Apollo Medical Holdings, Inc. (now Astrana Health, Inc.) — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017, the first quarter of fiscal 2018 (fiscal year ended March 31). The filing was signed August 14, 2017. The issuer described its California-focused, physician-centric population health and care-management business, serving Medicare, Medicaid, HMO and other patients.
Financial performance and position
| Metric | Three months ended June 30, 2017 | Comparable 2016 period / balance-sheet comparison |
|---|---|---|
| Revenue | $41.6 million | $12.4 million; up 236% |
| Cost of services | $40.2 million | $10.1 million; up 297% |
| Operating loss | $3.7 million | $1.8 million loss |
| Net loss attributable to Apollo Medical Holdings | $3.6 million; $0.60 per diluted share | $1.3 million; $0.22 per diluted share |
| Operating cash flow | $22.6 million provided | $2.3 million used |
| Cash and cash equivalents | $31.2 million at June 30 | $8.7 million at March 31 |
| Current liabilities / current assets | $40.8 million / $37.7 million; $3.1 million working-capital deficit | $14.5 million / $14.9 million |
| Total liabilities | $46.6 million | $20.4 million at March 31 |
Revenue growth was primarily driven by approximately $27.9 million of new CMS Next Generation ACO (NGACO) revenue. Cost of services included approximately $27.3 million of related patient-care costs. Revenue less cost of services was approximately $1.3 million, or 3.2% of revenue; operating and net losses widened year over year. General and administrative expense rose 27% to $4.9 million, including NGACO and proposed-merger costs. Interest expense increased with new borrowings.
Operating cash flow was supported chiefly by a roughly $26.0 million working-capital contribution, including increases in accounts payable, accrued expenses and medical liabilities—not by earnings. Medical liabilities rose to $19.7 million from $1.8 million at March 31, including estimates for the new NGACO program. Investing cash use was $36,000 and financing cash use was $38,000. The company reported approximately $9.9 million of net borrowings on notes and lines of credit, plus only $25,000 drawn on a $150,000 line. Stockholders’ equity was negative $3.3 million, including a $41.3 million accumulated deficit.
Material changes and developments
- CMS capitation under APAACO’s NGACO contract began in this quarter and drove the sharp revenue and medical-liability increases. Management said it expects NGACO revenue to be significant in fiscal 2018 and later periods, but noted the program involves financial risk and reconciliation with CMS.
- The company deconsolidated Los Angeles Lung Center and Eli Hendel, M.D., Inc. after changes to their management agreements; their prior-period results therefore are not fully comparable.
- The company terminated two hospitalist contracts during the quarter in an effort to improve profitability.
- A $5.0 million related-party note from NMM and a $4.99 million Alliance convertible note were outstanding. The Alliance note is due upon earlier termination of the merger agreement or December 31, 2017, unless converted in a qualifying merger closing; failure to close could require repayment or refinancing.
Outlook, liquidity, risks and contingencies
Going concern: Despite $31.2 million of reported cash, the filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management said it did not believe available liquidity was sufficient for at least the next 12 months without additional funds and that the company was substantially dependent on the proposed NMM merger to meet liquidity needs. No financing commitment or assurance was disclosed. Failure to secure capital could force curtailment of operations. Management expected positive operating cash flow for the remainder of fiscal 2018, but this is not formal earnings guidance.
Merger: The proposed NMM merger would give NMM shareholders 82% of the combined company’s shares, with existing ApolloMed shareholders retaining 18%, subject to the agreement’s terms. The HSR waiting period expired July 7, 2017; shareholder approvals and other closing conditions remained outstanding. The companies expected closing in the second half of calendar 2017 and filed an S-4 on August 10.
Other risks and contingencies: The company depends on government programs and a limited number of payors; Medicare/Medi-Cal represented 72.1% of quarterly revenue. NGACO medical-cost estimates are uncertain, and MSSP shared-savings payments are contingent and recognized only when CMS confirms payment. CMS determined the company missed the MSSP minimum savings threshold for performance year 2015; potential 2016 payment, if earned, was expected in fiscal 2018. California DMHC requirements remain material: MMG had been subject to a corrective action plan for a tangible-net-equity deficiency, had restored positive TNE, and was awaiting DMHC review to be removed from the plan. The filing also cites healthcare regulation, malpractice claims and insurance availability, provider-cost estimation, merger completion and financing as risks. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Reconcile the $22.6 million operating cash inflow to working-capital movements and assess whether it is repeatable.
- Review NGACO claims development, the $19.7 million medical-liability estimate and subsequent CMS reconciliations against capitation revenue.
- Confirm the status, financing implications and dilution terms of the NMM merger, including the Alliance note’s repayment or conversion outcome.
- Track liquidity, near-term obligations and any new debt or equity financing; verify the basis for management’s positive cash-flow expectation.
- Check CMS shared-savings outcomes and DMHC’s decision on MMG’s corrective action plan.