SECURITIES & EXCHANGE COMMISSION EDGAR FILING
Apollo Medical Holdings, Inc.
Form: 10-K
Date Filed: 2015-07-14
Corporate Issuer CIK: 1083446
© Copyright 2015, 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 March 31, 2015
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 220
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 ❑
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):
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 September 30, 2014, the last business day of the Registrant’s most
recently completed second fiscal quarter, was $13,916,424. Solely for purposes of the foregoing calculation, all of the registrant’s
directors and officers as of September 30, 2014 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 July 8, 2015, there were 4,863,389 shares of common stock, $.001 par value per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the 2015 Annual Meeting
of Stockholders of the Company to be filed with the Securities and Exchange Commission not later than 120 days after March 31,
2015.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.
FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2015
TABLE OF CONTENTS
Description of Business
Risk Factors
Unresolved Staff Comments
Description of Properties
Legal Proceedings
Mine Safety Disclosures
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
2
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
4
26
50
50
50
51
51
53
53
65
65
65
65
66
67
67
67
67
67
68
72
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
PART I
Introductory Comment
Unless the context dictates otherwise, references in this Annual Report on Form 10-K (the “Report”) to the “Company,” “we,” “us,”
“our”, “Apollo”, “ApolloMed” 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”).
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We caution readers that this Report contains “forward-looking statements.” Forward-looking statements, written, oral or otherwise, are
based on our 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,” “plan,” “envision,” “continue,” “intend,” “target,” “contemplate,” “budgeted,” “will” and similar or comparable words,
phrases or terminology. Forward-looking statements involve risks and uncertainties. We caution that these statements are further
qualified by important economic, competitive, governmental and technological factors that could cause our business, strategy, or
actual results or events to differ materially, or otherwise, from those in the forward-looking statements in this Report. 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, will prove to be accurate. The Company assumes no
obligation to update such forward-looking statements.
We have a relatively limited operating history compared to others in our industry and we operate in a rapidly changing industry
segment. As a result, our 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 the forward-looking statements herein 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 of Financial Condition and Results of Operations” in this Report, and include, but are not limited to, the
following:
· Our ability to raise capital when needed to finance our ongoing operations and new acquisitions on acceptable terms and
conditions;
· Our ability to retain key individuals, including our Chief Executive Officer, Warren Hosseinion, M.D.;
· Our ability to locate, acquire and integrate new businesses;
·
·
The effect of laws and regulations that apply to our operations and industry;
The intensity of competition;
· Our reliance on a few key payors; 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.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 1. DESCRIPTION OF BUSINESS
ApolloMed is a patient-centered, physician-centric integrated healthcare delivery company with a management team with over a
decade of experience working to provide coordinated, outcomes-based medical care in a cost-effective manner. ApolloMed has built
a company and culture that is focused on physicians providing high-quality care, population health management and care
coordination for patients, particularly for senior patients and patients with multiple chronic conditions. We believe that ApolloMed is
well-positioned to take advantage of changes in the U.S. healthcare industry, as there is a growing national movement towards more
results-oriented healthcare centered on the triple aim of patient satisfaction, high-quality care and cost efficiency.
ApolloMed operates in one reportable segment, the healthcare delivery segment, and implements and operates innovative health
care models to create a patient-centered, physician-centric experience. Accordingly, we report our consolidated financial statements
in the aggregate, including all of our activities in one reportable segment. ApolloMed has the following integrated, synergistic
operations:
·
·
·
·
·
Hospitalists, which includes our contracted physicians who focus on the delivery of comprehensive medical care
to hospitalized patients;
An Accountable Care Organization (“ACO”), which focuses on the provision of high-quality and cost-efficient care
to Medicare fee-for-service patients;
Two independent practice associations (“IPAs”), which contract with physicians and provide care to Medicare,
Medicaid, commercial and dual eligible patients on fee-for-service or risk and value based fee basis;
Clinics, which provide primary care and specialty care in the Greater Los Angeles area; and
Palliative care, home health and hospice services, which include, our at-home, and final-stages-of-life services.
Our revenue streams, which are described in greater detail below in “Our Revenue Streams and Our Business Operations,” are
diversified among our various operations and contract types, and include:
·
·
Traditional fee-for-service reimbursement, which is the primary revenue source for our clinics; and
Risk and value-based contracts with health plans, third party IPAs, hospitals and the Medicare Shared Savings
Program (“MSSP”) sponsored by the Centers for Medicare & Medicaid Services (“CMS”), which are the primary
revenue sources for our hospitalists, ACO, IPAs and palliative care operations.
ApolloMed serves Medicare, Medicaid, HMO and uninsured patients primarily in California, as well as in Mississippi and Ohio (where
our ACO has recently begun operations). We primarily provide services to patients that are covered by private or public insurance,
although we do derive a small portion of our revenue from non-insured patients. We provide care coordination services to 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.
Our mission is to transform the delivery of healthcare services in the communities we serve by implementing innovative population
health models and creating a patient-centered, physician-centric experience in a high performance environment of integrated care.
The original business owned by ApolloMed was ApolloMed Hospitalists (“AMH”), a hospitalist company, which was incorporated in
California in June, 2001, and which began operations at Glendale Memorial Hospital. Through a reverse merger, ApolloMed became
a publicly held company in June 2008. ApolloMed was initially organized around the admission and care of patients at inpatient
facilities such as hospitals. We have grown our inpatient strategy by providing high-quality care and innovative solutions for our
hospital and managed care clients. In 2012, ApolloMed formed an ACO, ApolloMed Accountable Care Organization, Inc. (“ApolloMed
ACO”), and an IPA, Maverick Medical Group, Inc. (“MMG”). In 2013, we expanded our service offering to include integrated inpatient
and outpatient services through MMG. In 2014, ApolloMed added several complementary operations by acquiring (either directly or
through affiliated entities that are wholly-owned by Dr. Hosseinion) AKM Medical Group, Inc. (“AKM”) (an IPA), outpatient primary
care and specialty clinics and hospice/palliative care and home health entities. Our largest acquisition to date, which was through an
affiliate wholly-owned by Dr. Hosseinion, was of Southern California Heart Centers (“SCHC”), a specialty clinic that focuses on
cardiac care and diagnostic testing. SCHC has a management services agreement with Apollo Medical Management, Inc. (“AMM”)
pursuant to which AMM manages all non-medical services for SCHC and has exclusive authority over all non-medical decision
making related to the ongoing business operations of SCHC.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4
ApolloMed’s physician network consists of hospitalists, primary care physicians and specialist physicians primarily through
ApolloMed's owned and affiliated physician groups. ApolloMed operates through the following subsidiaries: AMM, Pulmonary Critical
Care Management, Inc. (“PCCM”), Verdugo Medical Management, Inc. (“VMM”), and ApolloMed ACO. Through its wholly-owned
subsidiary, AMM, ApolloMed manages affiliated medical groups, which consist of AMH, ApolloMed Care Clinic (“ACC”), MMG, AKM
and SCHC. Through its wholly-owned subsidiary, PCCM, ApolloMed manages Los Angeles Lung Center (“LALC”), and through its
wholly-owned subsidiary VMM, ApolloMed manages Eli Hendel, M.D., Inc. (“Hendel”). ApolloMed also has a controlling interest in
ApolloMed Palliative Services, LLC (“ApolloMed Palliative”), which owns two Los Angeles-based companies, Best Choice Hospice
Care LLC and Holistic Health Home Health Care Inc. AMM, PCCM and VMM each operates as a physician practice management
company and is in the business of providing management services to physician practice corporations under long-term management
service agreements, pursuant to which AMM, PCCM or VMM, as applicable, manages all non-medical services for the affiliated
medical group and has exclusive authority over all non-medical decision making related to ongoing business operations. The
management agreements of AMM, PCCM and VMM generally provide for management fees that are recognized as earned based on
a percentage of revenues or cash collections generated by the physician practices. Further, under each of AMM’s management
agreements, the management fee and services provided are reviewed annually and the management fee is adjusted as necessary to
reflect the fair market value of AMM’s services. ApolloMed ACO participates in the MSSP, the goal of which is to improve the quality
of patient care and outcomes through more efficient and coordinated approach among providers.
On February 17, 2015, ApolloMed entered into a long-term management services agreement (the “Bay Area MSA”) with a hospitalist
group located in the San Francisco Bay Area. Under the Bay Area MSA, ApolloMed will provide all business administrative services,
including billing, accounting, human resources management and supervision of all non-medical business operations. ApolloMed has
evaluated the impact of the Bay Area MSA and has determined it triggers variable interest entity accounting, which requires the
consolidation of the hospitalist group into the Company’s consolidated financial statements.
INDUSTRY OVERVIEW
U.S. healthcare spending has increased steadily over the past 20 years. According to the CMS, the estimated total U.S. healthcare
expenditures are expected to grow by 5.7% for 2013 through 2023, comprising 19.3% of the U.S. gross domestic product by 2023.
CMS projects total U.S. healthcare spending to grow by an average annual growth rate of 6.0% from 2015 through 2023. By these
estimates, U.S. healthcare spending is expected to exceed average growth in U.S. gross domestic product 1.1 percentage annually.
These spending increases have been driven, in part, by the aging baby boomer generation, lack of a healthy lifestyle, both in terms of
diet and exercise, rapidly increasing costs in medical technology and pharmaceutical research, the steady growth of the U.S.
population and provider reimbursement structures that many argue promote volume over quality. Additionally, as the healthcare
Exchanges and Medicaid expansions become operational, healthcare spending is projected to increase even more.
Hospitalists
Hospital care expenditures represent the largest segment of healthcare industry spending. According to CMS estimates, total hospital
spending is anticipated to slow to 4.1 percent in 2013, reaching $918.8 billion, compared with 4.9% in 2012. In 2015, hospital
spending is projected to increase 5.1 percent due to the continued effects of the Affordable Care Act (ACA) insurance expansion
combined with the effect of faster economic growth. For 2016 through 2023, continued population aging combined with the improved
economic conditions are expected to result in projected average annual growth of 6.2 percent.
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Hospitalists assume the inpatient care responsibilities that are otherwise provided by the primary care physician or other attending
physician and are reimbursed by third parties using the same visit-based or procedural billing codes as would be used by the primary
care physician or attending physician. Hospitalists focus exclusively on inpatient care without the distraction of outpatient care
responsibilities. Additionally, by practicing each day in the same facility, hospitalists perform consistent functions, interact regularly
with the same specialists and other healthcare professionals and become accustomed to specific and unique hospital processes,
which can result in greater efficiency, less process variability and better patient outcomes. Finally, hospitalists manage the treatment
of a large number of patients with similar clinical needs and therefore develop practice expertise in both the diagnosis and treatment
of common conditions that require hospitalization. For these reasons, we believe that hospitalists generate operating and cost
efficiencies and produce better patient outcomes.
According to the Society of Hospital Medicine (“SHM”), the number of hospitalists has grown over the past decade from a few
hundred to more than 40,000 at the end of 2013, making it one of the fastest-growing medical specialties in the U.S.
As of March 31, 2015, ApolloMed Hospitalists provided hospitalist, intensivist and physician advisor services at over 20 hospitals in
Southern California and Central California and had contracts with over 50 IPAs, medical groups, health plans and hospitals.
IPAs
Medicare:
The Medicare program was established in 1965 and became effective in 1967 as a federally funded U.S. health insurance program
for persons aged 65 and older, and it was later expanded to include individuals with end-stage renal disease and certain disabled
persons, regardless of income or age. Initially, Medicare was offered only on a fee-for-service (“FFS”) basis. Under the Medicare FFS
payment system, an individual can choose any licensed physician enrolled in Medicare and use the services of any hospital,
healthcare provider or facility certified by Medicare. CMS reimburses providers, based on a fee schedule, if Medicare covers the
service and CMS considers it medically necessary.
Growth in Medicare spending is expected to continue to increase due to population demographics. According to the U.S. Census
Bureau, from 1970 to 2014, overall U.S. population grew 54% while the number of Medicare enrollees grew by more than 140% over
that time period. There were approximately 45 million Americans aged 65 or older in the U.S. in 2013, comprising approximately
14.1% of the total population. By the year 2030, the number of these elderly persons is expected to climb to 72.8 million, or 20% of
the total population. According to the U.S. Census Bureau, more than 2 million Americans turn 65 in the U.S. each year.
Medicare Advantage is a Medicare health plan program developed and administered by CMS as an alternative to the traditional FFS
Medicare program. Medicare Advantage plans contract with CMS to provide benefits to beneficiaries for a fixed premium PMPM.
According to the Kaiser Family Foundation, in 2013, Medicare Advantage represents only 28% of total Medicare members, creating a
significant opportunity for additional Medicare Advantage penetration of newly eligible seniors. The share of Medicare beneficiaries in
such plans has risen rapidly in recent years; it reached approximately 28% in 2013 from approximately 13% in 2004. The reasons for
this include: plan costs can be significantly lower than the corresponding cost for beneficiaries in the traditional Medicare FFS
program, plans typically provide extra benefits and provide preventive care and wellness programs.
