SECURITIES & EXCHANGE COMMISSION EDGAR FILING
Form: 10-K
Date Filed: 2013-05-01
Corporate Issuer CIK: 1083446
© Copyright 2014, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the
terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2013
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
For the transition period from ___________ to ____________
Commission File No.
000-25809
Apollo Medical Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
State of Incorporation
20-8046599
IRS Employer Identification No.
700 North Brand Blvd., Suite 450
Glendale, California 91203
(Address of principal executive offices)
(818) 396-8050
(Issuer’s telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each Class
Name of each Exchange on which Registered
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ¨ No x
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every
interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that registrant was required to submit and post such files).
Yes x No ¨
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not
contained herein and, will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The aggregate market value of the shares of voting common stock held by non-affiliates of the Registrant computed by reference to
the price at which the common stock was last sold on OTCQB on July 31, 2012, the last business day of the Registrant’s most
recently completed second fiscal quarter, was $3,835,600. Solely for purposes of the foregoing calculation, all of the registrant’s
directors and officers as of July 31, 2012 are deemed to be affiliates. This determination of affiliate status for this purpose does not
reflect a determination that any persons are affiliates for any other purpose.
As of April 30, 2013, there were 34,843,441shares of common stock, $.001 par value per share, issued and outstanding.
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APOLLO MEDICAL HOLDINGS, INC.
FORM 10-K
FOR THE YEAR ENDED JANUARY 31, 2013
TABLE OF CONTENTS
Description of Business
Risk Factors
Unresolved Staff Comments
Description of Properties
Legal Proceedings
Mine Safety Disclosure
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Signatures
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PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
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11
16
16
16
16
17
19
19
26
26
26
26
27
28
29
32
32
32
33
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Introductory Comment
PART I
Unless context dictates otherwise, references in this Annual Report on Form 10-K (the “Report”) to the “Company,” “we,” “us,” “our”,
(“Apollo”) and similar words are to Apollo Medical Holdings, Inc., and its wholly owned subsidiaries and affiliated medical groups:
The following discussion and analysis provides information that management believes is relevant to an assessment and
understanding of our results of operations and financial operations. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein, and with our prior filings with the Securities and
Exchange Commission (the “SEC”).
Disclosure Regarding Forward-Looking Statements - Cautionary Statement
We caution readers that this Report contains “forward-looking statements”. Forward-looking statements, written, oral or otherwise, are
based on the Company’s current expectations or beliefs rather than historical facts concerning future events, and they are indicated
by words or phrases such as, "but not limited to", “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,”
“expect,” “project,” “believe,” “think,” “intend,” “plan,” “envision,” “continue,” “intend,” “target,” “contemplate,” “budgeted,” or “will” and
similar words or phrases or comparable terminology. Forward-looking statements involve risks and uncertainties. The Company
cautions that these statements are further qualified by important economic, competitive, governmental and technological factors that
could cause the Company’s business, strategy, or actual results or events to differ materially, or otherwise, from those in the forward-
looking statements. We have based such forward-looking statements on our current expectations, assumptions, estimates and
projections, and therefore there can be no assurance that any forward-looking statement contained herein, or otherwise made by the
Company, will prove to be accurate. The Company assumes no obligation to update the forward-looking statements.
The Company has a relatively limited operating history compared to others in the same business and is operating in a rapidly
changing industry environment; as a result its ability to predict results or the actual effect of future plans or strategies, based on
historical results or trends or otherwise, is inherently uncertain. While we believe that these forward-looking statements are
reasonable, they are merely predictions or illustrations of potential outcomes, and they involve known and unknown risks and
uncertainties, many beyond our control, that are likely to cause actual results, performance, or achievements to be materially different
from those expressed or implied by such forward-looking statements. Factors that could have a material adverse effect on the
operations and future prospects of the Company on a condensed basis include those factors discussed under Item 1A “Risk Factors”
and Item 7, “Management’s Discussion and Analysis or Plan of Operation” in this Report, and include, but are not limited to, the
following:
¨ Our ability to attract and retain management, and to integrate and maintain technical information and management
information systems;
¨ Our ability to raise capital when needed and on acceptable terms and conditions;
¨
¨
The effect of laws and regulations that apply to our operations and industry;
The intensity of competition; and
¨ General economic conditions.
All written and oral forward-looking statements made in connection with this Report that are attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements,
you are cautioned not to place undue reliance on such forward-looking statements.
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ITEM 1. DESCRIPTION OF BUSINESS
Business Overview
Apollo Medical Holdings, Inc. and its affiliated physician groups (“ApolloMed”. “We”, “Our” or the “Company”) are a physician centric,
integrated healthcare delivery system serving Medicare, Commercial and Medi-Cal beneficiaries in California. ApolloMed’s
businesses operate primarily under risk and value-based contracts with health plans, Independent Physician Associations (“IPAs”),
Hospitals and the Centers for Medicare and Medicaid Services’ (“CMS”) Medicare Shared Savings Program. We believe each major
constituent of the healthcare delivery system, including patients, families, primary care physicians, specialists, acute care hospitals,
alternative sites of inpatient care, physician groups and health plans can benefit from better coordinated of care. We are positioned to
assist and provide “Best in Class” care coordination services to each of these constituents and assist in finding solutions to many of
the challenges associated with patient care in the inpatient and outpatient settings.
ApolloMed was incorporated in California in 2001, beginning operations at Glendale Memorial Hospital as a hospital based physician
group. The Company was organized around the admission and care of patients at inpatient facilities such as a hospital. We have
successfully grown our inpatient strategy in a competitive market by providing high quality care for our patients and innovative
solutions for our hospital and managed care clients by focusing on improving the inefficiencies associated with inpatient care and
reducing readmissions and improving outcomes through better care coordination. Currently, we provide inpatient services at over 28
hospitals and long-term acute care facilities in Los Angeles and Central California where we have contracted with over 50 Hospitals,
IPAs and health plans to provide a range of inpatient services including hospitalist, intensivist, physician advisor and consulting
services.
In 2012, the Company formed an Accountable Care Organization, ApolloMed ACO, to participate in CMS’ Medicare Shared Savings
Program. The ACO program is designed to work together with payors by aligning provider incentives. This alignment of provider
incentives is intended to improve quality and medical outcomes for patients across the ACO and achieve cost savings for Medicare.
We believe ApolloMed ACO is unique in that it leverages our best in class inpatient and outpatient capabilities.
As of April 30, 2013, ApolloMed has developed a network of over 300 hospitalists, primary care physicians and specialist physicians
through our owned and affiliated physician groups. We are in the process of forming a risk-bearing entity to enter the Medicare
Advantage, HMO-Medicaid and dual eligible markets.
Organizational History
On June 13, 2008, Siclone Industries, Inc. (“Siclone”), Apollo Acquisition Co., Inc., a wholly owned subsidiary of Siclone
(“Acquisition”), Apollo Medical Management, Inc. (“Apollo Medical”) and the shareholders of Apollo Medical entered into an
Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, Apollo Medical merged
with and into Acquisition, becoming a wholly owned subsidiary of Siclone. The former shareholders of Apollo Medical received
20,933,490 shares of Siclone’s common stock in the acquisition.
On July 1, 2008, the surviving entity (i.e., the combined entity of Acquisition and Apollo Medical) changed its name to Apollo Medical
Management, Inc. ("AMM"). On July 3, 2008, Siclone changed its name to Apollo Medical Holdings, Inc. Following the merger, the
Company is headquartered in Glendale, California.
On August 1, 2008, AMM completed negotiations and executed a formal Management Services Agreement with ApolloMed
Hospitalists (“AMH”), under which AMM will provide management services to AMH. The Agreement was effective as of August 1,
2008, and allows AMM, which operates as a Physician Practice Management Company, to consolidate AMH, which operates as a
Physician Practice, in accordance with ASC 810-10 “Consolidation of Entities Controlled By Contract” subsections. The Management
Services Agreement was amended on March 20, 2009 to allow for the calculation of the fee on a monthly basis with payment of the
calculated fee each month. AMH is controlled by Dr. Warren Hosseinion and Dr. Adrian Vazquez.
On February 15, 2011, the Company completed an acquisition, whereby Aligned Healthcare Group, Inc. became a wholly-owned
subsidiary of Apollo Medical Holdings, Inc. Pursuant to a Stock Purchase Agreement, dated February 15, 2011, by and among
Aligned Healthcare Group – California, Inc., Raouf Khalil, Jamie McReynolds, M.D. BJ Reese and BJ Reese & Associates, LLC and
the Company, under which the Company acquired all of the issued and outstanding shares of capital stock of Aligned Healthcare,
Inc., a California corporation (“AHI”), from AHI’s shareholders. AHI is engaged in the business of operating 24-hour physician call
centers and provides specialized care management services (See Note 17).
On August 2, 2011, Apollo Medical Holdings, Inc. entered into a stock purchase agreement (the “PCCM Purchase Agreement”) with
the sole shareholder of Pulmonary Critical Care Management, Inc. ("PCCM"), a provider of management services to the Los Angeles
Lung Center (“LALC”), under which the Company acquired all of the issued and outstanding shares of capital stock of PCCM (the
“PCCM Acquisition”) and the associated intangible asset in the management services agreement that PCCM has with LALC (the
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“PCCM Services Agreement”).
On August 1, 2012, Apollo entered into a stock purchase agreement (the “VMM Purchase Agreement”) with Dr. Eli Hendel, the sole
shareholder of Verdugo Medical Management, Inc. ("VMM"), a provider of management services pursuant to a management services
agreement (the “VMM MSA”) with Eli Hendel M.D. Inc. (“Hendel”), a medical group specializing in pulmonary and critical care patient
services, under which the Company will acquire all of the issued and outstanding shares of capital stock of VMM for $1,200.
Our Strategic Objectives
Patient satisfaction
·
· Quality care
·
Cost efficiency
Our Strategy
The principal components of our strategy are to:
·
·
Engage the patients we serve to help them make better decisions about their healthcare, clinically and economically
Employ our medical management and care coordination capabilities to improve the health and well being of the patients we
serve through improved outcomes and reduced inefficiencies in the healthcare delivery chain
· Work in collaboration at the local level with physicians and other healthcare providers to help them participate in a changing
healthcare landscape and provide them the knowledge and IT tools to achieve measurably better quality and lower costs
· Grow our inpatient business through expansion of services and geographic expansion
·
Expand our relationships with healthcare providers and facilities across the US to develop additional capabilities to participate
in the growing Medicare, Medicaid and dual eligible markets
Acquire and develop additional capabilities to participate in the growing healthcare market, especially the Medicare and dual
eligible segments, under both risk-bearing and value-based contracts
·
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Opportunities in Healthcare
Inpatient Opportunity
We believe that attractive growth opportunities exist for our inpatient business due to the increasing need for improved efficiencies in
the hospital from both payors and hospital management teams. Our physicians work closely with our partners to improve the care
given to patients and their families and enhance how care is coordinated within the hospital and upon discharge of the patient. We
have designed programs for some of the largest health plans and hospital chains in California to improve outcomes, reduce
overutilization, reduce Medi-Cal denial rates, optimize lengths of stay (LOS), optimize senior and commercial beddays/1000, improve
HCAHPS scores, improve hospital core measures, improve documentation and reduce 30-day readmissions. In addition, our
physicians consult with the hospital management teams to assist in RAC audits, Medi-Cal denial reviews, case management and
improving discharge management.
Accountable Care Organizations
In March 2010, President Barrack Obama signed into law The Patient Protection and Affordable Care Act and The Health Care and
Education Reconciliation Act of 2010, which we collectively refer to as the Affordable Care Act. The Affordable Care Act established
Accountable Care Organizations as a tool to improve quality and lower costs through increased care coordination in the Medicare
Fee-for-Service program, which covers approximately 75% of Medicare recipients, approximately 36 million eligible Medicare
beneficiaries.
CMS established the Medicare Shared Savings Program to facilitate coordination and cooperation among providers to improve the
quality of care for Medicare Fee-For-Service (FFS) beneficiaries and reduce unnecessary costs. Eligible providers, hospitals, and
suppliers may participate in the Shared Savings Program by creating or participating in an ACO.
The Shared Savings Program is designed to improve beneficiary outcomes and increase value of care by:
(i)
(ii)
(iii)
promoting accountability for the care of Medicare FFS beneficiaries;
requiring coordinated care for all services provided under Medicare FFS; and
encouraging investment in infrastructure and redesigned care processes.
The Shared Savings Program will reward ACOs that lower their growth in health care costs while meeting performance standards on
quality of care. Under the final Medicare Shared Savings Program, or MSSP rules, Medicare will continue to pay individual providers
and suppliers for specific items and services as it currently does under the FFS payment methodologies. The Shared Savings
Program rules require CMS to develop a benchmark for savings to be achieved by each ACO if the ACO is to receive shared savings
or for ACOs that have elected to accept responsibility for losses. An ACO that meets the program's quality performance standards will
be eligible to receive a share of the savings to the extent its assigned beneficiary medical expenditures are below its own medical
expenditure benchmark provided by CMS.
We have partnered primary care physicians and specialists to form ApolloMed ACO, which has been approved by CMS for
participation in the Medicare Shared Savings Program. We estimate that our ACO currently includes approximately 300 participating
providers in California. We will provide enhanced care coordination, population health management, data analytics and reporting,
information technology and other administrative capabilities to enable participating providers to deliver better care, improved health
and lower healthcare costs for their Medicare fee-for-service beneficiaries.
Senior Market Opportunity—Medicare Advantage
We believe that significant growth opportunities exist for patient-focused, physician-centric integrated groups in serving the growing
senior market. At present, approximately 51 million Americans are eligible for Medicare, the federal program that offers basic hospital
and medical insurance to people over 65 years old and some disabled people under the age of 65. According to the U.S. Census
Bureau, more than 2 million Americans turn 65 in the United States each year, and this number is expected to grow as the so-called
baby boomers continue to turn 65. In addition, many large employers that traditionally provided medical and prescription drug
coverage to their retirees have begun to curtail these benefits. Finally, the passage of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003, known as the MMA, increased the healthcare options available to Medicare beneficiaries through the
expansion of Medicare managed care plans through the Medicare Advantage program. We are in the process of forming a risk-
bearing entity to enter the Medicare Advantage, HMO-Medicaid and dual eligible markets.
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Medicaid Program and Dual Eligibles
Established in 1965, Medicaid is the largest publicly funded program in the United States, and provides health insurance to low-
income families and individuals with disabilities. Authorized by Title XIX of the Social Security Act, Medicaid is an entitlement program
funded jointly by the federal and state governments and administered by the states. The majority of funding is provided at the federal
level. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration within federal
standards. Eligibility is based on a combination of household income and assets, often determined by an income level relative to the
federal poverty level. Historically, children have represented the largest eligibility group.
Due to the Medicaid expansion provisions under the Affordable Care Act, CMS projects that Medicaid expenditures will increase from
approximately $450 billion in 2012 to approximately $900 billion by 2020. In addition, as part of the Affordable Care Act,
approximately 20 million additional people are expected to qualify for Medicaid beginning in 2014.
A portion of Medicaid beneficiaries are dual eligibles, low-income seniors and people with disabilities who are enrolled in both
Medicaid and Medicare. Based on CMS and Kaiser Family Foundation data, we estimate there are approximately 9 million dual
eligible enrollees with annual spending of approximately $320 billion. Only a small portion of the total spending on dual eligibles is
administered by managed care organizations across the US. Dual eligibles tend to consume more healthcare services due to their
tendency to have more chronic health issues. We believe this represents a significant opportunity for companies like ours that have
the capabilities to effectively manage this difficult population.
Competition
The healthcare industry is highly competitive. We compete for customers with many other healthcare providers, including local
physicians and practice groups as well as local, regional and national networks of physicians and healthcare companies.
Inpatient Business. The market for hospitalists within this industry is highly fragmented. The Company faces competition from
numerous small inpatient practices as well as large physician groups. Some of our competitors operate on a national level, such as
Emcare, Team Health and IPC, and may have greater financial and other resources available to them. In addition, because the
market for hospitalist services is highly fragmented and the ability of individual physicians to provide services in any hospital where
they have certain credentials and privileges, competition for growth in existing and expanding markets is not limited to our largest
competitors.
Accountable Care Organizations. We believe that competition for customers is generally based upon the reputation of the physician
treating the customer, the physician’s expertise, the physician’s demeanor and manner of engagement with the customer. We also
compete with hospitals, sophisticated provider groups, payors, and management service organizations in the creation, administration,
and management of ACOs.
Healthcare Reform
The Affordable Care Act enacted significant changes to various aspects of the U.S. health insurance industry. There are many
important provisions of the legislation that will require additional guidance and clarification in form of regulations and interpretations in
order to fully understand the impact of the legislation on our overall business, which we expect to occur over the next several years.
Certain significant provisions of the Affordable Care Act that will impact our business include, among others, establishment of ACO's,
reduced Medicare Advantage reimbursement rates, implementation of quality bonus for Star Ratings, stipulated minimum medical
loss ratios, non-deductible federal premium taxes assessed to health insurers and coding intensity adjustments with mandatory
minimums. The health care reform legislation is discussed more fully in the "Risk Factors" section of this report.
In June 2012, the United States Supreme Court upheld the constitutionality of the Affordable Care Act, with one limited exception
relating to its Medicaid expansion provision. The Supreme Court held that States could not be required to expand Medicaid or risk the
loss of federal funding for existing Medicaid programs. Beginning in January 2014, Medicaid coverage will be expanded to all
individuals under age 65 with incomes up to 133% of the federal poverty level, subject to the States' elections. The federal
government will pay the entire costs for Medicaid coverage for newly eligible beneficiaries for three years, from 2014 through 2016.
The federal share declines to 95% in 2017, 94% in 2018, 93% in 2019, and 90% in 2020 and subsequent years.
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Geographic Coverage
As of January 31, 2013, we provide hospitalist services at 28 acute-care hospitals and long-term acute care facilities in Los Angeles
and the Central Valley of California.
Professional Liability and Other Insurance Coverage
Our business has an inherent risk of claims of medical malpractice against our affiliated physicians and us. We or our independent
physician contractors pay premiums for third-party professional liability insurance that indemnifies us and our affiliated hospitalists on
a claims-made basis for losses incurred related to medical malpractice litigation. Professional liability coverage is required in order for
our affiliated hospitalists to maintain hospital privileges. All of our physicians carry first dollar coverage with limits of coverage with
limits of liability equal to $1,000,000 for all claims based on occurrence up to an aggregate of $3,000,000 per year.
We believe that our insurance coverage is appropriate based upon our claims experience and the nature and risks of our business. In
addition to the known incidents that have resulted in the assertion of claims, we cannot be certain that our insurance coverage will be
adequate to cover liabilities arising out of claims asserted against us, our affiliated professional organizations or our affiliated
hospitalists in the future where the outcomes of such claims are unfavorable. We believe that the ultimate resolution of all pending
claims, including liabilities in excess of our insurance coverage, will not have a material adverse effect on our financial position,
results of operations or cash flows; however, there can be no assurance that future claims will not have such a material adverse
effect on our business.
We also maintain worker’s compensation, director and officer, and other third-party insurance coverage subject to deductibles and
other restrictions in accordance with industry standards. We believe that our insurance coverage is appropriate based upon our
claims experience and the nature and risks of our business. However, we cannot assure that any pending or future claim will not be
successful or if successful will not exceed the limits of available insurance coverage.
Regulatory Matters
Significant Federal and State Healthcare Laws Governing Our Business
As a healthcare company, our operations and relationships with healthcare providers such as hospitals, other healthcare facilities,
and healthcare professionals are subject to extensive and increasing regulation by numerous federal, state, and local government
entities. These laws and regulations often are interpreted broadly and enforced aggressively by multiple government agencies,
including the U.S. Department of Health and Human Services Office of the Inspector General, or the ("OIG"), the U.S. Department of
Justice, and various state authorities. We have included brief descriptions of some, but not all, of the laws and regulations that affect
our business.
Imposition of sanctions associated with a violation of any of these healthcare laws and regulations could have a material adverse
effect on our business, financial condition and results of operations. The Company cannot guarantee that its arrangements or
business practices will not be subject to government scrutiny or be found to violate certain healthcare laws. Government
investigations and prosecutions, even if we are ultimately found to be without fault, can be costly and disruptive to our business.
Moreover, changes in healthcare legislation or government regulation may restrict our existing operations, limit the expansion of our
business or impose additional compliance requirements and costs, any of which could have a material adverse effect on our
business, financial condition and results of operations.
False Claims Acts
The federal False Claims Act imposes civil liability on individuals or entities that submit false or fraudulent claims for payment to the
federal government. The False Claims Act provides, in part, that the federal government may bring a lawsuit against any person
whom it believes has knowingly or recklessly presented, or caused to be presented, a false or fraudulent request for payment from
the federal government, or who has made a false statement or used a false record to get a claim for payment approved. Private
parties may initiate qui tam whistleblower lawsuits against any person or entity under the False Claims Act in the name of the
government and may share in the proceeds of a successful suit.
The federal government has used the False Claims Act to prosecute a wide variety of alleged false claims and fraud allegedly
perpetrated against Medicare and state healthcare programs. By way of illustration, these prosecutions may be based upon alleged
coding errors, billing for services not rendered, billing services at a higher payment rate than appropriate, and billing for care that is
not considered medically necessary. The government and a number of courts also have taken the position that claims presented in
violation of certain other statutes, including the federal Anti-Kickback Statute or the Stark Law, can be considered a violation of the
False Claims Act based on the theory that a provider impliedly certifies compliance with all applicable laws, regulations, and other
rules when submitting claims for reimbursement.
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Penalties for False Claims Act violations include fines ranging from $5,500 to $11,000 for each false claim, plus up to three times the
amount of damages sustained by the government. A False Claims Act violation may provide the basis for the imposition of
administrative penalties as well as exclusion from participation in governmental healthcare programs, including Medicare and
Medicaid. In addition to the provisions of the False Claims Act, which provide for civil enforcement, the federal government also can
use several criminal statutes to prosecute persons who are alleged to have submitted false or fraudulent claims for payment to the
federal government.
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A number of states have enacted false claims acts that are similar to the federal False Claims Act. Even more states are expected to
do so in the future because Section 6031 of the Deficit Reduction Act of 2005 ("DRA"), amended the federal law to encourage these
types of changes, along with a corresponding increase in state initiated false claims enforcement efforts. Under the DRA, if a state
enacts a false claims act that is at least as stringent as the federal statute and that also meets certain other requirements, the state
will be eligible to receive a greater share of any monetary recovery obtained pursuant to certain actions brought under the state’s
false claims act. The OIG, in consultation with the Attorney General of the United States, is responsible for determining if a state’s
false claims act complies with the statutory requirements. Currently, 19 states, including California have some form of state false
claims act.
Anti-Kickback Statutes
The federal Anti-Kickback Statute is a provision of the Social Security Act that prohibits as a felony offense the knowing and willful
offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, (1) the referral of a patient for items or
services for which payment may be made in whole or part under Medicare, Medicaid or other federal healthcare programs, (2) the
furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other federal healthcare
programs or (3) the purchase, lease, or order or arranging or recommending the purchasing, leasing or ordering of any item or service
reimbursable under Medicare, Medicaid or other federal healthcare programs. Patient Protection and Affordable Care Act (“PPACA”)
amended section 1128B of the Social Security Act to make it clear that a person need not have actual knowledge of the statute, or
specific intent to violate the statute, as a predicate for a violation. The OIG, which has the authority to impose administrative
sanctions for violation of the statute, has adopted as its standard for review a judicial interpretation which concludes that the statute
prohibits any arrangement where even one purpose of the remuneration is to induce or reward referrals. A violation of the Anti-
Kickback Statute is a felony punishable by imprisonment, criminal fines of up to $25,000, civil fines of up to $50,000 per violation and
three times the amount of the unlawful remuneration. A violation also can result in exclusion from Medicare, Medicaid or other federal
healthcare programs. In addition, pursuant to the changes of PPACA, a claim that includes items or services resulting from a violation
of the Anti-Kickback Statute is a false claim for purposes of the False Claims Act.
Due to the breadth of the Anti-Kickback Statute’s broad prohibitions, statutory exceptions exist that protect certain arrangements from
prosecution. In addition, the OIG has published safe harbor regulations that specify arrangements that also are deemed protected
from prosecution under the Anti-Kickback Statute, provided all applicable criteria are met. The failure of an activity to meet all of the
applicable safe harbor criteria does not necessarily mean that the particular arrangement violates the Anti-Kickback Statute, but these
arrangements may be subject to scrutiny and prosecution by enforcement agencies.
Some states have enacted statutes and regulations similar to the Anti-Kickback Statute, but which may be applicable regardless of
the payer source for the patient. These state laws may contain exceptions and safe harbors that are different from and/or more limited
than those of the federal law and that may vary from state to state.
Federal Stark Law
The federal Stark Law, also known as the physician self-referral law, generally prohibits a physician from referring Medicare and
Medicaid patients to an entity (including hospitals) providing ‘‘designated health services,’’ if the physician or a member of the
physician’s immediate family has a ‘‘financial relationship’’ with the entity, unless a specific exception applies. Designated health
services include, among other services, inpatient and outpatient hospital services, clinical laboratory services, certain imaging
services, and other items or services that our affiliated physicians may order. The prohibition applies regardless of the reasons for the
financial relationship and the referral; and therefore, unlike the federal Anti-Kickback Statute, intent to violate the law is not required.
Like the Anti-Kickback Statute, the Stark Law contains a number of statutory and regulatory exceptions intended to protect certain
types of transactions and business arrangements from penalty. Compliance with all elements of the applicable Stark Law exception is
mandatory.
The penalties for violating the Stark Law can include the denial of payment for services ordered in violation of the statute, mandatory
refunds of any sums paid for such services and civil penalties of up to $15,000 for each violation, double damages, and possible
exclusion from future participation in the governmental healthcare programs. A person who engages in a scheme to circumvent the
Stark Law’s prohibitions may be fined up to $100,000 for each applicable arrangement or scheme.
Some states have enacted statutes and regulations similar to the Stark Law, but which may be applicable to the referral of patients
regardless of their payer source and which may apply to different types of services. These state laws may contain statutory and
regulatory exceptions that are different from those of the federal law and that may vary from state to state.
Health Information Privacy and Security Standards
Among other directives, the Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996
("HIPAA"), required the Department of Health and Human Services, or the HHS, to adopt standards to protect the privacy and security
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of certain health-related information. The HIPAA privacy regulations contain detailed requirements concerning the use and disclosure
of individually identifiable health information by “HIPAA covered entities,” which include entities like the Company, our affiliated
hospitalists, and practice groups.
In addition to the privacy requirements, HIPAA covered entities must implement certain administrative, physical, and technical
security standards to protect the integrity, confidentiality and availability of certain electronic health information received, maintained,
or transmitted. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must
use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and
collection of healthcare claims.
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The American Recovery and Reinvestment Act enacted on February 18, 2009, included the Health Information Technology for
Economic and Clinical Health Act (HITECH) which modified the HIPAA legislation significantly. Pursuant to HITECH, certain
provisions of the HIPAA privacy and security regulations become directly applicable to “HIPAA business associates”.
Violations of the HIPAA privacy and security standards may result in civil and criminal penalties. Historically, these included: (1) civil
money penalties of $100 per incident, to a maximum of $25,000, per person, per year, per standard violated and (2) depending upon
the nature of the violation, fines of up to $250,000 and imprisonment for up to ten years. The passage of HITECH significantly
modified the enforcement structure, creating a tiered system of civil money penalties that range from $100 to $50,000 per violation,
with a cap of $1.5 million per year for identical violations. We must also comply with the “breach notification” regulations, which
implement certain provisions of HITECH. Under these regulations, in addition to reasonable remediation, covered entities must
promptly notify affected individuals in the case of a breach of “unsecured PHI,” which is defined by HHS guidance, as well as the
HHS Secretary and the media in cases where a breach affects more than 500 individuals. Breaches affecting fewer than 500
individuals must be reported to the HHS Secretary on an annual basis. The regulations also require business associates of covered
entities to notify the covered entity of breaches at or by the business associate. Formal enforcement of the new breach notification
regulations began on February 22, 2010.
We expect increased federal and state HIPAA privacy and security enforcement efforts. Under HITECH, State Attorney Generals now
have the right to prosecute HIPAA violations committed against residents of their states. In addition, HITECH mandates that the
Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates. It also tasks HHS with
establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a
percentage of the Civil Monetary Penalty fine or monetary settlement paid by the violator. This methodology for compensation to
harmed individuals is required to be in place by February 17, 2012.
Many states also have laws that protect the privacy and security of confidential, personal information. These laws may be similar to or
even more stringent than the federal provisions. Not only may some of these state laws impose fines and penalties upon violators, but
some may afford private rights of action to individuals who believe their personal information has been misused.
