Business context and reporting period
The filing is by Apollo Medical Holdings, Inc. (ApolloMed), not a registrant named Astrana Health. It covers the unaudited quarter ended June 30, 2016, which the company describes as the first quarter of fiscal 2017; comparisons are with the quarter ended June 30, 2015. ApolloMed is a California-focused integrated healthcare delivery company serving Medicare, Medicaid, HMO and other patients through physician groups, hospitalist services, clinics, hospice and home health, an ACO, and a population-health technology platform.
Financial results and liquidity
| Metric | Quarter ended June 30, 2016 | Comparable 2015 quarter |
|---|---|---|
| Net revenue | $12.37 million | $10.20 million |
| Cost of services | $10.13 million | $7.57 million |
| Operating loss | $1.76 million | $1.66 million |
| Net loss | $0.90 million | $2.23 million |
| Net loss attributable to ApolloMed | $1.32 million | $2.48 million |
| Net loss per share, basic and diluted | $0.22 | $0.51 |
| Cash used in operating activities | $2.27 million | $0.53 million |
Revenue increased 21%. Cost of services grew faster, up 34%; calculated cost-of-services margin fell to about 18% from 26%. Operating margin was approximately negative 14% versus negative 16%. The narrower net loss reflected, in part, a $822,000 noncash gain from remeasuring warrant liabilities and substantially lower interest expense after repayment of approximately $6.5 million of NNA debt in October 2015. The company remained loss-making at the operating level.
At June 30, 2016, cash and cash equivalents were $6.51 million, down from $9.27 million at March 31, 2016. Current assets were $11.35 million and current liabilities $6.94 million; management reported net working capital of approximately $4.4 million. Total liabilities were $9.74 million. Reported notes and lines of credit totaled $176,000, with approximately $0.5 million of line availability. Medical liabilities were $2.51 million. The company reported an accumulated deficit of $30.0 million and total stockholders’ equity of $0.50 million, alongside $7.08 million of Series A preferred stock classified as mezzanine equity.
Material changes versus the prior comparable period
- Revenue rose approximately $2.2 million, driven by about $1.0 million of MMG growth from increased patient lives and new hospital contracts that added revenue at BAHA and AMH. Home health and LALC revenue declined.
- Cost of services increased approximately $2.6 million, including higher MMG claims costs, a pharmacy-claims true-up and costs tied to new hospital contracts.
- General and administrative expense decreased about $0.4 million, attributed to cost-management and overhead reductions; depreciation and amortization increased as ApolloCare technology entered use.
- Operating cash outflow worsened to $2.27 million, primarily with working-capital use, including higher receivables and lower accrued liabilities. Investing cash outflow was $0.16 million; financing cash outflow was $0.33 million, including a $0.45 million distribution to a non-controlling shareholder.
- During the quarter, ApolloMed entered two new management services agreements and three hospitalist service agreements.
Outlook, risks, contingencies and unusual items
- Management expected positive operating cash flow for fiscal 2017 and believed available liquidity would fund obligations for at least 12 months, through September 30, 2017. The filing also says additional funding might be required if available resources prove inadequate; there is no assurance financing would be available.
- Series A preferred stock has a redemption trigger if revenue for the four quarters ending September 30, 2016 is below $60 million. NMM may elect redemption; the company could then have up to one year to redeem the securities at the purchase price plus 10% annual interest. The Series A is classified as mezzanine equity because redemption is not solely within company control.
- CMS determined ApolloMed ACO missed the MSSP minimum savings threshold for calendar 2015, so it received no incentive payment in fiscal 2016. Future MSSP payments are uncertain, annual and contingent on program results.
- California’s DMHC found MMG noncompliant with the positive tangible-net-equity requirement as of February 28, 2016. MMG submitted a corrective action plan, under review; management projected positive TNE by fiscal Q3 2017.
- Two related disputes with competing physician groups are in arbitration, with mediation underway for the claims involving the CEO. The company said it was too early to assess the likelihood or amount of any loss. Medical malpractice claims and other litigation also arise in the ordinary course.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30, 2016. The company identified three material weaknesses: no written internal-control documentation, insufficient segregation of accounting duties, and inadequate financial-reporting review and supervision. A comprehensive remediation program had not yet been introduced.
- Risks include dependence on major payors, reimbursement and regulatory changes, California concentration, claims-reserve estimates, access to capital and competition. Approximately $5.2 million of cash exceeded FDIC insurance limits. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer and period: this filing names Apollo Medical Holdings, Inc. and covers the quarter ended June 30, 2016; the supplied company metadata says Astrana Health and 2016 Q1.
- Track operating performance and cash conversion: revenue grew, but service costs rose faster and operating cash use increased materially.
- Monitor the September 30, 2016 revenue test and any NMM redemption election under the Series A terms.
- Check whether MMG cured its DMHC TNE deficiency and whether its corrective action plan was accepted.
- Assess progress remediating the three disclosed material weaknesses and the eventual outcomes of the arbitration matters.
- Validate management’s positive fiscal 2017 operating-cash-flow expectation and 12-month liquidity assessment against subsequent results and funding needs.