Many health plans subcontract a significant portion of the responsibility for managing patient care to integrated medical systems such
as ApolloMed. These integrated healthcare systems, whether medical groups or IPAs, offer a comprehensive medical delivery
system and sophisticated care management know-how and infrastructure to more efficiently provide for the healthcare needs of the
population enrolled with that health plan. Reimbursement models for these arrangements vary around the country. In California,
health plans typically prospectively pay the IPA or medical group a fixed Per Member Per Month amount, or capitation payment,
which is often based on a percentage of the amount received by the health plan. Capitation payments to medical groups or IPAs, in
the aggregate, represent a prospective budget from which the IPA manages care-related expenses on behalf of the population
enrolled with that IPA. Those IPAs or medical groups that manage care-related expenses under the capitated levels will realize an
operating profit; if care-related expenses exceed projected levels, the IPA will realize an operating deficit.
Integrated healthcare delivery companies such as ApolloMed can utilize their medical care and quality management strategies and
interventions for potential high cost cases and aggressively manage them to improve the health of its population and therefore lower
costs for these patients. Additionally, IPAs and medical groups such as MMG have established physician performance metrics that
allow them to monitor quality and service outcomes achieved by participating physicians in order to reward efficient, high quality care
delivered to members and to initiate improvement efforts for physicians whose results can be enhanced.
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ApolloMed arranges for the provision of managed care services through IPAs, namely MMG and AKM, and has entered into
capitation agreements with health plans, either directly or through a MSO.
Medicaid:
Medicaid is a federal entitlement program administered by the states that provides healthcare and long-term care services and
support to low-income Americans. Medicaid is funded jointly by the states and the federal government. The federal government
guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s federal medical assistance
percentage, which is calculated annually and varies inversely with the average personal income in the state. Each state establishes
its own eligibility standards, benefit packages, payment rates and program administration within federal guidelines. In an effort to
improve quality and provide more uniform and cost-effective care, many states have implemented Medicaid managed care programs
to improve access to coordinated care, to improve preventive care and to control healthcare costs. Under Medicaid managed care
programs, a health plan receives capitation payments from the state. The health plan then arranges for the provision of healthcare
services by contracting either directly with providers or with IPAs and medical groups, such as MMG or AKM. Both MMG and AKM
have entered into capitation agreements with health plans, either directly or through a Management Services Organization.
Commercial:
Patients enrolled in health plans offered through their employers are generally referred to as commercial members. According to the
Robert Wood Johnson Foundation, in 2011 approximately 60% of non-elderly U.S. citizens received their healthcare benefits through
their employer, which contracted with health plans to administer these healthcare benefits. Nationally, commercial employer-
sponsored health plan enrollment was approximately 159 million in 2011.
Dual Eligibles:
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 estimates, there are approximately 10.7 million dual eligible enrollees with annual spending
of approximately $285 billion. Only a small percentage of the total spending on dual eligibles is administered by managed care
organizations. Dual eligibles tend to consume more healthcare services due to their tendency to have more chronic conditions. In
some states, dual eligible patients are being voluntarily enrolled and/or auto-assigned into managed care programs. In California,
eight counties are participating in the duals pilot program.
Health Reform Acts:
In an effort to reduce the number of uninsured and to begin to control healthcare expenditures, President Obama signed the ACA in
2010, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Reform Acts”) into law in March 2010.
The Health Reform Acts seeks a reduction of up to 32 million uninsured individuals by 2019, while potentially increasing Medicaid
coverage by up to 16 million individuals and net commercial coverage by 16 million individuals. CMS projects that the total number of
uninsured Americans will fall to 23 million by 2023 from 45 million in 2012. This represents a significant new market opportunity for
health plans and integrated healthcare delivery companies.
As of March 31, 2015, MMG and AKM delivered services to nearly 10,000 members through a network of over 130 primary care
physicians and over 360 specialist physicians.
Accountable Care Organizations
One provision of the Health Reform Acts of 2010 required CMS to establish a MSSP that promotes accountability and coordination of
care through the creation of Accountable Care Organizations (“ACOs”), which, as described below, are eligible to participate in some
of the savings generated by such ACOs. The program was designed for beneficiaries in the Medicare FFS program, which covers
approximately 72% of Medicare recipients, or approximately 36 million eligible Medicare beneficiaries. CMS established the MSSP to
facilitate coordination and cooperation among providers to improve the quality of care and reduce unnecessary costs. Eligible
providers, hospitals and suppliers may participate in the MSSP by creating an ACO and then applying to CMS. MSSP ACOs must
have at least 5,000 Medicare beneficiaries in order to be eligible to participate in the program.
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The MSSP is designed to improve beneficiary outcomes and increase value of care by (1) promoting accountability for the care of
Medicare FFS beneficiaries; (2) requiring coordinated care for all services provided under Medicare FFS; and (3) encouraging
investment in infrastructure and redesigned care processes. The MSSP will reward ACOs that lower their healthcare costs while
meeting performance standards on quality of care and patient satisfaction. Under the final 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
MSSP rules require CMS to develop a benchmark for savings to be achieved by each ACO if the ACO is to receive shared savings.
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 the medical expenditure benchmark provided by CMS. A MSR must be
achieved before the ACO can receive a share of the savings. Once the MSR is surpassed, all the savings below the benchmark
provided by CMS will be shared 50% with the ACO. The MSR varies depending on the number of patients assigned to the ACO,
starting at 3.9% for ACOs with patients totaling 5,000 and grading to 2% for ACOs with more than 60,000 patients.
CMS assigns a beneficiary to the preliminary roster of an ACO if the ACO physicians billed for a “plurality” of services during the
calendar year preceding the performance period. A plurality means the ACO physicians provided a greater proportion of primary care
services, measured in terms of allowed charges, than the physicians in any other ACO or Medicare-enrolled tax identification number.
CMS sets the benchmark for each ACO using the historical medical costs of the beneficiaries assigned to the ACO. Under the final
MSSP rules, primary care physicians may only join one ACO, unless they have more than one Medicare tax identification number.
Palliative Care; Home Health and Hospice Organizations
Hospice companies serve terminally ill patients and their families. Comprehensive management of the healthcare services and
products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a
patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s),
social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals. Hospice services are
provided primarily in the patient’s home or other residence, such as an assisted living residence or nursing home, or in a hospital.
Medicare’s hospice benefit is designed for patients expected to live six months or less. Hospice services for a patient can continue,
however, for more than six months, so long as the patient remains eligible as reflected by a physician’s certification.
Home health care companies provide direct home nursing and therapy services in addition to nutrition and disease management
education. These services are provided by licensed and Medicare-certified skilled nurses and other paraprofessional nursing
personnel.
OUR OPERATIONS
Our Hospitalist Operation
Through our affiliated physician group, AMH, we:
1. Provide admission, daily rounding and discharge of patients at acute care hospitals and long-term acute hospitals for
health plans, hospitals and IPAs
2. Evaluate patients in the emergency room to determine if they may be safely discharged to home, a skilled nursing
facility or other facility
3. Provide Physician Advisor consultative services for hospitals, which entails meeting daily with hospital case
managers to review the charts, lab studies and imaging studies of hospitalized patients to determine if they meet criteria for continued
stay in the hospital, to determine observation vs. inpatient status and to evaluate proper coding
4. Provide intensivist/ICU services for hospitals
5. Provide out-of-network to in-network transfers of patients for health plans and IPAs
8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our IPA Operation
Our IPAs are networks of independent primary care physicians and specialists who collectively care for HMO patients under
either a capitated payment or fee-for-service arrangement. Under the capitated model, an HMO pays our IPAs a PMPM rate, or a
“capitation” payment, and then assigns our IPAs the responsibility for providing the physician services required by the applicable
patients. The physicians in our IPAs are exclusively in control of and responsible for all aspects of the practice of medicine for our
patients. Each of our IPAs enters into contracts with HMOs, either directly or through a risk-shifting arrangement with MSOs, to
provide physician services to enrollees of the HMOs. Most of the HMO agreements have an initial term of two years renewing
automatically for successive one-year terms. The HMO agreements generally provide for a termination by the HMOs for cause at any
time, although we have never experienced a termination. The HMO agreements generally allow either party to terminate the HMO
agreements without cause with a four to six month notice.
Through our two IPAs, MMG and AKM, we provide the following services:
1. Physician recruiting
2. Physician contracting
3. Medical management, including utilization management and quality assurance
4. Provider relations
5. Member services, including annual wellness evaluations
6. Education of physicians on proper coding
7. Data collection and analysis
8. Pre-negotiating contracts with specialists, labs, imaging centers, nursing homes and other vendors
Our ACO Operation
Through our accountable care organization, we provide the following services for our physicians and patients:
1. Population health management, using the Cerecons IT platform to analyze monthly claims data from CMS and data
collected from each physician’s practice
2. Care coordination in the inpatient and outpatient settings using case managers
3. High-risk management of patients with multiple chronic conditions
4. Education of our physicians. For example, we have a partnership with Boehringer Ingelheim to educate our
physicians on patients with chronic obstructive pulmonary disease (“COPD”)
5. Services for our patients. For example, we have a partnership with Rite Aid to provide health education, medication
reconciliation and motivational interviewing for our patients
6. Promote use of evidence-based medicine by our physicians
As of June 16, 2015, ApolloMed ACO had over 1,000 physicians and nearly 40,000 Medicare FFS beneficiaries in California,
Mississippi and Ohio.
ACO has entered into an agreement with Prospect Medical Group (PMG) that, among other things, grants to PMG a right of first
refusal to acquire the ACO network of physicians who were contracted with PMG and introduced to ACO by PMG. This right takes
effect only if ACO elects to sell its operations and terminates on the termination of the agreement between ACO and PMG. We
estimate that no more than 20 physicians would be subject to PMG’s right of first refusal.
9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our Care Clinics
Our outpatient clinics provide both primary care as well as specialty services, such as cardiology services. ApolloMed also owns an
imaging center complete with MRI, CT, cardiac echo, ultrasound and nuclear and exercise stress-test equipment. Our clinics focus on
the efficient delivery of ambulatory treatment and ancillary services, with an increasing emphasis on preventive care and
management of chronic conditions. Our clinics also serve as post-discharge centers for patients who have just left the hospital.
Our clinics are located within our historical core service areas in Los Angeles. The clinics we acquired in 2014 have served their
communities for many years, handle approximately 20,000 patient visits per year and provide adult primary care, pediatric specialty
services and lab and imaging services.
Our Palliative Care, Home Health and Hospice Service Operations
Our palliative care, home health and hospice operations provide hospice, palliative care and home health services for patients using a
combination of physicians, nurses and other healthcare workers. For hospice services, depending on the needs of the specific patient
in each case, our service team may include, a physician, a nurse, a home health aide, a medical social worker, a chaplain, a dietary
counselor and a bereavement coordinator. Our hospice and palliative care services are provided in the patient's home, assisted living
or nursing home or in a hospital. Our home health services are provided directly in each patient’s home, and may include skilled
nursing and therapy services, as well as specialty programs such as disease management education, nutrition and help with daily
living activities.
Our hospice and home health services are currently offered only in Southern California, with an average daily census of about 40
hospice patients and 100 home health patients.
As of March 31, 2015, entities owned by our 51% subsidiary, ApolloMed Palliative, served over 150 patients on a daily basis.
OUR CORPORATE INFORMATION
ApolloMed’s principal executive offices are located at 700 North Brand Blvd., Suite 220, Glendale, California 91203. ApolloMed was
incorporated in the State of Delaware on November 1, 1985 under the name of McKinnely Investment, Inc. On November 5, 1986
McKinnely Investment, Inc. changed its name to Acculine Industries, Incorporated and Acculine Industries, Incorporated changed its
name to Siclone Industries, Incorporated on May 24, 1988. On July 3, 2008, Apollo Medical Holdings, Inc. merged into Siclone
Industries, Incorporated and Siclone Industries, Incorporated, as the surviving entity from the merger, simultaneously changed its
name to Apollo Medical Holdings Inc. ApolloMed’s telephone number is (818) 396-8050 and its website URL is http://apollomed.net/,
which is included herein as an inactive textual reference. Information contained on, or accessible through, our website is not a part of,
and is not incorporated by reference into, this Report.
Employees
As of March 31, 2015, ApolloMed, its subsidiaries and its consolidated affiliates (including affiliated clinics) had 150 employees and
over 40 employed or independent contractor physicians. We also had a broader physician network which consisted as of March 31,
2015, of approximately 1,000 additional contracted physicians who provided services to us. None of our employees is a member of a
labor union, and we have never experienced a work stoppage.
STRENGTHS AND COMPETITIVE ADVANTAGES
The following are some of the material opportunities that we believe exist for our Company.
Diversification
Through its subsidiaries and consolidated affiliates, ApolloMed has been able to reduce its business risk and increase revenue
opportunities by diversifying its service offerings and expand its ability to manage patient care across a horizontally integrated care
network. Our revenue is spread across our operations. Additionally, with its ability to monitor and manage care within its wide
network, ApolloMed is a more attractive business partner to health plans, IPAs and health systems seeking to provide better access
to care at lower costs.