Financial Information and Privacy Standards
In addition to privacy and security laws focused on health care data, multiple other federal and state laws regulate the use and
disclosure of consumer’s financial information ("Personal Information"). Many of these laws also require administrative, technical, and
physical safeguards to prevent unauthorized use or disclosure of Personal Information, including mandated processes and
timeframes for notification of possible or actual breaches of Personal Information to the affected individual. The Federal Trade
Commission primarily oversees compliance with the federal laws relevant to us, while state laws are addressed by the state attorney
general or other respective state agencies. As with HIPAA, enforcement of laws protecting financial information is increasing.
Examples of relevant federal laws include the Fair Credit Reporting Act, the Electronic Communications Privacy Act, and the
Computer Fraud and Abuse Act.
Fee-Splitting and Corporate Practice of Medicine
Some states have laws that prohibit business entities, such as us, from practicing medicine, employing physicians to practice
medicine, exercising control over medical decisions by physicians, also known collectively as the corporate practice of medicine, or
engaging in certain arrangements, such as fee-splitting, with physicians. In some states these prohibitions are expressly stated in a
statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation.
The Company operates by maintaining long-term management contracts with affiliated professional organizations, which are each
owned and operated by physicians and which employ or contract with additional physicians to provide hospitalist services. Under
these arrangements, we perform only non-medical administrative services, do not represent that we offer medical services, and do
not exercise influence or control over the practice of medicine by the physicians or the affiliated professional organizations.
For financial reporting purposes, however, we consolidate the revenues and expenses of all our practice groups that we own or
manage because we have a controlling financial interest in these practices based on applicable accounting rules and as described in
our accompanying consolidated financial statements. In states where fee-splitting is prohibited between physicians and non-
physicians, the fees that we receive through our management contracts have been established on a basis that we believe complies
with the applicable state laws.
Some of the relevant laws, regulations, and agency interpretations in the State of California have been subject to limited judicial and
regulatory interpretation. Moreover, state laws are subject to change and regulatory authorities and other parties, including our
affiliated physicians, may assert that, despite these arrangements, we are engaged in the prohibited corporate practice of medicine
or that our arrangements constitute unlawful fee-splitting. If this occurred, we could be subject to civil or criminal penalties, our
contracts could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure our contractual
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arrangements.
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Deficit Reduction Act of 2005
Among other mandates, the Deficit Reduction Act of 2005, or the DRA, created a new Medicaid Integrity Program designed to
enhance federal and state efforts to detect Medicaid fraud, waste and abuse. Additionally, section 6032 of the DRA requires entities
that make or receive annual Medicaid payments of $5.0 million or more from any one state to provide their employees, contractors
and agents with written policies and employee handbook materials on federal and state False Claims Acts and related statues. At this
time, we are not required to comply with section 6032 because we receive less than $5.0 million in Medicaid payments annually from
any one state. However, we may likely be required to comply in the future as our Medicaid billings increase.
Other Federal Healthcare Compliance Laws
We are also subject to other federal healthcare laws.
In 1995, Congress amended the federal criminal statutes set forth in Title 18 of the United States Code by defining additional federal
crimes that could have an impact on our business, including “Health Care Fraud” and “False Statements Relating to Health Care
Matters.” The Health Care Fraud provision prohibits any person from knowingly and willfully executing, or attempting to execute, a
scheme to defraud any healthcare benefit program. As defined in this provision of Title 18, a “healthcare benefit program” can be
either a government or private payer plan. A violation of this statute may be charged as a felony offense and may result in fines,
imprisonment or both. PPACA amended section 1347 of Title 18 to provide that a person may be convicted under the Health Care
Fraud provision even in the absence of proof that the person had actual knowledge of, or specific intent to violate, the statute.
The False Statements Relating to Health Care Matters provision prohibits, in any matter involving a federal health care program,
anyone from knowingly and willfully falsifying, concealing or covering up, by any trick, scheme or device, a material fact, or making
any materially false, fictitious or fraudulent statement or representation, or making or using any materially false writing or document
knowing that it contains a materially false or fraudulent statement. A violation of this statute may be charged as a felony offense and
may result in fines, imprisonment or both.
Under the Civil Monetary Penalties law of the Social Security Act, a person, including any individual or organization, may be subject
to civil monetary penalties, treble damages and exclusion from participation in federal health care programs for certain specified
conduct. One provision of the Civil Monetary Penalties law precludes any person (including an organization) from knowingly
presenting or causing to be presented to any United States officer, employee, agent, or department, or any state agency, a claim for
payment for medical or other items or services that the person knows or should know (a) were not provided as described in the
coding of the claim, (b) is a false or fraudulent claim, (c) is for a service furnished by an unlicensed physician, (d) is for medical or
other items or service furnished by a person or an entity that is in a period of exclusion from the program or (e) are medically
unnecessary items or services. Violations of the law may result in penalties of up to $10,000 per claim, treble damages, and exclusion
from federal healthcare programs. In addition, the OIG may impose civil monetary penalties against any physician who knowingly
accepts payment from a hospital (as well as against the hospital making the payment) as an inducement to reduce or limit services
provided to Medicare or Medicaid program beneficiaries.
Other State Healthcare Compliance Provisions
In addition to the state laws previously described, we also are subject to other state fraud and abuse statutes and regulations. Many of
the states in which we operate or expand to have adopted a form of anti-kickback law, self-referral prohibition, and false claims and
insurance fraud prohibition. The scope of these laws and the interpretations of them vary from state to state and are enforced by state
courts and regulatory authorities, each with broad discretion. Generally, state laws reach to all healthcare services and not just those
covered under a governmental healthcare program. A determination of liability under any of these laws could result in fines and
penalties and restrictions on our ability to operate in these states. We cannot assure that our arrangements or business practices will
not be subject to government scrutiny or be found to violate applicable fraud and abuse laws.
Fair Debt Collection Practices Act
Some of our operations may be subject to compliance with certain provisions of the Fair Debt Collection Practices Act and
comparable state statutes. Under the Fair Debt Collection Practices Act, a third-party collection company is restricted in the methods
it uses to contact consumer debtors and elicit payments with respect to placed accounts. Requirements under state collection agency
statutes vary, with most requiring compliance similar to that required under the Fair Debt Collection Practices Act.
U.S. Sentencing Guidelines
The U.S. Sentencing Guidelines are used by federal judges in determining sentences in federal criminal cases. The guidelines are
advisory, not mandatory. With respect to corporations, the guidelines state that having an effective ethics and compliance program
may be a relevant mitigating factor in determining sentencing. To comply with the guidelines, the compliance program must be
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reasonably designed, implemented, and enforced such that it is generally effective in preventing and detecting criminal conduct. The
guidelines also state that a corporation should take certain steps such as periodic monitoring and appropriately responding to
detected criminal conduct. We have yet to develop a formal ethics and compliance program.
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Licensing, Certification, Accreditation and Related Laws and Guidelines
Our clinical personnel are subject to numerous federal, state and local licensing laws and regulations, relating to, among other things,
professional credentialing and professional ethics. Since the Company performs services at hospitals and other types of healthcare
facilities, it may indirectly be subject to laws applicable to those entities as well as ethical guidelines and operating standards of
professional trade associations and private accreditation commissions, such as the American Medical Association and the Joint
Commission on Accreditation of Health Care Organizations. There are penalties for non-compliance with these laws and standards,
including loss of professional license, civil or criminal fines and penalties, loss of hospital admitting privileges, and exclusion from
participation in various governmental and other third-party healthcare programs.
Professional Licensing Requirements
The Company’s affiliated hospitalists must satisfy and maintain their professional licensing in the states where they practice medicine.
Activities that qualify as professional misconduct under state law may subject them to sanctions, or to even lose their license and
could, possibly, subject us to sanctions as well. Some state boards of medicine impose reciprocal discipline, that is, if a physician is
disciplined for having committed professional misconduct in one state where he or she is licensed, another state where he or she is
also licensed may impose the same discipline even though the conduct occurred in another state. Professional licensing sanctions
may also result in exclusion from participation in governmental healthcare programs, such as Medicare and Medicaid, as well as
other third-party programs.
Employees
As of January 31, 2013, we had 10 full-time employees. None of our full-time employees is a member of a labor union, and we have
never experienced a work stoppage.
ITEM 1A. RISK FACTORS
If any of the following risks occur, our business, financial condition or results of operations could be materially harmed. The risks and
uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties may also impair its
business operations or financial condition. You should consider carefully the following factors, in addition to the other information
concerning the Company and its business, before you decide to buy or hold shares of our common stock.
Risk Relating to Our Business
The Company has a limited operating history that makes it difficult to reliably predict future growth and operating results.
Apollo Medical, the predecessor to our operating subsidiary, was incorporated on October 18, 2006, and served initially as the
management company for our affiliated medical group, ApolloMed Hospitalists. In addition, Apollo was awarded its ACO license
under CMS’ MSSP in June 2012. Apollo has limited experience operating an ACO or managed care organization. Accordingly, we
have a limited operating history upon which you can evaluate our business prospects, which makes it difficult to forecast ApolloMed’s
future operating results. The evolving nature of the current medical services industry increases these uncertainties. You must
consider the Company’s business prospects in light of the risks, uncertainties and problems frequently encountered by companies
with limited operating histories. Our ability to predict growth at any time in the future may be limited.
The growth strategy of the Company may not prove viable and expected growth and value may not be realized.
Our business strategy is to rapidly grow by managing a network of medical groups providing certain hospital-based services. Where
permitted by local law, we may also acquire such medical groups. Identifying quality acquisition candidates is a time-consuming and
costly process. There can be no assurance that we will be successful in identifying and establishing relationships with these and
other candidates. If the Company is successful in identifying and acquiring other businesses, there is no assurance that it will be able
to manage the growth of such businesses effectively.
The success of the Company’s growth strategy depends on the successful identification, completion and integration of
acquisitions.
The Company’s future success will depend on the ability to identify, complete, and integrate the acquired businesses with its existing
operations. The growth strategy will result in additional demands on our infrastructure, and will place further strain on limited
management, administrative, operational, financial and technical resources. Acquisitions involve numerous risks, including, but not
limited to:
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the possibility that we will not able to identify suitable acquisition candidates or consummate acquisitions on acceptable
terms, if at all;
possible decreases in capital resources or dilution to existing stockholders;
difficulties and expenses incurred in connection with an acquisition;
the diversion of management’s attention from other business concerns;
the difficulties of managing an acquired business;
the potential loss of key employees and customers of an acquired business; and
in the event that the operations of an acquired business do not meet expectations, we may be required to restructure
the acquired entity or write-off the value of some or all of the assets of the acquisition.
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Our future growth could be harmed if we lose the services of certain key personnel.
Our success depends to a significant extent on the continued contributions of our key management personnel, including our Chief
Executive Officer, Warren Hosseinion, M.D., for the management of our business and implementation of our business strategy. We
have entered into employment agreements with Dr. Hosseinion as well as our other named executive officers. The loss of Dr.
Hosseinion or other key management personnel could have a material adverse effect on our business, financial condition and results
of operations.
The healthcare industry is complex and intensely regulated at the federal, state, and local levels and government authorities
may determine that we have failed to comply with applicable laws or regulations.
As a company involved in the provision of healthcare services, we are subject to a myriad of federal, state, and local laws and
regulations. There are significant costs involved in complying with these laws and regulations. Moreover, if we are found to have
violated any applicable laws or regulations, we could be subject to civil and/or criminal damages, fines, sanctions, or penalties,
including exclusion from participation in governmental healthcare programs, such as Medicare and Medicaid. We may also be
required to change our method of operations. These consequences could be the result of current conduct or even conduct that
occurred a number of years ago. We also could incur significant costs merely if we become the subject of an additional investigation
or legal proceeding alleging a violation of these laws and regulations. We cannot predict whether a federal, state, or local government
will determine that we are not operating in accordance with law, or whether the laws will change in the future and impact our
business. Any of these actions could have a material adverse effect on our business, financial condition and results of operations.
The following is a non-exhaustive list of some of the more significant healthcare laws and regulations that affect us:
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federal laws, including the federal False Claims Act, that provide for penalties against entities and individuals which
knowingly or recklessly make claims to Medicare, Medicaid, and other governmental healthcare programs, as well as
third-party payors, that contain or are based upon false or fraudulent information;·
a provision of the federal Social Security Act, commonly referred to as the “anti-kickback” statute, that prohibits the
knowing and willful offering, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration, in cash
or in kind, in return for the referral or recommendation of patients for items and services covered, in or in part, by federal
healthcare programs such as Medicare and Medicaid;·
a provision of the Social Security Act, commonly referred to as the Stark Law or physician self-referral law, that (subject
to limited exceptions) prohibits physicians from referring Medicare patients to an entity for the provision of certain
“designated health services” if the physician or a member of such physician’s immediate family has a direct or indirect
financial relationship with the entity, and prohibits the entity from billing for services arising out of such prohibited
referrals;·
a provision of the Social Security Act that provides for criminal penalties for healthcare providers who fail to disclose
known overpayments;·
a provision of the Social Security Act that provides for civil monetary penalties for healthcare providers who fail to repay
known overpayments within 60 days of discovery, and also allows improper retention of known overpayments to serve
as a basis for false claims act violations;·
state law provisions pertaining to anti-kickback, self-referral and false claims issues, which typically are not limited to
relationships involving governmental payors;·
provisions of, and regulations relating to, HIPAA that provide penalties for knowingly and willfully executing a scheme or
artifice to defraud a healthcare benefit program or falsifying, concealing or covering up a material fact or making any
material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits,
items or services;·
provisions of HIPAA and HITECH limiting how covered entities and business associates may use and disclose PHI and
the security measures that must be taken in connection with protecting that information and related systems, as well as
similar or more stringent state laws;·
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federal and state laws that provide penalties for providers for billing and receiving payment from a governmental
healthcare program for services unless the services are medically necessary and reasonable, adequately and accurately
documented, and billed using codes that accurately reflect the type and level of services rendered; federal laws that
provide for administrative sanctions, including civil monetary penalties for, among other violations, inappropriate billing of
services to federal healthcare programs, payments by hospitals to physicians for reducing or limiting services to
Medicare or Medicaid patients , or employing or contracting with individuals or entities who/which are excluded from
participation in federal healthcare programs;
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federal and state laws and policies that require healthcare providers to enroll in the Medicare and Medicaid programs
before submitting any claims for services, to promptly report certain changes in their operations to the agencies that
administer these programs, and to re-enroll in these programs when changes in direct or indirect ownership occur or in
response to revalidation requests from Medicare and Medicaid;·
state laws that prohibit general business entities from practicing medicine, controlling physicians’ medical decisions or
engaging in certain practices, such as splitting fees with physicians;·
laws that prohibit non-domiciled entities from owning and operating medical practices in their states;·
provisions of the Social Security Act (emanating from the Deficit Reduction Act of 2005) that require entities that make
or receive annual Medicaid payments of $5 million or more from a single Medicaid program to provide their employees,
contractors and agents with written policies and employee handbook materials on federal and state false claims acts and
related statutes; that establish a new Medicaid Integrity Program designed to enhance federal and state efforts to detect
Medicaid fraud, waste, and abuse; and that increase financial incentives for both states and individuals to bring fraud
and abuse claims against healthcare companies; and·
federal and state laws and regulations restricting the techniques that may be used to collect past due accounts from
consumers, such as our patients, for services provided to the consumer.
Providers in the healthcare industry are the subject of federal and state investigations, as well as payer audits.
Due to our participation in government and private healthcare programs, we are sometimes involved in inquiries, reviews, audits and
investigations by governmental agencies and private payors of our business practices, including assessments of our compliance with
coding, billing and documentation requirements. Federal and state government agencies have active civil and criminal enforcement
efforts that include investigations of healthcare companies, and their executives and managers. Under certain circumstances, these
investigations can also be initiated by private individuals under whistleblower provisions which may be incentivized by the possibility
for private recoveries. The Deficit Reduction Act of 2005 revised federal law to further encourage these federal, state and individually-
initiated investigations against healthcare companies.
Responding to these audit and enforcement activities can be costly and disruptive to our business operations, even when the
allegations are without merit. If we are subject to an audit or investigation and a finding is made that we were incorrectly reimbursed,
we may be required to repay these agencies or private payors, or we may be subjected to pre-payment reviews, which can be time-
consuming and result in non-payment or delayed payment for the services we provide. We also may be subject to other financial
sanctions or be required to modify our operations.
Economic conditions or changing consumer preferences could adversely impact our business.
A downturn in economic conditions in one or more of the Company’s markets could have a material adverse effect on its results of
operations, financial condition, business and prospects. Although we attempt to stay informed of customer preferences, any
sustained failure to identify and respond to trends could have a material adverse effect on our results of operations, financial
condition, business and prospects.
We may be unable to scale our operations successfully.
Our growth strategy will place significant demands on our management and financial, administrative and other resources. Operating
results will depend substantially on the ability of our officers and key employees to manage changing business conditions and to
implement and improve our financial, administrative and other resources. If the Company is unable to respond to and manage
changing business conditions, or the scale of its operations, then the quality of its services, its ability to retain key personnel, and its
business could be harmed.
The Company’s success depends upon the ability to adapt to a changing market and continued development of additional
services.
Although we expect to provide a broad and competitive range of services, there can be no assurance of acceptance by the
marketplace. The procurement of new contracts by the Company may be dependent upon the continuing results achieved at the
current facilities, upon pricing and operational considerations, as well as the potential need for continuing improvement to existing
services. Moreover, the markets for such services may not develop as expected nor can there be any assurance that we will be
successful in its marketing of any such services.
Changes associated with reimbursement by third-party payers for the Company’s services may adversely affect operating
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results and financial condition.
The medical services industry is undergoing significant changes with third-party payers that are taking measures to reduce
reimbursement rates or in some cases, denying reimbursement altogether. There is no assurance that third-party payers will continue
to pay for the services provided by our affiliated medical groups. Failure of third party payers to adequately cover the medical services
so provided by the Company will have a material adverse effect on our results of operations, financial condition, business and
prospects.
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Changes in the rates or methods of third-party reimbursements may adversely affect our operations.
We derive the majority of our revenue from direct billings to governmental healthcare programs, such as Medicare and Medicaid, and
private health insurance companies. As a result, any negative changes in the rates or methods of reimbursement for the services we
provide would have a significant adverse impact on our revenue and financial results. Government funding for healthcare programs,
in particular, is subject to unpredictable statutory and regulatory changes, administrative rulings, interpretations of policy and
determinations by intermediaries, and governmental funding restrictions, all of which could materially impact program coverage and
reimbursements for our services.
The Medicare program reimburses for our services based upon the rates set forth in the Medicare Physician Fee Schedule, which
relies, in part, on a target-setting formula system called the Sustainable Growth Rate ("SGR"). Each year on January 1st, the
Medicare program updates the Physician Fee Schedule reimbursement rates. Many private payors use the Medicare Physician Fee
Schedule to determine their own reimbursement rates. Based on the SGR, the annual fee schedule update is adjusted to reflect the
comparison of actual expenditures to target expenditures. Because one of the factors for calculating the SGR is linked to the growth in
the U.S. gross domestic product ("GDP"), the SGR formula may result in a negative payment update if growth in Medicare
beneficiaries’ use of services exceeds GDP growth, a situation which has occurred every year since 2002 and the reoccurrence of
which we cannot predict.
Center for Medicare & Medicaid Services ("CMS") determined that, effective January 1, 2012, the SGR formula results in a payment
cut of approximately 27 percent. Congress, however, enacted the Temporary Payroll Tax Cut Continuation Act of 2011, which
blocked this cut through the end of February 2012. In February 2012, Congress passed the Middle Class Tax Relief and Job Creation
Act of 2012, which blocked the cut through the end of 2012. On January 1, 2013, Congress passed the American Taxpayer Relief Act,
which delays the payment cut for another year and replaces it with a “zero percent update” to the Medicare conversion factor (used to
calculate Medicare Physician Fee Schedule payments). While Congress has repeatedly intervened to mitigate the negative
reimbursement impact associated with the SGR formula, there is no guarantee that Congress will continue to do so in the future.
Moreover, the existing methodology may result in significant yearly fluctuations in the Physician Fee Schedule amounts, which may
be unrelated to changes in the actual costs of providing physician services. Unless Congress enacts a change in the SGR
methodology, the uncertainty regarding reimbursement rates and fluctuation will continue to exist.
Another provision that affects physician payments is an adjustment under the Medicare statute to reflect the geographic variation in
the cost of delivering physician services, by comparing those costs to the national average. This concerns the “work” component of
the Geographic Practice Cost Indices (GPCI). If Congress does not block this adjustment, payments would be decreased to any
geographic area with an index of less than 1.0. The Medicare and Medicaid Extenders Act of 2010 blocked cuts by providing a “floor”
of 1.0 through the end of 2011, and this protection was extended through the end of February 2012 by the Temporary Payroll Tax Cut
Continuation Act of 2011, and extended through the end of 2013 by the American Taxpayer Relief Act. Congress has convened a
House / Senate conference committee whose duties include consideration of whether to block the adjustment for an additional period.
Providing an additional period is controversial because of disagreement on how to offset the costs so that blocking the adjustment is
deficit neutral. Although Congress has extended the work GPCI floor several times, there is no guarantee that Congress will block the
adjustment in the future, which could result in a decrease in payments we receive for physician services.
Congress has a strong interest in reducing the federal debt, which may lead to new proposals designed to achieve savings by altering
payment policies. The Budget Control Act of 2011 (BCA) established a Joint Select Committee on Deficit Reduction, which had the
goal of achieving a reduction in the federal debt level of at least $1.2 trillion. That Committee did not draft a proposal by the BCA’s
deadline, with the result that automatic cuts in various federal programs will take place, beginning in January 2013. Although the
Medicare program is generally exempt from these cuts, Medicare payments to providers are not exempt. The BCA does, however,
provide that the Medicare cuts to providers may not exceed two percent. At this time it is unclear how this automatic reduction may be
applied to various Medicare healthcare programs, including physician reimbursement. Therefore it is not possible at this time to
estimate what impact, if any, the BCA will have on our business or results of operations.
As noted, the cuts described above will occur automatically as a matter of law. Many in Congress, however, want to achieve even
greater reductions in the federal debt, and they want to change entitlement programs, such as Medicare. It is difficult to assess
whether and to what extent Congress will alter Medicare payment policies.
Because governmental healthcare programs generally reimburse on a fee schedule basis rather than on a charge-related basis, we
generally cannot increase our revenues from these programs by increasing the amount we charge for our services. If our costs
increase, we may not be able to recover our increased costs from these programs. Government and private payors have taken and
may continue to take steps to control the cost, eligibility for, use and delivery of healthcare services as a result of budgetary
constraints, cost containment pressures and other reasons. We believe that these trends in cost containment will continue. These
cost containment measures and other market changes in non-governmental insurance plans have generally restricted our ability to
recover, or shift to non-governmental payors, any increased costs that we experience. Our business and financial operations may be
materially affected by these developments.
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We may be impacted by eligibility changes to government and private insurance programs.
Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or
participate in governmental programs may increase. A shift in payor mix from managed care and other private payors to government
payors or the uninsured may result in a reduction in our rates of reimbursement or an increase in our uncollectible receivables or
uncompensated care, with a corresponding decrease in our net revenue. Changes in the eligibility requirements for governmental
programs also could increase the number of patients who participate in such programs or the number of uninsured patients. Even for
those patients who remain with private insurance, changes in those programs could increase patient responsibility amounts, resulting
in a greater risk for us of uncollectible receivables. These factors and events could have a material adverse effect on our business,
financial condition and results of operations.
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We may have difficulty collecting payments from third-party payors in a timely manner.
We derive significant revenue from third-party payors, and delays in payment or audits leading to refunds to payors may impact our
net revenue. We assume the financial risks relating to uncollectible and delayed payments. In the current healthcare environment,
payors are continuing their efforts to control expenditures for healthcare, including proposals to revise coverage and reimbursement
policies. We may experience difficulties in collecting our revenue because third-party payors may seek to reduce or delay payment to
which we believe we are entitled. If we are not paid fully and in a timely manner for such services or there is a finding that we were
incorrectly paid, our revenues, cash flows, and financial condition could be materially adversely affected.
If we are unable to effectively adapt to changes in the healthcare industry, our business may be harmed.
Due to the importance of the healthcare industry in the lives of all Americans, federal, state, and local legislative bodies frequently
pass legislation and promulgate regulations relating to healthcare reform. It is reasonable to believe that there may be increased
federal oversight and regulation of the healthcare industry in the future. We cannot assure you as to the ultimate content, timing or
effect of any healthcare reform legislation, nor is it possible at this time to estimate the impact of potential legislation on our business.
It is possible that future legislation enacted by Congress or state legislatures could adversely affect our business or could change the
operating environment of our targeted customers. It is possible that the changes to the Medicare or other governmental healthcare
program reimbursements may serve as precedent to possible changes in other payors’ reimbursement policies in a manner adverse
to us. Similarly, changes in private payor reimbursements could lead to adverse changes in Medicare and other governmental
healthcare programs which could have a material adverse effect on our business, financial condition and results of operations.
Compliance with changing regulation of corporate governance and public disclosure, once the Company is subject to such
requirements, will result in significant additional expenses.
Changing laws, regulations, and standards relating to corporate governance and public disclosure for public companies, including the
Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and various rules and regulations
adopted by the Securities and Exchange Commission (the “SEC”), are creating uncertainty for public companies. The Company's
management will continue to invest significant time and financial resources to comply with both existing and evolving requirements for
public companies, which will lead, among other things, to significantly increased general and administrative expenses and a certain
diversion of management time and attention from revenue generating activities to compliance activities.
If we fail to remain current in our SEC reporting obligations, we could be removed from the OTCQB, which would adversely
affect the market liquidity for our securities.
Companies trading on the OTCQB, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934,
as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTCQB. If
we fail to remain current in our reporting requirements, we could be removed from the OTCQB. As a result, the market liquidity for our
securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market.
Our common stock is subject to the “penny stock” rules of the SEC, and trading in our securities is very limited, which
makes transactions in our common stock cumbersome and may reduce the value of an investment in our securities.
The SEC has adopted Rule 3a51-1 of the Securities and Exchange Act of 1934, as amended, which establishes the definition of a
"penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt,
Rule 15g-9 requires:
·
·
a broker or dealer to approve a person's account for transactions in penny stocks; and
a broker or dealer receives a written agreement for the transaction from the investor , setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
·
·
obtain financial information and investment experience objectives of the person; and
make a reasonable determination that the transactions in penny stocks are suitable for that person and the
person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, among other things:
·
·
sets forth the basis on which the broker or dealer made the suitability determination; and
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and
about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and
the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more
difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Trading on the OTCQB may be volatile and sporadic, which could depress the market price of our common stock and make
it difficult for our stockholders to resell their shares.
Our common stock is quoted on the OTCQB. Trading in stock quoted on the OTCQB is often thin and characterized by wide
fluctuations in trading prices due to many factors that may have little to do with our operations or business prospects. This volatility
could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTCQB is not a
stock exchange, and trading of securities on the OTCQB is often more sporadic than the trading of securities listed on a stock
exchange like NASDAQ or a New York Stock Exchange. Accordingly, our shareholders may have difficulty reselling any of their
shares.
We might need to raise additional capital, which might not be available.
We may require additional equity or debt financing for additional working capital for expansion, to consummate acquisitions or if we
suffer significant losses. In the event of additional financing is unavailable to us, we may be unable to expand or make acquisitions
and the price of our common stock may decline.
We may write off intangible assets, such as goodwill.
Our intangible assets, which consist primarily of goodwill related to our acquisitions, are subject to annual impairment testing. Under
current accounting standards, goodwill is tested for impairment on an annual basis and we may be subject to impairment losses as
circumstances change after an acquisition. If we record an impairment loss related to our goodwill, it could have a material adverse
effect on our results of operations for the year in which the impairment is recorded.
ACOs are new and unproven and CMS may discontinue, alter or radically change the MSSP program.
Company has invested resources in both acquiring the ACO license and in establishing initial infrastructure. Any material change to
the MSSP program and ACO license requirements, governance and operating rules, could provide a significant financial risk for
Company and alter the strategic direction of the Company thereby producing shareholder risk and uncertainty.
The Company operates in only one geographic state, California.
The Company’s business and operations are limited to one state, California. Any material changes by California with respect to
strategic, taxation and economics of healthcare delivery and reimbursements could produce an adverse effect on the continued
business operations of Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company’s corporate headquarters is located at 700 North Brand Boulevard, Suite 450, Glendale, California 91203. The lease
on our present corporate headquarters expires on January 14, 2017. We believe our present facilities are adequate to meet our
current and projected needs.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which
involve claims of medical malpractice related to medical services provided by our affiliated hospitalists. We may also become subject
to other lawsuits which could involve significant claims and/or significant defense costs.
We believe, based upon our review of pending actions and proceedings, that the outcome of such legal actions and proceedings will
not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such
actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.
ITEM 4. MINE SAFETY DISCLOSURE.
Not applicable.
