SEC Filing Summary: Apollo Medical Holdings, Inc. (identified in request metadata as Astrana Health, Inc.)
The filing is a Form 10-Q for the quarter ended July 31, 2011, with comparative results for the three and six months ended July 31, 2010. The registrant named in the filing is Apollo Medical Holdings, Inc.; the filing does not explain the relationship to the name in the request metadata. Amounts below are in U.S. dollars.
Business context and reporting period
Apollo managed hospitalist and other hospital-based medical services through affiliated physician groups. In February 2011, it acquired Aligned Healthcare, Inc. (AHI), which operates physician call centers and care-management services; AHI’s results are included from the acquisition date. The acquisition and expansion of services affect comparability with the prior-year period.
Financial results and liquidity
| Metric | Three months ended July 31, 2011 | Three months ended July 31, 2010 | Six months ended July 31, 2011 | Six months ended July 31, 2010 |
|---|---|---|---|---|
| Revenue | $1,093,708 | $1,039,695 | $2,133,400 | $1,842,580 |
| Gross profit | $154,371 | $174,976 | $246,575 | $303,175 |
| Gross margin | 14.1% | 16.8% | 11.6% | 16.4% |
| Operating income (loss) | $(83,339) | $(18,533) | $(270,783) | $21,468 |
| Net income (loss) | $(122,834) | $(60,130) | $(351,764) | $(60,973) |
| Net loss per share, basic and diluted | $(0.00) | $(0.00) | $(0.01) | $(0.00) |
For the six-month period, cost of services was $1,886,825 (88% of revenue), compared with $1,539,405 (84%) in 2010. General and administrative expense was $511,485 (24% of revenue), versus $275,708 (15%). Management attributed the cost increases to physician hiring and contract start-up costs, AHI acquisition-related costs, expanded services, and non-cash compensation. Six-month AHI start-up and transaction costs were approximately $148,158; total acquisition transaction costs were reported as $64,408.
At July 31, 2011, cash and cash equivalents were $343,150, current assets $1,133,016, and current liabilities $644,849. Working capital was therefore approximately $488,167. Long-term 10% convertible notes were $1,248,990, due January 31, 2013; the company reported no short-term borrowings. Stockholders’ deficit was $147,291.
Six-month operating cash use was reported as $53,151 in the cash flow statement, compared with $126,248 in 2010. Cash declined by $53,951 to $343,150. The filing’s MD&A instead states operating cash use of $53,951 for 2011, so the operating cash-flow figure is inconsistent within the filing. The cash-flow statement reports no net investing cash use, although it lists an $800 advance to an affiliate.
Material changes versus the prior comparable period
- Revenue increased 5% for the quarter and 16% for the six-month period, attributed to new hospital contracts, same-market growth, and expanded services.
- Despite higher revenue, gross margins declined and operating results worsened: the six-month period moved from operating income of $21,468 to an operating loss of $270,783.
- Six-month net loss increased to $351,764 from $60,973, reflecting higher physician and administrative costs, AHI start-up and transaction costs, and expansion-related expenses.
- The company recorded $577,500 of acquisition-related intangible assets for AHI and a $367,500 current liability for estimated contingent consideration. The acquisition consideration included 1,000,000 shares issued and potential additional shares tied to revenue and EBITDA targets.
Outlook, risks, contingencies, and unusual items
- Going concern: The filing cites continuing operating losses, an accumulated deficit of $1,749,126, stockholders’ deficit, and negative operating cash flow. Management said cost reductions and other actions were expected to support operating needs through January 31, 2012 and beyond, and it was exploring equity and debt financing. It cautioned that there was no assurance its plans would succeed and that failure to raise additional capital could force the company to cease operations.
- Customer concentration and collections: The three largest contracts represented 40.9%, 14.1%, and 8.4% of quarterly revenue. Management noted collection-timing and fee-for-service estimation risks.
- Acquisition uncertainty: AHI’s purchase-price allocation was preliminary and subject to third-party valuation work and changes in estimated contingent consideration. AHI’s agreement also included revenue- and EBITDA-based potential share issuances.
- Subsequent acquisition: On August 2, 2011, Apollo acquired Pulmonary Critical Care Management, Inc. for 350,000 common shares and formed a pulmonary and critical-care division.
- Legal matters: The company described ordinary-course claims, including medical-malpractice matters, and said it did not expect pending matters to have a material adverse effect, while noting outcomes could not be predicted with certainty.
- Controls: Management concluded disclosure controls were ineffective as of July 31, 2011, citing three material weaknesses: lack of written internal-control documentation, insufficient segregation of accounting duties, and inadequate financial-reporting review and supervision. It said it was taking steps to improve controls, including hiring additional employees.
- No formal financial guidance or quantified forward outlook is provided. The filing states there were no off-balance-sheet arrangements and no derivative or hedging activities.
Important facts for investors to verify
- Reconcile the conflicting 2011 operating cash-flow figures ($53,151 in the cash flow statement versus $53,951 in MD&A) and the treatment of the $800 affiliate advance.
- Assess whether cash, operating cash generation, and access to financing are sufficient given the going-concern warning and $1.25 million of notes due in 2013.
- Track AHI’s contract performance, contingent share obligations, preliminary purchase accounting, and the impact of acquisition-related start-up costs.
- Evaluate contract concentration, collections, and whether new or expanded hospital contracts can achieve sustainable margins.
- Monitor remediation of the disclosed material weaknesses and future disclosure-control assessments.