10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Strong Management Team
The ApolloMed management team and Board of Directors have decades of experience managing physician practices, risk-based
organizations, health plans, hospitals and health systems. Collectively, they have a keen understanding of the healthcare
marketplace, emerging trends and an exciting vision for the future of healthcare delivery that is driven by physician-driven healthcare
networks.
Scalable Business Model
ApolloMed believes that elements of its physician-driven model of care can be replicated in different communities across the nation.
These elements have been rolled out across different cities in Los Angeles County with a population size of 13 million, as well as
Orange County and Tulare County in California. We have also established a presence with our ACO model in Ohio and Mississippi,
although we have not derived any revenue from such states yet.
Strong Relationships with Physicians
As of March 31, 2015, the ApolloMed physician network consisted of over 1,000 additional contracted physicians, including
hospitalists, primary care physicians and specialist physicians, through our owned and affiliated physician groups and ACO.
Long-Standing Relationships with Clients Generating Recurring Contractual Revenue
ApolloMed has long-standing relationships with multiple health plans, hospitals, hospital systems and IPAs which have been
generating recurring contractual revenue.
Comprehensive and Effective Medical Management Programs
ApolloMed has developed comprehensive and effective programs for patients with multiple chronic conditions as well as hospitalized
patients. ApolloMed has also developed its own protocol for identifying high-risk patients. In addition, ApolloMed has developed
expertise in population health and care coordination for its ACO and IPA patients.
OUR GROWTH STRATEGY
Our mission is to transform the delivery of health services to the communities we serve by implementing innovative population health
and care coordination models and by creating a patient-centered, physician-centric experience in a high-performing environment of
integrated care.
Our strategy is forward looking and aspirational in nature. While we have taken many concrete steps to achieve our strategy, the
disclaimers in this Report applicable to forward looking statements apply to this section, and we may not achieve our strategy goals.
The principal elements of our strategy are to:
1. Pursue growth opportunities in established markets. We continuously work to identify growth opportunities in
established markets we serve by working with our local network physicians. Opportunities may include continued physician
enrolment for MMG and ApolloMed ACO, additional or expanded hospitalist contracts, new risk-based insurance contracts and new
clinic acquisitions.
2. Continue to strengthen our market presence and reputation. We position ourselves to thrive in a changing healthcare
environment by continuing to build and operate high-performing, patient-centered care networks, fully engaging in health and
wellness and enhancing our reputation in our markets. We focus particularly on patient safety, patient satisfaction, care coordination,
population health and implementing clinical quality best practices across all our types of operations. We measure the health status of
our patients with the goal to directly improve their health.
3. Focus on high-quality, patient-centered care. We provide high-quality, patient-centered care in our communities. We
have implemented several initiatives to maintain and enhance the delivery of high-quality care, including clinical best practices,
information technology and tools, coordination of care, home visits, annual wellness exams and population health.
11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. Drive physician collaboration and alignment. We foster a collaborative approach among our physicians to provide
clinically superior healthcare services. We provide resources to our physicians sufficient to support the necessary, high-quality
services to our patients. We have implemented several initiatives, including active participation of physician leadership in ApolloMed
ACO, MMG, AKM and hospitalist boards and subcommittees, training programs and information technology resources. In addition, we
are aligning with our physicians in various forms of risk contracting, including pay-for-performance.
5. Expand ambulatory services and further our population health strategies. We are flexible and competitive in a
dynamic healthcare environment. We will continue to add resources to our ambulatory care services. We intend to pursue further
strategies in physician practice management and population health services. We also intend to pursue the expansion of certain
strategic products and services, such as home health care, hospice and palliative care and urgent care centers in an attempt to
create a more comprehensive network of healthcare services.
6. Pursue selective acquisitions. We believe that our organization, built on patient-centered healthcare and clinical quality
and efficiency, gives us a competitive advantage in expanding our services in our existing markets as well as other markets through
acquisitions or partnerships. We continue to monitor opportunities to acquire hospitalist groups, IPAs, ACOs and clinics that fit our
vision and long-term strategies.
7. Expand our relationships with payors and facilities in selective markets across the U.S. We intend to further develop
relationships with existing and new health plans and hospitals in selective markets across the U.S. in order to participate in the
growing Medicare Advantage, Medicaid HMO and dual-eligible segments, under both risk-bearing and value-based contracts.
Hospitalists. We believe that attractive growth opportunities exist for our hospitalists’ 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 over-utilization, reduce Medicaid denial rates, optimize lengths of stay, optimize senior and commercial bed-days,
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 Medicaid denial reviews, case management and improving
discharge management.
We believe that the demand for hospitalists, including our hospitalists’ inpatient business, will continue to grow due to the following
significant changes in the healthcare delivery system:
· The primary care physician’s role in hospital care appears to be decreasing due to the increasingly specialized nature
of hospital care, the demands of treating increasingly sicker patients in the hospital and higher acuity patients in the clinic, the
increased time it takes to round on patients in the hospital due to electronic health records and the desire to reduce on-call
obligations.
· Hospitals have a greater need for consistent on-site physician availability due to the increasing severity of illness
required to justify hospital admissions, the need to reduce readmissions, the need for better documentation and external pressures to
decrease the inpatient length of stay.
· Health plans, IPAs and other payors are searching for strategies to control the increase in inpatient expenditures.
· There is increasing pressure in providing a coordinated continuum of care for patients to improve the quality of care,
improve patient satisfaction and to reduce costs over an entire episode of care.
IPAs.
Senior/Medicare Advantage Market Opportunity. We believe that significant growth opportunities exist for patient-centered,
physician-centric integrated groups in serving the growing senior market. At present, approximately 51 million Americans are eligible
for Medicare. 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. Also, many large employers that traditionally provided
medical and prescription drug coverage to their retirees have begun to curtail these benefits. In addition, the passage of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), increased the healthcare options available to Medicare
beneficiaries through the expansion of Medicare managed care plans through the Medicare Advantage program.
12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Medicaid Program and Dual Eligibles. As a result of the Health Reform Acts, CMS projects that the total number of uninsured
Americans will fall to 23 million by 2023 from 45 million in 2012. This represents a significant new market opportunity for health plans
and integrated healthcare delivery companies such as ApolloMed, and we believe that we are strategically positioned to benefit from
this expansion.
“Dual-eligibles” present another opportunity for ApolloMed. Based on CMS data, we estimate there are approximately 10.7 million
dual-eligible enrollees with annual spending of approximately $285 billion. We believe this represents a significant opportunity for
companies like ours that have the capabilities to effectively manage this sicker population.
Accountable Care Organization.
We believe that there are growth opportunities in the ACO market, both through starting new ACOs in new geographies as well as by
acquisition of, or joint ventures with, existing ACOs. Additionally, we believe that there is the possibility that CMS will change the
business model of ACOs, possibly to some sort of partial or full capitated model. We also believe that ACOs will increasingly contract
with health plans for commercial patients.
Palliative Care, Home Health and Hospice.
We believe that there are multiple factors that will contribute to the growth of the hospice and home health industry, including (1)
increasing consumer and physician awareness and interest in hospice, palliative and home health services, (2) recognition that in-
home services can be a cost-effective alternative to more expensive institutional care (3) aging demographics and hanging family
structures in which more aging people will be living alone and may be in need of assistance, (4) the psychological benefits of
recuperating from an illness or accident or receiving care for a chronic condition in one’s own home and (5) medical and technological
advances that allow more healthcare procedures and monitoring to be provided at home.
CONSOLIDATION OF OUR AFFILIATES
Our consolidated financial statements include our accounts and those of our subsidiaries and affiliated medical practices. Some
states have laws that prohibit business entities, such as ApolloMed, 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 our affiliates, 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 our affiliates, except in the case of gross negligence,
fraud, or other illegal acts by ApolloMed, or bankruptcy of ApolloMed.
Through the management agreements and our relationship with the stockholders of our affiliates, we have exclusive authority over all
non-medical decision making related to the ongoing business operations of our affiliates. Consequently, we consolidate the revenue
and expenses of our affiliates from the date of execution of the management agreements, as the primary beneficiary of these variable
interest entities.
OUR REVENUE STREAMS AND OUR BUSINESS OPERATIONS
Our Revenue Streams
ApolloMed’s generates revenue through various contractual agreements which vary in both structure and by type of business
operation. These contracts are multi-year renewable contracts that include traditional “fee for service,” capitation, case rates,
professional and institutional risk contracts. Our revenue streams consist of contracted, fee-for-service, capitation, and MSSP
revenue:
13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Contracted revenue
Contracted revenue represents revenue generated under contracts for which ApolloMed provides 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. Additionally, contract revenue also includes supplemental revenue
from hospitals where ApolloMed may have a fee-for-service contract arrangement or provide physician advisory services to the
medical staff at a specific facility. 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. Additionally, ApolloMed derives a
portion of ApolloMed’s revenue as a contractual bonus from collections received by ApolloMed’s partners and such revenue is
contingent upon the collection of third-party billings.
Fee-for-service revenue
Fee-for-service revenue represents revenue earned under contracts in which ApolloMed bills and collects the professional
component of charges for medical services rendered by ApolloMed’s contracted and employed physicians. Under the fee-for-service
arrangements, ApolloMed bills patients for services provided and receives payment from patients or their third-party payors. 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. 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 ApolloMed’s billing center for medical coding and entering into ApolloMed’s billing system and the
verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for
payment of such services.
Capitation revenue
Capitation revenue represents revenue that ApolloMed generates based on agreements that generally make ApolloMed or its
affiliates liable for excess medical costs. The use of capitation under provider service agreements (“PSAs”) is intended to control the
use of health care resources by putting ApolloMed or its affiliates at financial risk for services provided to patients. Capitation is a fixed
amount of money per patient per unit of time paid in advance to ApolloMed for the delivery of health care services. The actual amount
of money paid is determined by the ranges of services that we provide, the number of patients involved, and the period of time during
which the services are provided. Capitation rates under our PSAs are generally based on local costs and average utilization of
services. To ensure that contracting physicians do not provide suboptimal care through under-utilization of health care services, many
managed care organizations measure rates of resource utilization in physician practices. These reports are made available to the
public as a measure of health care quality, and can be linked to financial rewards, such as bonuses. For example, ApolloMed
receives incentives under “pay-for-performance” programs for quality medical care, based on various criteria.
Additionally, Medicare pays capitation using a “Risk Adjustment model,” which compensates managed care organizations and
providers based on the health status (acuity) of each individual enrollee. Health plans and providers with higher acuity enrollees will
receive more and those with lower acuity enrollees will receive less. Under Risk Adjustment, capitation is determined based on
health severity, measured using patient encounter data. Capitation is paid on an interim basis based on data submitted for the
enrollee for the preceding year and is adjusted in subsequent periods after the final data is compiled.
Medicare Shared Savings Program Revenue
ApolloMed through its subsidiary, ApolloMed ACO, participates in the MSSP sponsored by the CMS. The MSSP allows ACO
participants to share in cost savings it generates in connection with rendering medical services to Medicare patients. Payments to
ACO participants, if any, will be calculated annually by CMS on cost savings generated by the ACO participant relative to the ACO
participants’ CMS benchmark. The MSSP is a newly formed program with minimal history of payments to ACO participants.
ApolloMed considers revenue, if any, under the MSSP, as contingent upon the realization of program savings as determined by CMS,
and are not considered earned and therefore are not recognized as revenue until notice from CMS that cash payments are to be
imminently received.
14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Types of Revenue by Business Operation
Each of our synergistic operations generates revenue in the following manners:
· Hospitalist Operation - AMH contracts with health plans or IPAs to be paid on fee schedules or case rates to see
patients and earns revenue primarily on a contracted basis. AMH also contracts directly with hospitals for fixed monthly stipends for
continuous staffing coverage.
· IPA Operation - MMG and AKM are traditional IPAs that earn revenue based on capitation payments from health plans.
In California, health plans prospectively pay the IPA or medical group a fixed Per Member Per Month amount, or capitation payment,
which is often based on a percentage of the amount received by the health plan. Capitation payments to medical groups or IPAs, in
the aggregate, represent a prospective budget from which the IPA manages care-related expenses on behalf of the population
enrolled with that IPA. Those IPAs or medical groups that manage care-related expenses under the capitated levels will realize an
operating profit; if care-related expenses exceed projected levels, the IPA will realize an operating deficit.
· ACO Operation - ApolloMed ACO is a “Shared Savings” performance model that is a contracted with CMS and earns
revenue from MSSP based on cost-savings achieved. The MSSP will reward ACOs that lower their healthcare costs while meeting
performance standards on quality of care and patient satisfaction. Under the final 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
MSSP rules require CMS to develop a benchmark for savings to be achieved by each ACO if the ACO is to receive shared savings.
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 the medical expenditure benchmark provided by CMS. A MSR must be
achieved before the ACO can receive a share of the savings. Once the MSR is surpassed, all the savings below the benchmark
provided by CMS will be shared 50% with the ACO. The MSR varies depending on the number of patients assigned to the ACO,
starting at 3.9% for ACOs with patients totaling 5,000 and grading to 2% for ACOs with more than 60,000 patients.
· Care Clinics - ApolloMed Care Clinic’s clinics receives the majority of its revenues from traditional fee-for-service models
where the physicians are paid based on professional fee schedules from various health plans, and also receives capitated payments
from IPAs, including from MMG.