16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Market Information
Our common stock is traded on the OTCQB under the symbol "AMEH". Following is a table presenting the closing sale prices for a
share of our common stock by fiscal quarter for the fiscal years 2013 and 2012
Fiscal Year ended January 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year ended January 31, 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Stockholders
$
$
High
Low
0.19 $
0.63
0.63
1.38
High
Low
0.26 $
0.24
0.19
0.17
0.09
0.10
0.20
0.47
0.16
0.14
0.14
0.05
As of April 30, 2013, as reported by the Company’s stock transfer agent, there were 330 holders of record of our common stock.
Within the holders of record of the Company's Common Stock are depositories such as Cede & Co., a nominee for The Depository
Trust Company (or DTC), that hold shares of stock for brokerage firms which, in turn, hold shares of stock for one or more beneficial
owners. Accordingly, the Company believes there are many more beneficial owners of its Common Stock whose shares are held in
"street name", not in the name of the individual shareholder.
Dividends
To date we have not paid any cash dividends on our common stock and we do not contemplate the payment of cash dividends in the
foreseeable future. Our future dividend policy will depend on our earnings, capital requirements, financial condition, and other factors
considered relevant to our ability to pay dividends.
Securities Authorized for Issuance under Equity Compensation Plans
For the year ended January 31, 2013, the Company granted stock options to management, employees and consultants as follows:
Number of
shares of
common
stock
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected)
Number of
shares of
common
stock to be
issued upon
exercise of
outstanding
options,
Weighted-
average
exercise price
of outstanding
options,
5,300,000 $
-
5,300,000 $
0.18
-
0.18
267,333
-
267,333
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Recent Sales of Unregistered Securities
We have issued and sold unregistered securities of the Company as disclosed below within the last three years. Unless otherwise
noted, the following sales of securities were effected in reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933 (as amended, the “Act”)t and Regulation D promulgated there under, and such securities may not be reoffered
or sold in the United States by the holders in the absence of an effective registration statement, or valid exemption from the
registration requirements, under the Act :
17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Purchaser
Date
Security Type
Aggregate
offering
price of
securities
sold for cash
Aggregate
underwriting
discounts
and
commissions
(13)
Aggregate
consideration
of securities
issued for
services (1)
Nature of
transaction
in which
securities
were issued
for services
Number of
shares or
units sold
Suresh Nihalani
Suresh Nihalani
Third Party Investor
Kanehoe Advisors, LLC
Third Party Investor
Gary Augusta
Shining Star Family Trust
Gary Augusta
Gary Augusta
SpaGus Capital Partners,
LLC
Gary Augusta
Gary Augusta
Gary Augusta
Gary Augusta
Gary Augusta
Third Party Investor
Kanehoe Advisors, LLC
Kanehoe Advisors, LLC
Warren Hosseinion, M.D.
Third Party Investor
Third Party Investor
Third Party Investor
Third Party Investor
SpaGus Ventures LLC
Third Party Investor
Mark Meyers
Mitch Creem
Third Party Investor
Mark Meyers
Third Party Investors
3/31/2010 Common Stock
7/16/2010 Common Stock
2/16/2011 Common Stock
3/15/2011 Common Stock
8/2/2011 Common Stock
12/1/2011 Common Stock
1/1/2012 Common Stock
1/1/2012 Common Stock
2/1/2012 Common Stock
2/29/2012 Common Stock
3/1/2012 Common Stock
3/1/2012 Common Stock
4/1/2012 Common Stock
5/1/2012 Common Stock
6/1/2012 Common Stock
9/15/2012 Common Stock
9/15/2012 Common Stock
9/15/2012 Common Stock
9/15/2012 Common Stock
9/15/2012 Common Stock
9/15/2012 Common Stock
9/15/2012 Common Stock
10/9/2012 Common Stock
10/9/2012 Common Stock
10/9/2012 Common Stock
10/18/2012 Common Stock
10/22/2012 Common Stock
12/14/2012 Common Stock
1/31/2013
12/21/2012-
1/31/2013
(12)
(12)
33,333
211,113
500,000
350,000
350,000
100,000
400,000
100,000
100,000
216,000
400,000
100,000
100,000
100,000
100,000
1,200,000
350,000
350,000
1,000,000
66,667
200,000
50,000
40,000
50,000
10,000
400,000
500,000
75,000
2.0
15.6
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
33
211
-
-
-
100
400
100
100
-
400
100
100
100
100
1,200
350
350
1,000
67
200
50
-
-
-
400
-
15,750
100,000
780,000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
18,826
146,842
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
8,967
29,856
105,000
63,000
70,000
14,900
59,600
14,900
14,700
25,661
47,520
11,880
14,880
13,880
11,880
480,000
105,000
164,500
420,000
28,000
84,000
21,000
20,000
25,000
5,000
168,000
210,000
-
-
-
(16)
(17)
(14)
(2)
(15)
(3)
(4)
(3)
(3)
(5)
(18)
(3)
(3)
(3)
(3)
(6)
(2)
(2)
(7)
(8)
(9)
(9)
(5)
(5)
(5)
(10)
(11)
-
-
-
(1) The amount shown in this column reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.
(2) Pursuant to the consulting agreement with Kaneohe Advisors LLC dated March 15, 2009, as amended.
(3) Pursuant to a consulting agreement with Augusta Advisors Corporation dated December 1, 2011.
(4) Pursuant to the amended Directors Agreement with Suresh Nihalani dated January 1, 2012.
(5) Pursuant to the Senior Secured Note agreement on February 1, 2012, as amended October 15, 2012, with SpaGus Capital
Partners, LLC.
(6) Pursuant to a consulting agreement dated August 1, 2012.
(7) Pursuant to the September 15, 2012 grant by the Company's Board of Directors for services as the Company's Chief Executive
Officer.
(8) Pursuant to the September 15, 2012 grant by the Company's Board of Directors for services as an employee.
(9) Pursuant to an accounting services agreement dated April 5, 2012.
(10) Pursuant to the Directors Agreement with Mr. Meyers dated October 18, 2012.
(11) Pursuant to the Directors Agreement with Mr. Creem dated October 18, 2012.
(12) Units of $50,000 par value 9% Senior Subordinated Callable Convertible Promissory Notes due February 15, 2016. Each unit
receives warrants to purchase 37,500 shares of the Company's common stock.
(13) Commissions and expenses paid to Syndicated Capital, Inc. ("Syndicated Capital"), the placement agent for the offering,
discussed in further detail below in ‘Item 7’ aggregated $92,374. Syndicated Capital also received warrants to purchase 176,000
shares of the Company's common stock, which had a fair value of $54,468. Commissions, expenses and the fair value of the
warrants received by Syndicated Capital have allocated to the units purchased on a pro-rata basis.
(14) Pursuant to a stock purchase agreement dated February 15, 2011.
(15) Pursuant to a stock purchase agreement dated August 2, 2011.
(16) Pursuant to the Directors Agreement with Mr. Nihalani dated October 27, 2008 in which an aggregate of 188,887 shares of
common stock were issued.
(17) Pursuant to the amended Directors Agreement with Mr. Nihalani dated July 16, 2010.
(18) Pursuant to the Directors Agreement with Gary Augusta dated March 7, 2012.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
18
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENTS’ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as
our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our consolidated
financial statements and the related notes included in this Report. This discussion contains forward-looking statements that are
subject to known and unknown risks. Actual results and the timing of events may differ significantly from those expressed or implied in
such forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and
elsewhere in this Report. The operating results for the periods presented were not significantly affected by inflation.
Overview
Apollo Medical Holdings, Inc. and its affiliated physician groups are a physician centric, integrated healthcare delivery system serving
Medicare, Commercial and Medi-Cal beneficiaries in California. As of April 30, 2013, ApolloMed’s physician network consisted of over
300 hospitalists, primary care physicians and specialist physicians primarily through our owned and affiliated physician groups.
Recent Developments
On July 10, 2012, ApolloMed ACO was notified that it had been selected by the Centers for Medicare and Medicaid Services (“CMS”)
to participate in the Medicare Shared Savings Program (“MSSP”). The Medicare Shared Savings Program model is designed to
encourage the development of Accountable Care Organizations (“ACOs”), which can be comprised of hospitals, doctors and other
health care providers who work together and are accountable for quality outcomes and the overall patient experience, while reducing
the growth in Medicare expenditures.
The ACO concept places a degree of financial responsibility on the providers in hopes of improving care management and limiting
unnecessary expenditures while continuing to provide patients freedom to selection of their medical services. The Company believes
that in establishing an ACO, ApolloMed will be able to leverage its medical management expertise to efficiently manage patient’s
costs through improved communication between physicians and their patients, which should lead to improved patient outcomes and
lower readmission rates. ACOs participating in the shared-savings payment model will be able to share in up to 50 percent of their
achieved savings, depending on how well they exceed minimum quality performance standards. The Company’s executive
management and certain of its physicians have focused efforts to develop the infrastructure to support the ACO program, which
included identifying participating physicians, hiring support staff, and identifying technology and facilities to support the anticipated
growth. ApolloMed will be required to raise additional capital to fund this opportunity, as the initial outlay of funds will be required in
advance of any potential future revenues, and this initial outlay maybe substantial.
On August 1, 2012, Apollo entered into a stock purchase agreement (the “VMM Purchase Agreement”) with Dr. Eli Hendel, the sole
shareholder of Verdugo Medical Management, Inc. ("VMM"), a provider of management services pursuant to a management services
agreement (the “VMM MSA”) with Eli Hendel M.D. Inc. (“Hendel”), a medical group specializing in pulmonary and critical care patient
services, under which the Company will acquire all of the issued and outstanding shares of capital stock of VMM for $1,200. In
addition, the Company’s subsidiary, ApolloMed ACO, entered into a consulting agreement with Dr. Hendel as chairman of its ACO
advisory board in which Dr. Hendel received the right to acquire 1,200,000 shares of the Company’s restricted common stock for
$0.001 per share. In the event the consulting agreement is terminated for “any or no reason”, the Company will have the right, but not
the obligation, to repurchase at $0.001 per share 800,000 shares if the agreement is terminated within twelve months of the date of
the VMM Purchase Agreement, and repurchase 400,000 shares if the agreement is terminated within 24 months. The fair value of the
shares was estimated to be $480,000.
19
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On January 31, 2013 the Company raised in a private placement offering of $880,000 in par value 9% Senior Subordinated Callable
Convertible Promissory Notes maturing February 15, 2016 (the “9% Notes”). The 9% Notes bear interest at a rate of 9% per annum,
payable semi-annually on August 15 and February 15. The principal of the 9% Notes plus any accrued yet unpaid interest is
convertible at any time by the holder at a conversion price of $0.40 per share of Common Stock, subject to adjustment for stock splits,
stock dividends and reverse stock splits, and is callable in full or in part by the Company at any time after January 31, 2015. The
holders of the 9% Notes received warrants to purchase 660,000 shares of the Company’s common stock at an exercise price of $0.45
per share, subject to adjustment for stock splits, reverse stock splits and stock dividends, and which are exercisable at any date prior
to January 31, 2018. The Company will use the net proceeds (after issuance costs) of approximately $776,000 for general corporate
purposes.
Factors Affecting Operating Results
Rate Changes by Government Sponsored Programs
The Medicare program reimburses for our services based upon the rates set forth in the annually updated Medicare Physician Fee
Schedule, which relies, in part, on a target-setting formula system called the Sustainable Growth Rate (SGR). Many private payors
use the Medicare Physician Fee Schedule to determine their own reimbursement rates. Based on the SGR, the annual Medicare
Physician Fee Schedule update is adjusted to reflect the comparison of actual expenditures to target expenditures. Because one of
the factors for calculating the SGR is linked to the growth in the U.S. GDP, the SGR formula may result in a negative payment update
if growth in Medicare beneficiaries’ use of services exceeds GDP growth, a situation which has occurred every year since 2002 and
the reoccurrence of which we cannot predict.
Another provision that affects physician payments is an adjustment under the Medicare statute to reflect the geographic variation in
the cost of delivering physician services, by comparing those costs to the national average. This concerns the “work” component of
the Geographic Practice Cost Indices (GPCI). If Congress does not block this adjustment, payments would be decreased to any
geographic area with an index of less than 1.0. The Middle Class Tax Relief and Job Creation Act of 2012 prevented the GPCI
payment adjustment through the end of 2012. With enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013,
again, the GPCI payment adjustment has been delayed through the end of 2013. Although Congress has delayed the GPCI payment
adjustment several times, there is no guarantee that Congress will block the adjustment in the future, which could result in a
decrease in payments we receive for physician services. The magnitude of Medicare cuts that may be made through budget
agreements is unclear. However, under our provider compensation plan, any decrease in reimbursement rates would reduce our
physician incentive payments.
Healthcare Reform
In March 2010, the Affordable Care Act (ACA) was enacted. The ACA includes a number of provisions that may affect our Company,
although the impact of many of the changes will be unknown until they are implemented, which in some cases will not occur for a
couple of years. The impact of some of these provisions may be positive, such as the expansion in the number of individuals with
health insurance, the ten percent Medicare bonus payment for primary care services (including outpatient and nursing home visits)
from 2011 through 2015 to primary care practitioners for whom primary care services represented a minimum of 60 percent of
Medicare allowed charges in a prior period, and the increase in Medicaid rates in 2013 and 2014 for primary care services. The
impact of other provisions is unknown at this time, such as the establishment of an Independent Payment Advisory Board that could
recommend changes in payment for physicians under certain circumstances not earlier than January 15, 2014, which the federal
Department of Health and Human Services (HHS) generally would be required to implement unless Congress enacts superseding
legislation. Fraud and abuse penalty increases and the expansion in the scope of the reach of the federal False Claims Act and
government enforcement tools may adversely impact entities in the healthcare industry, including our Company.
The impact of certain provisions will depend upon the ultimate method of implementation. For example, the ACA requires HHS to
develop a budget neutral value-based payment modifier that provides for differential payment under the Medicare Physician Fee
Schedule for physicians or groups of physicians that is linked to quality of care furnished compared to cost. HHS has begun
implementing the modifier through the Medicare Physician Fee Schedule rulemaking for 2013, by, among other things, specifying the
initial performance period and how it will apply the upward and downward modifier for certain physicians and physician groups
beginning January 1, 2015, as well as all physicians and physician groups starting not later than January 1, 2017. During this
rulemaking process, HHS considered whether it should develop a value-based payment modifier option for hospital-based
physicians, but ultimately, HHS decided to deal with this issue in future rulemaking. The impact of this payment modifier cannot be
determined at this time.
In addition, certain provisions of the ACA authorize voluntary demonstration projects, which include the development of bundling
payments for acute, inpatient hospital services, physician services, and post-acute services for episodes of hospital care. The
Medicare Acute Care Episode Demonstration is currently underway at five health care system demonstration sites. The impact of
these projects on our Company cannot be determined at this time.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Professional Liability Rates
Medical malpractice insurance premium rates are affected by a variety of factors both internal, including our own loss experience and
the associated defense costs, and external such as medical malpractice loss experience for internal medicine physicians, which
varies greatly across different regions. Other factors include varying state laws covering tort reform, the local climate for large jury
awards, the rate of investment income and reinsurance costs, all of which can result in wide variations in premium rates not only from
region to region, but also from year to year. Although our malpractice premium rates have remained relatively stable over the last two
years, the factors discussed above could lead to variations in future costs.
20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Critical Accounting Policies
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires
management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and
results of operations. Specifically, critical accounting estimates have the following attributes: (i) we are required to make assumptions
about matters that are uncertain at the time of the estimate; and (ii) different estimates we could reasonably have used, or changes in
the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on
historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These
estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These
changes have historically been minor and have been included in the consolidated financial statements as soon as they became
known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the
application of those policies, management believes that our consolidated financial statements are fairly stated in accordance with
accounting principles generally accepted in the United States, and meaningfully present our financial condition and results of
operations.
We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of
our consolidated financial statements:
Principals of Consolidation
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 of Notes to Consolidated Financial Statements
describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these
significant accounting policies are considered to be critical accounting policies, as defined below.
Our consolidated financial statements include the accounts of Apollo Medical Holdings, Inc. and its wholly owned subsidiaries AMM,
Aligned Healthcare Group (“AHI”), ApolloMedACO, PCCM, and VMM as well as PPC’s managed under long-term management
service agreements including AMH, LALC and Hendel. Some states have laws that prohibit business entities, such as Apollo, from
practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (collectively
known as the corporate practice of medicine), or engaging in certain arrangements with physicians, such as fee-splitting. In
California, we operate by maintaining long-term management service agreements with the PPC’s, which are each owned and
operated by physicians, and which employ or contract with additional physicians to provide hospitalist services. Under the
management agreements, we provide and perform all non-medical management and administrative services, including financial
management, information systems, marketing, risk management and administrative support. The management agreements typically
have an initial term of 20 years unless terminated by either party for cause. The management agreements are not terminable by the
PMC’s, except in the case of gross negligence, fraud, or other illegal acts by Apollo, or bankruptcy of Apollo.
Through the management agreements and our relationship with the stockholders of the PPC’s, we have exclusive authority over all
non-medical decision making related to the ongoing business operations of the PPC’s. Consequently, we consolidate the revenue
and expenses of the PPCs from the date of execution of the management agreements.
Revenue Recognition
Revenue consists of contracted and fee-for-service revenue. Revenue is recorded in the period in which services are rendered. Our
revenue is principally derived from the provision of healthcare staffing services to patients within healthcare facilities. The form of
billing and related risk of collection for such services may vary by customer. The following is a summary of the principal forms of our
billing arrangements and how net revenue is recognized for each.
Contracted revenue represents revenue generated under contracts in which we provide physician and other healthcare staffing and
administrative services in return for a contractually negotiated fee. Contracted revenue represented approximately 89% of our
revenues in the year ended January 31, 2013. Contract revenue consists primarily of billings on a per admission basis or based on
hours of healthcare staffing provided at agreed-to hourly rates. Hourly revenue is recognized as the hours are worked by our staff and
contractors. Additionally, contracted revenue also includes supplemental revenue from hospitals where we may have a fee-for-
service contract arrangement or provide physician advisory services to the medical staff at specific facility. Contract revenue for the
supplemental billing in such cases is recognized based on the terms of each individual contract. Such contract terms generally either
provides for a fixed monthly dollar amount or a variable amount based upon measurable monthly activity, such as hours staffed,
patient visits or collections per visit compared to a minimum activity threshold. Such supplemental revenues based on variable
arrangements are usually contractually fixed on a monthly, quarterly or annual calculation basis considering the variable factors
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
negotiated in each such arrangement. Such supplemental revenues are recognized as revenue in the period when such amounts are
determined to be fixed and therefore contractually obligated as payable by the customer under the terms of the respective agreement.
Additionally, we derive a portion of our revenue as a contractual bonus from collections received by our partners and such revenue is
contingent upon the collection of third-party billings. These revenues are not considered earned and therefore not recognized as
revenue until actual cash collections are achieved in accordance with the contractual arrangements for such services.
21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fee-for-service revenue represents revenue earned under contracts in which we bill and collect the professional component of
charges for medical services rendered by our contracted and employed physicians. Under the fee-for-service arrangements, we bill
patients for services provided and receive payment from patients or their third-party payers. Fee-for-service revenue is reported net of
contractual allowances and policy discounts. All services provided are expected to result in cash flows and are therefore reflected as
net revenue in the financial statements.
Fee-for-service revenue is recognized in the period in which the services are rendered to specific patients and reduced immediately
for the estimated impact of contractual allowances in the case of those patients having third-party payer coverage.
The recognition of net revenue (gross charges less contractual allowances) from such visits is dependent on such factors as proper
completion of medical charts following a patient visit, the forwarding of such charts to our billing center for medical coding and
entering into our billing system and the verification of each patient’s submission or representation at the time services are rendered as
to the payer(s) responsible for payment of such services. Revenue is recorded based on the information known at the time of entering
of such information into our billing systems as well as an estimate of the revenue associated with medical services provided.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consists of amounts due from third-party payors, including government sponsored Medicare and
Medicaid programs, and insurance companies, and amounts due from hospitals, and patients. Accounts receivable are recorded and
stated at the amount expected to be collected.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of
accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic
trends and changes in customer payment patterns to evaluate the adequacy of these reserves. We also regularly analyze the ultimate
collectability of accounts receivable after certain stages of the collection cycle using a historical analysis to determine the percentage
of invoiced amounts subsequently collected and adjustments are recorded when necessary. Reserves are recorded primarily on a
specific identification basis.
Goodwill and Other Intangible Assets
Under FASB ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill and indefinite-lived intangible assets are reviewed at
least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives.
On at least an annual basis, management assesses whether there has been any impairment in the value of goodwill by first
comparing the fair value to the net carrying value. If the carrying value exceeds its estimated fair value, a second step is performed to
compute the amount of the impairment. An impairment loss is recognized if the implied fair value of the asset being tested is less than
its carrying value. In this event, the asset is written down accordingly. The fair values of goodwill impairment testing are determined
using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the
circumstances. The fair value is evaluated based on market capitalization determined using average share prices within a reasonable
period of time near the selected testing date (fiscal year-end).
Indefinite-lived intangible assets are tested at least annually for impairment. Impairment for intangible assets with indefinite lives
exists if the carrying value of the intangible asset exceeds its fair value. The fair values of indefinite-lived intangible assets are
determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the
circumstances.
Medical Malpractice Liability Insurance
Our business has an inherent risk of claims of medical malpractice against our affiliated physicians and us. We or our independent
physician contractors pay premiums for third-party professional liability insurance that indemnifies us and our affiliated hospitalists on
a claims-made basis for losses incurred related to medical malpractice litigation. Professional liability coverage is required in order for
our affiliated hospitalists to maintain hospital privileges. All of our physicians carry first dollar coverage with limits of coverage with
limits of liability equal to $1,000,000 for all claims based on occurrence up to an aggregate of $3,000,000 per year.
We believe that our insurance coverage is appropriate based upon our claims experience and the nature and risks of our business. In
addition to the known incidents that have resulted in the assertion of claims, we cannot be certain that our insurance coverage will be
adequate to cover liabilities arising out of claims asserted against us, our affiliated professional organizations or our affiliated
hospitalists in the future where the outcomes of such claims are unfavorable. We believe that the ultimate resolution of all pending
claims, including liabilities in excess of our insurance coverage, will not have a material adverse effect on our financial position,
results of operations or cash flows; however, there can be no assurance that future claims will not have such a material adverse
effect on our business.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Recently Adopted Accounting Principles
See Note 2 to the Consolidated Financial Statements for information regarding recently adopted accounting principles.
22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Results of Operations and Operating Data
Year Ended January 31, 2013 vs. Year Ended January 31, 2012
2013
2012
Change
Change
excluding
2013
acquisition
(1)
Percentage
change
Percentage
change
excluding
2013
acquisition
(1)
NET REVENUES
COST OF SERVICES
GROSS PROFIT
Operating expenses:
General and administrative
Depreciation and amortization
Total operating expenses
$ 7,776,131 $ 5,110,806 $ 2,665,325 $ 2,211,863
1,941,513
270,350
6,316,164
1,459,967
2,183,765
481,560
4,132,399
978,407
3,517,536
20,918
3,538,454
1,379,153
12,589
1,391,742
2,138,383
8,329
2,146,712
1,805,672
8,329
1,814,001
52.2%
52.8%
49.2%
155.1%
66.2%
154.2%
43.3%
47.0%
27.6%
130.9%
66.2%
130.3%
LOSS FROM OPERATIONS
$(2,078,487) $ (413,335) $(1,665,152) $(1,543,650)
402.9%
373.5%
NET REVENUES
COST OF SERVICES
GROSS PROFIT
Operating expenses:
General and administrative
Depreciation and amortization
Total operating expenses
LOSS FROM OPERATIONS
% of revenues
2013
2012
100.0%
81.2%
18.8%
45.2%
0.3%
45.5%
-26.7%
100.0%
80.9%
19.1%
27.0%
0.2%
27.2%
-8.1%
Net revenues are comprised of net billings under the various fee structures from health plans, medical groups/IPA’s and hospitals,
and income from service fee agreements. The increase was attributable to:
$
1,787,149
New hospital contracts, increased same-market area growth and expansion of services with existing medical group
clients at new hospitals.
453,462 Acquisition of VMM in 2013.
424,714 Full year of operations by PCCM acquired in 2012.
$
2,665,325 Total increase in net revenues
(1) Excluding the 2013 acquisition of Verdugo Medical Management, which has a long term management service agreement with Eli
Hendel, M.D. (“Hendel’) the increase in net revenues from 2012 would have been $2,211,863.
Cost of services are comprised primarily of physician compensation and related expenses. The (increase) decrease was attributable
to:
$
(1,522,647)
Increase in physician costs attributable to new physicians hired to support new contracts.
Portion of Dr. Hosseinion's compensation not spent as a practicing physician classified in general and
administrative expense
Increase in physician stock-based compensation
124,250
(526,877)
(242,251) Acquisition of VMM in 2013.
(16,240)
Increase in other physician costs due to physician increase
$
(2,183,765) Total increase in cost of services
Cost of services as percentage of net revenues increased principally due to the increase in stock-based compensation in 2013.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
General and administrative expenses include all salaries, benefits, supplies and operating expenses, including billing and collections
functions, and our corporate management and overhead not specifically related to the day-to-day operations of our physician group
practices. The (increase) decrease was attributable to:
$
$
(1,353,118)
(136,673)
(193,447)
(166,117)
(332,711)
43,684
(2,138,383)
Increase in non-cash stock compensation due to restricted stock grants to employees, directors and consultants.
Increase in consulting and professional fees to support the continuing growth of our operations.
Increase in personnel, services and related expenses related to the ACO effort.
Increase in administrative personnel to support in-house billing and collection, and to support growth in the
business
Increase due to the acquisition of VMM in 2013
Reduction in bad debt expense due to establishment of in-house billing and collection function in 2013
Total increase in general and administrative expense
Loss from operations increased primarily due to increase in stock based compensation that totaled $1,846,662.
23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The increase in loss on change in fair value of warrant and derivative liabilities reflects the change in the fair value of the Company’s
warrant and derivative liabilities as follows:
Loss on change in fair value of derivative liabilities
2013
5,853,855 $
$
2012
Change
- $
5,853,855
Interest expense increased due to primarily to higher discount amortization, and interest expense and financing cost amortization
expense related to borrowing associated with the Senior Secured Notes, the placement of $880,000 of 9% Senior Subordinated
Convertible Notes, and the modification of the 10% Senior Subordinated Convertible Notes.
Interest expense
2013
2012
Change
$
930,176 $
304,034 $
626,142
Net loss increased primarily due to increase in non-cash stock compensation, the loss on change in the fair value of the
Company’s warrant and derivative liabilities, and the increase in interest expense associated with the increased borrowings and
additional debt discount amortization.
Net loss
2013
2012
Change
$
8,904,564 $
720,346 $
8,184,218
Year Ended January 31, 2012 vs. Year Ended January 31, 2011
Net revenue increased to $5,110,806 or 31.2% for the twelve months ended January 31, 2012, compared to revenues of $3,896,584
for the comparable twelve months ended January 31, 2011. The increase was directly attributable to an increase in new contracts
during the year and the acquisition of PCCM.
Cost of services totaled $4,132,399 for the twelve months ended January 31, 2012, compared to $3,314,722 for the corresponding
twelve months ended January 31, 2011. Cost of services were 80.9% of net revenues for the twelve months ended January 31, 2012,
down from 85.1% of revenues for the comparable twelve month period ended January 31, 2011. Cost of services includes the payroll
and consulting costs of the physicians, all payroll related costs, costs for all medical malpractice insurance and physician privileges.
The reduction in the cost of services as percentage of revenue is primarily due to new hospital contracts for 2011, increased volume
at existing hospitals and leveraging of fixed costs. Total physician compensation increased to $3,814,698 or 74.6% of revenues for
the twelve months ended January 31, 2012, up 26.7% compared to $3,010,716 or 77.3% of revenues for the twelve month period
ended January 31, 2011. The increases in physician costs are directly related to new contracts started in the period, offset by
increased revenue per physician.
General and administrative expenses increased $812,504, or 143.4%, to $1,379,153 or 27% of net revenue, for the twelve months
ended January 31, 2012, as compared to $566,649, or 15% of net revenue, for the twelve months ended January 31, 2011. For the
twelve months ended January 31, 2012, bad debt expense was $118,077 compared to a reversal of $76,231 for the twelve month
period ended January 31, 2011. The increase in bad debt expense was due to a write off of historical accounts receivable amounts
deemed uncollectible at January 31, 2012, compared to the reversal of a previous recorded provision for doubtful accounts at January
31, 2011. The Company recorded stock compensation expense of $181,733 for the twelve months ended January 31, 2012,
compared with $119,530 in the year ended January 31, 2011. The Company incurred expenses of $189,610 associated with Aligned
Healthcare transaction which closed on February 15, 2011. The Company recognized an impairment loss of $210,000 relating to our
investment in Aligned Healthcare Group Inc. based upon the completion of the Company’s annual goodwill impairment test. The
cause of the impairment was due to contracts not materializing as anticipated at the time of closing the Acquisition and management
has decided to focus its energies on new higher growth initiatives. Additionally the Company incurred higher legal, salary and
consulting expenses and overhead costs related to the continuing growth of our operations in the 12 months ended January 31, 2012
as compared to 12 months ended January 31, 2011.
