period year over year. Management attributed the increase mainly to APAACO’s CMS contract, contributing approximately $27.9 million in quarterly revenue and $55.7 million for six months.
- Cost of services rose faster than revenue: 221% for the quarter and 256% for six months. The company recorded approximately $27.3 million of APAACO patient-care costs in the quarter and $54.6 million for six months. Calculated gross margin was about 3.4% for the quarter and 3.3% for six months, versus about 16.8% and 17.4% in the comparable 2016 periods.
- General and administrative expense rose 20% for the quarter and 23% for six months, partly reflecting NGACO operations and merger-related costs. The filing cites approximately $0.7 million of merger costs for the quarter and $1.3 million for six months.
- Six-month operating cash flow was positive $21.5 million, versus cash used of $4.4 million in 2016. The filing attributes the positive result chiefly to working-capital changes, including a $28.9 million increase in medical liabilities; it should not be read as evidence of sustainable operating cash generation. Investing used $56,000 and financing provided $48,000.
- Cash and cash equivalents were $30.2 million at September 30, up from $8.7 million at March 31. Management noted that this included CMS capitation largely intended to pay related provider claims. Restricted cash was $0.7 million.
- Current assets were $35.7 million and current liabilities $42.7 million, a working-capital deficit of approximately $7.0 million. Medical liabilities rose to $30.7 million from $1.8 million at March 31.
- At September 30, debt included a $5.0 million related-party NMM note, a $4.99 million Alliance convertible note (reported net of issuance costs at $4.94 million), and $25,000 outstanding on a line of credit. Total liabilities were $48.5 million, and stockholders’ equity was negative $7.3 million.
- Cash of approximately $32.9 million exceeded FDIC insurance limits. Government Medicare/Medi-Cal programs contributed 73% of quarterly and 72.5% of six-month revenue.
Material changes and developments
- The company deconsolidated Los Angeles Lung Center and Hendel effective January 1, 2017 after changes to management agreements meant it no longer had a variable interest in those entities.
- APAACO began the NGACO program in January 2017 and entered the All-Inclusive Population-Based Payment (AIPBP) mechanism effective April 1. Under it, APAACO received monthly CMS payments and bore responsibility for paying in-network providers.
- In October 2017, after the balance-sheet date, CMS notified APAACO that it would not renew AIPBP participation for performance year 2018, citing alleged performance deficiencies. APAACO disputed the determination and requested reconsideration on November 9. If unsuccessful, the payment mechanism would default to traditional fee-for-service; management disclosed current APAACO revenue and cash flow of approximately $9.3 million per month could be lost.
- Also after quarter-end, the October 2017 merger amendment extended the merger end date to March 31, 2018 and increased consideration payable to NMM shareholders, including 2,566,666 additional common shares and warrants for 900,000 shares at $10 per share, on top of previously described consideration. NMM agreed to provide an additional $4 million working-capital loan, restating its note to $9 million. The Alliance note was amended; if the merger closes by the applicable deadline, it converts into shares at $10 per share, otherwise repayment may be required. The amended NMM note’s principal could rise to $13.99 million if the company does not pay the Alliance note.
Outlook, risks and contingencies
- Going concern: The filing states that recurring losses, a $7.0 million working-capital deficit, and financing needs raise substantial doubt about the company’s ability to continue as a going concern. Management said it did not expect positive operating cash flow for the remainder of fiscal 2018 and did not believe liquidity was sufficient for at least 12 months without additional funds. Continued operations depend on cost reductions, improved performance, financing and, substantially, completion of the merger; success is not assured.
- NGACO exposure: APAACO selected Risk Arrangement A, accepting 80% of Part A and Part B risk with a 5% cap, equivalent to an effective 4% cap. The filing estimates 2017 benchmark expenditures of approximately $335 million and potential shared savings or losses of up to approximately $13.4 million. Reconciliation outcomes were not yet known.
- Merger and financing: The merger remained subject to shareholder approvals and other closing conditions. Failure or delay could impair liquidity, trigger repayment needs, add costs, disrupt operations, and reduce expected benefits. Management described dependence on the merger and additional capital, with no assurance funding would be available on acceptable terms or at all.
- Operating and regulatory risks: The company cited concentrated exposure to key payors and California healthcare programs, medical-cost and claims-estimation uncertainty, healthcare regulation, and dependence on CMS reimbursement. MMG had been subject to a DMHC corrective action plan for tangible net equity; the filing said the regulator was reviewing its removal and staff had indicated no objection to closing the plan.
- Other items: A plaintiffs’ law firm announced an investigation related to the merger; the company said it was not aware of litigation expected to have a material adverse effect, but could not rule out claims. The company also disclosed a prior missed Form 8-K amendment concerning executive-compensation vote frequency, filed November 3, 2017, which could affect securities-registration and capital-raising options. Management reported disclosure controls effective at a reasonable-assurance level.
Investor verification priorities
- Check CMS’s final decision on APAACO’s 2018 AIPBP participation and the resulting revenue, cash-flow and risk-sharing consequences.
- Assess the quality and timing of operating cash flow, especially the large medical-liability accrual and cash reserved economically for provider claims.
- Confirm the merger’s completion status, final consideration and dilution, required approvals, and the maturity, conversion and repayment terms of the NMM and Alliance notes.
- Review liquidity needs, access to additional financing, and progress toward resolving the going-concern uncertainty.
- Track claims development and APAACO’s estimated medical liabilities, as well as the potential shared-loss exposure under the NGACO contract.
- Verify material legal, DMHC and securities-reporting developments, and whether a Nasdaq listing is approved.