· Palliative Care, Home Health and Hospice Service Operations - ApolloMed Palliative, which includes Best Choice
Hospice and Holistic Home Health, receives both fee-for-service and contracted revenues. Under the home health Prospective
Payment System (“PPS”) of reimbursement, for Medicare and Medicare Advantage programs paid at episodic rates, ApolloMed
estimates net revenues to be recorded based on a reimbursement rate which is determined using relevant data, relating to each
patient’s health status including clinical condition, functional abilities and service needs, as well as applicable wage indices to give
effect to geographic differences in wage levels of employees providing services to the patient. Billings under PPS are initially
recognized as deferred revenue and are subsequently amortized into revenue over an average patient treatment period. The process
for recognizing revenue to be recorded is based on certain assumptions and judgments, including (i) the average length of time of
each treatment as compared to a standard 60 day episode (ii) any differences between the clinical assessment of and the therapy
service needs for each patient at the time of certification as compared to actual experience, as well as (iii) the level of adjustments to
the fixed reimbursement rate relating to patients who receive a limited number of visits, are discharged but readmitted to another
agency within the same 60 day episodic period or are subject to certain other factors during the episode. Medicare revenues for
Hospice are recorded on an accrual basis based on the number of days a patient has been on service at amounts equal to an
estimated payment rate. The payment rate is dependent on whether a patient is receiving routine home care, general inpatient care,
continuous home care or respite care. Adjustments to Medicare revenues are recorded based on an inability to obtain appropriate
billing documentation or authorizations acceptable to the payor or other reasons unrelated to credit risk.
Key Payors
ApolloMed has a few key payors that represent a significant portion of its net revenues. For the fiscal year ended March 31. 2015,
three key payors accounted for 60.3% of ApolloMed’s net revenues. For the two months ended March 31, 2014, four key payors
accounted for 49.8% of ApolloMed’s net revenues. For the twelve months ended January 31, 2014, three key payors accounted for
47.6% of ApolloMed’s net revenues.
Medicare/Medi-Cal
L.A Care
Healthnet
Year Ended
March 31,
2015
Two Months
Ended
March 31,
2014
Year
Ended
January
31, 2014
34.8%
13.2%
12.3%
14.3%
12.1%
*
17.8%
*
*
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Hollywood Presbyterian
California Hospital
* Represents less than 10%
GEOGRAPHIC COVERAGE
*
*
11.8%
11.6%
15.9%
13.9%
As of March 31, 2015, through our managed physician practices, we provided hospitalist services at over 20 acute-care hospitals and
long-term acute care facilities in Southern and Central California, and operated primary care and specialty medical clinics in the Los
Angeles area. MMG and AKM each provides primary and specialist care through its contracted physicians throughout the Greater Los
Angeles area. ApolloMed ACO had nearly 40,000 Medicare beneficiaries assigned to it by CMS in California, Mississippi and Ohio.
The Company’s business and operations are primarily in one state, California. While the Company operates through ApolloMed ACO
outside of California, it has not derived any revenues from operations outside of California, and, it currently derives all of its revenues
from California.
15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, hospitals and other healthcare
companies.
Hospitalists
The market for hospitalists within this industry is highly fragmented. ApolloMed 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,
IPC-The Hospitalist Company and Sound Physicians, 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.
IPAs
ApolloMed’s affiliated IPAs, MMG and AKM, operate in a highly competitive market. They compete with other IPAs, medical groups
and hospitals. Some of our competitors may have greater financial and other resources available to them. For example, in Los
Angeles, examples of our competitors include Regal Medical Group and Lakeside Medical group, which are part of the Heritage
Provider Network, as well as HealthCare Partners, which is owned by DaVita HealthCare Partners.
ACCOUNTABLE CARE ORGANIZATION
ApolloMed ACO competes with hospitals, sophisticated provider groups, and management service organizations in the creation,
administration, and management of ACOs. Some of our competitors may have greater financial and other resources available to
them. For example, in Los Angeles, our competitors include Heritage California ACO, which is part of the Heritage Provider Network
and operates a Pioneer ACO and HealthCare Partners ACO, which is owned by DaVita HealthCare Partners and which participates
in the MSSP.
PALLIATIVE CARE, HOME HEALTH AND HOSPICE
The palliative care, home health and hospice industries are highly competitive and fragmented. Palliative care and hospice providers
include not-for-profit and charity-funded programs that may have strong ties to their local communities and for-profit programs that
may have greater financial and marketing resources available to them. Home health providers include not-for-profit and for-profit
facility-based agencies, such as hospitals or nursing homes, as well as independent companies, some of which are large publicly-
traded companies.
PROFESSIONAL LIABILITY AND OTHER INSURANCE COVERAGE
Our business has an inherent risk of claims of medical malpractice against our affiliated physicians and us. We and 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 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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
16
NNA FINANCING ARRANGEMENTS
On March 28, 2014, we entered into a Credit Agreement (the “Credit Agreement”) pursuant to which NNA, an affiliate of Fresenius,
extended to us (i) a $1,000,000 revolving line of credit (the “Revolving Loan”) and (ii) a $7,000,000 term loan (the “Term Loan”). The
Company drew down the full amount of the Revolving Loan on October 23, 2014. The Term Loan and Revolving Loan mature on
March 28, 2019, subject to NNA’s right to accelerate payment on the occurrence of certain events. The Term Loan may be prepaid at
any time without penalty or premium. The loans extended under the Credit Agreement are secured by substantially all of our assets,
and are guaranteed by our subsidiaries and consolidated entities. The guarantees of these subsidiaries and consolidated entities are
in turn secured by substantially all of the assets of the subsidiaries and consolidated entities providing the guaranty. Any entity that
subsequently becomes a subsidiary or consolidated entity will be required to provide a similar guaranty secured by substantially all of
its assets and to comply with all of the other applicable requirements in the Credit Agreement and NNA Convertible Note.
Concurrently with the Credit Agreement, we entered into an Investment Agreement with NNA (the “Investment Agreement”), pursuant
to which it issued to NNA a Convertible Note in the original principal amount of $2,000,000 (the “NNA Convertible Note”). We drew
down the full principal amount of the NNA Convertible Note on July 30, 2014. The NNA Convertible Note matures on March 28,
2019, subject to NNA’s right to accelerate payment on the occurrence of certain events. We may redeem amounts outstanding under
the NNA Convertible Note on 60 days’ prior notice to NNA. Amounts outstanding under the NNA Convertible Note are convertible at
NNA’s sole election into shares of our common stock at an initial conversion price of $10.00 per share. Our obligations under the
NNA Convertible Note are guaranteed by our subsidiaries and consolidated entities (including any subsidiaries or consolidated
entities that are acquired or formed in the future).
On February 6, 2015, we entered into a First Amendment and Acknowledgement (the “Acknowledgement”) with NNA, Warren
Hosseinion, M.D., and Adrian Vazquez, M.D. The Acknowledgement amended some provisions of, and/or provided waivers in
connection with, each of (i) the Registration Rights Agreement between the Company and NNA, dated March 28, 2014 (the
“Registration Rights Agreement”), (ii) the Investment Agreement, (iii) the NNA Convertible Note, and (iv) the NNA Warrants. The
amendments to the Registration Rights Agreement included amendments with respect to the timing of the filing deadline for a resale
registration statement for the benefit of NNA.
Under the Investment Agreement, we issued to NNA warrants to purchase up to 300,000 shares of our common stock at an initial
exercise price of $10.00 per share and warrants to purchase up to 200,000 shares of our common stock at an initial exercise price of
$20.00 per share (collectively, the “NNA Warrants”).
The Credit Agreement, Investment Agreement and NNA Convertible Note contain various representations, warranties and covenants
that we made, including the following:
· We and our subsidiaries and consolidated entities are prohibited from acquiring another entity or business with a purchase
price greater than $500,000 without NNA’s prior consent.
· We and our subsidiaries and consolidated entities are prohibited from creating or acquiring new subsidiaries without NNA’s
prior approval. We are further prohibited from creating or acquiring any subsidiary that is not wholly-owned by us or one of our
subsidiaries.
· We are required to meet certain financial covenants as to consolidated EBITDA, leverage ratio, fixed charge coverage ratio
and consolidated tangible net worth (in the case of consolidated tangible net worth, adding back certain goodwill and intangible
assets of some of our acquisitions). In particular, we are required (i) to maintain a consolidated tangible net worth of no less than
$(3,700,000) as of March 31, 2015, June 30, 2015 and September 30, 2015, respectively, and a consolidated tangible net worth of no
less than $0 as of December 31, 2015, and (ii) to have consolidated EBITDA of not less than $1,000,000 and a fixed charge
coverage ratio of not less than 1.25 to 1.0, in each case as of September 30, 2015.
· We are prohibited from being acquired by merger or consolidation without NNA’s prior consent. With certain exceptions,
neither us nor any of our subsidiaries or consolidated entities may sell or dispose of any assets.
17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
· With certain exceptions, neither us nor any of our subsidiaries or consolidated entities may incur any indebtedness or permit
any liens to be placed on their properties without NNA’s prior consent.
· With certain exceptions, neither us nor any of our subsidiaries or consolidated entities may make any dividends or
distributions or repurchase shares of its capital stock without NNA’s prior consent.
Both the NNA Convertible Note and the NNA Warrants include the following terms:
· The exercise price under the NNA Warrants and the conversion price under the NNA Convertible Note and the number of
shares underlying such securities would be adjusted under certain circumstances, resulting in the issuance of additional shares of
our securities. This adjustment would be triggered by our issuance of shares of our common stock (or securities issuable into its
common stock) at a price per share less than $9.00 per share. The adjustments described in this paragraph do not apply to certain
exempt issuances, including the sale of shares of our common stock in a bona fide, firmly underwritten public offering pursuant to a
registration statement under the 1933 Act and with a purchase price per share of at least $20.00 (a “Qualified IPO”). In addition, these
adjustments would terminate on the earlier of March 28, 2016 and our closing of an equity financing yielding gross cash proceeds of
at least $2,000,000 (the “Next Financing”). Any future issuances of our securities that are not exempt would result in the adjustments
described in this paragraph until the adjustments are terminated.
· We are required to make cash payments to NNA on a ratable basis if we make any payments to holders of restricted stock
units, phantom equity rights, equity appreciation rights or any other payments calculated in reference to the valuation or changes in
valuation of our common stock or equity.
· We have also granted the following rights to NNA under the Investment Agreement, for so long as NNA holds a specified
number shares of our common stock or NNA Warrants or the NNA Convertible Note convertible into such specified number of shares
of our common stock:
· NNA has the right to have one director nominated to our Board of Directors and each Board of Directors committee, and to
appoint one representative to attend meetings of our Board of Directors and each Board of Director’s committee as an observer. NNA
has exercised its observer rights but has not appointed a director to our Board of Directors.
· With certain specified exceptions, NNA has the right to subscribe for its pro rata share of any of our issuances of
securities on the same terms as such securities are being offered to others. This subscription right does not apply to certain exempt
issuances, including the sale of our shares of common stock in a Qualified IPO.
We have also entered into a Registration Rights Agreement with NNA, which, as amended by the First Amendment,
provides NNA with the following rights, among others:
· NNA has the right to include all of its registrable securities (except for those eligible for resale under Rule 144) in any
public offering by us of our securities under a registration statement filed with the SEC.
· We are prohibited for an extended period of time from preparing or filing with the SEC a registration statement without
the prior consent of NNA.
· We are required to prepare and file with the SEC a registration statement covering the sale of NNA’s registrable
securities by October 24, 2015. If we fail to do so, on October 24, 2015, and in each following month until we file the registration
statement registering NNA’s registrable securities, we must pay NNA liquidated damages of 1.5% of the total purchase price of the
registrable securities owned by NNA, payable in Common Stock. We are also required to use our commercially reasonable best
efforts to cause the registration statement registering NNA’s registrable securities to be declared effective by the SEC by April 16,
2016.
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, the U.S. Department of Justice, CMS,
and various state authorities. We have included brief descriptions of some, but not all, of the laws and regulations that affect our
business below.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Imposition of liabilities 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.
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.
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 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, many 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. The ACA 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 the ACA, 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.
19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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. The conduct or business arrangement, however,
does increase the risk of scrutiny by government enforcement authorities. We may be less willing than some of our competitors to
take actions or enter into business arrangements that do not clearly satisfy the safe harbors. As a result, this unwillingness may put
us at a competitive disadvantage.
Some states have enacted statutes and regulations similar to the Anti-Kickback Statute, but which may be applicable regardless of
the payor 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. Although we have established policies and procedures to ensure
that our arrangements with physicians comply with current laws and applicable regulations, we cannot assure you that regulatory
authorities that enforce these laws will not determine that some of these arrangements violate the Anti-Kickback Statute or other
applicable laws. An adverse determination could subject us to liabilities under the Social Security Act, including criminal penalties,
civil monetary penalties and exclusion from participation in Medicare, Medicaid or other federal health care programs, any of which
could have a material adverse effect on our business, financial condition or results of operations.