24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Depreciation and amortization expense was $12,589 and $11,198 for the twelve months ended January 31, 2012 and 2011,
respectively.
The Company reported a loss from operations of $413,335 for the twelve months ended January 31, 2012, compared to income from
operations of $4,015 in the fiscal year ended January 31, 2011. The decrease in income from operations was primarily due to write
off of accounts receivable, expenses associated with the acquisition of Aligned Healthcare Group, higher legal costs associated with
acquisitions and new growth opportunities and consulting expenses during the year ended January 31, 2012 as described above.
Interest expense and financing costs were $304,034 for the twelve months ended January 31, 2012, compared to interest and
financing expenses of $163,931 for the twelve months ended January 31, 2011. Interest expense in 2012 included $131,534 of
interest expense related to our 10% Senior Subordinated Callable Convertible Notes. Financing fees included the amortization of pre-
paid commissions of $37,500 that were paid to the placement agent and a charge of $120,000 related to an exercise price adjustment
pertaining to the warrants that were issued in connection with our 10% Senior Subordinated Callable Convertible Notes.
The Company reported a net loss of $720,346 for the twelve months ended January 31, 2012, compared to a net loss of $156,331
reported for the twelve months ended January 31, 2011. The increase in net loss was primarily due to an impairment loss of
$210,000 recognized relating to the our investment in Aligned Healthcare Group, Inc., a $120,000 charge related to the increase in
the Company’s warrant liability and a write off of accounts receivable, expenses associated with the acquisition of Aligned Healthcare
Group, higher legal costs associated with acquisitions and new growth opportunities and consulting expenses.
Liquidity and Capital Resources
The Company had $1,176,727 in cash and cash equivalents at January 31, 2013. The Company's financial statements are prepared
using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. However, the Company incurred the following:
Net operating loss
Cash provided by operating activities
Accumulated deficit
Stockholders' deficit
Year ended January 31, 2013:
As of January 31, 2013:
$
$
2,078,487
57,956
$
$
11,022,272
391,379
The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
To date the Company has funded its operations from internally generated cash flow and external sources, the proceeds from the
Senior Secured Note and the convertible notes which have provided funds for near-term operations and growth. The current
operating plan indicates that losses from operations may be incurred for all of fiscal 2014. Consequently, we may not have sufficient
liquidity necessary to sustain operations for the next twelve months and this raises substantial doubt that we will be able to continue
as a going concern. On January 31, 2013 the Company raised through a private placement offering $880,000 of par value 9% Senior
Subordinated Callable Convertible Promissory Notes maturing February 15, 2016 (the “9% Notes”). The 9% Notes bear interest at a
rate of 9% per annum, payable semi-annually on August 15 and February 15. The Company will use the net proceeds after issue
costs of approximately $776,000 for working capital and general corporate purposes. The Company intends to seek to raise additional
capital through public or private equity financings, partnerships, joint ventures, disposition of assets, debt financings, bank borrowings
or other sources of financing.
No assurances can be made that management will be successful in achieving its plan. If the Company is not able to raise substantial
additional capital in a timely manner, the Company may be forced to cease operations.
Year ended January 31, 2013
For the year ended January 31, 2013, cash provided by operations was $152,751. This was substantially the result of net losses of
$8,809,799, offset by cash provided by non-cash expenses of $8,770,753 and working capital of $191,767. Non-cash expenses
primarily include depreciation expense, bad debt expense, issuance of shares of common stock for services, stock option
compensation expense, amortization of financing costs, amortization of debt discount, and gain on change in fair value of warrant and
derivative liabilities.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Cash provided by working capital was due to:
Increase in Accounts payable and accrued liabilities
Decrease in Other assets
Decrease in Due from affiliates
Cash used by working capital was due to:
Increase in Prepaid expenses and advances
Increase in Accounts receivable
Decrease in Due to Officers
$
$
$
$
$
$
764,208
7,020
5,504
(23,666)
(548,899)
(12,400)
For the year ended January 31, 2013, cash used in investing activities was $31,865 related to $45,799 in investments in a new billing
system, investment in ACO-related office and technology equipment, partially offset by the acquisition of VMM, net of cash acquired
in connection in the consolidation of VMM.
For the year ended January 31, 2013, cash provided by financing activities was $986,095 related to $500,000 in proceeds from the
Senior Secured Note, $775,581 in net proceeds from the issuance of 9% Senior Subordinated Convertible Notes, and $94,765 from
other borrowings, partially offset by $400,000 in distributions to non-controlling interest (LALC). Borrowings were used primarily to
fund working capital requirements and technology investments.
Year ended January 31, 2012
Net cash used provided by operating activities for the year ended January 31, 2012 was $385,455 and included a net loss of
$720,346 for the twelve month period. Adjustments for non-cash charges which include depreciation, bad debt expense, and the
value of shares issued for services, option expense, amortization of warrant discount and impairment loss on our investment in
Aligned Healthcare Group, Inc., totaled $643,203. In addition, net changes in operating assets and liabilities, primarily due to an
increase in outstanding receivables, used cash of $308,311.
For the twelve months ended January 31, 2012, net cash used in financing activities totaled $4,290, compared to $2,440 used in
financing activities for the same period in 2011. During the year ended January 31, 2012, the Company issued convertible notes
payable in the amount of $150,000 and made distributions of $154,290 to a non-controlling interest shareholder. During the year
ended January 31, 2011, the Company did not issue any debt.
Debt Agreements
The following is an overview of the Company's total outstanding debt obligations as of January 31, 2013:
Description of Debt
Lender Name
Interest Rate
January 31,
2013
Senior Secured Note
Line of Credit
10% Senior Subordinated Callable Convertible Notes due January 31,
2016
8% Senior Subordinated Convertible Promissory Notes due February 1,
2015
9% Senior Subordinated Convertible Notes due February 15, 2016
Total debt
Less: debt discount
Net debt
Off-Balance Sheet Arrangements
SpaGus Capital
Partners, LLC
Union Bank
Various
Various
Various
The Company had no off-balance sheet arrangements as of or for the year ended January 31, 2013.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
8.9% $
7.75%
500,000
94,765
10.0%
1,250,000
8.0%
9.0%
$
150,000
880,000
2,874,765
(370,286)
2,504,479
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s financial statements for the fiscal year ended January 31, 2013 are included in this annual report, beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company has carried out an evaluation under the supervision and with the
participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design
and operation of its disclosure controls and procedures as defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange
Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at January 31, 2012,
the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) were not effective, at a reasonable assurance level, in ensuring that information required to be disclosed in the reports the
Company files and submits under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported as and
when required. For a discussion of the reasons on which this conclusion was based, see “Management’s Annual Report on Internal
Control over Financial Reporting” below.
26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule
13a-15(f) and Rule 15d-15(f) under the Exchange Act. Management must evaluate its internal controls over financial reporting, as
required by Sarbanes-Oxley Act. The Company's internal control over financial reporting is a process designed under the supervision
of the Company's management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
the Company's financial statements for external purposes in accordance with U.S. generally accepted accounting principles
(“GAAP”). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on
conducting such assessments. Based on this evaluation, our management concluded that there were material weaknesses in our
internal control over financial reporting as of January 31, 2013.
A material weakness is a significant control deficiency (within the meaning of the Public Company Accounting Oversight Board
(PCAOB) Auditing Standard No. 2) or combination of significant control deficiencies that result in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the
following three material weaknesses in our disclosure controls and procedures, and internal controls over financial reporting:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key
internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the
impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure
controls and procedures, and concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to
our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However,
to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by
separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our
disclosure controls and procedures, and concluded that the control deficiency that resulted represented a material weakness.
3. We do not have review and supervision procedures for financial reporting functions. The review and supervision
function of internal control relates to the accuracy of financial information reported. The failure to review and supervise could allow the
reporting of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be
possible or economically feasible.
Based on the foregoing material weaknesses, we have determined that, as of January 31, 2013, our internal controls over our
financial reporting are not effective. The Company is taking remediating steps to address each material weakness. We continue to
add employees and consultants to address these issues and we will continue to broaden the scope of our accounting and billing
capabilities and realigning responsibilities in our financial and accounting review functions.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute
assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain
assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how
remote.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered
public accounting firm.
Changes in Internal Controls over Financial Reporting
There has been no change in our internal controls over financial reporting during our most recently completed fiscal quarter (i.e., the
three-month period ended January 31, 2013) that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
27
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Name
Warren Hosseinion, M.D.
Kyle Francis
Mark Meyers
Ted Schreck
Suresh Nihalani
Gary Augusta
Mitch Creem
Age
40
39
62
67
60
46
53
Title
Chief Executive Officer, Director
Executive Vice President and Chief Financial Officer
Chief Strategy Officer, Director
Chairman, Director
Director
Director
Director
Warren Hosseinion, M.D. Dr. Hosseinion has been a director, and our Company’s Chief Executive Officer since July 2008. In 2001,
Dr. Hosseinion founded ApolloMed Hospitalists in Los Angeles with Dr. Adrian Vazquez. Dr. Hosseinion received his medical degree
from Georgetown University and is a Diplomat of the American Board of Internal Medicine. Dr. Hosseinion's qualifications to serve on
our Board of Directors include his position as our chief executive officer since the inception of the Company, his background as
founder of the Company and leading physician within the medical community in Los Angeles. In addition, Dr. Hosseinion is currently a
practicing hospitalist physician and brings to our Board of Directors and our Company a depth of understanding of physician culture
and strong knowledge of the healthcare market.
Kyle Francis. Mr. Francis was appointed as Chief Financial Officer, effective December 31, 2010. Prior to being appointed Chief
Financial Officer, Mr. Francis served as the Executive Vice President of Business Development and Strategy. Mr. Francis will
continue to serve in that function as well as Chief Financial Officer. Prior to joining ApolloMed, he was a member of the Healthcare
Services Investment Banking Division of Oppenheimer & Co. and CIBC World Markets. Prior to joining CIBC World Markets, Mr.
Francis worked at Enron Corporation. Mr. Francis holds a Bachelor of Commerce with a major in finance and accounting degree from
McGill University.
Mark Meyers. Mr. Meyers is a senior healthcare executive whose career spans over 30 years. Most recently, from April 2009 until
September 2012, he served as Senior Vice President of Operations for Dignity Health's Los Angeles Service Area, which
encompasses four hospitals, as well as President of Glendale Memorial Hospital and Health Center. Dignity Health, formerly Catholic
Healthcare West, is the fifth largest hospital system in the nation. Prior to this, from 2001 to 2009, Mr. Meyers was President of
California Hospital Medical Center, a 316-bed Dignity facility in Downtown Los Angeles which also serves as a Level II trauma
center. Prior to this, he worked for Tenet Healthcare Corporation from 1987 to 1997, serving as CEO for several hospitals, including
Garden Grove Hospital in Garden Grove, California, Western Medical Center in Anaheim, California, Coastal Communities Hospital in
Santa Ana, California, Doctors Hospital of Santa Ana and Santa Ana Hospital Medical Center. Mr. Meyers has also served as
President and CEO of West Hills Hospital and Medical Center, a 272-bed facility in West Hills, California and CEO of Florida Medical
Center, a 460-bed hospital in Broward County, Florida. Mr. Meyers received a Bachelor of Science in Psychology from the University
of Pittsburgh and a MPH from the University of Pittsburgh's Graduate School of Public Health. He is a Board Member of the Hospital
Council of Southern California and Board Member of the Orange County Symphony.
Ted Schreck. Mr. Schreck is a senior healthcare executive with over 37 years of healthcare experience in both the public and private
sector . In 1998, he joined Tenet Healthcare Corporation and served in a number of senior executive roles including, CEO of USC
University Hospital and USC/Norris Cancer Hospital, Regional Vice President of Operations, charged with leading a group of ten Los
Angeles-area hospitals and finally Senior Vice President of Operations. Prior to joining Tenet, Mr. Schreck worked for the St. Joseph
Health System, serving as CEO of Santa Rosa General Hospital and Senior Vice President of Santa Rosa Memorial Hospital, and for
Sutter Health System as CEO of Delta Memorial Hospital. He also served as CEO of the Eden Township District Hospitals. Mr.
Schreck retired in 2006 but returned to work as a consultant for Portland-based Legacy Health System, which operates five hospitals,
a research facility, a hospice agency, and specialty and primary care clinics. Most recently, he served on the board of Los Angeles
Orthopedic Hospital, a member of the UCLA Health System. Mr. Schreck brings to our Company a significant amount of healthcare
experience and will be tremendous resource to our Company.
Suresh Nihalani. Mr. Nihalani is a business consultant and advisor currently involved with many early stage ventures in the area of
Cloud Computing, Data Centers, Next Generation Storage and 4G Backhaul wireless radios, consulting them in technology direction,
business development and strategic business planning. Mr. Nihalani was President and CEO of ClearMesh Network from 2005 to
2007. He also co-founded Nevis Networks, where he served as CEO from 2002 through 2005. Prior to Nevis Networks, he co-
founded Accelerated Networks and ACT Networks. Mr. Nihalani holds a BS in Electrical Engineering from ITT Bombay and MSEE
and MBA degrees from the Florida Institute of Technology. Mr. Nihalani has over 35 years of corporate experience working as a
senior executive and director. Mr. Nihalani’s qualifications to serve on our Board of Directors include his many years of experience as
a senior corporate executive with both public and private organizations.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Gary Augusta. Mr. Augusta brings more than 20 years of experience as an executive focused on private equity, growth strategy and
operations, corporate development and M&A. He is also an experienced investor and operator of growth businesses. Mr. Augusta
currently serves as President of SpaGus Ventures LLC and SpaGus Capital Partners, growth funds that invest in life sciences and
technology companies. Previously, Mr. Augusta was CEO of OCTANe, an innovation development company, AT Kearney, a leading
consulting firm, and Corporate Development/ M&A Officer at Fluor Inc., a Fortune 500 company. He earned a BS in Mechanical
Engineering from the University of Rhode Island and a Master of Science and Management (MSM) from Georgia Tech.
Mitch Creem. Mr. Creem has 30 years of management experience covering all aspects of the healthcare industry including hospital
and group practice management, and is a frequent speaker on topics ranging from IT strategic planning to organizational turnarounds
and transformation. Most recently, Mr. Creem was the CEO for the Keck Hospital of USC and USC Norris Cancer Hospital where he
led USC’s historic acquisition of the hospitals from Tenet and their transformation to a world-class medical center. Prior to USC, Mr.
Creem was the Associate Vice Chancellor and Chief Financial Officer for the UCLA Medical Sciences. He led significant turnarounds
as CFO at UCLA, Beth Israel Deaconess Medical Center and Tufts Medical Center in Boston.
28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons
who beneficially own more than 10% of our outstanding common stock, to file with the SEC, initial reports of ownership and reports of
changes in ownership of our equity securities. Such persons are required by SEC regulations to furnish us with copies of all such
reports they file, and we are required to identify Covered Persons that we know have failed to file or filed late Section 16(a) reports. To
our knowledge, we believe that our Covered Persons complied with all Section 16(a) filing requirements applicable to them, except
that: Messrs. Francis, Schreck, Augusta, Meyers and Creem failed to file Forms 3 when they became obligated to commence Section
16(a) reporting; Messrs. Hosseinion, Francis, Nihalani and Augusta failed to file Forms 4 on a timely basis with respect to acquisitions
of shares of our common stock; Messrs. Hosseinion, Meyers, and Vasquez failed to file Form 4s on a timely basis with respect to
grants of stock options; Mr. Meyers failed to file Form 4 with respect to acquisition of warrants to purchase our common stock and a
promissory note that is convertible into our common stock; and Messrs. Hosseinion, Francis, Schreck, Nihalani, Augusta, Meyers,
Creem and Vasquez failed to file Forms 5 on a timely basis. The covered persons whose filings are not up to date are working
diligently to [illegible] the required filings to bring them up to date and anticipate having them completed by May 31, 2013.
Code of Ethics
The Company has not yet adopted a code of ethics, in part because we have a limited number of employees. As the Company grows
its business, and hires additional employees, we expect to adopt a code of ethics applicable to the conduct of our employees.
Committees of the Board of Directors
Our common stock is currently quoted on the OTCQB electronic trading platform, which does not maintain any standards requiring us
to establish or maintain an Audit, Nominating or Compensation committee. As of January 31, 2013, our Board of directors did not
maintain an audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, a nominating committee nor a
compensation committee. The entire Board of Directors is acting as the Company's audit committee as specified in section 3(a)(58)
(B) of the Exchange Act, and the Board of Directors has determined that Mr. Mitch Creem, a current independent director, is an “audit
committee financial expert” as defined by item 407 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation awarded to, earned by, or paid to our executive officers for the fiscal years ended
January 31, 2013, 2012 and 2011, respectively:
Summary Compensation Table
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($) (1)
Option
Awards
($) (1)
Warren Hosseinion, M.D.
Chief Executive Officer
2013
2012
2011
376,221
349,999
385,013
-
-
-
420,000
-
12,619
Kyle Francis
Chief Financial Officer (4)
2013
2012
2011
132,000
132,000
11,000
30,000
10,000
-
269,500
63,000
33,761
-
-
-
-
-
-
Mark Meyers
Chief Strategy Officer (5)
2013
2012
2011
42,000
-
-
-
-
-
168,000
-
-
55,617
-
-
Adrian Vazquez, M.D. (6)
2012
2011
300,074
382,920
-
-
-
12,619
-
-
Non-
Equity
Incentive
Plan
Earnings
($)
Non-Qualified
Deferred
Compensation
Earnings ($)
All Other
Compensation
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
124,446(2)
104,821(2)
57,002(2)
920,667
454,820
454,634
46,890(3)
25,516(3)
30,174(3)
478,390
230,516
74,935
-
-
-
-
-
265,617
-
-
300,074
395,539
(1) The amount shown in this column reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.
(2) Personal benefits include payments to Dr. Hosseinion for health insurance premiums of $24,972 (2013), $14,821(2012), $17,192
(2011); vehicle allowance of $24,972 (2013), $22,925 (2012), and $23,631 (2011); and travel, meals, cell phone and other business
expense-related allowances.
(3) Personal benefits include payments to Mr. Francis for health insurance premiums of $5,400 (2013), $ - (2012), and $ - (2011); and
reimbursement of travel, meals, cell phone and other business related expenses.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(4) Mr. Francis was appointed as Chief Financial Officer, effective December 31, 2010. Prior to that, Mr. Francis served as the
Executive Vice President of Business Development and Strategy and continued to serve in that function in addition to his role as Chief
Financial Officer until October 17, 2012.
(5) Mr. Meyers was appointed as Chief Strategy Officer effective October 17, 2012.
(6) Adrian Vazquez, M.D., resigned his positions as Chairman of the Board, President and a director of Apollo Medical Holdings, Inc.,
in each case effective December 9, 2011.
29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following table summarizes the outstanding equity awards held by each of our named executive officers as of January 31, 2013:
Outstanding Equity Option Awards at Fiscal Year End
Option Awards
Number of
Securities
Underlying
Unexercised
Options-
Exercisable
300,000
Number of
Securities
Underlying
Unexercised
Options-
Unexercisable
Option
Exercise
Price (2)
- $
0.15
Option
Expiration
Date
12/8/2020
Name and Principal Position
Warren Hosseinion, M.D.
Chief Executive Officer
Grant Date
12/9/2010
Kyle Francis
Chief Financial Officer
Mark Meyers
Chief Strategy Officer
12/9/2010
150,000
- $
0.15
12/8/2020
(1)
150,000
- $
0.21
(1)
Adrian Vazquez, M.D.
12/9/2010
300,000
- $
0.15
12/8/2020
(1) Mr. Meyers was granted 50,000 options on each of November 1, 2012, December 1, 2012, and January 1, 2013 all of which
vested upon grant. Mr. Meyer's options expire 10 years from grant date.
(2) All options have been issued with an exercise price equal to the closing price of our common stock on the date of grant except
options granted to Mr. Meyers. The closing stock price on the date of grant November 1, 2012, December 1, 2012, and January 1,
2013 was $0.63, $0.55 and $0.48 per share, respectively.
No options were exercised during the fiscal year ended January 31, 2013.
Hospitalist Participation Service Agreements
Warren Hosseinion, M.D. In February 2009, the Company entered into a Second Amended and Restated Hospitalist Participation
Agreement with Dr. Hosseinion, pursuant to which he provides physician services for ApolloMed Hospitalists. Effective February
2009, Dr.Hosseinion’s annual base salary was set at $360,000 payable in bimonthly installments. Dr. Hosseinion's salary is for
physician services only and he does not receive any compensation to serve as Chief Executive Officer or for his services as a
Director. He is eligible to receive equity awards, in each case as determined by the Board of Directors in accordance with the 2010
Equity Incentive Plan. The Company maintains Dr. Hosseinion’s professional liability insurance.
Adrian Vazquez, M.D. In February 2009, the Company entered into a Second Amended and Restated Hospitalist Participation
Agreement with Dr. Vazquez, pursuant to which he provides physician services for ApolloMed Hospitalists. Effective February 2009,
Dr.Vazquez’s annual base salary was set at $360,000 payable in bi-monthly installments. Dr. Vazquez's salary for physician services
only and he does not receive any compensation to serve as President or as Chairman of our Board of Directors. He is eligible to
receive equity awards, in each case as determined by the Board of Directors in accordance with the 2010 Equity Incentive Plan. The
Company maintains Dr. Vazquez’s professional liability insurance.
Employment Agreements
On March 15, 2009, the Company entered into a Consulting Agreement with Kaneohe Advisors LLC (Kyle Francis) under which Mr.
Francis became the Company’s Executive Vice President, Business Development and Strategy. Under the terms of the Agreement,
Mr. Francis was compensated at a rate of $8,000 per month. In addition, Mr. Francis received 350,000 shares of restricted stock at
the date of the Agreement and is entitled to 350,000 additional restricted shares on the first and second anniversaries of the
Agreement, provided the Agreement was not terminated. The initial 350,000 shares, along with 50,000 shares granted to Mr. Francis
in the fiscal year ended January 31, 2009, were issued in the third quarter ended October 31, 2009. On March 15, 2011, the second
anniversary of the Consulting Agreement, Mr. Francis was granted an additional 350,000 shares. Mr. Francis was named Chief
Financial Officer on December 31, 2010. Mr. Francis' compensation has been increased to $11,000 per month. On August 16, 2012,
the Company entered into an amended consulting agreement with Kaneohe Advisors LLC, to serve as the Company’s Executive Vice
President, Business Development and Chief Financial Officer. The term of the agreement is on a month-to-month basis, and provided
for Mr. Francis to receive $11,900 per month and the right to purchase 700,000 shares of the Company’s common stock at $0.001
per share. The agreement can be terminated by either party at any time.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On March 1, 2013 the Company entered into an employment agreement with Mr. Francis whereby Mr. Francis will receive a salary of
$225,000 per annum, reimbursement of up to $1,200 per month in health insurance premiums, additional performance-based cash
and stock compensation as determined by the Company’s board of directors, and other standard benefits afforded to the Company’s
employees. If Mr. Francis’ employment is terminated prior to the first anniversary for any reason other than gross negligence or
misconduct, Mr. Francis will be entitled to the remaining unpaid first year salary and health insurance reimbursement. The agreement
will be effective commencing June 1, 2013.
On October 8, 2012 the Company entered into a consulting agreement with Mr. Mark Meyers to perform services as the Company’s
Chief of Strategy and Business Development, pursuant to which Mr. Meyers will receive $10,000 per month, the right to receive
options to acquire 50,000 shares per month of the Company’s common stock with an exercise price of $0.21 per share, and be
eligible for performance-based compensation as determined by the Company’s Board of Directors. Mr. Meyers has the option to
convert all or a portion of the cash compensation to equity at a conversion price equal to a discount of 30% from the trailing 90 day
average of the closing price of the Company’s common stock. The agreement is terminable by either party without cause upon
providing 90 days’ notice.
Outstanding Equity Awards at Fiscal Year-End
On March 4, 2010, the Board of Directors of Apollo Medical Holdings, Inc. and three members of our Board that owned, in the
aggregate, approximately 65% of the outstanding shares of our common stock, approved the adoption of the Apollo Medical Holdings,
Inc., 2010 Equity Incentive Plan. Subject to the adjustment provisions of the Plan that are applicable in the event of a stock dividend,
stock split, reverse stock split or similar transaction, up to 5,000,000 shares of common stock may be issued under the Plan. On
August 31, 2012 the Company’s Board of Directors amended the 2010 Equity Incentive Plan, which allowed the Board to grant an
additional 7,000,000 shares up to 12,000,000 shares of the Company’s common stock. The Plan awards include incentive stock
option, non-qualified options, restricted common stock, and stock appreciation rights and was approved by unanimous written
consent of two stockholders that beneficially owned in the aggregate 57.0% of the outstanding shares of the Company’s common
stock.
During the fiscal year ended January 31, 2011, 1,150,000 options were granted to management, directors and independent
contractors of which 1,150,000 were exercisable as of January 31, 2013 at an exercise price of $0.15 per share. There were no stock
options granted during the year ended January 31, 2012. During the fiscal year ended January 31, 2013, 4,225,000 options were
granted to management, directors and independent contractors of which 1,583,336 were exercisable as of January 31, 2013 at a
weighted-average exercise price of $0.18 per share.
30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Director Compensation
Gary Augusta
Effective as of March 7, 2012, Gary Augusta was appointed to the Company’s Board of Directors. In connection with his service to the
Company as a director, Mr. Augusta entered into the Company’s Director’s Agreement, which provides for Mr. Augusta to be a
director and entitles Mr. Augusta to receive a restricted stock grant of 400,000 shares of the Company's Common Stock. The shares
will vest monthly at a rate of 1/36 per month over a three year time period. In connection with Mr. Augusta’s service as a consultant to
the Company, Mr. Augusta, through his entity, Augusta Advisors Inc., entered into a Consulting Agreement with the Company which
became effective December 1, 2011. Pursuant to that agreement, various consulting services were provided to the Company in return
for $10,000 per month in cash compensation and 100,000 shares of common stock issued in the name of Gary Augusta monthly over
the initial term of the agreement (totaling 700,000 shares of common stock) expiring June 20, 2012. Thereafter, the Company
extended Mr. Augusta on month-to-month basis in return for $10,000 per month in cash compensation and eligibility for incentive
stock awards as determined by the Board of Directors.
The Company entered into a $270,000 Senior Secured Note (“Note”) agreement on February 1, 2012 with SpaGus Capital Partners,
LLC (“SpaGus”) an entity in which Gary Augusta, a director and shareholder of the Company, holds an ownership interest. The terms
of the Note provide for interest at 8.929% per annum, payments of principal of $135,000 on each of September 15, 2012 and October
15, 2012, and to be secured by substantially all assets of the Company. The Company prepaid interest on the Note principal of
$15,000 in accordance with the Note, and paid financing costs of $5,000 in cash and the issuance of 216,000 shares of the
Company’s common stock, which was valued at $25,661 at the date of issuance. On September 15, 2012, SpaGus agreed to allow
the Company to defer payment of the scheduled principal payments due on September 15 and October 15, 2012, and amended the
Note effective October 15, 2012 in which SpaGus agreed to provide additional principal to the Company in the amount of $230,000.
The terms of the amended Note provide for borrowings to bear interest at 8.0 % per annum with accrued interest payable in arrears
on each of December 28, 2012, March 31, 2013, June 30, 2013 and October 15, 2013. The amended Note will mature as of October
15, 2013, and may be prepaid at any time prior to September 29, 2013. The Company paid SpaGus financing costs of 100,000
restricted shares of the Company’s common stock on the amendment date, which transaction was fair valued at $50,000, and is
obligated to pay SpaGus an additional 100,000 restricted shares of the Company’s common stock if the amended Note principal and
or any accrued interest are outstanding on April 15, 2013.
Edward “Ted” Schreck
Effective as of February 15, 2012, Edward “Ted” Schreck was appointed to the Company’s Board of Directors was also appointed as
the Chairman of the Board of Directors. In connection with his service to the Company as a director and Chairman, Mr. Schreck
entered into the Company’s Director Agreement which entitles such director to receive a combined $30,000 annual cash retainer for
his board service as well as an initial option grant of 1,000,000 options. These options will vest evenly over a 3-year period.
Suresh Nihalani
In connection with his service to the Company as a director, Mr. Nihalani entered into the Company’s Director Agreement on October
27, 2008 (as amended on July 16, 2010), which provided for Mr. Nihalani to be a director and entitled Mr. Nihalani to receive a
restricted stock grant of 400,000 shares of the Company's common stock. On January 1, 2012 the Company amended the 2010
Directors Agreement with Mr. Nihalani pursuant to which Mr. Nihalani received the right to purchase an additional 400,000 shares of
the Company’s restricted common stock for $0.001 per share which will vest monthly over 36 months. The Company has the right but
not the obligation to repurchase the unvested portion of these shares at $0.001 per share.
