Apollo Medical Holdings, Inc. (now identified in the request as Astrana Health, Inc.) — Form 10-Q
Reporting period: Three and nine months ended December 31, 2016, for the fiscal year ending March 31, 2017. The filing is under the name Apollo Medical Holdings, Inc. and presents unaudited consolidated results.
Business context and financial performance
The company provides integrated healthcare services in California, including hospitalist, physician-group, clinic, hospice, home-health and accountable-care operations. Revenue is generated through fee-for-service, contracted and capitated arrangements, with exposure to medical-cost risk under certain contracts.
| Metric | Three months ended Dec. 31, 2016 | Prior year | Nine months ended Dec. 31, 2016 | Prior year |
|---|---|---|---|---|
| Revenue | $15.7 million | $10.7 million | $42.7 million | $32.2 million |
| Operating loss | $1.7 million | $1.5 million | $5.6 million | $3.5 million |
| Net loss | $1.5 million | $1.5 million | $3.9 million | $4.1 million |
| Net loss attributable to Apollo Medical Holdings | $1.7 million | $1.7 million | $4.4 million | $4.7 million |
| Loss per share, basic and diluted | $0.29 | $0.31 | $0.74 | $0.93 |
Revenue grew 47% for the quarter and 32% for the nine-month period. Management attributed growth primarily to new hospitalist contracts and increased MMG membership and shared-risk revenue. Cost of services rose faster than revenue—50% quarterly and 44% year to date—so revenue less cost of services declined as a share of revenue: approximately 18.9% versus 20.6% for the quarter, and 17.9% versus 24.6% for nine months. These are calculated gross-margin proxies, not a company-reported margin measure.
Quarterly operating loss widened by $0.2 million; the nine-month operating loss widened by $2.1 million. Net losses were partly offset by noncash gains from changes in the fair value of warrant liabilities: $0.3 million for the quarter and $1.6 million for nine months. G&A included merger-related legal and consulting costs, which management said increased by approximately $1.0 million for the quarter and $1.6 million year to date.
Cash flow, debt and liquidity
- Nine-month operating cash use was $4.2 million, compared with $1.8 million a year earlier. Investing cash use was $0.5 million; financing cash use was $0.6 million, including $1.2 million of distributions to a noncontrolling-interest shareholder.
- Cash and cash equivalents fell to $4.0 million at December 31, 2016, from $9.3 million at March 31, 2016. Restricted cash was $0.8 million. The company disclosed approximately $3.7 million of cash above FDIC insurance limits.
- Current assets were $10.8 million and current liabilities $10.2 million, versus $13.6 million and $7.4 million, respectively, at March 31. Accounts payable and accrued liabilities rose to $7.8 million from $4.6 million.
- At quarter-end, the company had a $0.4 million related-party note payable, net of discount, bearing 12% interest and due in February 2017, plus $0.2 million outstanding on unsecured credit lines. Credit-line availability aggregated $0.48 million. The filing reports $11.1 million in total liabilities.
- On January 3, 2017, after quarter-end, NMM provided a $5.0 million working-capital loan, bearing interest at prime plus 1%, with principal due January 3, 2019. This financing was not included in December 31 cash or debt balances.
Management stated that recurring operating losses, operating cash use and the accumulated deficit of $33.1 million raised substantial doubt about the company’s ability to continue as a going concern. Revenue was not sufficient to cover operating costs; additional financing, cost reductions and improved profitability were necessary, with no assurance financing would be available.
Material changes, outlook and risks
- Merger and preferred stock: The December 2016 merger agreement with NMM contemplated NMM shareholders owning 82% of the combined company and existing Apollo shareholders 18% at closing, subject to approvals and other closing conditions. NMM waived its right to redeem Series A preferred stock after the company missed a $60 million revenue threshold. The waiver allowed $7.1 million of mezzanine equity to be reclassified to permanent equity and removed the stated redemption right for $10 million.
- ACO exposure: ApolloMed ACO did not meet the MSSP minimum savings threshold for calendar 2015 and received no incentive payment for fiscal 2016. In January 2017, CMS approved the 50%-owned APAACO to join the Next Generation ACO Model through 2018. The model involves higher levels of potential financial risk and reward; settlement depends on performance and CMS calculations.
- Regulatory and medical-cost risk: MMG had previously failed California’s positive tangible-net-equity requirement. Its corrective action plan was approved in December 2016, and the company reported MMG was then compliant, subject to continued monitoring through March 2017. The filing also describes a $235,000 standby letter of credit arranged for Humana following MMG’s default on certain provider-payment obligations.
- Acquisitions and operations: The company acquired the remaining noncontrolling interest in BAHA through an affiliate in November 2016. It also began a hospitalist services contract with Madera Community Hospital during the quarter. Management cited declining patient census as a reason for lower hospice and home-health revenue.
- Legal and accounting matters: The Lakeside/Regal dispute was resolved by written settlement during the period without adjudication or admission of liability. Other ordinary-course claims remain possible. Management reported no off-balance-sheet arrangements.
- Controls: Disclosure controls were deemed ineffective as of December 31, 2016, due to three material weaknesses: lack of documented control procedures, inadequate segregation of accounting duties, and insufficient review and supervision. Remediation was underway, but the company could not estimate when it would be complete.
The filing provides no numerical earnings or revenue guidance. Management’s outlook focused on growing revenue, reducing costs, reaching profitability and obtaining additional financing; it cautioned that these objectives and financing plans were uncertain.
Important facts for investors to verify
- Whether the NMM merger closed, its final ownership and dilution effects, and the terms and use of the $5.0 million loan.
- Subsequent cash burn, ability to repay the $0.4 million short-term note, and availability of additional capital.
- Whether revenue growth translates into improved service margins, given cost of services grew faster than revenue.
- MMG’s continued compliance with DMHC requirements and the financial exposure from risk-pool claims and provider-payment obligations.
- APAACO’s participation terms, minimum beneficiary requirement, and potential shared-loss exposure under the Next Generation ACO Model.
- Progress in remediating material weaknesses and any impact on the reliability of financial reporting.