Astrana Health, Inc. quarterly report, Q1 FY2013

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Business context and reporting period

This filing is for Apollo Medical Holdings, Inc., not a registrant named Astrana Health. It is a Form 10-Q for the three months ended April 30, 2012 (the company’s fiscal first quarter of 2013); the filing compares results with the three months ended April 30, 2011. The company manages hospitalist and pulmonary/critical-care medical practices in the Greater Los Angeles area. Unless otherwise stated, amounts below are in U.S. dollars.

Key financial metrics

  • Revenue: $1.632 million, up 57% from $1.040 million.
  • Profitability: Gross profit was $303,185, versus $92,204; gross margin improved to about 18.6% from 8.9%. Operating loss narrowed to $53,153 from $187,444. Net loss was $157,356 versus $228,930; basic and diluted loss per share was $0.01 in both periods.
  • Cash flow: Operating cash outflow was $131,160, compared with $115,232 in the financial statements for the prior-year quarter. Investing cash outflow was $9,270. Financing provided $170,000 net, including $270,000 of note proceeds and a $100,000 distribution to a non-controlling shareholder. Cash increased by $29,570 to $193,931.
  • Liquidity: Current assets were $1.451 million and current liabilities $1.772 million, implying negative working capital of about $320,000 and a current ratio of about 0.82. Management reported $1.52 million of debt maturing within one year and $150,000 of long-term borrowings.
  • Debt and deficit: Current liabilities included a $270,000 senior secured note and $759,824 of 10% convertible notes, net of discount. The 8% convertible notes were $150,000. Total liabilities were $2.027 million; stockholders’ deficit was $456,257. Accumulated deficit was $2.275 million.

Material changes versus the prior comparable period

  • Revenue growth reflected acquisitions, new hospital contracts, expansion at existing clients, and increased fee-for-service revenue.
  • Cost of services rose in dollars but fell to 81.4% of revenue from about 91.2%, contributing to higher gross margin. General and administrative expenses increased to $351,547 from $276,355, while declining as a share of revenue to about 21.5% from 26.6%.
  • Interest expense and financing cost increased to $224,036 from $40,949, largely due to $163,458 of debt-discount amortization. A $123,838 non-cash gain from changes in warrant and derivative fair values partly offset these costs.
  • Accounts receivable increased to $1.147 million from $994,118. Three customers represented 26.2%, 10.0%, and 9.1% of quarterly revenue, respectively.

Outlook, risks, and unusual items

  • Going concern: Management stated that losses could continue through fiscal 2013 and that liquidity may be insufficient for the next 12 months, raising substantial doubt about the company’s ability to continue as a going concern. It cited $1.52 million of debt maturing in fiscal 2013 and said additional financing was needed; there is no assurance it can be obtained, and failure to raise capital could force cessation of operations.
  • Outlook: The company was pursuing designation as an Accountable Care Organization under the Medicare Shared Savings Program and expected a response in the second or third quarter of fiscal 2013. Management said the opportunity could require additional capital. No quantified revenue or earnings guidance was provided.
  • Related-party financing: The $270,000 senior secured note was entered into with an entity in which a company director held an ownership interest. It bears 8.929% interest, is secured by substantially all company assets, and requires two $135,000 principal payments in September and October 2012.
  • Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective as of April 30, 2012, citing three material weaknesses: lack of written control documentation, insufficient segregation of duties, and inadequate review and supervision. Remediation was underway.
  • Legal matters: The company reported ordinary-course proceedings, primarily medical-malpractice claims, and said it did not expect a material adverse effect, while noting outcomes cannot be predicted with certainty.

Important facts for investors to verify

  1. Confirm the company identity and fiscal-period labeling: the filing is for Apollo Medical Holdings and the quarter ended April 30, 2012, despite the request metadata identifying Astrana Health and “2012 Q1.”
  2. Assess the funding plan, near-term maturities, security and terms of the related-party note, and the company’s ability to raise capital in light of the going-concern warning.
  3. Review collection trends and customer concentration, including the increase in receivables and the reliance on a small number of customers.
  4. Track remediation of the three material weaknesses and whether subsequent filings report effective controls.
  5. Reconcile cash-flow comparisons: the financial statements report prior-period operating cash use of $115,232, while the MD&A gives different prior-period cash-flow figures and references different comparative dates.
  6. Evaluate the ACO application’s status, potential capital needs, and whether anticipated benefits materialize.