Mitch Creem
On October 22, 2012 Mitchell R. Creem was elected to the Company’s Board of Directors. In connection with his service to the
Company as a director, Mr. Creem entered into the Company’s Director Agreement which entitles Mr. Creem to receive a fee of
$1,000 per board meeting attended, as well as a grant of 500,000 restricted shares of the Company’s common stock for his board
service which will vest monthly over 36 months.
The following Summary Compensation Table reflects the compensation awarded to, earned by, or paid to our outside directors for the
year ended January 31, 2013.
Fees
Earned
or Paid in
Cash ($)
Stock
Awards
($) (1)
Option
Awards
($) (1)
Non-Equity
Incentive
Plan
Earnings ($)
Non-Qualified
Deferred
Compensation
Earnings ($)
All Other
Compensation
($)
Total ($)
-
30,000
5,000
1,000
195,501(3)
-
60,000
210,000
-
120,000
-
-
-
-
-
-
-
-
-
-
156,838(2)
-
-
-
352,339
150,000
65,000
211,000
Name
Gary Augusta
Ted Schreck
Suresh Nihalani
Mitch Creem
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(1) The amount shown in this column reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.
(2) Pursuant to a consulting agreement with Augusta Advisors Inc. dated December 1, 2011, Mr. Augusta received cash
compensation of $127,500; and pursuant to the Senior Secured Note agreement on February 1, 2012, as amended October 15,
2012, with SpaGus Capital Partners, LLC, of which Mr. Augusta is a member (“SpaGus”), SpaGus directly received interest and fees
aggregating $29,388. Mr. Augusta disclaims beneficial ownership of the shares held by SpaGus except to the extent of his pecuniary
interest therein, and the filing of this report and inclusion of these shares in this table is not an admission that Mr. Augusta is the
beneficial owner of these shares for purposes of Section 16 or for any other purpose.
(3) Pursuant to a consulting agreement with Augusta Advisors Inc. dated December 1, 2011, Mr. Augusta received 700,000 shares of
restricted common with a grant date fair value of $97,320; pursuant to the Directors agreement with Mr. Augusta dated March 7,
2012, Mr. Augusta received 400,000 shares of restricted common stock with a grant date fair value of $47,520; and pursuant to the
Senior Secured Note agreement on February 1, 2012, as amended October 15, 2012, with SpaGus Capital Partners, LLC, of which
Mr. Augusta is a member (“SpaGus”), SpaGus directly received 266,000 shares with a grant date fair value of $50,661. Mr. Augusta
disclaims beneficial ownership of the shares held by SpaGus except to the extent of his pecuniary interest therein, and the filing of
this report and inclusion of these shares in this table is not an admission that Mr. Augusta is the beneficial owner of these shares for
purposes of Section 16 or for any other purpose.
31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table sets forth certain information as of April 30, 2013, with respect to (i) those persons known to us to beneficially own
more than 5% of our voting securities, (ii) each of our directors, (iii) each of our executive officers, and (iv) all directors and executive
officers as a group. The information is determined in accordance with Rule 13d-3 promulgated under the Exchange Act. Except as
indicated below, the beneficial owners have sole voting and dispositive power with respect to the shares beneficially owned.
Name and Address of Beneficial Owner (1)
Certain Beneficial Owners:
Adrian Vazquez, M.D. (4)
Directors/Named Executive Officers:
Warren Hosseinion, M.D.
Kyle Francis
Gary Augusta
Mark Meyers
Suresh Nihalani
Ted Schreck
Mitch Creem
All Named Executive Officers and Directors as a group
Shares Beneficially
Owned (2)
Percent of
Class (3)
9,423,387
10,423,387
2,250,000
1,766,000
1,125,000
800,000
666,667
500,000
17,531,054
27.0%
29.9%
6.5%
5.1%
3.2%
2.3%
1.9%
1.4%
50.3%
(1) Unless otherwise indicated, the business address of each person listed is c/o Apollo Medical Holdings, Inc., 700 N. Brand Blvd.,
Suite 450, Glendale, California 91203.
(2) For purposes of this table, shares are considered beneficially owned if the person directly or indirectly has the sole or shared
power to vote or direct the voting of the securities or the sole or shared power to dispose of or direct the disposition of the securities.
Shares are also considered beneficially owned if a person has the right to acquire beneficial ownership of the shares within 60 days
of April 30, 2013.
(3) The percentages are calculated based on the actual number of shares issued and outstanding as of April 30, 2013, which is
34,843,441.
(4) Adrian Vazquez, M.D., resigned his positions as Chairman of the Board, President and a director of Apollo Medical Holdings, Inc.,
in each case effective December 9, 2011.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
On January 31, 2013 Mr. Mark Meyers, the Company’s Chief Strategy Officer and a director of the Company, purchased two units of
$50,000 par value 9% Senior Subordinated Callable Convertible Promissory Notes due February 15, 2016, or $100,000 in the
aggregate, and are convertible at any time into 250,000 shares of the Company’s common stock at an exercise price of $0.40 per
share. Each unit received warrants to purchase 37,500 shares of the Company's common stock at an exercise price of $0.45 per
share, and had a grant date fair value aggregating $21,238 computed in accordance with ASC Topic 718.
Director Independence
Our common stock is quoted on the OTCQB electronic trading platform, which does not maintain any standards regarding the
“independence” of the directors on our Company’s Board, and we are not otherwise subject to the requirements of any national
securities exchange or an inter-dealer quotation system with respect to the need to have a majority of our directors be independent.
In the absence of such requirements, we have elected to use the definition for director independence under the NASDAQ stock
market’s listing standards, which defines an independent director as “a person other than an officer or employee of the Company or
its subsidiaries or any other individual having a relationship, which in the opinion of our Board, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director.” The definition further provides that, among others,
employment of a director by us (or any parent or subsidiary of ours) at any time during the past three years is considered a bar to
independence regardless of the determination of our Board. Based on the foregoing standards, the Board has determined that Ted
Schreck, Suresh Nihalani, and Mitch Creem are “independent” directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The aggregate fees for professional services rendered by Kabani and Company, Inc. to us for the fiscal years ended January 31,
2013 and January 31, 2012 were as follows:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
All other fees
Total
2013
2012
$
44,000 $
-
-
-
$
44,000 $
48,000
-
-
-
48,000
(1) Audit fees represent fees for professional services provided in connection with the audit of our annual financial statements and the
review of our financial statements included in our Forms 10-Q quarterly reports and services that are normally provided in connection
with statutory or regulatory filings for the 2013 and 2012 fiscal years.
(2) Audit-related fees represent fees for assurance and related services that are reasonably related to the performance of the audit or
review of our financial statements and not reported above under “Audit Fees.”
(3) Tax fees represent fees for professional services related to tax compliance, tax advice and tax planning.
Audit Committee Pre-Approval Policies and Procedures
The policy of our board of directors, acting as the audit committee, is to pre-approve all audit and permissible non-audit services
provided by our independent auditors. These services may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or
category of services. All services and fees described above for the years ended January 31, 2013 and 2012 were approved by our
Board.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Please see the Report of our Independent Registered Public Accounting Firm, and related financial statements for our fiscal
year ended January 31, 2013, beginning on page F-1 of this Form 10-K.
(b) Exhibits Index
Number
Exhibit
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6*
4.7*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.1
10.11
10.12
Certificate of Incorporation (filed as an exhibit to Registration Statement on Form 10-SB filed on April 19, 1999, and
incorporated herein by reference).
Certificate of Ownership (filed as an exhibit to Current Report on Form 8-K filed on July 15, 2008, and incorporated
herein by reference).
Second Amended and Restated Bylaws (filed as an exhibit to Form 10-Q filed on September 14, 2011, and
incorporated herein by reference).
Form of 10% Senior Subordinated Convertible Note, dated October 16, 2009 (filed as an exhibit on Annual Report on
Form 10-K on May 14, 2010, and incorporated herein by reference).
Form of Investor Warrant, dated October 16, 2009, for the purchase of 25,000 shares of common stock (filed as an
exhibit on Annual Report on Form 10-K/A on March 28, 2012, and incorporated herein by reference).
Form of Amendment to October 16, 2009 10% Senior Subordinated Convertible Promissory Note, dated October 29,
2012
Form Of Investor Warrant, dated October 29, 2012, for the purchase of common stock
Form of Amendment to October 16, 2009 Warrant to Purchase Shares of Common Stock, dated October 29, 2012
Form of 9% Senior Subordinated Callable Convertible Note, dated January 31, 2013
Form Of Investor Warrant for purchase of 37,500 shares of common stock, dated January 31, 2013
Agreement and Plan of Merger among Siclone Industries, Inc. and Apollo Acquisition Co., Inc. and Apollo Medical
Management, Inc (filed as an exhibit to Current Report on Form 8-K filed on June 19, 2008 and incorporated herein
by reference).
Management Services Agreement dated August 1, 2008, between Apollo Medical Management and ApolloMed
Hospitalists (filed as an exhibit on Annual Report on Form 10-K/A on March 28, 2012, and incorporated herein by
reference).
Director Agreement, dated October 27, 2008, between the Company and Suresh Nihalani (filed as an exhibit on
Annual Report on Form 10-K/A on March 28, 2012, and incorporated herein by reference).
Management Services Agreement dated March 20, 2009, between Apollo Medical Management and ApolloMed
Hospitalists (filed as an exhibit on Annual Report on Form 10-K/A on April 10, 2012, and incorporated herein by
reference).
2010 Equity Compensation Plan (filed as an exhibit to Current Report on Form 8-K filed on March 9, 2010, and
incorporated herein by reference).
Employment Agreement with A. Noel DeWinter (filed as an exhibit to Current Report on Form 8-K filed on September
11, 2008, and incorporated herein by reference).
Amendment to Suresh Nihalani's Director Agreement dated July 16, 2010 (filed as an exhibit on Annual Report on
Form 10-K/A on April 10, 2012, and incorporated herein by reference).
2010 Equity Incentive Plan (filed as Appendix A to Schedule 14C Information Statement filed on August 17, 2010 and
incorporated herein by reference).
Stock Purchase Agreement, dated as of February 15, 2011, among the Company, Aligned Healthcare Group LLC,
Aligned Healthcare Group - California, Inc., Raouf Khalil, Jamie McReynolds, M.D., BJ Reese & Associates, LLC and
BJ Reese (filed as an exhibit on Annual Report on Form 10-K/A on April 10, 2012, and incorporated herein by
reference).
First Amendment to Stock Purchase Agreement entered into by Apollo Medical Holdings, Inc. and Aligned Healthcare
Group LLC, Aligned Healthcare Group - California, Inc., Raouf Khalil, Jamie McReynolds, M.D., BJ Reese &
Associates LLC and BJ Reese dated July 8, 2011 (filed as an exhibit on Annual Report on Form 10-K/A on April 10,
2012, and incorporated herein by reference).
Services Agreement entered into by Apollo Medical Holdings, Inc. and Aligned Healthcare Group LLC, Aligned
Healthcare Group - California, Inc., Raouf Khalil, Jamie McReynolds, M.D., BJ Reese & Associates LLC and BJ
Reese dated July 8, 2011 (filed as an exhibit on Annual Report on Form 10-K/A on April 10, 2012, and incorporated
herein by reference).
Employment Agreement with Jilbert Issai, M.D. dated September 4, 2008 (filed as an exhibit on Annual Report on
Form 10-K/A on April 10, 2012, and incorporated herein by reference).
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.13
Consulting Agreement with Kyle Francis dated March 22, 2009 (filed as an exhibit on Annual Report on Form 10-K/A
on April 10, 2012, and incorporated herein by reference).
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.14
10.15
Hospitalist Participation Service Agreement with Warren Hosseinion, M.D. dated May 1, 2009 (filed as an exhibit on
Annual Report on Form 10-K/A on April 10, 2012, and incorporated herein by reference).
Hospitalist Participation Service Agreement with Adrian C. Vazquez, M.D. dated May 1, 2009 (filed as an exhibit on
Annual Report on Form 10-K/A on April 10, 2012, and incorporated herein by reference).
21.1*
Subsidiaries of Apollo Medical Holdings, Inc.
31.1*
31.2*
32.1*
32.2*
Certification by Chief Executive Officer
Certification by Chief Financial Officer
Certification by Chief Executive Officer pursuant to 18 U.S.C. section 1350.
Certification by Chief Financial Officer pursuant to 18 U.S.C. section 1350
101.INS+
101.SCH+
101.CAL+
101.DEF+
101.LAB+
101.PRE+
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
+ Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is furnished
and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the
Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and
otherwise is not subject to liability under these sections.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 30, 2013
APOLLO MEDICAL HOLDINGS, INC.
By:
/s/ WARREN HOSSEINION, M.D
Warren Hosseinion, M.D.,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/S/ KYLE FRANCIS
Kyle Francis
Chief Financial Officer (Principal
Financial and Accounting Officer)
April 30, 2013
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
FINANCIAL STATEMENTS - TABLE OF CONTENTS:
Report of independent registered public accounting firm
Consolidated financial statements:
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of changes in stockholders’ deficit
Consolidated statements of cash flows
Notes to consolidated financial statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Apollo Medical Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Apollo Medical Holdings, Inc as of January 31, 2013 and 2012
and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Apollo Medical Holdings, Inc. as of January 31, 2013 and 2012, and the results of their operations and their cash flows for each of the
years then ended, in conformity with U.S. generally accepted accounting principles.
The Company's consolidated financial statements are prepared using the U.S. generally accepted accounting principles applicable to
a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The
Company had a loss from operations of $2,078,487 for the year ended January 31, 2013 and had an accumulated deficit of
$11,022,272 as of January 31, 2013. These factors, as discussed in Note 1 to the financial statements raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in regard to the matter are also described in Note 1. The
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Kabani & Company, Inc.
Certified Public Accountants
Los Angeles, California
April 30, 2013
F-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Advances
Due from affiliates
Prepaid expenses
Deferred financing costs, current
Total current assets
Deferred financing costs, non-current
Property and equipment, net
Goodwill
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities
Notes payable
Convertible notes payable, net
Derivative liability
Stock issuable
Due to officers
Total current liabilities
Convertible notes payable, net
Warrant liability
Total liabilities
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Preferred stock, par value $0.001 ;
5,000,000 shares authorized; none issued
Common Stock, par value $0.001; 100,000,000 shares authorized,
34,843,441 and 29,335,774 shares issued and outstanding
as of January 31, 2013 and 2012, respectively
Prepaid consulting
Additional paid-in-capital
Accumulated deficit
Total Apollo Medical Holdings, Inc. stockholders' deficit
Non-controlling interest
Total stockholders' deficit
$
$
$
January
31, 2013
January 31,
2012
1,176,727 $
1,582,505
-
5,648
72,628
34,614
2,872,122
218,640
68,142
33,200
30,981
3,223,085 $
950,651 $
594,765
-
-
159,334
-
1,704,750
1,909,714
-
3,614,464
164,361
994,118
2,140
5,504
45,601
37,500
1,249,224
-
43,261
32,000
39,563
1,364,048
163,476
-
596,366
653,026
90,000
12,400
1,515,268
150,000
120,000
1,785,268
-
-
34,844
(616,014)
11,248,566
(11,022,272)
(354,876)
(36,503)
(391,379)
29,336
-
1,429,051
(2,117,708)
(659,321)
238,101
(421,220)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$
3,223,085 $
1,364,048
The accompanying notes are an integral part of these consolidated financial statements
F-3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2013 AND 2012
NET REVENUES
COST OF SERVICES
GROSS PROFIT
Operating expenses:
General and administrative
Depreciation and amortization
Total operating expenses
LOSS FROM OPERATIONS
Other (expense) income
Loss on change in fair value of derivative liabilities
Interest expense
Other (expense) income
Total other expenses
LOSS BEFORE INCOME TAXES
Provision for Income Tax
NET LOSS
2013
2012
$
7,776,131 $
6,316,164
1,459,967
5,110,806
4,132,399
978,407
3,517,536
20,918
3,538,454
1,379,153
12,589
1,391,742
(2,078,487)
(413,335)
(5,853,855)
(930,176)
(37,246)
(6,821,277)
-
(304,034)
2,842
(301,192)
(8,899,764)
(714,527)
4,800
5,819
$
(8,904,564) $
(720,346)
WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING - BASIC AND
DILUTED
32,469,999
29,078,925
BASIC AND DILUTED NET LOSS PER SHARE
$
(0.27) $
(0.02)
The accompanying notes are an integral part of these consolidated financial statements
F-4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JANUARY 31, 2013 AND 2012
Preferred Stock
Common Stock
Prepaid Additional
Non-
Accumulated controlling Stockholders'
Shares
Amount
Shares
Amount
Consulting
Interest
Deficit
- $
- 27,635,774 $ 27,636 $
1,350
-
-
350
1,350,000
-
-
350,000
-
-
- 29,335,774
-
29,336
paid-in
capital
- $ 1,058,418 $
278,650
-
-
-
-
-
62,650
-
29,333
-
-
-
- 1,429,051
(500,000)
-
-
-
-
5,932,667
-
-
75,000
(500)
-
-
-
-
5,933
-
-
75
-
500
-
-
-
-
- 6,626,881
-
510,642
1,955,837
-
709,980
15,675
(616,014)
-
Deficit
(1,397,362) $
-
-
-
-
228,115 $
-
164,276
(154,290)
-
(720,346)
(2,117,708)
-
238,101
-
-
-
-
-
-
-
-
-
113,096
(400,000)
-
-
12,300
-
-
(83,193)
280,000
164,276
(154,290)
63,000
29,333
(720,346)
(421,220)
-
113,096
(400,000)
6,626,881
510,642
1,974,070
(616,014)
709,980
15,750
(8,904,564)
(391,379)
- $
(8,904,564)
- 34,843,441 $ 34,844 $ (616,014) $ 11,248,566 $ (11,022,272) $
(36,503) $
Balance at January 31, 2011
Shares issued in connection with acquisitions of AHI and PCCM
Acquisition related non-controlling interest
Distributions to non-controlling interest shareholder
Issuance of stock for stock-based compensation
Issuance of stock options for stock-based compensation
Net Loss
Balance at January 31, 2012
Shares reconveyed in connection with termination of AHI
transaction
Acquisition related non-controlling interest
Distributions to non-controlling interest shareholder
Reclassification of warrant and derivative liabilities
Issuance of warrants
Issuance of stock for stock-based compensation
Unvested stock-based compensation classified as prepaid
Issuance of stock options for stock-based compensation
Exercise of stock options
Net Loss
Balance at January 31, 2013
The accompanying notes are an integral part of these consolidated financial statements
F-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2013 AND 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
$
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense
Bad debt expense
Issuance of shares for services
Non-cash stock option expense
Amortization of financing costs
Amortization of debt discount
Loss on change in fair value of warrant and derivative liabilites
Impairment loss
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable
Due to officers
Due from affiliates
Prepaid expenses and advances
Other assets
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment acquired
Acquisition, net of cash acquired from consolidation of VIE
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable
Proceeds from stock option exercise
Distributions to non-controlling interest shareholder
Proceeds from issuance of convertible notes payable
Debt issuance costs
Net cash provided by (used in) financing activities
2013
2012
(8,904,564) $
(720,346)
20,918
74,393
1,355,708
706,020
89,162
670,697
5,853,855
(548,899)
(12,400)
5,504
(23,666)
7,020
764,208
57,956
(45,799)
14,114
(31,685)
594,765
15,750
(400,000)
880,000
(104,420)
986,095
12,589
118,077
152,400
29,333
37,500
804
120,000
210,000
(407,224)
14,953
(1,604)
(22,668)
-
70,731
(385,455)
(7,205)
164,210
157,005
150,000
-
(154,290)
-
-
(4,290)
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
1,012,366
(232,740)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE
164,361
397,101
CASH & CASH EQUIVALENTS, ENDING BALANCE
$
1,176,727 $
164,361
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Interest paid
Income Taxes paid
Non-Cash Financing Activities:
Shares issued in connection with acquisitions
Contingent consideration payable
Shares issuable for services
Shares and warrants issued in connection with promissory note financing costs
Warrants issued in connection with promissory notes
Warrants and derivative reclassified from liabilities to stockholders' deficit
$
$
$
$
$
$
$
$
160,792 $
9,763 $
- $
- $
159,334 $
198,935 $
387,349 $
6,626,881 $
129,000
2,400
280,000
367,500
90,000
-
-
-
The accompanying notes are an integral part of these consolidated financial statements
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
F-6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Apollo Medical Holdings, Inc. and its affiliated physician groups are a physician centric, integrated healthcare delivery system serving
Medicare, Commercial and Medi-Cal beneficiaries in California. As of April 30, 2013, ApolloMed’s physician network consisted of over
300 hospitalists, primary care physicians and specialist physicians primarily through our owned and affiliated physician groups.
ApolloMed operates as a medical management holding company through the following wholly-owned subsidiary management
companies, Apollo Medical Management, Inc. (“AMM”), Pulmonary Critical Care Management, Inc. (“PCCM”), Verdugo Medical
Management, Inc. (“VMM”) and ApolloMed ACO, Inc. (“ApolloMed ACO”). Through AMM, PCCM, and VMM, the Company manages
affiliated medical groups, which consists of ApolloMed Hospitalists (“AMH"), Los Angeles Lung Center (“LALC”) and Eli Hendel, M.D.,
Inc. (“Hendel”). AMM, PCCM and VMM each operate as a physician practice management company (“PPM”) and are in the business
of providing management services to physician practice companies (“PPC”) under long-term management service agreements.
On July 10, 2012, ApolloMedACO was notified that it had been selected by the Centers for Medicare and Medicaid Services (“CMS”)
to participate in the Medicare Shared Savings Program (“MSSP”). The Medicare Shared Savings Program model is designed to
encourage the development of Accountable Care Organizations (“ACOs”), which can be comprised of hospitals, doctors and other
health care providers who work together and are accountable for quality outcomes and the overall patient experience, while reducing
the growth in Medicare expenditures. Through the MSSP model, ApolloMedACO will work with CMS on a program for Medicare
beneficiaries to enhance the engagement between patients and their medical providers through the coordination of care and services
across all aspects of their healthcare needs. The goal of the program is to improve the quality of the patient’s care and outcomes
through more efficient and coordinated approach among providers.
Going Concern
The Company's financial statements are prepared using United States generally accepted accounting principles applicable to a going
concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the
Company incurred the following for the year ended January 31, 2013:
Net operating loss
Cash provided by operating activities
As of January 31, 2013, the Company’s accumulated and stockholders’ deficit was as follows:
Accumulated deficit
Stockholders' deficit
$
$
2,078,487
57,956
$
$
11,022,272
391,379
The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
To date the Company has funded its operations from internally generated cash flow and external sources, the proceeds from the
Senior Secured Note and the convertible notes which have provided funds for near-term operations and growth. The current
operating plan indicates that losses from operations may be incurred for all of fiscal 2014. Consequently, we may not have sufficient
liquidity necessary to sustain operations for the next twelve months and this raises substantial doubt that we will be able to continue
as a going concern. On January 31, 2013 the Company raised through a private placement offering $880,000 of par value 9% Senior
Subordinated Callable Convertible Promissory Notes maturing February 15, 2016 (the “9% Notes”) (see Note 6) . The 9% Notes bear
interest at a rate of 9% per annum, payable semi-annually on August 15 and February 15. The Company will use the net proceeds
after issue costs of approximately $776,000 for working capital and general corporate purposes. The Company intends to seek to
raise additional capital through public or private equity financings, partnerships, joint ventures, disposition of assets, debt financings,
bank borrowings or other sources of financing. The Company intends to seek to raise additional capital through public or private
equity financings, partnerships, joint ventures, disposition of assets, debt financings, bank borrowings or other sources of financing.
No assurances can be made that management will be successful in achieving its plan. If the Company is not able to raise substantial
additional capital in a timely manner, the Company may be forced to cease operations.
2. Summary of Significant Accounting Policies
Principles of Consolidation
Our consolidated financial statements include the accounts of Apollo Medical Holdings, Inc. and its wholly owned subsidiaries AMM,
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Aligned Healthcare Group (“AHI”), ApolloMedACO, PCCM, and VMM as well as PPC’s managed under long-term management
service agreements including AMH, LALC and Hendel. Some states have laws that prohibit business entities, such as Apollo, from
practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (collectively
known as the corporate practice of medicine), or engaging in certain arrangements with physicians, such as fee-splitting. In
California, we operate by maintaining long-term management service agreements with the PPC’s, which are each owned and
operated by physicians, and which employ or contract with additional physicians to provide hospitalist services. Under the
management agreements, we provide and perform all non-medical management and administrative services, including financial
management, information systems, marketing, risk management and administrative support. The management agreements typically
have an initial term of 20 years unless terminated by either party for cause. The management agreements are not terminable by the
PMC’s, except in the case of gross negligence, fraud, or other illegal acts by Apollo, or bankruptcy of Apollo.
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Through the management agreements and our relationship with the stockholders of the PPC’s, we have exclusive authority over all
non-medical decision making related to the ongoing business operations of the PPC’s. Consequently, we consolidate the revenue
and expenses of the PPCs from the date of execution of the management agreements.
All intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue consists of contracted and fee-for-service revenue. Revenue is recorded in the period in which services are rendered. Our
revenue is principally derived from the provision of healthcare staffing services to patients within healthcare facilities. The form of
billing and related risk of collection for such services may vary by customer. The following is a summary of the principal forms of our
billing arrangements and how net revenue is recognized for each.
Contracted revenue represents revenue generated under contracts in which we provide physician and other healthcare staffing and
administrative services in return for a contractually negotiated fee. Contract revenue consists primarily of billings based on hours of
healthcare staffing provided at agreed-to hourly rates. Revenue in such cases is recognized as the hours are worked by our staff and
contractors. Additionally, contract revenue also includes supplemental revenue from hospitals where we may have a fee-for-service
contract arrangement or provide physician advisory services to the medical staff at specific facility. Contract revenue for the
supplemental billing in such cases is recognized based on the terms of each individual contract. Such contract terms generally either
provides for a fixed monthly dollar amount or a variable amount based upon measurable monthly activity, such as hours staffed,
patient visits or collections per visit compared to a minimum activity threshold. Such supplemental revenues based on variable
arrangements are usually contractually fixed on a monthly, quarterly or annual calculation basis considering the variable factors
negotiated in each such arrangement. Such supplemental revenues are recognized as revenue in the period when such amounts are
determined to be fixed and therefore contractually obligated as payable by the customer under the terms of the respective agreement.
Additionally, we derive a portion of our revenue as a contractual bonus from collections received by our partners and such revenue is
contingent upon the collection of third-party billings. These revenues are not considered earned and therefore not recognized as
revenue until actual cash collections are achieved in accordance with the contractual arrangements for such services.
Fee-for-service revenue represents revenue earned under contracts in which we bill and collect the professional component of
charges for medical services rendered by our contracted and employed physicians. Under the fee-for-service arrangements, we bill
patients for services provided and receive payment from patients or their third-party payers. Fee-for-service revenue is reported net of
contractual allowances and policy discounts. All services provided are expected to result in cash flows and are therefore reflected as
net revenue in the financial statements. Fee-for-service revenue is recognized in the period in which the services are rendered to
specific patients and reduced immediately for the estimated impact of contractual allowances in the case of those patients having
third-party payer coverage. The recognition of net revenue (gross charges less contractual allowances) from such visits is dependent
on such factors as proper completion of medical charts following a patient visit, the forwarding of such charts to our billing center for
medical coding and entering into our billing system and the verification of each patient’s submission or representation at the time
services are rendered as to the payer(s) responsible for payment of such services. Revenue is recorded based on the information
known at the time of entering of such information into our billing systems as well as an estimate of the revenue associated with
medical services.
Concentrations
The Company had three major customers that contributed the following percentage of revenue during the years ended January 31:
Customer A
Customer B
Customer C
2013
2012
8%
9%
22%
Receivables from these customers amounted to the following percentage of total accounts receivable at January 31:
Customer A
Customer B
Customer C
Fair Value of Financial Instruments
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2013
2012
7%
5%
11%
8%
17%
34%
4%
9%
14%
Our accounting for Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires
classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes
between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:
Level one — Quoted market prices in active markets for identical assets or liabilities;
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and
reflect those assumptions that a market participant would use.
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its
hierarchy disclosures each quarter. The Company currently records warrants using level two in the hierarchy.
The carrying values of cash and cash equivalents, trade and other receivables, trade and other payables approximate their fair values
due to the short maturities of these instruments.
Cash and Cash Equivalents and Concentration of Cash
The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.