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. Unlike safe harbors under the Anti-Kickback Statute with which
compliance is voluntary, an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in
violation of the Stark Law.
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 payor 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.
Because the Stark Law and its implementing regulations continue to evolve, we do not always have the benefit of significant
regulatory or judicial interpretation of this law and its regulations. We attempt to structure our relationships to meet an exception to the
Stark Law, but the regulations implementing the exceptions are detailed and complex, and we cannot be certain that every
relationship complies fully with the Stark Law. In addition, in the July 2008 final Stark rule, CMS indicated that it will continue to enact
further regulations tightening aspects of the Stark Law that it perceives allow for Medicare program abuse, especially those
regulations that still permit physicians to profit from their referrals of ancillary services. There can be no assurance that the
arrangements entered into by us with physicians and facilities will be found to be in compliance with the Stark Law, as it ultimately
may be implemented or interpreted.
20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
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.
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 was 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.
21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fee-Splitting and Corporate Practice Of Medicine
Some states, including California, have laws that prohibit business entities, such as our Company and its subsidiaries, 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 these states, a
violation of the corporate practice of medicine prohibition constitutes the unlawful practice of medicine, which is a public offense
punishable by fines and other criminal penalties. In addition, any physician who participates in a scheme that violates the state’s
corporate practice of medicine prohibition may be punished for aiding and abetting a lay entity in the unlawful practice of medicine.
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. The
California Medical Board, as well as other state’s regulatory bodies, has taken the position that certain physician practice
management agreements that confer too much control over a physician practice violate the prohibition against corporate practice of
medicine.
The Company operates by maintaining long-term management contracts with affiliated professional organizations, which are each
owned and operated by physicians and other individuals, and which employ or contract with additional physicians to provide clinical
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 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 and other states that have corporate
practice prohibitions 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 arrangements. If we were required to restructure our operating structures due to
determination that a corporate practice of medicine violation existed, such a restructuring might include revisions of our management
services agreements, which might include a modification of the management fee, and/ or establishing an alternative structure.
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 payor plan. Violation of this statute may be charged as a felony offense and may result in fines,
imprisonment or both. The ACA 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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
22
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 medically
necessary services provided to Medicare or Medicaid program beneficiaries. Further, except as specifically permitted under the Civil
Monetary Penalties law, a person who offers or transfers to a Medicare or Medicaid beneficiary any remuneration that the person
knows or should know is likely to influence the beneficiary’s selection of a particular provider of Medicare or Medicaid payable items
or services may be liable for civil money penalties of up to $10,000 for each wrongful act.
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 plan to 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.
Knox-Keene Act and Other State Insurance Laws
Some of the medical groups and IPAs that have entered into management services agreements with us, have historically contracted
with health plans and other payors to receive a per member per month (“PMPM”) or percentage of premium (“POP”) capitation
payment for professional (physician) services and assumed the financial responsibility for professional services. In many of these
cases, the health plans or other payors separately enter into contracts with hospitals that directly receive payment (either a capitation
or fee-for-service payment) and assume some type of contractual financial responsibility for their institutional (hospital) services. In
some instances, the Company’s managed medical groups and IPAs have been paid by their contracting payor for the financial
outcome of managing the care dollars associated with both the professional and institutional services received by the medical groups’
and IPAs’ members. In the case of institutional services, the medical groups and IPAs have recognized a percentage of the surplus of
institutional revenues less institutional expense as the medical groups’ and IPAs’ net revenues and has also been responsible for
some percentage of any short-fall in the event that institutional expenses exceed institutional revenues. Notwithstanding, neither the
Company nor any of its managed medical groups or IPAs are contractually obligated to pay claims to any hospitals or other
institutions under these arrangements. The California Department of Managed Health Care (“DMHC”) licenses and regulates health
care service plans pursuant to the Knox-Keene Act. We do not hold a limited Knox-Keene license. If DMHC were to determine that
we have been inappropriately taking risk for institutional and professional services as a result of our various hospital and physician
arrangements without having a limited Knox-Keene license, we may be required to obtain a limited Knox-Keene license to resolve
such violations and we could be subject to civil and criminal liability, any of which could have a material adverse effect on our
business, financial condition or results of operations.
23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Further, some states require ACOs to be registered or otherwise comply with state insurance laws. Our affiliated ACO does not
currently take financial risk, and is therefore not registered with any state insurance agency. If a state insurance agency were to
determine that we have been inappropriately operating an ACO without state registration or licensure, we may be required to obtain
such registration or licensure to resolve such violations and we could be subject to liability, which could have a material adverse effect
on our business, financial condition or results of operations.
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
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 recently adopted a code of ethics for our Company.
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. 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. Our ability to operate profitably will depend, in part, upon our ability and the ability of our affiliated
physician organizations to obtain and maintain all necessary licenses and other approvals and operate in compliance with applicable
health care laws and regulations, including any new laws and regulations or new interpretations of existing laws and regulations.
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. . Our ability to operate profitably will depend, in part, upon our ability and the ability of our affiliated
physician organizations to obtain and maintain all necessary licenses and other approvals and operate in compliance with applicable
health care laws and regulations, including any new laws and regulations or new interpretations of existing laws and regulations.
Home Health and Hospice Regulation.
We have invested in new business lines consisting of (i) home health, (ii) hospice, and (iii) palliative care that require compliance with
additional regulatory requirements. For example, we must comply with laws relating to hospice care eligibility, the development and
maintenance of plans of care, and the coordination of services with nursing homes or assisted living facilities where many of our
patients live. In addition, our hospice programs are licensed as required under state law as either hospices or home health agencies.
24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Below, please find a discussion of the regulations that we believe most significantly affect our home health and hospice business.
Licensure, Certification, Accreditation and Related Laws and Guidelines.
Our agencies and facilities are subject to state and local licensing regulations ranging from the adequacy of medical care, to
compliance with building codes and environmental protection laws. To assure continued compliance with these various regulations,
governmental and other authorities periodically inspect our agencies and facilities. Additionally, our clinical professionals are subject
to numerous federal, state and local licensing laws and regulations, relating to, among other things, professional credentialing and
professional ethics. Clinical professionals are also subject to state and federal regulation regarding prescribing medication and
controlled substances. Each state defines the scope of practice of clinical professionals through legislation and through the respective
Boards of Medicine and Nursing, and many states require that nurse practitioners and physician assistants work in collaboration with
or under the supervision of a physician. There are penalties for noncompliance with these laws and standards, including the loss of
professional license, civil or criminal fines and penalties, federal health care program disenrollment, loss of billing privileges, and
exclusion from participation in various governmental and other third-party healthcare programs. We operate our business to ensure
that our employees and agents possess all necessary licenses and certifications.
Reimbursement for palliative care and house call services is generally conditioned on our clinical professionals providing the correct
procedure and diagnosis codes and properly documenting both the service itself and the medical necessity for the service. Incorrect
or incomplete documentation and billing information, or the incorrect selection of codes for the level and type of service provided,
could result in non-payment for services rendered or lead to allegations of billing fraud.
Medicare Participation.
To participate in the Medicare program and receive Medicare payments, our agencies and facilities must comply with regulations
promulgated by the CMS. Among other things, these requirements, known as the “Conditions of Participation” relate to the type of
facility, its personnel, and its standards of medical care, as well as its compliance with state and local laws and regulations. The
Conditions of Participation for hospice programs include, but may not be limited to regulation of the: Governing Body, Medical
Director, Direct Provision of Core Services, Professional Management of Non-Core Services, Plan of Care, Continuation of Care,
Informed Consent, Training, Quality Assurance, Interdisciplinary Team, Volunteers, Licensure, Central Clinical Records, Surveys and
Audits, Billing Audits/ Claims Reviews, Certificate of Need Laws and Other Restrictions, Limitations on For-Profit Ownership, Limits
on the Acquisition or Conversion of Non-Profit Health Care Organizations, and Professional Licensure.
To be eligible for Medicare payments for home health services, a patient must be “homebound” (cannot leave home without
considerable or taxing effort), require periodic skilled nursing or physical or speech therapy services, and receive treatment under a
plan of care established and periodically reviewed by a physician based upon a face-to-face encounter between the patient and the
physician.
From time to time we receive survey reports containing statements of deficiencies. We review such reports and takes appropriate
corrective action. If a hospice or home health agency were found to be out of compliance and actions were taken against that hospice
or home health agency, this could materially adversely affect the entity’s ability to continue to operate, to provide certain services and
to participate in the Medicare and Medicaid programs, which could materially adversely affect our business operations.
Billing Audits/Claims Reviews. The Medicare program and its fiscal intermediaries and other payors periodically conduct pre-payment
or post-payment reviews and other reviews and audits of health care claims, including hospice claims. There is pressure from state
and federal governments and other payors to scrutinize health care claims to determine their validity and appropriateness. In order to
conduct these reviews, the payor requests documentation from us and then reviews that documentation to determine compliance with
applicable rules and regulations, including the eligibility of patients to receive hospice benefits, the appropriateness of the care
provided to those patients and the documentation of that care. Our claims have been subject to review and audit. We make
appropriate provisions in our accounting records to reduce our revenue for anticipated denial of payment related to these audits and
reviews. We believe our hospice programs comply with all payor requirements at the time of billing. However, we cannot predict
whether future billing reviews or similar audits by payors will result in material denials or reductions in revenue.
25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Professional Licensure and Participation Agreements. Many hospice employees are subject to federal and state laws and regulations
governing the ethics and practice of their profession, including physicians, physical, speech and occupational therapists, social
workers, home health aides, pharmacists and nurses. In addition, those professionals who are eligible to participate in the Medicare,
Medicaid or other federal health care programs as individuals must not have been excluded from participation in those programs at
any time.
Environmental, Occupational Health, OSHA
We are subject to federal, state and local regulations governing the storage, use and disposal of materials and waste products.
Although we believe that our safety procedures for storing, handling and disposing of these hazardous materials comply with the
standards prescribed by law and regulation, we cannot completely eliminate the risk of accidental contamination or injury from those
hazardous materials. In the event of an accident, we could be held liable for any damages that result and any liability could exceed
the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all we
could incur significant costs and the diversion of our management’s attention to comply with current or future environmental laws and
regulations.
Federal regulations promulgated by OSHA impose additional requirements on us including those protecting employees from
exposure to elements such as blood-borne pathogens. We cannot predict the frequency of compliance, monitoring, or enforcement
actions to which we may be subject as those regulations are implemented, and regulations might adversely affect our operations.
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 our
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
We might need to raise additional capital, which might not be available.
The Company has historically incurred significant losses, and we may require additional equity or debt financing for additional
working capital, to fund acquisitions, or to meet our liabilities, including our maturing short term obligations. In the event of additional
financing being unavailable to us, we may be unable to operate or continue in existence, and the price of our common stock may
decline and we may be or be made bankrupt.
We have a history of losses, and may have to further reduce our costs by curtailing future operations to continue as a
business.
Historically we have had operating losses and our cash flow has been inadequate to support our ongoing operations. For the year
ended March 31, 2015, we had a net loss of $1.3 million, and as of March 31, 2015, we had an accumulated deficit of $19.3 million.
Our ability to fund our capital requirements out of our available cash and cash generated from our operations depends on a number
of factors, including our ability to integrate recently acquired businesses and continue growing our existing operations. If we cannot
continue to generate positive cash flow from operations, we will have to reduce our costs and try to raise working capital from other
sources. These measures could materially and adversely affect our ability to execute our operations and expand our business.
The terms of our debt agreements could restrict our operations, particularly our ability to respond to changes in our
business or to take specified actions and an event of default under our debt agreements could harm our business.
Our existing secured debt agreements with NNA of Nevada, Inc. (“NNA”), an affiliate of Fresenius SE & Co. KGaA (“Fresenius”),
contain, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and
financial restrictions on us, including restrictions on our ability to take actions that may be in our best interests. Our existing debt
agreements include covenants that generally:
26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
· do not allow us to borrow additional amounts without the approval of NNA;
· require us to obtain the consent of NNA for acquisitions of $500,000 or more and grant security interests in newly-
acquired companies;
· do not allow us to dispose of assets;
· do not allow us to liquidate, wind up or dissolve any of our subsidiaries without the approval of NNA;
· do not allow us to create any liens on any of our assets;
· do not allow us to pursue lines of business outside the lines of businesses engaged in by the Company as of March
28, 2014;
· require us to not impair NNA’s security interests in our assets; and
· require us to meet, on an ongoing basis, certain financial targets as to consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”), leverage ratio, fixed charge coverage ratio and consolidated tangible net worth. No
assurances can be given that we will be able to meet any of the financial covenants in favor of NNA, and, if we fail to meet any
financial covenant, there will be an event of default under the existing NNA agreements, and no assurance can be given that
NNA will waive such default, which could result in material adverse effects on us.
As discussed below in the risk factor entitled “Laws regulating the corporate practice of medicine could restrict the manner in which
we are permitted to conduct our business and the failure to comply with such laws could subject us to penalties or require a corporate
restructuring,” we have certain contractual rights relating to the transfer of equity interests in some of our affiliated physician groups
through Physician Shareholders agreements with Dr. Hosseinion, the controlling stockholder of our affiliated physician groups. Dr.