Cash and cash equivalents at January 31, 2013 include $427,678 in a brokerage money market account.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consists of amounts due from third-party payors, including government sponsored Medicare and
Medicaid programs, and insurance companies, and amounts due from hospitals, and patients. Accounts receivable are recorded and
stated at the amount expected to be collected
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of
accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic
trends and changes in customer payment patterns to evaluate the adequacy of these reserves. We also regularly analyze the ultimate
collectability of accounts receivable after certain stages of the collection cycle using a look-back analysis to determine the amount of
receivables subsequently collected and adjustments are recorded when necessary. Reserves are recorded primarily on a specific
identification basis. The following amounts which are excluded from our accounts receivable, represent an estimate of uncollectible
accounts at January 31:
2013
2012
Allowance for doubtful accounts
$
78,822 $
42,576
Property and Equipment
Property and Equipment is recorded at cost and depreciated using the straight- line method over the estimated useful lives of the
respective assets. Cost and related accumulated depreciation on assets retired or disposed of are removed from the accounts and
any resulting gains or losses are credited or charged to income. Computers and Software are depreciated over 3 years. Furniture and
Fixtures are depreciated over 8 years. Machinery and Equipment are depreciated over 5 years. At January 31, property and
equipment consisted of the following:
Website
Computers
Software
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
For the years ended January 31, depreciation and amortization expense was as follows:
Depreciation and amortization expense
Deferred financing costs
2013
2012
$
4,568 $
19,639
171,626
73,940
21,235
13,362
304,371
(236,229)
$
68,142 $
4,568
13,912
155,039
71,553
5,302
8,198
258,572
(215,311)
43,261
2013
2012
$
20,918 $
12,589
Costs incurred to issue debt are deferred and amortized as interest expense using the effective interest method over the term of the
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
related debt. Unamortized debt issue costs are written off at the time of prepayment.
Deferred financing costs are related to the placement of its Senior Secured and Convertible Notes Payable (see Notes 5 and 6) and
consist of the following at January 31, 2013:
Debt issue costs
Accumulated amortization
Net deferred financing costs
Goodwill and Intangible Assets
$
$
342,632
(89,377)
253,255
Under FASB ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill and indefinite-lived intangible assets are reviewed at
least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives.
On at least an annual basis, management assesses whether there has been any impairment in the value of goodwill by first
comparing the fair value to the net carrying value. If the carrying value exceeds its estimated fair value, a second step is performed to
compute the amount of the impairment. An impairment loss is recognized if the implied fair value of the asset being tested is less than
its carrying value. In this event, the asset is written down accordingly. The fair values of goodwill impairment testing are determined
using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the
circumstances. The fair value is evaluated based on market capitalization determined using average share prices within a reasonable
period of time near the selected testing date (fiscal year-end).
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Indefinite-lived intangible assets are tested at least annually for impairment. Impairment for intangible assets with indefinite lives
exists if the carrying value of the intangible asset exceeds its fair value. The fair values of indefinite-lived intangible assets are
determined using valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the
circumstances.
The changes in the carrying amount of goodwill for the years ended January 31 are as follows:
Goodwill - beginning of year
Goodwill acquired
Goodwill - end of year
Medical Malpractice Liability Insurance
2013
2012
$
$
32,000 $
1,200
33,200 $
-
32,000
32,000
Our business has an inherent risk of claims of medical malpractice against our affiliated physicians and us. We or our independent
physician contractors pay premiums for third-party professional liability insurance that indemnifies us and our affiliated hospitalists on
a claims-made basis for losses incurred related to medical malpractice litigation. Professional liability coverage is required in order for
our affiliated hospitalists to maintain hospital privileges. All of our physicians carry first dollar coverage with limits of coverage with
limits of liability equal to $1,000,000 for all claims based on occurrence up to an aggregate of $3,000,000 per year.
We believe that our insurance coverage is appropriate based upon our claims experience and the nature and risks of our business. In
addition to the known incidents that have resulted in the assertion of claims, we cannot be certain that our insurance coverage will be
adequate to cover liabilities arising out of claims asserted against us, our affiliated professional organizations or our affiliated
hospitalists in the future where the outcomes of such claims are unfavorable. We believe that the ultimate resolution of all pending
claims, including liabilities in excess of our insurance coverage, will not have a material adverse effect on our financial position,
results of operations or cash flows; however, there can be no assurance that future claims will not have such a material adverse
effect on our business.
Income Taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of
deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility
is uncertain.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is
to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any
related appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets
the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is
measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent
period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should
be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest
incurred related to underpayment of income tax are classified as income tax expense in the year incurred.
Stock-Based Compensation
The Company maintains a stock-based compensation program for employees, directors and consultants, which is more fully
described in Note 10. The Company sells certain of its restricted common stock to its employees, directors and consultants with a
right of repurchase feature that lapses based on performance of services in the future. The Company accounts for the unvested
portion of the related stock-based compensation expense prepaid consulting. Prepaid consulting is amortized to stock-based
compensation expense over the vesting period.
Non-controlling Interest
The non-controlling interest recorded in our consolidated financial statements represents the pre-acquisition equity of those PPC’s
which we have determined that we have a controlling financial interest and that consolidation is required as a result of management
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
contracts entered into with these entities. The nature of these contracts provide us with a monthly management fee to provide the
services described above, and as such, the only adjustments to non-controlling interests in any period subsequent to initial
consolidation would relate to either capital contributions or withdrawals by the non-controlling parties.
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Basic and Diluted Earnings per Share
Basic net loss per share is calculated using the weighted average number of shares of the Company’s common stock issued and
outstanding during a certain period, and is calculated by dividing net loss by the weighted average number of shares of the
Company’s common stock issued and outstanding during such period. Diluted net loss per share is calculated using the weighted
average number of common and potentially dilutive common shares outstanding during the period, using the as-if converted method
for secured convertible notes, and the treasury stock method for options and warrants.
Use of Estimates
The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period.
Reclassifications
Certain reclassifications have been made to the accompanying 2012 consolidated financial statements to conform them to the 2013
presentation.
Recently Adopted Accounting Pronouncements
In December 2011, the FASB issued guidance on offsetting (netting) assets and liabilities. Entities are required to disclose both gross
information and net information about both instruments and transactions eligible for offset in the statement of financial position and
instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidance is effective for
annual periods beginning after January 1, 2013. We do not expect the adoption of this revised GAAP to have a material effect on our
financial position.
In September 2011, the FASB issued a GAAP update on goodwill to allow an entity the option of performing a qualitative assessment
before calculating the fair value of the reporting unit when testing goodwill for impairment. If the qualitative assessment concludes that
it is more likely than not that the fair value of a reporting unit is less than its carrying value, the entity shall perform the quantitative
two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This revised GAAP will be
effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not expect the adoption of this
revised GAAP to have a material effect on our financial position, results of operations or cash flows.
In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option
to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to
present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements.
The new guidance is effective for annual periods beginning after December 15, 2011. In December 2011, the FASB issued a deferral
of certain portion of this guidance . We do not expect the adoption of this revised GAAP to have a material effect on our financial
position.
In May 2011, the FASB issued a GAAP update on fair value measurement, which eliminates differences between U.S. GAAP and
International Financial Reporting Standards (IFRS), resulting in a consistent definition of fair value and common requirements for
measurement of and disclosure about fair value between GAAP and IFRS. It also expands the disclosures for fair value
measurements that are estimated using significant unobservable (Level 3) inputs. This revised GAAP will be effective for annual and
interim periods beginning after December 15, 2011. We do not expect the adoption of this revised GAAP to have a material effect on
our financial position, results of operations or cash flows.
In July 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment. In accordance with the amendments in this Update, an entity has the option first to
assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that
the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it
is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.
However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and
perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30.
The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15,
2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a
public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities,
have not yet been made available for issuance. We do not expect the adoption of this revised GAAP to have a material effect on our
financial position, results of operations or cash flows.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In October 2012 the FASB clarified the codification to correct the unintended application of guidance and includes amendments
identifying when the use of fair value should be linked to the definition of fair value in Topic 820, Fair Value Measurement.
Amendments to the Codification without transition guidance are effective upon issuance for both public and nonpublic entities. For
public entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. We
do not expect the adoption of this revised GAAP to have a material effect on our financial position, results of operations or cash flows.
In February 2013 the FASB amended Topic 220 Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income. The amendments do not change the current requirements for reporting net income or other comprehensive income in
financial statements. These amendments require an entity to provide information about the amounts reclassified out of accumulated
other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net
income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the
respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in
its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety
to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details
about those amounts. For public entities, the amendments are effective prospectively for fiscal years, and interim periods within those
years, beginning after December 15, 2012. Early adoption is permitted. We do not expect the adoption of this revised GAAP to have a
material effect on our financial position, results of operations or cash flows.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
3. Acquisitions
Aligned Healthcare Group
On February 15, 2011, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Aligned Healthcare
Group – California, Inc., Raouf Khalil, Jamie McReynolds, M.D. BJ Reese and BJ Reese & Associates, LLC, under which the
Company acquired all of the issued and outstanding shares of capital stock and associated Intellectual property and related
intangibles (the “Acquisition”) of AHI.
Upon the signing of the Purchase Agreement, 1,000,000 shares of the Company’s common stock became issuable (the “Initial
Shares”) and are included in the number of shares outstanding. In addition, if the gross revenues of AHI and an affiliated entity (the
“Aligned Division”) had exceeded $1,000,000 on or before February 1, 2012, then the Company would have been obligated to issue
an additional 1,000,000 shares of common stock (the “Contingent Shares”). Moreover, the Company would be obligated to issue up
to an additional 3,500,000 shares of common stock (the “Earn-Out Shares” and, collectively with the Initial Shares and the Contingent
Shares, the “Shares”) over a three year period following closing based on the EBITDA generated by the Aligned Division during that
time. Under the agreement, ApolloMed would issue twelve shares of its Common stock for each dollar of Actual EBITDA earned in
the first 12-month period. In subsequent periods, ApolloMed would be required to issue twelve shares of its common stock for each
dollar of Actual EBITDA in excess of the maximum EBITDA earned in either the first 12-month period or first 12-month period and
second 12 month period.
Additionally, in accordance with the Purchase Agreement, if prior to February 15, 2012, AHI had not entered into an agreement for the
provision of certain services to a hospital or certain other health organizations that has a term of at least one year and provides
aggregate net revenues to AHI of at least $1,000,000, the Company would have the right to repurchase all of the Initial Shares for
$0.05 per share, at which time the Company’s obligation to issue any further Shares would terminate.
Based on our initial internal estimate of contingent shares to be issued as part of this agreement, we had estimated that the total fair
value of the common stock shares issued and contingently issuable for this transaction on the acquisition date was $367,500
(1,750,000 shares).
The Company originally recognized a liability based on the acquisition date fair value of the acquisition-related contingent
consideration based on the probability of the achievement of the targets stipulated in the Purchase Agreement. Based on the
Company’s estimation, an initial liability of $367,500 was recorded. At January 31, 2012 the Company determined that it did not have
an obligation to issue additional shares under the terms of the Purchase Agreement, and reversed its $367,500 accrual.
As of January, 31, 2012, based upon the completion of the Company’s annual goodwill impairment test, it was determined that the
goodwill associated with the AHI acquisition has been impaired, and as the result, the Company recorded an impairment loss of
$210,000 due to the result of contracts that were anticipated to result from this acquisition that did not materialize, and Company
management decided to focus its energies on new initiatives.
On October 11, 2012, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with
Aligned Healthcare, Inc. (“AHI”), Aligned Healthcare Group, LLC (“Aligned LLC”), Aligned Healthcare Group – California, Inc.
(“Aligned Corp.”), Jamie McReynolds, M.D., BJ Reese, BJ Reese & Associates, LLC, Marcelle Khalil and Hany Khalil (collectively, the
“Aligned Affiliates”). The Settlement Agreement terminates (a) the Company’s obligations with respect to the Aligned Affiliates under
that certain Stock Purchase Agreement, dated as of February 15, 2011 (the “Purchase Agreement”), among the Company, Aligned
LLC, Aligned Corp., Raouf Khalil, Jamie McReynolds, M.D., BJ Reese and BJ Reese & Associates, LLC, as amended by that certain
First Amendment to Stock Purchase Agreement, dated as of July 8, 2011, among the Company, Aligned LLC, Aligned Corp., Raouf
Khalil, Jamie McReynolds, M.D., BJ Reese and BJ Reese & Associates, LLC, and (b) AHI’s obligations to Aligned LLC and Aligned
Corp. under that certain Services Agreement, dated as of July 8, 2011, among AHI, Aligned LLC and Aligned Corp.
Under the Settlement Agreement, the Company has reconveyed to Jamie McReynolds, M.D., BJ Reese & Associates, LLC and
Aligned Corp. all of the shares of AHI common stock that the Company acquired from those parties under the Purchase Agreement. In
addition, Jamie McReynolds, M.D., BJ Reese & Associates, LLC and Aligned Corp. have reconveyed to the Company 500,000 shares
of the Company’s common stock, constituting all of the shares that were issued to them under the Purchase Agreement. Following
these reconveyances, the Company owns 50% of the outstanding shares of AHI’s capital stock. The conveyances under the
Settlement Agreement were in each case made for no additional consideration. The Settlement Agreement provides for a mutual
general release of all claims between the Company and the Aligned Affiliates.
Pulmonary Critical Care Management, Inc.
On August 2, 2011, Apollo Medical Holdings, Inc. entered into a stock purchase agreement (the “PCCM Purchase Agreement”) with
the sole shareholder of Pulmonary Critical Care Management, Inc. ("PCCM"), a provider of management services to the Los Angeles
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Lung Center (“LALC”), under which the Company acquired (the “PCCM Acquisition”) all of the issued and outstanding shares of
capital stock of PCCM and the associated intangible asset in the management services agreement that PCCM has with LALC (the
“PCCM Services Agreement”). Upon the signing of the PCCM Purchase Agreement, the Company issued 350,000 common shares to
the sole shareholder of PCCM, which was valued as of the date of issuance at $70,000, based on the fair market value of our shares.
F-12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
At the time of the acquisition, the assets of PCCM consisted only of the PCCM Services Agreement with LALC. Through this PCCM
Services Agreement, our wholly-owned subsidiary, PCCM, has exclusive authority over all non-medical decision-making related to
the ongoing business operations of LALC. Based on the provisions of the PCCM Purchase Agreement, we have determined that
LALC is a variable interest entity (VIE), and that we are the primary beneficiary because we have control over the operations of the
VIE. Consequently, we consolidated the accounts of LALC beginning on the PCCM Acquisition date. As a result of this consolidation,
we recorded a non-controlling interest of $164,276.
The following table summarizes the fair value of LALC’s assets acquired and liabilities at the date of acquisition of PCCM and
consolidation of LALC:
Purchase Price
Fair value of net assets acquired
Cash
Prepaid expenses
Property and equipment
Management services agreement
Accounts payable and accrued liabilities
Due from officer
Non-controlling interest
Net assets acquired
Goodwill
Verdugo Medical Management, Inc.
$
70,000
$
$
$
164,210
9,472
26,041
38,000
(1,447)
(34,000)
(164,276)
38,000
32,000
On August 1, 2012, Apollo entered into a stock purchase agreement (the “VMM Purchase Agreement”) with Dr. Eli Hendel, the sole
shareholder of Verdugo Medical Management, Inc. ("VMM"), a provider of management services pursuant to a management services
agreement (the “VMM MSA”) with Eli Hendel M.D. Inc. (“Hendel”), a medical group specializing in pulmonary and critical care patient
services, under which the Company will acquire all of the issued and outstanding shares of capital stock of VMM for $1,200. In
addition, the Company’s subsidiary, ApolloMed ACO, entered into a consulting agreement with Dr. Hendel as chairman of its ACO
advisory board in which Dr. Hendel received the right to acquire 1,200,000 shares of the Company’s restricted common stock for
$0.001 per share. In the event the consulting agreement is terminated for “any or no reason”, the Company will have the right, but not
the obligation, to repurchase at $0.001 per share 800,000 shares if the agreement is terminated within twelve months of the date of
the VMM Purchase Agreement, and repurchase 400,000 shares if the agreement is terminated within 24 months. The fair value of the
shares was estimated to be $480,000 (see Note 14).
As August 1, 2012 VMM’S assets consisted solely of the VMM MSA with Hendel. The VMM MSA provides VMM with exclusive
authority over all substantial non-medical decision-making related to the ongoing business operations of VMM. Based on the
provisions of the VMM Purchase Agreement and MSA, we have determined that Hendel is a variable interest entity (VIE), and that we
are the primary beneficiary because we have control over the operations of the VIE. Consequently, the Company consolidated the
accounts of Hendel beginning August 1, 2012.
The following table summarizes the fair value of Hendel’s assets acquired and liabilities at the date of acquisition of VMM and
consolidation of Hendel:
Purchase Price
Fair value of net assets acquired and consolidation of Hendel:
Cash
Accounts receivable
Prepaid expenses
Accounts payable and accrued liabilities
Non-controlling interest
Goodwill
4. Accounts Payable and Accrued Liabilities
$
1,200
15,314
113,881
6,869
(22,968)
(113,096)
1,200
$
Accounts payable and accrued liabilities consisted of the following at January 31:
2013
2012
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Accounts payable
D&O insurance payable
Income taxes payable
Accrued interest
Accrued professional fees
Accrued compensation
5. Notes Payable
Senior Secured Note
$
$
394,915 $
-
1,087
9,310
45,316
500,023
950,651 $
109,704
11,444
4,219
1,000
27,500
9,609
163,476
The Company entered into a Senior Secured Note (“Note”) agreement on February 1, 2012 with SpaGus Capital Partners, LLC
(“SpaGus”) an entity in which Gary Augusta, a director and shareholder of the Company, holds an ownership interest. The terms of
the Note provide for interest at 8.929% per annum, payments of principal of $135,000 on each of September 15, 2012 and October
15, 2012, and to be secured by substantially all assets of the Company. The Company prepaid interest on the Note principal of
$15,000 in accordance with the Note, and paid financing costs of $5,000 in cash and the issuance of 216,000 shares of the
Company’s common stock, which was valued at $25,661 at the date of issuance.
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On September 15, 2012, SpaGus agreed to allow the Company to defer payment of the scheduled principal payments due on
September 15 and October 15, 2012, and amended the Note effective October 15, 2012 in which SpaGus agreed to provide
additional principal to the Company in the amount of $230,000. The terms of the amended Note provide for borrowings to bear
interest at 8.0 % per annum with accrued interest payable in arrears on each of December 28, 2012, March 31, 2013, June 30, 2013
and October 15, 2013. The amended Note will mature of October 15, 2013, and may be prepaid at any time prior to September 29,
2013. The Company paid SpaGus financing costs of 100,000 restricted shares of the Company’s common stock on the amendment
date, which transaction was fair valued at $50,000, and is obligated to pay SpaGus an additional 100,000 restricted shares of the
Company’s common stock if the amended Note principal and or any accrued interest is outstanding on April 15, 2013. The Company
accounted for this amendment as a modification. Amendment financing costs will be amortized to interest expense over the life of the
amended Note using the effective interest method.
Line of credit payable
The Company has a $100,000 revolving line of credit with a financial institution of which $94,765 was outstanding at January 31,
2013. Borrowings under the line of credit bear interest at the prime rate (as defined) plus 4.50% (7.75% per annum at January 31,
2013), interest only is payable monthly, and matures June 5, 2013. The line of credit is secured by substantially all assets of the
Company’s subsidiary, Eli M. Hendel, Inc.
Interest expense related to the Notes Payable, including financing cost amortization, for the years ended January 31:
Interest expense
6. Convertible Notes Payable
The Company’s long-term debt consists of the following at January 31:
10% Senior Subordinated Convertible Notes due January 31, 2016
9% Senior Subordinated Convertible Notes due February 15, 2016
8% Senior Subordinated Convertible Notes due February 1, 2015
Less: debt discount
Total Convertible Notes
Less: Current Portion
Long Term Portion
2013
2012
$
73,337 $
-
January 31,
2013
January 31,
2012
$
$
1,250,000 $
880,000
150,000
(370,286)
1,909,714
-
1,909,714 $
1,250,000
-
150,000
(653,826)
746,366
596,366
150,000
10% Senior Subordinated Callable Convertible Notes due January 31, 2016
On October 16, 2009, the Company issued $1,250,000 of its 10% Senior Subordinated Callable Convertible Notes (the “10% Notes”).
The net proceeds of $1,100,000 were used for the repayment of existing debt, acquisitions, physician recruitment and other general
corporate purposes. The notes bear interest at a rate of 10% annually, payable semi- annually on January 31 and July 31. The Notes
mature and become due and payable on January 31, 2013 and rank senior to all other unsecured debt of the Company.
The 10% Notes were sold through an Agent in the form of a Unit. Each Unit was comprised of one 10% Senior Subordinated Callable
Note with a par value $25,000, and one five-year warrant to purchase 25,000 shares of the Company’s common stock. The purchase
price of each Unit was $25,000, resulting in gross proceeds of $1,250,000.
In connection with the placement of the subordinated notes, the Company paid a commission of $125,000 and $25,000 of other direct
expenses. The agent also received five-year warrants to purchase up to 250,000 shares of the Common Stock at an initial exercise
price of $0.25 per share adjustable pursuant to changes in public value of our shares and cash flow of the Company from July 31,
2011 until the note is paid in full. The agent also received 100,000 shares of restricted common stock for pre-transaction advisory
services and due diligence. A commission of $125,000 paid at closing, is accounted for as prepaid expense and will be amortized
over a forty-month period through January 31, 2013, the maturity date of the notes. The $25,000 of other direct expenses were paid
at closing and accounted for as financing costs in the accompanying consolidated financial statements. In addition, financing costs
included $4,000 related to the value of the 100,000 shares granted to the placement agent.
The 10% Notes are convertible any time prior to January 31, 2013. The initial conversion rate is 200,000 shares of the Company’s
common stock per $25,000 principal amount of the 10% Notes adjustable pursuant to changes in public value of our shares and cash
flow of the Company. This represents an initial conversion price of $0.125 per share of the Company’s common stock. The note is
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
fixed from August 1, 2009 through July 31, 2011. After July 31, 2011, the conversion price will be equal to the lesser of $0.125 per
share or the average of the monthly high stock price and low stock price as reported by Bloomberg multiplied by 110%. The minimum
conversion price is the greater of $0.05 per share or 8 times cash EPS. On or after January 31, 2012, the Company may, at its
option, upon 60 days’ notice to both the Noteholder’s and the placement agent, redeem all or a portion of the notes at a redemption
price in cash equal to 102% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding,
the redemption date.
The Company recorded a derivative liability and an off-setting debt discount in the amount of $653,026 as of January 31, 2012, as the
result of the change in the conversion price in connection with the conversion price reset to $0.11485. The Company’s calculation of
the derivative liability was made using the Black-Scholes option-pricing model with the following assumptions: expected life of 1 year;
80.0% stock price volatility; risk-free interest rate of 0.30% and no dividends during the expected term.
The Warrants attached to the Units are exercisable into shares of Common Stock at an initial exercise price of $0.125. The Warrants
have a five-year term and expire on October 31, 2014. The Company’s calculations were made using the Black-Scholes option-
pricing model with the following assumptions: expected life of 5 years; 80.0% stock price volatility; risk-free interest rate of 2.16% and
no dividends during the expected term. These warrants were estimated to have a fair value of $2,653 using the Black-Scholes pricing
model which was recorded as unamortized warrant discount on the grant date and $2,418 as of January 31, 2010.
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In connection with this offering, the Company also issued warrants to purchase 250,000 shares of our common stock to the
placement agent at an exercise price of $0.25 per share, and are exercisable immediately upon issuance and expire five years after
the date of issuance. The Company’s calculations were made using the Black-Scholes option-pricing model with the following
assumptions: expected life of 5 years; 48.0% stock price volatility; risk-free interest rate of 2.16% and no dividends during the
expected term. These warrants were estimated to have a fair value of $2,200, which was recorded as unamortized warrant discount
on the grant date. The exercise price of the warrants is adjustable according to the same terms as the 10% Notes.
At January 31, 2012, the warrant exercise price reset to $0.11485. In connection with this the Company recorded a warrant liability of
$120,000 and recognized additional financing costs of $120,000 for the year ended January 31, 2012. The fair value of the warrant
liability was determined using the Black-Scholes model option pricing model with the following assumptions: expected life of 2.75
years; 30% stock price volatility; risk-free interest rate of 0.30% and no dividends during the expected term.
On October 29, 2012, the Company amended the terms of the 10% Notes to extend the maturity to January 31, 2016, and to fix the
conversion price of the 10% Notes at $0.11485 per share. The Company accounted for this amendment as a modification. As a result
of fixing the conversion price, the Company determined that the conversion feature was indexed to the Company’s common stock,
and should be equity classified. The fair value of the derivative liability immediately prior to the amendment was $5,605,703
determined using the Black-Scholes option pricing model with the following inputs: expected life 0.25 years; 80% stock price volatility;
risk-free rate of 0.18% and no dividends. The fair value of the conversion right giving effect to the amendment was $5,818,149 using
the Black-Scholes option pricing model with the following inputs: expected life 3.25 years; 80% stock price volatility; risk free rate of
0.37% and no dividends, and was reclassified from derivative liability to additional paid-in capital in the accompanying condensed
consolidated balance sheet. The difference in the pre-amendment and post-amendment derivative fair values of $212,446 was
recorded as a loss on modification and included in the accompanying condensed consolidated statement of operations. The
Company paid placement fees to an agent in the form of warrants to purchase 100,000 shares of the Company’s common stock with
an exercise price of $0.50 per share and contractual life of 60 months; and 20,000 restricted shares of the Company’s common stock.
The fair value of the warrants was $56,225 using the Black-Scholes option pricing model with the following model assumptions:
expected life 60 months; 80% stock price volatility; risk-free interest rate of 0.37%, and no dividends during the expected term. The
fair value of the restricted shares was $12,600. The total fair value of the warrants and restricted shares was $68,825 and was
recorded as deferred financing costs and an increase to additional paid in capital. The deferred financing costs will be amortized to
interest expense using the effective interest method through January 31, 2016.
The Company also amended the Warrants on October 29, 2012 to extend the expiration date to July 31, 2016 and to fix the Warrant’s
exercise price at $0.11485 per share. At January 31, 2012 the Warrants were reclassified as warrant liabilities in accordance with
ASC 815-40 as the Warrants did not meet the criteria to be indexed to the Company’s common stock and classified as equity. At the
Warrant amendment date, the Company reassessed the classification of the Warrants as a result of fixing the conversion price, and
determined that the amended Warrants met the criteria to be indexed to the Company’s common stock, and should be equity-
classified. The Company determined that the fair of the Warrants immediately prior to the Warrant amendment was $785,135 using
the Black-Scholes option pricing model inputs of: expected life 2.0 years; 80% stock price volatility; risk-free interest rate of 0.28%,
and no dividends during the expected term. The fair value of the Warrants giving effect to the amendment was $808,732 was
reclassified from warrant liability to additional paid-in capital in the accompanying consolidated balance sheet, and was determined
using the Black-Scholes option pricing model inputs of: expected life 3.8 years; 80% stock price volatility; risk-free interest rate of
0.37%, and no dividends during the expected term. The difference between the pre-amendment and post-amendment Warrant fair
values of $24,437 was recorded as a loss on modification and included in the accompanying consolidated statement of operations.
In addition, each $2.50 of 10% Note principal received one warrant to purchase one share of the Company’s common stock, or a total
of 500,000 shares, for $0.45 per share (the “Amendment Warrants”). The fair value of the Amendment Warrants was $200,452
determined using the Black-Scholes option pricing model with the following inputs: expected life 3.8 years; 80% stock price volatility;
risk-free interest rate of 0.37%, and no dividends during the expected term. The Company recorded this amount as additional debt
discount and an increase to additional paid-in capital in the accompanying consolidated balance sheet, and will amortize the debt
discount to interest expense using the effective interest method over the term of the amended 10% Notes.
8% Senior Subordinated Convertible Promissory Notes due February 1, 2015
On September 1, 2011, the Company issued $150,000 of its 8% Senior Subordinated Promissory Convertible Notes. The net
proceeds were used for working capital to support organic growth including the expansion to new hospitals and hiring of new
physicians, acquisitions of physician practices and/or care management businesses and for general corporate purposes. The notes
bear interest at a rate of 8% annually, payable semi -annually on December 31 and June 30. The Notes mature and become due and
payable on February 1, 2015 and rank senior to all other subordinated debt of the Company.
The 8% Notes are convertible any time prior to February 1, 2015. The initial conversion rate is 100,000 shares of the Company’s
common stock per $25,000 principal amount of the 8% Notes, which represents an initial conversion price of $0.25 per share of the
Company’s common stock. The conversion price of the 8% Notes will be adjusted on a weighted average basis if the Company
issues certain additional shares of common stock (or warrants or rights to purchase share of common stock or securities convertible
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
into common stock) for a consideration per share which is less than the then applicable conversion price.
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company may require the holders of the 8% Notes to convert to common stock at the then applicable conversion rate at any time
after June 30, 2013 if: i) our 10% Notes have been fully repaid or converted and ii) the closing price of our common stock has
exceeded 150% of the then applicable Conversion Price for no less than 30 consecutive trading days prior to giving notice.
At any time on or after June 30, 2014, the Company may, at its sole option redeem all of the Notes at a redemption price in cash
equal to 108% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest to, but excluding the
redemption rate.