Hosseinion’s ceasing to serve as a senior executive under his employment agreement would be an event of default under the debt
agreements with NNA, unless he died or became disabled or was replaced by a new senior executive reasonably satisfactory to
NNA. In the event that an event of default has occurred under the terms of our debt agreements with NNA, NNA has the right to
require us to exercise this equity transfer right in favor of a transferee approved by NNA. If NNA exercised this right, in addition to any
other remedies NNA would be entitled to under our debt agreements, we may lose control of our affiliated physician groups which
could have a material adverse effect on our business.
NNA has a security interest over all of our assets and those of our subsidiaries and (with limited exceptions) affiliates, and
NNA would be able to foreclose on our assets if we defaulted on our obligations under the NNA debt agreements.
If we defaulted on our obligations to NNA, they would be able to exercise various remedies, including foreclosing on and selling our
assets and those of our subsidiaries, and using the proceeds to pay down our outstanding obligations to NNA.
Certain of NNA’s rights under the financing agreements would continue after we repay all our debt to NNA.
As discussed in “Our Business - NNA Financing Arrangements,” we have granted NNA various rights, including the right to nominate
a director and appoint a board observer and to participate in certain equity offerings that will survive the repayment of our debt to
NNA.
27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NNA has consent rights over certain corporate decisions.
As discussed above regarding our debt arrangements with NNA and as further discussed in “Our Business - NNA Financing
Arrangements,” we have needed and may in the future need NNA’s consent for a number of different types of transactions. NNA
could at any time withhold or condition its consent at its sole discretion. Consequently, we would be unable to take the action to which
NNA did not consent or, if we did so without NNA’s consent, we would be in default under the agreements with NNA and NNA would
have the right to enforce various remedies, including requiring immediate repayment of any outstanding indebtedness under those
agreements. NNA’s enforcement of its remedies would likely have a material adverse effect on us and our business.
We have to make significant expenditures to service our existing debt, which may reduce our ability to continue expanding.
We have significant outstanding debt obligations, including the obligations with NNA described above and our 9% Senior
Subordinated Convertible Notes, which become due and payable on February 15, 2016 unless converted. As a result, we have to
devote significant resources to servicing our existing debt load, and may be unable to devote sufficient resources to our ongoing
growth and expansion. This may have a material adverse effect on us and our business.
We are required to prepare and file with the SEC a registration statement covering the sale of NNA’s registrable securities
by October 24, 2015.
We are required to prepare and file with the SEC a registration statement covering the sale of NNA’s registrable securities by October
24, 2015. If we fail to do so, on October 24, 2015, and for each month thereafter until we file the registration statement registering
NNA’s registrable securities, we must pay NNA liquidated damages of 1.5% of the total purchase price of the registrable securities
owned by NNA, payable in Common Stock. This may result in the dilution of the ownership interests of our stockholders.
We are required to obtain NNA’s consent to the preparation and filing of any registration statement.
We will have to obtain a consent from NNA before filing any registration statement, and there can be no assurance that NNA will
provide a consent. If NNA does not provide a consent, or conditioned its consent on any new requirements, we may be unable to file
a registration statement in the future, even if such filing is advantageous to our business.
The Company has a limited operating history that makes it difficult to reliably predict future growth and operating results.
The predecessor to ApolloMed was incorporated in California in 2001, and served initially as the management company for our
affiliated medical group, ApolloMed Hospitalists. In addition, ApolloMed was awarded a participation agreement under CMS’ MSSP in
July 2012. ApolloMed has limited experience operating an ACO or managed care organization. Further, MMG is growing rapidly and
has received a one-time true-up payment in the fourth quarter for services rendered throughout fiscal year 2015, that make it difficult
to predict its future cash flow and results based on current results. 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 and cash flows. 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.
We may be unable to successfully integrate recently acquired and launched entities and may have difficulty predicting the
future needs of those entities.
In 2014, ApolloMed (including its affiliates that are wholly-owned by Dr. Hosseinion) acquired Southern California Heart Centers, AKM
Medical Group, a Los Angeles based IPA, Best Choice Hospice Care LLC and Holistic Health Home Health Care Inc., and launched
ApolloMed Care Clinic and ApolloMed Palliative Services, LLC. As a result of our rapid expansion we may be unable to successfully
integrate the various entities we have acquired or formed. Further, these entities operate in different areas of the health care industry,
and we cannot accurately predict how these acquired entities will perform in the future.
28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 and
integrated inpatient and outpatient physician networks. We also seek growth opportunities through the acquisition of target medical
groups and other service providers. 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 entities, our ability to successfully implement our business plan and achieve targeted
financial results is dependent on successfully integrating those entities. The process of integrating acquired entities involves risks.
These risks include, but are not limited to:
·
·
·
·
·
·
·
·
demands on our management team related to the significant increase in the size of our business;
diversion of management’s attention from the management of daily operations;
difficulties in the assimilation of different corporate cultures and business practices;
difficulties in conforming the acquired entities’ accounting policies to ours;
retaining employees who may be vital to the integration of departments, information technology systems, including accounting;
systems, technologies, books and records, procedures and maintaining uniform standards, such as internal accounting controls;
procedures, and policies; and
costs and expenses associated with any undisclosed or potential liabilities.
There is no assurance that we will be able to manage the integration of our acquisitions or the growth of such acquisitions effectively.
An element of our growth strategy is also the expansion of our business by developing new palliative care programs in our existing
markets and in new markets. This aspect of our growth strategy may not be successful, which could adversely impact our overall
growth and profitability. We cannot assure you that we will be able to:
·
·
identify markets that meet our selection criteria for new palliative care programs;
hire and retain a qualified management team to operate each of our new palliative care programs;
· manage a large and geographically diverse group of palliative care programs;
·
·
·
become Medicare and Medicaid certified in new markets;
generate a sufficient patient base in new markets to operate profitably in these new markets; or
compete effectively with existing programs.
We may not make appropriate acquisitions, may fail to integrate them into our business, or these acquisitions could alter
our current payor mix and reduce our income.
Our business is significantly dependent on locating and acquiring or partnering with medical practices or individual physicians to
provide health care services. As part of our growth strategy, we regularly review potential acquisition opportunities. We believe that
there continue to be a number of acquisition opportunities that would be complementary to our business. We cannot predict whether
we will be successful in pursuing such acquisition opportunities or what the consequences of any such acquisitions would be. If we
are not successful in finding attractive acquisition candidates that we can acquire on satisfactory terms, or if we cannot successfully
complete and efficiently integrate those acquisitions that we identify, we may not be able to implement our business model, which
would likely negatively impact our revenues and income. Furthermore, our acquisition strategy involves a number of risks and
uncertainties, including:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
29
· We may not be able to identify suitable acquisition candidates or strategic opportunities or successfully implement or realize the
expected benefits of any suitable opportunities. In addition, we compete for acquisitions with other potential acquirers, some of
which may have greater financial or operational resources than we do. This competition may intensify due to the ongoing
consolidation in the healthcare industry, which may increase our acquisition costs.
· We may be unable to successfully and efficiently integrate completed acquisitions, including our recently completed acquisitions
and such acquisitions may fail to achieve the financial results we expected. Integrating completed acquisitions into our existing
operations involves numerous short-term and long-term risks, including diversion of our management’s attention, failure to retain
key personnel, failure to retain payor contracts and failure of the acquired practice to be financially successful.
· We cannot be certain of the extent of any unknown or contingent liabilities of any acquired business, including liabilities for failure
to comply with applicable laws. We may incur material liabilities for past activities of acquired entities. Also, depending on the
location of the acquisition, we may be required to comply with laws and regulations that may differ from those of the states in
which our operations are currently conducted.
· We may acquire individual or group medical practices that operate with lower profit margins as compared with our current or
expected profit margins or which have a different payor mix than our other practice groups, which would reduce our profit
margins. Depending upon the nature of the local healthcare market, we may not be able to implement our business model in
every local market that we enter, which may negatively impact our revenues and profitability.
·
If we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders
could be diluted, which, in turn, could adversely affect the market price of our stock. If we finance an acquisition with debt, it could
result in higher leverage and interest costs. As a result, if we fail to evaluate and execute acquisitions properly, we might not
achieve the anticipated benefits of these acquisitions, and we may increase our acquisition costs.
Changes to the fair value of contingent payments to be paid in connection with our acquisitions may result in significant
fluctuations to our results of operations.
In connection with our recent acquisitions we are required to make certain contingent payments. The fair value of such payments is
re-evaluated periodically based on changes in our estimate of future operating results and changes in market discount rates. Any
changes in our estimated fair value are recognized in our results of operations. Increases in the amount of contingent payments were
are required to make may have an adverse effect on our operations.
Our management team’s attention may be diverted by recent acquisitions and searches for new acquisition targets, and our
business and operations may suffer adverse consequences as a result.
Mergers and acquisitions are time intensive, requiring significant commitment of our management team’s focus and resources. If our
management team spends too much time focused on recent acquisitions or on potential acquisition targets, our management team
may not have sufficient time to focus on our existing business and operations. This diversion of attention could have material and
adverse consequences on our operations and our ability to be profitable.
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.
30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We could experience significant losses under our capitation-based contracts if the medical expenses we incur exceed
revenues.
In California, health plans typically prospectively pay an IPA a fixed Per Member Per Month amount, or capitation payment, which is
often based on a percentage of the amount received by the health plan. Capitation payments to IPAs, in the aggregate, represent a
prospective budget from which the IPA manages care-related expenses on behalf of the population enrolled with that IPA. If our IPAs
are able to manage care-related expenses under the capitated levels we realize an operating profit on our capitation contracts.
However, if our care-related expenses exceed projected levels, our IPAs may realize substantial operating deficits, which are not
capped and could lead to substantial losses for our Company.
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 and we hold a $5 million key man life insurance policy. 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.
Our current principal stockholders have significant influence over us and they could delay, deter or prevent a change of
control or other business combination or otherwise cause us to take action with which you might not agree. This includes
that Warren Hosseinion, M.D. and Adrian Vazquez, M.D., combined currently own more than 40% of our shares and have
significant influence over our operations and strategic direction.
Our executive officers and directors, together with holders of greater than 5% of our outstanding common stock, as a group, currently
beneficially own a majority of our outstanding common stock. As a result, our executive officers, directors and holders of greater than
5% of our outstanding common stock will have the ability to control all matters submitted to our stockholders for approval, including:
·
·
·
changes to the composition of our Board of Directors, which has the authority to direct our business and appoint and remove our
officers;
proposed mergers, consolidations or other business combinations; and
amendments to our Certificate of Incorporation and Bylaws which govern the rights attached to our shares of common stock.
This concentration of ownership of shares of our common stock could delay or prevent proxy contests, mergers, tender offers, open
market purchase programs or other purchases of shares of our common stock that might otherwise give our stockholders the
opportunity to realize a premium over the then prevailing market price of our common stock. The interests of our executive officers,
directors and holders of greater than 5% of our outstanding common stock may not always coincide with the interests of the other
stockholders. This concentration of ownership may also adversely affect our stock price.
The concentration of ownership includes that Dr. Hosseinion (who currently owns approximately 21% of our shares) and Dr. Vazquez
(who currently owns approximately 19% of our shares) together currently own over 40% of our shares of common stock and exert a
significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. As stockholders Dr. Hosseinion and Dr. Vazquez are entitled to
vote their shares in their own interests, which may not always be in the interests of our stockholders generally. Their concentrated
holding of such a significant block of shares may harm the value of our shares and discourage investors from being involved in our
Company. They could also use their concentrated holdings to delay, defer, or prevent a change of control, merger, consolidation, or
sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in
the consummation of such a transaction that our other stockholders do not support.
31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
If our agreements or arrangements with Dr. Hosseinion or physician groups are deemed invalid under state law, including
laws against the corporate practice of medicine, or federal law, or are terminated as a result of changes in state law, it could
have a material impact on our profitability.
There are various state laws regulating the corporate practice of medicine which prohibit us from owning various health care entities.
These corporate practice of medicine prohibitions are intended to prevent unlicensed persons from interfering with or inappropriately
influencing the physician’s professional judgment. These and other laws may also prevent fee-splitting, which is the sharing of
professional service income with non-professional or business interests. The interpretation and enforcement of these laws vary
significantly from state to state. As a result, we have structured other agreements and arrangements with these entities, which may
not be as effective in providing control as direct ownership. If those agreements and arrangements were held to be invalid under state
laws prohibiting the corporate practice of medicine, a significant portion of our revenues could be affected, which may result in a
material adverse effect upon our Company. Further, changes to federal or state law that made regulated or prohibited such
agreements or arrangements could also have a material adverse effect upon our profitability and operations.
We rely on certain key affiliated entities that are owned by key personnel who could stop services to our Company. Any
failure by our key affiliated entities or their equity holders to perform their obligations under the contractual arrangements
would have a material adverse effect on our business, financial condition and results of operations. We also own the
majority, and not all, of the equity of our key subsidiaries.