9% Senior Subordinated Callable Convertible Promissory Notes due February 15, 2016
On January 31, 2013 the Company raised through a private placement offering $880,000 of par value 9% Senior Subordinated
Callable Convertible Promissory Notes maturing February 15, 2016 (the “9% Notes”). The 9% Notes bear interest at a rate of 9% per
annum, payable semi-annually on August 15 and February 15. The principal of the 9% Notes plus any accrued yet unpaid interest is
convertible at any time by the holder at a conversion price of $0.40 per share of Common Stock, subject to adjustment for stock splits,
stock dividends and reverse stock splits. After 60 days prior notice, the Note is callable in full or in part by the Company at any time
after January 31, 2015. If the Average Daily Value of Trades (“ADVT”) during the prior 90 days as reported by Bloomberg is greater
than $100,000, the Note is callable at a price of 105% of the Note’s par value, and if the ADVT is less than $100,000, the Note is
callable at a price of 110% of the Note’s par value.
The holders of the 9% Notes received warrants to purchase 660,000 shares of the Company’s common stock at an exercise price of
$0.45 per share, subject to adjustment for stock splits, reverse stock splits and stock dividends, and which are exercisable at any date
prior to January 31, 2018. The fair value of the 9% Notes warrants was based on the Company’s closing stock price at the transaction
date and inputs to the Black-Scholes option pricing model as follows:
Fair value of 9% Notes warrants
Exercise price
Expected life (years)
Volatility
Risk-free interest rate
Dividends
$
$
186,897
0.45
5.00
36.70%
0.70%
0.00%
The Company incurred financing costs with a placement agent equal to 9% of the of the subscription price of the 9% Notes sold, out-
of- pocket expenses, legal fees, and warrants to purchase 176,000 shares of the Company’s common at a conversion price of $0.40
per share, subject to adjustment for stock splits, stock dividends and reverse stock splits as follows:
Fees and expenses
Fair value of placement agent warrants
$
$
101,179
54,468
The fair value of the placement agent warrants was based on the Company’s closing stock price at the transaction date and inputs to
the Black-Scholes option pricing model as follows:
Exercise price
Expected life (years)
Volatility
Risk-free interest rate
Dividends
$
0.40
5.00
36.70%
0.70%
0.00%
These amounts were recorded as deferred financing costs which will be amortized to interest expense using the effective interest
method over the term of the 9% Notes.
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Interest expense on the Convertible Notes, including amortization of related debt discount and financing costs for the years ended
January 31 was as follows:
2013
2012
Interest expense
$
856,839 $
304,034
Convertible notes maturing after one year consists of the following:
Year ending January 31,
2015
2016
2017
2018
7. Fair Value of Financial Instruments
$
$
$
$
-
1,400,000
880,000
-
The fair values of the Company’s financial instruments are measured on a recurring basis. The carrying amount reported in the
accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short-term maturity of those instruments. The carrying amount for borrowings under
the Senior Secured Note and the Convertible Notes approximates fair value. The fair value of the warrant and derivative liability was
estimated using the Black-Scholes option valuation model. The Company did not have any assets or liabilities categorized as Level
1 or 2 as of January 31, 2013.
The following summarizes the activity of Level 3 inputs measured on a recurring basis for the year ended January 31, 2013:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Derivative
Warrant
Total
Balance at January 31, 2011
Additions
Exercises
Balance at January 31, 2012
Additions
Exercises
Reclassification (Note 6)
Adjustment resulting from change in fair value recognized in earnings
Balance at January 31, 2013
$
8. Related Party Transactions
$
- $
- $
653,026
-
653,026
-
-
(5,818,149)
5,165,123
120,000
-
120,000
-
-
(808,732)
688,732
- $
- $
-
773,026
-
773,026
-
-
(6,626,881)
5,853,855
-
Due to officers represent amounts due in connection with acquisition of PCCM and reimbursement of certain expenses paid on behalf
of the Company. These amounts are non- interest bearing, due on demand, and consist of the following at January 31:
Due to officers
$
- $
12,400
2013
2012
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
9. Income Taxes
The Company uses the liability method of accounting for income taxes as set forth in ASC 740 (formerly Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”)). Under the liability method, deferred taxes are
determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. As of
January 31, 2013, the Company had federal and California tax net operating loss carryforwards of approximately $9,046,000 and
$9,039,000, respectively. The federal and California net operating loss carryforwards will expire at various dates from 2028 through
2032. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss and credit carryforwards
may be limited if a cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership
change. The Company may have had a change in control under these Sections. However, the Company does not anticipate
performing a complete analysis of the limitation on the annual use of the net operating loss and tax credit carryforwards until the time
that it projects it will be able to utilize these tax attributes.
Significant components of the Company’s deferred tax assets as of January 31, 2013 and January 31, 2012 are shown below. A
valuation allowance of $4,164,591 and $933,420 as of January 31, 2013 and 2012, respectively, has been established against the
Company’s deferred tax assets as realization of such assets is uncertain. The Company’s effective tax rate is different from the
federal statutory rate of 34% due primarily to operating losses that receive no tax benefit as a result of a valuation allowance recorded
for such losses.
Deferred tax assets (liabilities) consist of the following at January 31:
NOL carry forward
Stock options - exercisable
Contribution carryforward
Warrant liability
State income taxes
Accrual to cash
State income taxes, deferred
Impairment loss
Other, net
Net Deferred Tax Assets
Valuation Allowance
2013
2012
$
$
3,967,114 $
741,971
8,740
-
544
(243,300)
(310,478)
-
-
4,164,591
(4,164,591)
- $
849,591
81,775
6,970
51,408
1,247
(76,500)
(71,035)
89,964
-
933,420
(933,420)
-
The provision for income taxes differs from the amount computed by applying the federal income tax rate as follows for the
year ended January 31:
Tax computed at the statutory rate (34%)
Stock options
Accrual to cash
Warrant liability
Impairment Loss
Non-cash stock compensation
Change in valuation
2013
2012
0.34%
(0.06)%
-%
-%
-%
-%
(0.28)%
-%
0.34%
(0.01)%
0.01%
(0.05)%
(0.08)%
(0.06)%
(0.15)%
-%
As of January 31, 2013, the Company does not have any unrecognized tax benefits related to various federal and state income tax
matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.
The Company is subject to U.S. federal income tax as well as income tax of multiple state tax jurisdictions. The Company and its
subsidiaries’ state income tax returns are open to audit under the statute of limitations for the years ended January 31, 2010 through
2013. The Company does not anticipate material unrecognized tax benefits within the next 12 months.
10. Stockholder’s Deficit
Equity Incentive Plan
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On March 4, 2010, the Company’s Board of Directors approved the 2010 Equity Incentive Plan (the “2010 Plan”). The Plan provides
for the granting of the following types of awards to persons who are employees, officers, consultants, advisors, or directors of our
Company or any of its affiliates:
Under the 2010 Plan, the Company may issue a variety of equity vehicles to provide flexibility in implementing equity awards,
including incentive stock options, nonqualified stock options, restricted stock grants and stock appreciation rights.
Subject to the adjustment provisions of the 2010 Plan that are applicable in the event of a stock dividend, stock split, reverse stock
split or similar transaction, up to 5,000,000 shares of common stock may be issued under the 2010 Plan. Options granted under the
2010 Plan generally vest over a three-year period and generally expire ten years from the date of grant.
Stock options and warrants issued to non-employees as compensation for services to be provided to the Company are accounted for
based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly
determined. The Company recognizes this expense over the period in which the services are provided.
On August 31, 2012 the Company’s Board of Directors amended the 2010 Plan, which allowed the Board to grant an additional
7,000,000 shares up to 12,000,000 shares of the Company’s common stock. The 2010 Plan awards include incentive stock option,
non-qualified options, restricted common stock, and stock appreciation rights. As of January 31, 2013, approximately 267,000 shares
are available for future grants under the 2010 Plan. The Company issues new shares to satisfy stock option and warrant exercises.
Share Issuances
The Company’s Board of Directors authorized the issuance 600,000 shares of common stock for compensation related to consulting
and directors’ fees during the twelve months ended January 31, 2012. The shares were valued at $90,000 based on the fair values of
the shares at the issuance dates. These shares were not issued as January 31, 2012 and were recorded as a liability at January 31,
2012. Included in the issuance of 600,000 shares were 400,000 restricted shares of common stock acquired by Mr. Suresh Nihalani
for $0.001 per share in connection with Mr. Nihalani’s re-election to the Company’s Board of Directors. The fair value of the grant to
Mr. Nihalani was $60,000 and was recorded as compensation expense during the year ended January 31, 2012.
F-18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During the three months ended April 30, 2012, the Company’s Board of Directors authorized: (i) the purchase of 400,000 restricted
shares of the Company’s common stock by Mr. Gary Augusta at $0.001 per share by Mr. Augusta in connection with Mr. Augusta’s
election to the Company’s Board. The fair value of the shares at grant date was $47,520 and will be accounted for as prepaid
consulting and amortized to expense over the related service period, with the unamortized portion presented as a contra equity
account on the balance sheet ; (ii) the issuance of 216,000 common shares to SpaGus Capital, LLC with a fair value of $25,661
related to the cost of placing the Senior Secured Note (see Note 8); and (iii) the issuance of 300,000 common shares with a fair value
of $41,560 related to consulting services provided by Mr. Augusta during the three months ended April 30, 2012. The Company has
the right, but not the obligation, to redeem the unearned service portion of the 400,000 restricted shares purchased by Mr. Nihalani
and 400,000 restricted shares purchased by Mr. Augusta at par value.
The Company’s Board of Directors authorized the issuance of 200,000 shares to Mr. Augusta with a fair value of $26,000 during the
three months ended July 31, 2012 related to consulting services provided by Mr. Augusta.
On September 15, 2012, the Company’s Board of Directors authorized the issuance of 3,350,000 shares of the Company’s common
stock to certain employees and consultants as follows: (i)1,200,000 common shares purchased by Dr. Eli Hendel for $0.001 per
share, pursuant to a consulting agreement dated August 1, 2012 in which if Dr. Hendel is terminated for “any or no reason”, the
Company will have the right, but not the obligation, to repurchase at $0.001 per share 800,000 shares if the agreement is terminated
within twelve months of the date of the VMM Purchase Agreement (see Note 3), and repurchase 400,000 shares if the agreement is
terminated within 24 months. The fair value of the shares was estimated to be $480,000, and the share purchase will be accounted
for as prepaid consulting and amortized over the life of the agreement; (ii) 1,000,000 common shares purchased by Dr. Warren
Hosseinion, the Company’s Chief Executive Officer, for $0.001 per share with a fair value of $420,000 and expensed at grant date;
(iii) 700,000 common shares purchased by Mr. Kyle Francis, the Company’s Chief Financial Officer, for $0.001 per share with a fair
value of $269,500 and expensed at grant date; (iv) 316,667 common shares purchased by certain employees and consultants for
$0.001 per share with a fair value of $133,317 and expensed at grant date.
On October 15, 2012 the Company’s Board of Directors authorized the issuance of 100,000 shares of the Company’s common stock
to SpaGus Capital Partners, LLC in connection with the amendment of the Company’s Senior Secured Promissory Note with a fair
value of $50,000 (see Note 5).
On October 18, 2012 the Company’s Board of Directors authorized the issuance of 400,000 restricted shares of the Company’s
common stock with a fair value of $168,000 to Mr. Mark Meyers, pursuant to Mr. Meyers’ appointment to the Company’s Board of
Directors. On October 22, 2012 the Company’s Board of Directors authorized the issuance of 500,000 restricted shares of the
Company’s common stock with a fair value of $210,000 to Mr. Creem pursuant to Mr. Creem’s appointment to the Company’s Board
of Directors. Mr. Meyers and Mr. Creem’s restricted share grants each vest on a monthly basis over 36 months and will be accounted
for as prepaid consulting and amortized over the life of their respective agreements.
On October 29, 2012 the Board of Directors authorized the issuance of 20,000 shares of the Company’s common stock with a fair
value of $12,600 to the 10% Notes placement agent (see Note 6).
Option Issuances
During the year ended January 31, 2011, the Company’s Board of Directors granted 1,150,000 options to employees and directors.
The fair value of the options was $0.11 per share, or $126,500 aggregate fair value. The fair value of each option award was
estimated using the Black-Scholes option pricing model. The calculation was based on the exercise price of $0.15, an expected term
of 10.0 years using the simplified method, interest rate of 1.98%, volatility of 80% and no dividends.
On February 1, 2012 the Board of Directors approved the grant of 1,000,000 stock options to Mr. Ted Schreck in pursuant to Mr.
Schreck’s agreement to join the Company’s Board as director. The options vest in three equal installments on each of February 1,
2012, 2013, and 2014 subject to Mr. Schreck’s continued role as a director. The options expire on the tenth anniversary of issuance.
The fair value of the stock options of $120,000 was determined under the Black-Scholes option pricing model. The calculation was
based on the exercise price of $0.15, an expected term of 10.0 years using the simplified method, interest rate of 1.97%, volatility of
80.0% and no dividends.
On September 15, 2012 the Company’s Board of Directors authorized the issuance of stock options to acquire 3,075,000 shares of
the Company’s common stock to certain of the Company’s physicians and medical professionals. The options substantially vest in
three equal installments on each September 15, 2012, July 31, 2013 and July 31, 2014, subject to the recipients continued role with
the Company, and expire on the tenth anniversary of issuance. The fair value of the options was estimated to be $907,796
determined using the Black-Scholes option pricing model based on the following inputs: exercise price of $0.21, expected term of 3.7
years using the simplified method, interest rate of 0.42%, volatility of 80.0% and no dividends.
During the 4th quarter ended January 31, 2013 the Company’s Board of Directors authorized the issuance of 150,000 stock options to
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Mr. Mark Meyers pursuant to Mr. Meyer’s consulting agreement (Note 11). The options vest immediately and expire on the tenth
anniversary of issuance.
The fair value of the stock options of $55,617 was determined under the Black-Scholes option pricing model. The calculation was
based on the Company’s closing stock price on the date of grant and the following weighted-average inputs: exercise price of $0.21,
an expected term of 6.0 years using the simplified method, interest rate of 0.70%, volatility of 36.7% and no dividends.
F-19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Stock option activity for the year ended January 31, 2013 is summarized below:
Balance, January 31, 2011
Granted
Exercised
Expired
Forfeited
Balance, January 31, 2012
Granted
Exercised
Expired
Forfeited
Balance, January 31, 2013
Vested and expected to vest
Exercisable, January 31, 2013
Shares
- $
1,150,000
-
-
-
1,150,000
4,225,000
(75,000)
-
-
5,300,000 $
2,733,336 $
2,733,336 $
Weighted
Average
Per Share
Exercise
Price
Weighted
Average
Remaining
Life
(Years)
Aggregate
Intrinsic
Value
-
0.15
-
-
-
0.15
0.19
0.21
-
-
0.18
0.18
0.18
- $
-
-
-
-
8.9
9.2
-
-
-
9.1 $
8.9 $
8.9 $
-
-
-
-
-
-
-
-
-
-
-
-
-
The total intrinsic value of stock options exercised during the year ended January 31, 2013 was $15,750.
ApolloMed ACO 2012 Equity Incentive Plan
On October 18, 2012 ApolloMed ACO’s Board of Directors adopted the ApolloMed Accountable Care Organization, Inc. 2012 Equity
Incentive Plan (the “ACO Plan”) and reserved 9,000,000 shares of ApolloMed ACO’s common stock for issuance thereunder. The
purposes of the ACO Plan are to encourage selected employees, directors, consultants and advisers to improve operations and
increase the profitability of ApolloMed ACO and encourage selected employees, directors, consultants and advisers to accept or
continue employment or association with ApolloMed ACO.
Awards of restricted stock under the Plan vest (i) one-third on the date of grant; (ii) one-third on the first anniversary of the date of
grant, if the grantee has remained in service continuously until that date; and (iii) one-third on the second anniversary of the date of
grant if the grantee has remained in service continuously until that date.
In the 4th quarter ended January 31, 2013, ApolloMed ACO issued restricted common stock under the ACO Plan totaling 3,690,000
shares to participating physicians. One-third of the total share grant, or 1,230,000 shares, vested upon grant and the remainder is
subject to the ACO Plan vesting schedule. ApolloMed ACO’s Board of Directors determined the fair value of the shares at grant date
was $0.01 per share.
The following table summarizes the restricted stock award in the ACO Plan during the year ended January 31, 2013:
Balance, January 31, 2012
Granted
Released
Balance, January 31, 2013
Shares
-
3,690,000
-
3,690,000
Weighted
Average
Remaining
Life
(Years)
Aggregate
Intrinsic
Value
Weighted
Average
Fair Value
- $
1.9
- $
36,900
1.9 $
36,900 $
-
0.01
0.01
Stock-based compensation expense related to restricted stock and option awards is recognized over their respective vesting periods,
and is as follows for the year ended January 31:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2013
2012
Stock-based compensation expense:
Cost of services
General and administrative
$
$
550,710 $
1,511,017
2,061,728 $
29,333
152,400
181,733
F-20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As of January 31, 2013, total unrecognized compensation costs related to non-vested stock-based compensation arrangements
granted under our 2010, 2012 and ACO Plan’s and the weighted-average period of years expected to recognize those costs are as
follows:
Common stock options
ACO Plan restricted stock
Warrants
Warrants consisted of the following:
Outstanding at January 31, 2011
Lapsed
Outstanding at January 31, 2012
Granted
Exercised
Cancelled
Outstanding at January 31, 2013
Unrecognized
Compensation
Cost
Weighted
Average
Remaining
Life
(Years)
$
$
521,611
24,600
0.9
1.9
Aggregate
intrinsic value
Number of
warrants
-
-
-
-
-
-
-
1,655,333
(155,333)
1,500,000
2,936,000
-
(1,500,000)
2,936,000
$
$
Exercise Price
$
$
$
$
$
$
0.11485
0.11485
0.45000
0.50000
0.45000
0.40000
Warrants
outstanding
Weighted
average
remaining
contractual life
Warrants
exercisable
Weighted
average
exercise price
1,250,000
250,000
500,000
100,000
660,000
176,000
2,936,000
3.76
3.76
3.76
5.00
5.00
5.00
4.15
1,250,000 $
250,000 $
500,000 $
100,000 $
660,000 $
176,000 $
2,936,000 $
0.11485
0.11485
0.45000
0.50000
0.45000
0.40000
0.27748
In conjunction with the completion of the private placement on October 16, 2009, the Company issued a total of 1,500,000 warrants
(“Warrants”). Of this amount, 1,250,000 warrants were issued to the holders of the Convertible Notes and 250,000 warrants were
granted to the placement agent. The warrants are exercisable into shares of Common Stock at an exercise price of $0.11485. The
warrants had a five-year term and expire on October 31, 2014. On October 29, 2012 the Company, in connection with amendment of
its 10% Senior Subordinated Convertible Notes amended the Warrants in which the exercise price was fixed at $0.11485 per share
and in which the term was extended to July 31, 2016. In addition, the Company issued to the 10% Note holders warrants to acquire
500,000 shares of the Company’s common stock at $0.45 per share, which have a term that extends to July 31, 2016. The Company
issued to the placement agent in the 10% Notes amendment warrants to acquire 100,000 shares of the Company’s common stock at
$0.50 per share (see Note 6).
In connection with the placement of the 9% Notes (see Note 6), the holders of the 9% Notes received warrants to purchase 660,000
shares of the Company’s common stock at an exercise price of $0.45 per share, subject to adjustment for stock splits, reverse stock
splits and stock dividends, and the placement agent warrants to purchase 176,000 shares of the Company’s common at a conversion
price of $0.40 per share, subject to adjustment for stock splits, stock dividends and reverse stock splits, and which are exercisable at
any date prior to January 31, 2018. The fair value of the 9% Notes warrants was as follows:
Fair value of 9% Notes warrants
$
186,897
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fair value of placement agent warrants
$
54,468
Authorized stock
At January 31, 2013 the Company was authorized to issue up to 100,000,000 shares of common stock. The Company is required to
reserve and keep available out of the authorized but unissued shares of common stock such number of shares sufficient to effect the
conversion of all outstanding shares of the 10% Senior Subordinated Callable Convertible Notes, the 8% Senior Subordinated
Convertible Promissory Notes, the 9% Senior Subordinated Callable Notes, he exercise of all outstanding warrants exercisable into
shares of common stock, and shares granted and available for grant under the Company’s stock option grants. The amount of shares
of common stock reserved for these purposes is as follows at January 31, 2013:
F-21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Common stock issued and outstanding
Conversion of 10% Notes
Conversion of 8% Notes
Conversion of 9% Notes
Warrants
Stock options outstanding
11. Commitments and Contingencies
34,843,441
10,883,761
600,000
2,200,000
2,936,000
5,300,000
56,763,202
Lease commitments
The Company leases its office facilities under non-cancelable operating leases, certain of which contain renewal options. Future
minimum rental payments required under the operating leases as follows:
Year ending January 31,
2014
2015
2016
2017
2018
Rent expense recorded for years ended January 31 was as follows:
$
139,994
114,416
91,546
94,294
-
$
440,251
2013
2012
Rent expense
$
97,402 $
42,874
Consulting and employment agreements
On August 16, 2012, the Company entered into a consulting agreement with Kaneohe Advisors LLC, an entity wholly-owned and
controlled by Mr. Kyle Francis, to serve as the Company’s Executive Vice President, Business Development and Chief Financial
Officer. The term of the agreement is on a month-to-month basis, and provided for Mr. Francis to receive $11,900 per month and the
right to purchase 700,000 shares of the Company’s common stock at $0.001 (see Note 10), and can be terminated by either party at
any time.
On March 1, 2013, the Company entered into a direct employment agreement with Mr. Francis, which provides for salary of $225,000
per annum, reimbursement of up to $1,200 per month in health insurance expenses, additional performance-based stock and cash
compensation to be determined by the Company’s board of directors, and participation in employee benefits offered to other
employees of the Company. If Mr. Francis is terminated for any reason other than gross negligence or misconduct prior to the first
anniversary date of employment, Mr. Francis will be entitled to the remaining unpaid portion of his annual salary and health insurance
expense reimbursement.
On October 8, 2012 the Company entered into a consulting agreement with Mr. Mark Meyers to perform services as the Company’s
Chief of Strategy and Business Development, in which Mr. Meyers will receive $10,000 per month, the right to receive options to
acquire 50,000 shares per month of the Company’s common stock with an exercise price of $0.21 per share, and be eligible for
performance-based compensation as determined by the Company’s Board of Directors. Mr. Meyers has the option to convert all or a
portion of the cash compensation to equity at a conversion price equal to a discount of 30% from the trailing 90 day average of the
closing price of the Company’s common stock. The agreement is terminable by either party without cause upon providing 90 days’
notice.
Regulatory Matters
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with
such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action
including fines, penalties, and exclusion from the Medicare and Medicaid programs. We believe that we are in compliance with all
applicable laws and regulations.
Legal
In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
involve claims of medical malpractice related to medical services provided by our affiliated hospitalists. We may also become subject
to other lawsuits which could involve significant claims and/or significant defense costs. We believe, based upon our review of
pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on
our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot
be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our
business, financial condition, results of operations, or cash flows in a future period.
Liability Insurance
We believe that our insurance coverage is appropriate based upon our claims experience and the nature and risks of our business. In
addition to the known incidents that have resulted in the assertion of claims, we cannot be certain that our insurance coverage will be
adequate to cover liabilities arising out of claims asserted against us, our affiliated professional organizations or our affiliated
hospitalists in the future where the outcomes of such claims are unfavorable. We believe that the ultimate resolution of all pending
claims, including liabilities in excess of our insurance coverage, will not have a material adverse effect on our financial position,
results of operations or cash flows; however, there can be no assurance that future claims will not have such a material adverse
effect on our business.
Although we currently maintain liability insurance policies on a claims-made basis, which are intended to cover malpractice liability
and certain other claims, the coverage must be renewed annually, and may not continue to be available to us in future years at
acceptable costs, and on favorable terms.
F-22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
11. Quarterly Results of Operations (UNAUDITED)
Following is a summary of our quarterly results of operations for the years ended January 31, 2013 and 2012.
January 31,
2013
October 31,
2012
July 31,
2012
April 30,
2012
January 31,
2012
October 31,
2011
July 31,
2011
April 30,
2011
Revenues $ 2,529,683 $ 1,965,153 $ 1,649,451 $ 1,631,844 $ 1,545,440 $ 1,431,965 $ 1,093,708 $ 1,039,693
(Loss)
income
from
operations
(525,083) (1,437,225)
(63,026)
(53,153)
(268,754)
126,202
(83,339)
(187,444)
Loss on
change in
fair value
of
derivative
liabilities
Interest
expense
Other
(expense)
income
(Loss)
income
before
income
taxes
Provision
for income
taxes
Net (loss)
income
Per share
data:
Weighted
Average
Shares -
Basic and
Diluted
Basic and
Diluted
Loss per
share (1)
- (3,063,144) (2,914,549)
123,838
-
-
-
-
(259,995)
(221,239)
(224,906)
(224,036)
(154,060)
(68,047)
(40,978)
(40,949)
(37,903)
207
455
(5)
247
49
1,483
1,063
(822,981) (4,721,401) (3,202,026)
(153,356)
(422,567)
58,204
(122,834)
(227,330)
-
-
800
4,000
4,219
-
-
1,600
$
(822,981) $ (4,721,401) $ (3,202,826) $
(157,356) $
(426,786) $
58,204 $
(122,834) $
(228,930)
34,808,001 33,440,542 31,015,904 29,965,878 29,335,774 29,331,970 28,985,774 28,648,134
$
(0.02) $
(0.15) $
(0.10) $
(0.01) $
(0.01) $
0.00 $
(0.00) $
(0.01)
(1) Earnings per share are computed independently for each of the quarters presented and therefore may not sum to the total for the
year
12. Valuation and Qualifying Accounts
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2013
2012
Allowance for doubtful accounts:
Balance - beginning of year
Charged to operations
Write-off of accounts receivable
Balance - end of year
$
42,576 $
34,746
74,393
118,077
(38,147)
(110,247)
$
78,822 $
42,576
F-23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT B
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE SOLD OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF SUCH ACT AND SUCH LAWS
APOLLO MEDICAL HOLDINGS, INC.
9% SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTE
$_________________
November ___, 2012
FOR VALUE RECEIVED, the undersigned, APOLLO MEDICAL HOLDINGS, INC. (AMEH.OB), a company organized under the laws
of the State of Delaware (the "Company"), promises to pay to the order of
_____________________________________________________________ or its registered assigns (the "Holder"), the principal
sum of ______________ dollars ($___________), with interest from the date hereof at the rate of 9% per annum on the unpaid
balance hereof until paid.
1. Principal. If not earlier converted pursuant to Section 3(a) hereof, the principal of this Note shall be payable on February
15, 2016 (the "Maturity Date").
2. Interest. The Notes will bear interest at a rate of 9.0% per year. Interest (including additional interest, if any) will be paid
semi-annually in arrears on February 15 and August 15 of each year beginning on February 15, 2013.
Interest will be paid to the person in whose name a note is registered at the close of business on February 15 and August 15
(whether or not the day is a business day), immediately preceding the relevant interest payment date. Interest on the Notes will be
computed on a 360-day year comprised of twelve 30-day months and will accrue from the date of the original issuance of the Notes. If
any interest payment date falls on a date that is not a business day, such payment of interest (or principal in the case of the Maturity
Date or any earlier repurchase date for the Notes) will be made on the next succeeding business day, and no interest or other
amount will be paid as a result of any such delay. For purposes herein, an "Event of Default" exists if the Company fails to make a
payment required by Section 1 or 2 hereof, and such failure is not cured within 10 days following written notice from the Holder.
3. Conversion Events and Mechanics of Conversion.
(a) Conversion. The note-holder may convert the principal and unpaid interest to the Company's Common Stock at any
time on or before the maturity date at $0.40 per common share.
(b) Mechanics of Conversion. The Company shall not be obligated to issue certificates evidencing the Common Stock
issuable upon a Conversion Event unless this Note is either delivered to the Company, duly endorsed, at the office of the Company,
or the Holder notifies the Company that this Note has been lost, stolen or destroyed and executes an agreement satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection with this Note. After delivery of the Note, or delivery of
an agreement and indemnification in the case of a lost Note, the Company shall issue and deliver to the Holder a certificate or
certificates for the number of shares of Common Stock to which the Holder shall be entitled (the "Conversion Shares"), and a check
payable to the Holder in the amount equal to the cash amounts payable as a result of a conversion into fractional shares of such
preferred stock. Any Conversion Event shall be deemed to have occurred immediately prior to the close of business on the date of
the Conversion Event, and the Holder entitled to receive the common stock issuable upon such conversion shall be treated for all
purposes as the record holder of such common stock on such date.
1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
After receiving a written request from Holder to remove a restrictive legend, the Company will if necessary promptly obtain, at
its own expense, an opinion of its counsel to the effect that the common stock may be registered without legend or restriction for sale
or transfer under an exemption from such registration, and if the Rule 144 exemption is not available, public sale without registration
will require compliance with an exemption under the 1933 Act.
The Company shall instruct its transfer agent to accept any such opinion(s) and will process the request for removal of the
restrictive legend(s) within ten business days at the Company's expense.
If either the Company or its transfer agent, individually or jointly, fails or refuses to remove restrictive legends and has not
delivered by traceable means the unrestricted certificates within 10 business days after receipt of the written request to do so, the
Company shall pay a penalty to the Holder in an amount of additional restricted shares in the amount of 1% of the restricted shares in
the original written request for each day after the date of receipt of the written request until the Holder receives the unrestricted
shares.
As proscribed by Rule 144(d)(1)(i) and when the Holder provides the Company with a written Note conversion request, the
applicable holding period for the common stock issued will have begun on the date of the Note purchase. Therefore if the Notes had
been held for more than six months by non-affiliates of the Company, the common shares issued by the Company shall be issued
without restriction based on current holding period requirements of Rule 144.
(c) Conversion Price Adjustments. The shares of Common Stock underlying the Note will have anti-dilution protection for
stock splits, stock dividends, and/or similar transactions.
(d) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any
fractional shares to which the Holder would otherwise be entitled, the Company shall pay cash equal to such fraction multiplied by
the Conversion Price if the amount is greater than $0.40.
(e) The Note is callable in full or in part by the Company at any time after January 31, 2015 and after 60 days prior notice
to both the Note-holder’s and the Placement Agent. If the Average Daily Value of Trades (“ADVT”) during the prior 90 calendar days
as reported by Bloomberg is greater than $100,000, the Note is callable at a price of 105% of the Note’s par value and is callable at a
price of 110% of the Note’s par value if the ADVT is less than $100,000.
If after Maturity Date, the Note has not paid in full, then the interest rate payable on the Note shall be adjusted from 9% per
annum to the lesser of 30% per annum or the maximum statutory rate pursuant to California law and any other applicable jurisdiction
of the applicable note holder and the Note’s conversion price will continuously change to the last 20 trading days Volume Weighted
Average Price as reported by Bloomberg until the Note is paid in full.
4. Transfer Restrictions. The Holder shall not transfer the Note or the Conversion Shares (except to its own affiliate,
subsidiary, or shareholders) until (a) it has first given written notice to the Company, describing briefly the manner of any such
proposed transfer; and (b) (i) the Company has received from counsel satisfactory to the Company an opinion that such transfer can
be made without compliance with the registration requirements of the Securities Act of 1933, as amended (the "1933 Act"), and
applicable state securities laws, or (ii) a registration statement filed by the Company under the 1933 Act and applicable state
securities laws is declared effective by the Securities and Exchange Commission and state securities commissions having
jurisdiction.
5. Currency; Payments. All references herein to "dollars" or "$" are to U.S. dollars, and all payments of principal of, and
interest on, this Note shall be made in lawful money of the United States of America in immediately available funds. If the date on
which any such payment is required to be made pursuant to the provisions of this Note occurs on a Saturday or Sunday or legal
holiday observed in the State of California, such payments shall be due and payable on the immediately succeeding date which is not
a Saturday or Sunday or legal holiday so observed.
6. Representations and Warranties of Holder. Holder hereby represents and warrants that:
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(a) Securities Not Registered. Holder is acquiring the Note for its own account, not as an agent or nominee, and not with
a view to, or for sale in connection with, any distribution thereof in violation of applicable securities laws. By executing this Note,
Holder further represents that Holder does not have any present contract, undertaking, understanding or arrangement with any
person to sell, transfer or grant participations to such persons or any third person, with respect to the Note.
(b) Access to Information. The Company has made available to Holder the opportunity to ask questions of and to receive
answers from the Company's officers, directors and other authorized representatives concerning the Company and its business and
prospects, and Holder has been permitted to have access to all information which it has requested in order to evaluate the merits and
risks of the purchase of the Note.
(c) Investment Experience. Holder is an investor in securities of companies in the development stage and acknowledges
that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the purchase of the Note.
(d) Regulation D. Holder is an "accredited investor" as defined in Rule 501 under the 1933 Act. In the normal course of
business, Holder invests in or purchases securities similar to the Note and the Series A Convertible Preferred Stock and has such
knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of purchasing the
Note. The Holder is not a registered broker dealer or an affiliate of any broker or dealer registered under Section 15(a) of the
Exchange Act of 1934, as amended, or a member of the FINRA or a Person engaged in the business of being a broker dealer.
(e) Securities are Unregistered. Holder has been advised that (i) neither the Note nor the Common Stock issuable upon
conversion of the Note has been registered under the 1933 Act or other applicable securities laws, (ii) the common stock issuable
upon conversion of the Note may need to be held indefinitely, (iii) Holder will continue to bear the economic risk of the investment in
the common stock issuable upon conversion of the Note after it is subsequently registered under the 1933 Act or an exemption from
such registration is available, and (iv) when and if the common stock issuable upon conversion of the Note may be disposed of
without registration in reliance on Rule 144 promulgated under the 1933 Act, such disposition may be made only in amounts in
accordance with the terms and conditions of such Rule in effect at that time.
(f) Reservation of Stock Issuable on Conversion of the Note. The Company will at all times reserve and keep available,
solely for issuance and delivery on the conversion of the Note, shares of Common Stock from time to time issuable on the conversion
of the Note. Failure to adequately reserve for a period of thirty days shall constitute an Event of Default and cause the Principal of the
Note to increase by 1% for each day thereafter that the Company does not reserve and keep available, solely for issuance and
delivery on the conversion of the Note, shares of Common Stock from time to time issuable on the conversion of the Note.
(g) Pre-Existing Relationship. Holder has a pre-existing personal or business relationship with the Company or any of its
officers, directors or controlling persons, or by his/its business or financial experience or the business or financial experience of his/its
financial advisors who are unaffiliated with and who are not compensated by the Company, directly or indirectly, could be reasonably
assumed to have the capacity to protect his/its own interest in connection with the acquisition of the Note and the common stock into
which it converts.
(h) No Advertisement. Holder acknowledges that the offer and sale of the Note or the common stock into which it converts
was not accomplished by the publication of any advertisement.
(i) No Review. Holder understands that no arbitration board or panel, court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, has passed upon or made any
recommendation or endorsement of the common stock into which it converts.
(j) Holder understands that the Common Stock into which the Note may convert shall bear a restrictive legend in
substantially the following form:
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS UNLESS OFFERED, SOLD OR
TRANSFERRED UNDER AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE
LAWS.
7. Survival of Representation and Warranties. All representations and warranties made by Holder shall survive the earlier of
the Maturity Date and shall remain effective and enforceable until the earlier to occur of the Maturity Date or the date on which claims
based thereon shall have been barred by the applicable statutes of limitation.
8. Waiver. The Company expressly waives presentment, protest, demand, notice of dishonor, notice of nonpayment, notice of
maturity, notice of protest, presentment for the purpose of accelerating maturity, and diligence in collection.
9. Attorneys' Fees and Costs. In the event of any legal proceedings in connection with this Note, all expenses in connection
with such legal proceedings of the prevailing party, the non-prevailing party upon demand shall reimburse including reasonable legal
fees and applicable costs and expenses. This provision shall not merge with any enforcement order or judgment on this Note and
shall be applicable to any proceeding to enforce or appeal any judgment relating to the Note.
10. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provisions hereof
shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of
the remaining provisions hereof.
11. Successors and Assigns. This Note shall inure to the benefit of the Holder and its successors and permitted assigns and
shall be binding upon the undersigned and its successors and permitted assigns. As used herein, the term "Holder" shall mean and
include the successors and permitted assigns of the Holder.
12. Governing Law. The parties acknowledge and agree that this Note and the rights and obligations of all parties hereunder
shall be governed by and construed under the laws of the State of California, without regard to conflict of laws principles.
13. Modification. This Note may not be modified or amended orally, but only by an agreement in writing signed by the party
against whom such agreement is sought to be enforced.
14. Entire Agreement. This Note constitutes the entire agreement between the parties with respect to the subject matter
hereof and supersedes any and all prior written or oral agreements and understandings with respect to the matters covered hereby.
Signature page follows
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.,
a Delaware corporation
By:
Its:
Address:
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT A
TO
NOTE
NOTICE OF EXERCISE
To Be Executed by the Holder
in Order to Exercise the Warrant
The undersigned Holder hereby elects to purchase _______ Shares pursuant to the attached Note, and requests that
certificates for securities be issued in the name of:
__________________________________________________________
(Please type or print name and address)
__________________________________________________________
__________________________________________________________
__________________________________________________________
(Social Security or Tax Identification Number)
and delivered
to:_________________________________________________________________
___________________________________________________________________.
(Please type or print name and address if different from above)
If such number of Shares being purchased hereby shall not be all the Shares that may be purchased pursuant to the attached
Note, a new Note for the balance of such Shares shall be registered in the name of, and delivered to, the Holder at the address set
forth below.
In full payment of the purchase price with respect to the Shares purchased and transfer taxes, if any, the undersigned hereby
tenders payment of $__________ by check, money order or wire transfer payable in United States currency to the order of
[________________].
Dated:
HOLDER:
By:/s/
Name
Title
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT B
TO
NOTE
FORM OF ASSIGNMENT
(To be signed only on transfer of Note)
For value received, the undersigned hereby sells, assigns, and transfers unto _____________ the right represented by the
within Note to purchase ______ shares of Common Stock of _________, Inc., a Delaware corporation, to which the within Warrant
relates, and appoints ____________________ Attorney to transfer such right on the books of ____________, Inc., a Delaware
corporation, with full power of substitution of premises.
Dated:
Signed in the presence of :
Dated:
By:/s/
Name
Title
(signature must conform to name of holder as specified on the
fact of the Warrant)
Address:
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT C
APOLLO MEDICAL HOLDINGS, INC.
FORM OF INVESTOR WARRANT
THESE WARRANTS AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE
LAWS, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
APPLICABLE STATE LAW IS AVAILABLE.
STOCK PURCHASE WARRANT
To Purchase _________________________________ Shares of Common Stock
( ______________ shares)
No. 2012-
Issue Date: _______, 2012
THIS CERTIFIES that, for value received,
____________________________________________ ________________________ (the "Holder"), is entitled, upon the terms and
subject to the conditions hereinafter set forth, at any time on or after the date hereof, to subscribe for and purchase, from APOLLO
MEDICAL HOLDINGS, INC., a Delaware corporation (the "Company"), of the fully paid non-assessable shares of the Company's
common stock, $0.001 par value per share ("Common Stock") at a purchase price of $0.45 per share or a lesser price as described in
Section 11c, provided that such right will terminate, if not terminated earlier in accordance with the provisions hereof, at 5:00 p.m.
(California time) on January 31, 2018 (the "Expiration Date").
The purchase price and the number of shares for which these warrants (the "Warrants") is exercisable are subject to adjustment, as
provided herein and specifically in Section 11.
These Warrants were issued in connection with the Company's private offering (the "Offering") of units of the Company's securities
(the "Units"), each Unit consisting of $50,000 par value 9% Senior Subordinated Callable Convertible Promissory Notes maturing
February 15, 2016 and 37,500 warrants to purchase one share of the Company's Common Stock until January 31, 2018 (a "Warrant
Share"), pursuant to a Private offering Memorandum dated November ____, 2012 (the "Memorandum") and is subject to the terms of
a Subscription Agreement (the "Subscription Agreement") dated the date hereof to which the initial Holder is a party. Capitalized
terms used and not otherwise defined herein will have the respective meanings ascribed to such terms in the Memorandum.
As used herein the following terms, unless the context otherwise requires, have the following respective meanings:
(a) The term "Company" shall include Apollo Medical Holdings, Inc., f/k/a Silicone Inc. and any corporation that shall succeed
or assume the obligations of Apollo Medical Holdings, Inc. hereunder.
(b) The term "Warrant Shares" includes (i) the Company's common stock and (ii) any other securities into which or for which
any of the Common Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of
assets or otherwise.
1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any
other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received,
on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been
issued in exchange for or in replacement of Common Stock or Other Securities.
(d) The term "Exercise Price" shall be $0.45 per share or a lesser price per share as described in Section 11c, subject to
adjustment pursuant to the terms hereof.
1. Number of Shares Issuable upon Exercise.
Unless sooner terminated in accordance herewith, from and after the date hereof through and including the Expiration Date,
the Holder shall be entitled to receive, upon exercise of these Warrants in whole or in part, the number of shares of Common Stock of
the Company set forth on the first page of these Warrants, subject to adjustment pursuant hereto, by delivery of an original or fax
copy of the exercise notice attached hereto as Exhibit A (the "Notice of Exercise") along with payment to the Company of the Exercise
Price.
2. Exercise of Warrant.
(a) The purchase rights represented by these Warrants are exercisable by the registered Holder hereof, in whole at any time
or in part from time to time by delivery of the Notice of Exercise duly completed and executed at the office of the Company in
California (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder hereof at
the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the shares thereby
purchased (cash, bank wire transfer, or by certified or official bank check payable to the order of the Company in an amount equal to
the Exercise Price of the shares thereby purchased); whereupon the Holder of these Warrants shall be entitled to receive a certificate
for the number of Warrant Shares so purchased; provided that the Company will place on each certificate a legend substantially the
same as that appearing on these Warrants, in addition to any legend required by any applicable state or federal law. If these
Warrants are exercised in part, the Company will issue to the Holder hereof a new Warrant upon the same terms as these Warrants
but for the balance of Warrant Shares for which these Warrants remains exercisable. The Company agrees that upon exercise of
these Warrants the Holder shall be deemed to be the record owner of the shares issued upon exercise as of the close of business on
the date on which these Warrants shall have been exercised as aforesaid. These Warrants will be surrendered at the time of exercise
or if lost, stolen, misplaced or destroyed, the Holder will comply with Section 7 below (b) Certificates for shares purchased hereunder
shall be delivered to the Holder hereof within a reasonable time after the date on which these Warrants shall have been exercised as
aforesaid.
(c) The Company covenants that all Warrant Shares which may be issued upon the exercise of rights represented by these
Warrants will, upon exercise of the rights represented by these Warrants, be fully paid and non-assessable and free from all
preemptive rights, taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue which shall be paid by the Company in accordance with Section 4 below).
3. No Fractional Shares.
The Company shall not be required to issue fractional Warrant Shares upon the exercise of these Warrants or to deliver
Warrant Certificates that evidence fractional Warrant Shares. In the event that a fraction of a Warrant Share would, except for the
provisions of this Section 3, be issuable upon the exercise of these Warrants, the Company shall pay to the Holder exercising the
Warrant an amount in cash equal to such fraction multiplied by the Per Share Market Value of the Warrant Share.
For purposes of these Warrants, the Per Share Market Value shall be determined as follows: As used herein, "Per Share
Market Value" means on any particular date (a) the closing bid price per share of Common Stock on such date on the national
securities exchange on which the shares of Common Stock are then listed or quoted, or if there is no such price on such date, then
the average of the closing bid and asked prices on the national securities exchange on the date nearest preceding such date, (b) if
the shares of Common Stock are not then listed or quoted on a national securities exchange, the average of the closing bid and
asked prices for a share of Common Stock in the over-the-counter market, as reported by the National Quotation Bureau, Inc., or an
equivalent generally accepted reporting service, at the close of business on such date, or (c) if the shares of Common Stock are not
then publicly traded, the fair market value of a share of Common Stock as determined by an appraiser selected in good faith by the
Holders of a majority in interest of the Warrants then outstanding.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. Charges, Taxes and Expenses.
Issuance of certificates for Warrant Shares upon the exercise of these Warrants shall be made without charge to the Holder
hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder of these Warrants, or in such
name or names as may be directed by the Holder of these Warrants; provided, however, that in the event certificates for Warrant
Shares are to be issued in a name other than the name of the Holder of these Warrants, these Warrants, when exercised, shall be
accompanied by the Assignment Form attached hereto as Exhibit B (the "Assignment Form") duly executed by the Holder hereof; and
provided further, that upon any transfer involved in the issuance or delivery of any certificates for Warrant Shares, the Company may
require, as a condition thereto, that the transferee execute an appropriate investment representation as may be reasonably required
by the Company.
5. No Rights as Shareholders.
These Warrants does not entitle the Holder hereof to any voting rights or other rights as a Shareholder of the Company prior
to the exercise hereof.
6. Exchange and Registry of Warrant.
These Warrants is exchangeable, upon the surrender hereof by the registered Holder at the above-mentioned office or
agency of the Company, for a new Warrant or Warrants aggregating the total Warrant Shares of the surrendered Warrant of like tenor
and dated as of such exchange. The Company shall maintain at the above-mentioned office or agency a registry showing the name
and address of the registered Holder of these Warrants. These Warrants may be surrendered for exchange, transfer or exercise, in
accordance with its terms, at such office or agency of the Company, and the Company shall be entitled to rely in all respects, prior to
written notice to the contrary, upon such registry.
7. Loss, Theft, Destruction or Mutilation of Warrant.
Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of these
Warrants, and in case of loss, theft or destruction, of indemnity reasonably satisfactory to it, and upon reimbursement to the Company
of all reasonable expenses incidental thereto, and upon surrender and cancellation of these Warrants, if mutilated, the Company will
make and deliver a new Warrant of like tenor (but with no additional rights or obligations) and dated as of such cancellation, in lieu of
these Warrants.
8. Saturdays, Sundays, Holidays, etc.
If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a
Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next
succeeding day not a Saturday, Sunday or legal holiday.
9. Cash Distributions.
No adjustment on account of cash dividends or interest on the Company's Common Stock or Other Securities that may
become purchasable hereunder will be made to the Exercise Price under these Warrants.
10. Consolidation, Merger or Sale of the Company.
If the Company is a party to a consolidation, merger or transfer of assets that reclassifies or changes its outstanding Common
Stock, the successor corporation (or corporation controlling the successor corporation or the Company, as the case may be) shall by
operation of law assume the Company's obligations under these Warrants. Upon consummation of such transaction the Warrants
shall automatically become exercisable for the kind and amount of securities, cash or other assets that the holder of a Warrant would
have owned immediately after the consolidation, merger or transfer if the holder had exercised the Warrant immediately before the
effective date of such transaction. As a condition to the consummation of such transaction, the Company shall arrange for the person
or entity obligated to issue securities or deliver cash or other assets upon exercise of the Warrant to, concurrently with the
consummation of such transaction, assume the Company's obligations hereunder by executing an instrument so providing and further
providing for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Section 10.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
11. Adjustments in the Exercise Price
The number of shares and class of capital stock purchasable under these Warrants are subject to adjustment from time to
time as set forth in this Section 11.
(a) Adjustment for change in capital stock. If the Company:
(i) pays a dividend or makes a distribution on its Common Stock, in each case, in shares of its Common Stock;
(ii) subdivides its outstanding shares of Common Stock into a greater number of shares;
(iii) combines its outstanding shares of Common Stock into a smaller number of shares;
(iv) makes a distribution on its Common Stock in shares of its capital stock other than Common Stock; or
(v) issues by reclassification of its shares of Common Stock any shares of its capital stock;
then the number and classes of shares purchasable upon exercise of each Warrant in effect immediately prior to such action shall be
adjusted so that the holder of any Warrant thereafter exercised may receive the number and classes of shares of capital stock of the
Company which such holder would have owned immediately following such action if such holder had exercised the Warrant
immediately prior to such action.
For a dividend or distribution the adjustment shall become effective immediately after the record date for the dividend or
distribution. For a subdivision, combination or reclassification, the adjustment shall become effective immediately after the effective
date of the subdivision, combination or reclassification.
If after an adjustment the Holder, upon exercise of a Warrant, may receive shares of two or more classes of capital stock of
the Company, the Board of Directors of the Company shall in good faith determine the allocation of the adjusted Exercise Price
between or among the classes of capital stock. After such allocation, that portion of the Exercise Price applicable to each share of
each such class of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock
in these Warrants. Notwithstanding the allocation of the Exercise Price between or among shares of capital stock as provided by this
Section 11(a), a Warrant may only be exercised in full by payment of the entire Exercise Price currently in effect.
(b) The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in
the carrying out of all the provisions of this Section 11 and in the taking of all such action as may be necessary or appropriate in order
to protect the exercise rights of the Holders of these Warrants against impairment.
12. Certificate as to Adjustments.
In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to
compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other
Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities)
outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon
exercise of these Warrants, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided
in these Warrants. The Company will forthwith mail a copy of each such certificate to the Holder of the Warrant and any Warrant
agent of the Company (appointed pursuant to Section 16 hereof).
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
13. Reservation of Stock Issuable on Exercise of Warrant.
The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant,
shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant.
14. Assignment; Exchange of Warrant.
Subject to compliance with applicable securities laws, these Warrants, and the rights evidenced hereby, may be transferred
by any registered Holder hereof (a "Transferor") with respect to any or all of the shares underlying these Warrants. On the surrender
for exchange of these Warrants, with the Transferor's duly executed Assignment Form and together with evidence reasonably
satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, a legal
opinion from the Transferor's counsel that such transfer is exempt from the registration requirements of applicable securities laws, the
Company at its expense (but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order
of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such
Assignment Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of Warrant Shares called
for on the face or faces of the Warrant so surrendered by the Transferor; and provided further, that upon any such transfer, the
Company may require, as a condition thereto, that the Transferee execute an appropriate investment representation as may be
reasonably required by the Company.
15. Registration Rights.
The Company has agreed to register the Warrant Shares in any subsequent registration statement filed by the Company with
the SEC, so that Holders shall be entitled to sell the same simultaneously with and upon the terms and conditions as the securities
sold for the Company's account are being sold pursuant to any such registration statement, subject to such lock-up provisions as may
be proposed by the underwriter of said registration statement (the "Piggyback Registration Right"). There is no guarantee as to a time
frame for the filing of such a registration statement.
16. Warrant Agent.
The Company may, by written notice to each Holder of a Warrant, appoint an agent for the purpose of issuing Common Stock
(or Other Securities) on the exercise of these Warrants pursuant to Section 2, exchanging these Warrants pursuant to Section 14,
and replacing these Warrants pursuant to Section 7, or any of the foregoing, and thereafter any such issuance, exchange or
replacement, as the case may be, shall be made at such office by such agent.
17. Notices, etc.
All notices shall be in writing signed by the party giving such notice, and delivered personally or sent by overnight courier or
messenger or sent by registered or certified mail (air mail if overseas), return receipt requested, or by telex, facsimile transmission,
telegram or similar means of communication. Notices shall be deemed to have been received on the date of personal, telex, facsimile
transmission, telegram or similar means of communication, or if sent by overnight courier or messenger, shall be deemed to have
been received on the next delivery day after deposit with the courier or messenger, or if sent by certified or registered mail, return
receipt requested, shall be deemed to have been received on the third business day after the date of mailing. Notices shall be sent to
the addresses set forth below each party's signature on the Subscription Agreement.
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
18. Notices of Record Date.
In case,
(a) The Company takes a record of the holders of its Common Stock for the purpose of entitling them to subscribe for
or purchase any shares of stock of any class or to receive a dividend, distribution or any other rights; or
(b) There is any capital reorganization of the Company, reclassification of the capital stock of the Company (other
than a subdivision or combination of its outstanding shares of Common Stock), or consolidation or merger of the Company
with or into another corporation which does not constitute a sale of the Company; or
(c) There is a voluntary or involuntary dissolution, liquidation or winding up of the Company;
then, and in any such case, the Company shall cause to be mailed to the Holder, at least 20 business days prior to the date
hereinafter specified, a notice stating the date on which (i) a record is to be taken for the purpose of such dividend, distribution or
rights, or (ii) such reclassification, reorganization, consolidation, merger, dissolution, liquidation or winding up is to take place and the
date, if any is to be fixed, as of which holders of Common Stock of record shall be entitled to exchange their shares of Common Stock
for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, dissolution, liquidation or
winding up.
19. Amendments and Supplements.
(a) The Company may from time to time supplement or amend these Warrants without the approval of any Holders in order to
cure any ambiguity or to be correct or supplement any provision contained herein which may be defective or inconsistent with any
other provision, or to make any other provisions in regard to matters or questions herein arising hereunder which the Company may
deem necessary or desirable and which shall not materially adversely affect the interest of the Holder. All other supplements or
amendments to these Warrants must be signed by the party against whom such supplement or amendment is to be enforced.
(b) Notwithstanding Section 19(a), the Company may at any time during the term of these Warrants reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.
20. Investment Intent.
Holder represents and warrants to the Company that Holder is acquiring the Warrants for investment and with no present
intention of distributing or reselling any of the Warrants.
21. Certificates to Bear Language.
The Warrants and the Warrant Shares issuable upon exercise thereof shall bear the following legend by which Holder shall
be bound:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE."
Certificates for Warrants or Warrant Shares without such legend shall be issued if such Warrants or Warrant Shares are sold
pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), or if the Company has
received an opinion from counsel reasonably satisfactory to counsel for the Company, that such legend is no longer required under
the Act.
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
22. Miscellaneous.
(a) These Warrants shall be governed by and construed in accordance with the laws of the State of California without regard
to principles of conflicts of laws. The parties submit to the jurisdiction of the Courts of the County of Los Angeles, State of California or
a Federal Court empanelled in the State of California for the resolution of all legal disputes arising under the terms of these Warrants,
including, but not limited to, enforcement of any arbitration award. The Company and the Holder agree to submit to the jurisdiction of
such courts and waive trial by jury.
(b) If any action or proceeding is brought by the Company on the one hand or by the Holder on the other hand to enforce or
continue any provision of these Warrants, the prevailing party's costs and expenses, including its reasonable attorney's fees, in
connection with such action or proceeding shall be paid by the other party.
(c) In the event that any provision of these Warrants is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any such provision, which may prove invalid or unenforceable under any law, shall not affect the
validity or enforceability of any other provision of these Warrants.
(d) The headings in these Warrants are for purposes of reference only, and shall not limit or otherwise affect any of the terms
hereof.
IN WITNESS WHEREOF, the Company has caused these Warrants to be executed by its officers thereunto duly authorized
as of the date first written above.
APOLLO MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: _______________________________
Warren Hosseinion, M.D
Chief Executive Officer
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT A
TO
WARRANT
NOTICE OF EXERCISE
To Be Executed by the Holder
in Order to Exercise the Warrant
The undersigned Holder hereby elects to purchase _______ Shares pursuant to the attached Warrant, and requests that
certificates for securities be issued in the name of:
__________________________________________________________
(Please type or print name and address)
__________________________________________________________
__________________________________________________________
__________________________________________________________
(Social Security or Tax Identification Number)
and delivered
to:_________________________________________________________________
___________________________________________________________________.
(Please type or print name and address if different from above)
If such number of Shares being purchased hereby shall not be all the Shares that may be purchased pursuant to the attached
Warrant, a new Warrant for the balance of such Shares shall be registered in the name of, and delivered to, the Holder at the address
set forth below.
In full payment of the purchase price with respect to the Shares purchased and transfer taxes, if any, the undersigned hereby
tenders payment of $__________ by check, money order or wire transfer payable in United States currency to the order of
[________________].
Dated:
HOLDER:
By:/s/
Name
Title
8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT B
TO
WARRANT
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto _____________ the right represented by the
within Warrant to purchase ______ shares of Common Stock of _________, Inc., a Delaware corporation, to which the within Warrant
relates, and appoints ____________________ Attorney to transfer such right on the books of ____________, Inc., a Delaware
corporation, with full power of substitution of premises.
Dated:
Signed in the presence of :
Dated:
By:/s/
Name
Title
(signature must conform to name of holder as specified on the
fact of the Warrant)
Address:
9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 21.1 Subsidiaries of Apollo Medical Holdings, Inc.
Name
Jurisdiction of Operations
Apollo Medical Management, Inc.
Pulmonary Critical Care Management, Inc.
California
California
ApolloMed Accountable Care Organization, Inc.
California
Aligned Healthcare, Inc.
Verdugo Medical Management,
Inc.
California
California
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
FORM OF RULE 13A-14(A)
AS ADOPTED PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
I, Warren Hosseinion, M.D., Chief Executive Officer of Apollo Medical Holdings, Inc., certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Apollo Medical Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: April 30, 2013
/s/ WARREN HOSSEINION, M.D.
WARREN HOSSEINION, M.D.
Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
FORM OF RULE 13A-14(A)
AS ADOPTED PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Kyle Francis, Chief Financial Officer of Apollo Medical Holdings, Inc., certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Apollo Medical Holdings, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or reasonably likely to materially affect, registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: April 30, 2013
/s/ KYLE FRANCIS
KYLE FRANCIS
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of
Apollo Medical Holdings, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i)
(ii)
The Annual Report on Form 10-K of the Company for the year ended January 31, 2013 (the “ Report ”), fully complies with
the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: April 30, 2013
/s/ WARREN HOSSEINION, M.D.
WARREN HOSSEINION, M.D.
Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Apollo
Medical Holdings, Inc.(the “Company”) hereby certifies, to such officer’s knowledge, that:
(i)
(ii)
The Annual Report on Form 10-K of the Company for the year ended January 31, 2013 (the “ Report ”), fully complies with
the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: April 30, 2013
/s/ KYLE FRANCIS
KYLE FRANCIS
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.