We consolidate in our financial reporting and business structure various affiliated physician practice groups. If we had direct
ownership of certain of our affiliated entities, we would be able to exercise our rights as an equity holder directly to effect changes in
the boards of directors of those entities, which could effect changes at the management and operational level. Under our contractual
arrangements, we may not be able to directly change the members of the boards of directors of these entities and would have to rely
on the entities and the entities’ equity holders to perform their obligations in order to exercise our control over the entities. If any of
these affiliated entities or their equity holders fail to perform their respective obligations under the contractual arrangements, we may
have to incur substantial costs and expend additional resources to enforce such arrangements
Further, many of those entities are either wholly-owned or primarily owned by Dr. Hosseinion. If Dr. Hosseinion died, was
incapacitated or otherwise was no longer affiliated with our Company there could be a material adverse effect on our business.
Additionally, MMG and other affiliated medical physician practice groups are or may be owned by other medical doctors who could
also die, become incapacitated or otherwise become no longer affiliated with our Company, which might have a material adverse
effect on our business. Although the terms of the contractual agreements provide that they will be binding on the successors of the
entities’ equity holders, as those successors are not a party to the agreements, it is uncertain whether the successors in case of the
death, bankruptcy or divorce of an equity holder will be subject to or will be willing to honor the obligations of such agreements.
In addition, although we consolidate in our financial reporting and business structure ApolloMed ACO and ApolloMed Palliative,
individuals other than Dr. Hosseinion also own approximately 30% of the equity of ApolloMed ACO and 49% of the equity in
ApolloMed Palliative.
ApolloMed’s operations are dependent on a few payors.
We had three payors during the year ended March 31, 2015 that accounted for 34.8%, 13.2% and 12.3% of net revenues,
respectively. During the year ended January 31, 2014, we had three payors that accounted for 17.8%, 15.9% and 13.9% of net
revenues (unaudited), respectively. We believe that, going forward, a substantial portion of its revenue could be derived from a select
few payors. Each payor may immediately terminate any of our contracts or any individual credentialed physician upon the occurrence
of certain events. They may also amend the material terms of the contracts under certain circumstances. Failure to maintain the
contracts on favorable terms, for any reason, would materially and adversely affect our results of operations and financial condition. A
material decline in the number of patients we serve could also have a material adverse effect on our results of operations.
ApolloMed ACO may not generate savings through its participation in the MSSP, and any revenue generated by such
participation will be periodic and will occur, if at all, on an annual basis. The payment of the shared savings could happen
irregularly.
ApolloMed ACO participates in the MSSP sponsored by the CMS. The MSSP allows ACO participants to share in cost savings that
are generated in connection with rendering medical services to Medicare patients. Payments to ACO participants, if any, are
calculated annually by CMS on cost savings generated by the ACO participants relative to the ACO participants trailing medical
service history. The MSSP is a newly formed program with limited history of payments to ACO participants. As a result of the
uncertain nature of the MSSP program, the Company considers revenue, if any, under the MSSP, as contingent upon the realization
of program savings as determined by CMS, and revenues are not considered earned and therefore are not recognized until notice
from CMS that cash payments are to be imminently received.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During the year ended March 31, 2015, the Company was awarded and received approximately a $5.4 million payment related to
savings achieved from July 1, 2012, through December 31, 2013, for its participation in the MSSP which represented 16% of our net
revenue during the year ended March 31, 2015. Since payments, if any, are made on an annual basis, the Company will not receive
such payments during each quarter, and consequently, revenue may be materially lower in quarters when MSSP related payments
are not received. In addition, there is no assurance that the Company will meet the conditions necessary for receipt of future
payments. Further, the Company’s ability to continue to generate savings for the MSSP program depends on many factors, many of
which are outside of the Company’s control, including, among others, how the CMS elects to administer the MSSP program, how
savings levels are calculated and continued political support of the MSSP program. As a result, whether future revenues will be
earned by ApolloMed ACO is uncertain, and, if such amounts are payable, they will be paid on an annual basis significantly after the
time earned, and will be contingent on various factors, including whether savings were determined to be achieved in 2015 or in any
other period during which savings are measured.
Risk-sharing arrangements that Maverick Medical Group, Inc. has with health plans and hospitals could result in their costs
exceeding the corresponding revenues, which could reduce or eliminate any shared risk profitability. Maverick Medical
Group, Inc. also has a key contract with Prospect Medical Group (“PMG”) and its management service organization, which if
terminated could materially affect our business.
MMG’s risk-sharing arrangements may require MMG to assume a portion of any loss sustained from such arrangements, thereby
adversely affecting our consolidated results of operations. Under these risk-sharing arrangements, MMG is responsible for a portion
of the cost of hospital services or other services that are not capitated. The terms of the particular risk-sharing arrangement allocate
responsibility to the respective parties when the cost of services exceeds the related revenue, which results in a deficit, or permit the
parties to share in any surplus amounts when actual costs are less than the related revenue. The amount of non-capitated medical
and hospital costs in any period could be affected by factors beyond the control of MMG, such as changes in treatment protocols,
new technologies, longer lengths of stay by the patient, and inflation. To the extent that such non-capitated medical and hospital costs
are higher than anticipated, revenue may not be sufficient to cover the risk-sharing deficits the health plans and MMG are
responsible for, which could reduce our revenues and income.
MMG has further entered into a contract with PMG’s management service organization (“PMSO”) that has a term through September
28, 2020 and automatically renews unless either party provides notice, pursuant to which, among other services, PMSO provides
claims processing, authorizations and credentialing for certain physicians. Additionally, under another contract with PMG that has a
term through September 28, 2015 and automatically renews unless either party provides notice, MMG accesses some health plan
contracts by using PMG as the risk-bearing contracting party with those health plans. Any disruption or change in the condition of
PMG’s operations, or any changes to our contracts with PMSO or PMG, could have a material adverse effect on our business.
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 our results of
operations, financial condition, business and prospects. Historically, state budget limitations have resulted in reduced state spending.
Given that Medicaid is a significant component of state budgets, a downturn would put continued cost containment pressures on
Medicaid outlays for our services in California and the other states in which we operate. In addition, an economic downturn, coupled
with sustained unemployment, may also impact the number of enrollees in managed care programs as well as the profitability of
managed care companies, which could result in reduced reimbursement rates.
The existing federal deficit, as well as deficit spending by the government as the result of adverse developments in the economy or
other reasons, can lead to continuing pressure to reduce government expenditures for other purposes, including government-funded
programs in which we participate, such as Medicare and Medicaid. Such actions in turn may adversely affect our results of
operations.
Although we attempt to stay informed of government and customer trends, 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.
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 our marketing of any such services.
Competition for physicians is intense, and we may not be able to hire and retain physicians to provide services.
We are dependent on our affiliated physicians to provide services and generate revenue. We compete with many types of healthcare
providers, including teaching, research and government institutions, hospitals and other practice groups, for the services of clinicians.
The limited number of residents entering the job market each year and the limited number of other licensed providers seeking to
change employers makes it challenging to meet our hiring needs and may require us to contract locum tenens physicians or to
increase physician compensation in a manner that decreases our profit margins. The limited number of residents and other licensed
providers also impacts our ability to recruit new physicians with the expertise necessary to provide services within our business and
our ability to renew contracts with existing physicians on acceptable terms. If we do not do so, our ability to provide services could be
adversely affected. Our physician turnover rate has remained stable over the last three years. If the turnover rate were to increase
significantly, our growth could be impeded.
Moreover, unlike some of our competitors who sometimes pay additional compensation to physicians who agree to provide services
exclusively to that competitor, our IPAs have historically not entered into such exclusivity agreements and have allowed our affiliated
physicians to affiliate with multiple IPAs. This practice may place us at a competitive disadvantage regarding the hiring and retention
of physicians relative to those competitors who do enter into such exclusivity agreements.
The healthcare industry continues to experience shortages in qualified service employees and management personnel, and
we may be unable to hire qualified employees.
We compete with other healthcare providers for our employees, both clinical associates and management personnel. As the demand
for health services continues to exceed the supply of available and qualified staff, we and our competitors have been forced to offer
more attractive wage and benefit packages to these professionals. Furthermore, the competition for this shrinking labor market has
created turnover as many seek to take advantage of the supply of available positions, each offering new and more attractive wage
and benefit packages. In addition to the wage pressures described above, the cost of training new employees amid the turnover rates
may cause added pressure on our operating margins. Lastly, the market for qualified nurses and therapists is highly competitive,
which may adversely affect our home health and hospice operations, which are particularly dependent on nurses for patient care.
The health care industry is competitive.
There are other companies and individuals currently providing health care services. We compete directly with national, regional and
local providers of inpatient healthcare for patients and physicians. Other companies could enter the market in the future and divert
some or all of our business. On a national basis, our competitors include, but are not limited to, Team Health, EmCare, DaVita
HealthCare Partners and Heritage Provider Network, each of which may have greater financial and other resources available to them.
We also compete with physician groups and privately-owned health care companies in each of our local markets. Existing or future
competitors also may seek to compete with us for acquisitions, which could have the effect of increasing the price and reducing the
number of suitable acquisitions, which would have an adverse impact on our growth strategy. Since there are virtually no capital
expenditures required to enter the industry, there are few financial barriers to entry. Individual physicians, physician groups and
companies in other healthcare industry segments, including hospitals with which we have contracts, some of which have greater
financial, marketing and staffing resources, may become competitors in providing health care services, and this competition may have
a material adverse effect on our business operations and financial position. In addition, certain governmental payors contract for
services with independent providers such that our relationships with these payors are not exclusive, particularly in California.
Further, as we have expanded into palliative, home health and hospice care through the launch of ApolloMed Palliative, we face
competitors that have traditionally concentrated in this segment and that may have greater resources and specialized expertise than
us. In many areas in which our palliative, home health and hospice care programs are located, we compete with a large number of
organizations, including:
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
·
·
·
·
community-based home health and hospice providers;
national and regional companies;
hospital-based home health agencies, hospice and palliative care programs; and
nursing homes.
We may be unable to successfully compete with these competitors in palliative, home health and hospice care, and may expend
significant resources without success.
We are reliant on referrals from third parties for our services.
Our business is reliant on referrals from third parties for our services. We receive referrals from community medical providers,
emergency departments, payors, and hospitals in the same manner as other medical professionals receive patient referrals. We do
not provide compensation or other remuneration to our referral sources for referring patients to us. A decrease in these referrals due
to competition, concerns about the quality of our services, and other factors could result in a significant decrease in our revenues and
adversely impact our financial condition. Similarly, we cannot assure that we will be able to obtain or maintain preferred provider
status with significant third-party payors in the communities where we operate. If we are unable to maintain our referral base or our
preferred provider status with significant third-party payors, it may negatively impact our revenues and our financial performance.
Hospitals and other inpatient and post-acute care facilities (collectively “facilities”) may terminate their agreements with us
or reduce the fees they pay us.
For the year ended March 31, 2015, we derived approximately 13% of our net revenue for physician services from contracts directly
with facilities. Our current partner facilities may decide not to renew our contracts, introduce unfavorable terms, or reduce fees paid to
us. Any of these events may impact the ability of our practice groups to operate at such facilities, which would negatively impact our
revenue and profitability.
Some of the hospitals where our affiliated physicians provide services may have their medical staff closed to non-
contracted physicians.
In general, our affiliated physicians may only provide services in a hospital where they have certain credentials, called privileges,
which are granted by the medical staff and controlled by legally binding medical staff bylaws of the hospital. The medical staff decides
who will receive privileges, and the medical staff of the hospitals where we currently provide services or wish to provide services
could decide that non-contracted physicians can no longer receive privileges to practice there. Such a decision would limit our ability
to furnish services in a hospital, decrease the number of our affiliated physicians who could provide services, or preclude us from
entering new hospitals. In addition, hospitals may attempt to enter into exclusive contracts for physician services, which would reduce
access to certain populations of patients within the hospital.
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. In particular, we rely on some key governmental payors. We assume the financial risks relating to uncollectible and
delayed payments. Governmental payors typically pay on a more extended payment cycle, which could result in our incurring
expenses prior to receiving corresponding revenue. 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.
35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our business model depends on numerous complex management information systems, and any failure to successfully
maintain these systems or implement new systems could undermine our ability to receive ACO payments and otherwise
materially harm our operations and result in potential violations of healthcare laws and regulations.
We depend on a complex, specialized, integrated management information system and standardized procedures for operational and
financial information, as well as for our billing operations. We may be unable to enhance our existing management information
systems or implement new management information systems where necessary. Additionally, we may experience unanticipated
delays, complications, or expenses in implementing, integrating, and operating our systems. Our management information systems
may require modifications, improvements, or replacements that may require both substantial expenditures as well as interruptions in
operations. Our ability to implement these systems is subject to the availability of information technology and skilled personnel to
assist us in creating and implementing these systems. Our failure to successfully implement and maintain all of our systems could
undermine our ability to receive ACO shared savings payments and otherwise have a material adverse effect on our business,
financial condition and results of operations. Further, our failure to successfully operate our billing systems could lead to potential
violations of healthcare laws and regulations.
We have identified material weaknesses in our internal controls, and we cannot provide assurances that these weaknesses
will be effectively remediated or that additional material weaknesses will not occur in the future. If our internal control over
financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our
financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose
confidence in our reported financial information and may lead to a decline in our stock price.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in
Rule 13a-15(f) under the Exchange Act. We have identified a number of material weaknesses in our disclosure controls and
procedures. These material weaknesses could allow the reporting of inaccurate or incomplete information regarding our business in
our public filings and will require the Company to devote substantial resources to mitigating and resolving the weaknesses we have
identified.
Additionally, we intend to continue to grow our business through the acquisition of new entities. When we acquire such existing
entities our due diligence may fail to discover defects or deficiencies in the design and operations of the internal controls over
financial reporting of such entities, or defects or deficiencies in the internal controls over financial reporting may arise when we try to
integrate the operations of these newly acquired companies with our own. We can provide no assurances that we will not experience
such issues in future acquisitions, the result of which could have a material adverse effect on our financial statements.
The requirements of remaining a public company may strain our resources and distract our management, which could
make it difficult to manage our business.
We are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with
these reporting and other regulatory requirements are time-consuming and expensive and could have a negative effect on our
business, results of operations and financial condition.
We may write off intangible assets, such as goodwill.
Our intangible assets 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.
The Company has invested resources in both applying to participate in the MSSP and in establishing initial infrastructure. The MSSP
program and the rules regarding ACOs are new and may be altered in the future. Any material change to the MSSP program and
ACO requirements, governance and operating rules, could provide a significant financial risk for the Company and alter the strategic
direction of the Company thereby producing stockholder risk and uncertainty. In addition, the Company could be terminated from the
MSPP if it does not comply with the CMS MSSP participation requirements.
The Company currently derives 100% of its revenues in only California.
The Company’s business and operations are primarily in one state, California. While the Company operates through ApolloMed ACO
outside of California, it has not derived any revenues from operations outside of California, and, it currently derives all of its revenues
from California. Any material changes by California with respect to strategy, taxation and economics of healthcare delivery and
reimbursements could produce an adverse effect on the continued business operations of Company.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
A prolonged disruption of the capital and credit markets may adversely affect our future access to capital, our cost of
capital and our ability to continue operations.
We have relied on the capital and credit markets for liquidity and to execute our business strategies, which include increasing our
revenue base through a combination of internal growth and acquisitions. Volatility and disruption of the U.S. capital and credit markets
may adversely affect our access to capital and increase our cost of capital. Should current economic and market conditions
deteriorate, our ability to finance our ongoing operations and our expansion may be adversely affected, we may be unable to raise
necessary funds, our cost of debt or equity capital may increase significantly and future access to capital markets may be adversely
affected.
Our intellectual property rights are valuable, and if we are unable to protect them or are subject to intellectual property
rights claims, our business may be harmed.
Our intellectual property rights, including those rights related to our “ApolloMed” unregistered trademark and some other trademarks,
copyrights and trade secrets, are important assets for us. We do not hold any patents protecting our intellectual property. Various
events outside of our control pose a threat to our intellectual property rights as well as to our business. For example, we may be
subject to third-party intellectual property rights claims, and our technologies may not be able to withstand any such claims.
Regardless of the merits of the claims, any intellectual property claims could be time-consuming and expensive to litigate or settle. In
addition, if any claims against us are successful, we may have to pay substantial monetary damages or discontinue any of our
practices that are found to be in violation of another party’s rights. We also may have to seek a license to continue such practices,
which may significantly increase our operating expenses or may not be available to us at all. Also, the efforts we have taken to
protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could
harm our business or our ability to compete.
We attempt to protect our trade secrets and other critical confidential information through contractual agreements, which
may be breached.
There are a number of third parties, service providers, and others who have access to our confidential information. While we have
attempted to protect this information through confidentiality agreements and other protective arrangements, it is difficult to detect and
demonstrate a breach of any of these agreements or arrangements, and our confidential information may be leaked and used by
other companies that compete in our industry. Any such use of our information could have a material adverse effect on our
operations and future business plans.
Many of our agreements with hospitals and medical groups are relatively short term or may be terminated without cause by
providing advance notice, and any such termination could have a material adverse effect on our financial results,
operations and future business plans.
Many of our hospitalist and other operating agreements are relatively short term or may be terminated without cause by providing
advance notice. If these agreements are terminated at the end of their term, are not renewed or are terminated before the end of their
term, we would lose the revenues generated by those agreements. Any such termination could have a material adverse effect on our
financial results, operations and future business plans.
Many of our agreements with hospitals and medical groups include prohibitions on our hiring physicians or patients or
competing with the hospital or medical group, which limits our ability to implement our business plan in certain areas.
Because many of our hospitalist and other operating agreements include prohibitions on our hiring physicians or patients or
competing with the hospital or medical group, our ability to hire physicians, attract patients or conduct business in certain areas may
be limited in some cases.
ApolloMed ACO has entered into an agreement with PMG that may limit its ability to sell its operations.
ApolloMed ACO has entered into an agreement with PMG that prevents ApolloMed ACO from selling its operations without PMG’s
having the option to purchase the ApolloMed ACO network of physicians who were contracted with PMG and introduced to ApolloMed
ACO by PMG. We estimate that no more than 20 physicians would currently be subject to PMG’s purchase option, which takes effect
only if ApolloMed ACO elects to sell its operations. PMG’s option to purchase certain ApolloMed ACO physicians, unless terminated,
may limit our ability to sell our ApolloMed ACO operations if we decide to do so.
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Risks Related to Healthcare Regulation
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:
·
·
·
·
·
·
·
·
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 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 specific “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 on healthcare providers who fail to disclose known
overpayments;
a provision of the Social Security Act that provides for civil monetary penalties on healthcare providers who fail to repay known
overpayments within 60 days of identification or the date any corresponding cost report was due, if applicable, 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, the Health Insurance Portability and Accountability Act (“HIPAA”) that provide penalties
for knowingly and willfully executing a scheme or artifice to defraud a health-care 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 Health Information Technology for Economic and Clinical Health Act (“HITECH”) limiting how covered
entities, business associates and business associate sub-contractors 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;
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
·
·
·
·
·
·
·
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;
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 in some states 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 (the “DRA”)) 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.
We cannot predict the effect that the Affordable Care Act (“ACA”) and its implementation may have on our business,
financial condition or results of operations.
The ACA was signed into law, in two parts, on March 23, 2010 and March 30, 2010. The ACA dramatically alters the U.S. healthcare
system and is intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The ACA attempts
to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and
Medicaid eligibility, reducing Medicare and Medicaid disproportionate share hospital payments to providers, expanding the Medicare
program’s use of value-based purchasing programs, tying hospital payments to the satisfaction of quality criteria, bundling payments
to hospitals and other providers, and instituting private health insurance reforms. Although a majority of the measures contained in the
ACA just recently became effective, some of the reductions in Medicare spending, such as negative adjustments to the Medicare
hospital inpatient and outpatient prospective payment system market basket updates and the incorporation of productivity
adjustments to the Medicare program’s annual inflation updates, became effective in 2010, 2011 and 2012. Although the expansion
of health insurance coverage should increase revenues from providing care to previously uninsured individuals, many of these
provisions of the ACA will continue to become effective beyond 2015, and the impact of such expansion may be gradual and may not
offset scheduled decreases in reimbursement.
On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of the ACA, including the “individual mandate” provisions of
the ACA that generally require all individuals to obtain healthcare insurance or pay a penalty. However, the U.S. Supreme Court also
held that the provision of the ACA that authorized the Secretary of HHS to penalize states that choose not to participate in the
expansion of the Medicaid program by removing all of their existing Medicaid funding was unconstitutional. In response to the ruling,
a number of U.S. governors, including those of some states in which we intend to operate, have stated that they oppose their state’s
participation in the expanded Medicaid program, which could result in the ACA not providing coverage to some low-income persons
in those states. In addition, several bills have been and may continue to be introduced in Congress to repeal or amend all or
significant provisions of the ACA.
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The ACA changes how healthcare services are covered, delivered, and reimbursed. The net effect of the ACA on our business is
subject to numerous variables, including the law’s complexity, lack of complete implementing regulations and interpretive guidance,
gradual and potentially delayed implementation or possible amendment, as well as the uncertainty as to the extent to which states will
choose to participate in the expanded.
The Health Care Reform Act also mandates changes specific to home health and hospice benefits under Medicare. For home health,
the Health Care Reform Act mandates creation of a value-based purchasing program, development of quality measures, a decrease
in home health reimbursement beginning with federal year 2014 that will be phased-in over a four-year period, and a reduction in the
outlier cap. In addition, the Health Care Reform Act requires the Secretary of Health and Human Services to test different models for
delivery of care, some of which would involve home health services. It also requires the Secretary to establish a national pilot
program for integrated care for patients with specific conditions, bundling payment for acute hospital care, physician services,
outpatient hospital services (including emergency department services), and post-acute care services, which would include home
health. The Health Care Reform Act further directs the Secretary to rebase payments for home health, which will result in a decrease
in home health reimbursement beginning in 2014 that will be phased-in over a four-year period. The Secretary is also required to
conduct a study to evaluate cost and quality of care among efficient home health agencies regarding access to care and treating
Medicare beneficiaries with varying severity levels of illness and provide a report to Congress. Beginning October 1, 2012, the annual
market basket rate increase for hospice providers was reduced by a formula that caused payment rates to be lower than in the prior
year.
Providers in the healthcare industry are the subject of federal and state investigations, as well as payor 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 some circumstances, these
investigations can also be initiated by private individuals under whistleblower provisions which may be incentivized by the possibility
for private recoveries. The DRA 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.
Controls designed to reduce inpatient services may reduce our revenues.
Controls imposed by Medicare, Medicaid, and commercial third-party payors designed to reduce admissions and lengths of stay,
commonly referred to as “utilization review,” have affected and are expected to continue to affect our facilities. Federal law contains
numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a
requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement
organizations, which review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care
provided, and the appropriateness of cases of extraordinary length of stay or cost on a post-discharge basis. Quality improvement
organizations may deny payment for services or assess fines and also have the authority to recommend to the U.S. Department of
Health and Human Services that a provider which is in substantial noncompliance with the standards of the quality improvement
organization be excluded from participation in the Medicare program. The ACA potentially expands the use of prepayment review by
Medicare contractors by eliminating statutory restrictions on their use, and, as a result, efforts to impose more stringent cost controls
are expected to continue. Utilization review is also a requirement of most non-governmental managed care organizations and other
third-party payors. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payor-
required preadmission authorization and utilization review and by third party payor pressure to maximize outpatient and alternative
healthcare delivery services for less acutely ill patients. Although we are unable to predict the effect these controls and changes will
have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a
material, adverse effect on our business, financial position and results of operations.
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Laws regulating the corporate practice of medicine could restrict the manner in which we are permitted to conduct our
business and the failure to comply with such laws could subject us to penalties or require a corporate restructuring.
Some states have laws that prohibit business entities 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 some
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. California is one of the states that prohibit the
corporate practice of medicine.
In California, we operate by maintaining contracts with our affiliated physician groups which are each owned and operated by
physicians and which employ or contract with additional physicians to provide physician services. Under these arrangements, we
provide management services, receive a management fee for providing non-medical management 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
physician groups.
In addition to the above management arrangements, we have some contractual rights relating to the transfer of equity interests in
some of our affiliated physician groups, to a third party designated by us, through Physician Shareholders agreements with Dr.
Hosseinion, the controlling equity holder of such affiliated physician groups. However, such equity interests cannot be transferred to
or held by us or by any non-professional organization. Accordingly, we do not directly own any equity interests in any physician
groups in California. In the event that any of these affiliated physician groups fails to comply with the management arrangement or
any management arrangement is terminated and/or we are unable to enforce its contractual rights over the orderly transfer of equity
interests in its affiliated physician groups, such events could have a material adverse effect on our business, financial condition or
results of operations.
If there is a change in accounting principles or the interpretation thereof by the Financial Accounting Standards Board
(“FASB”), affecting consolidation of entities, it could impact our consolidation of total revenues derived from such affiliated
physician groups.
Our financial statements are consolidated and include the accounts of our majority-owned subsidiaries and various non-owned
affiliated physician groups that are variable interest entities (“VIEs”), which consolidation is effectuated in accordance with applicable
accounting rules. In the event of a change in accounting principles promulgated by FASB or in FASB’s interpretation of its principles,
or if there were an adverse determination by a regulatory agency or a court or if there were a change in state or federal law relating to
the ability to maintain present agreements or arrangements with such physician groups, we may not be permitted to continue to
consolidate the total revenues of such organizations.
Accounting rules require that under some circumstances the VIE consolidation model be applied when a reporting enterprise holds a
variable interest (e.g., equity interests, debt obligations, certain management and service contracts) in a legal entity. Under this
model, an enterprise must assess the entity in which it holds a variable interest to determine whether it meets the criteria to be
consolidated as a VIE. If the entity is a VIE, the consolidation framework next identifies the party, if one exists, that possesses a
controlling financial interest in a VIE, and requires that party to consolidate as the primary beneficiary. An enterprise’s determination
of whether it has a controlling financial interest in a VIE requires that a qualitative determination be made, and is not solely based on
voting rights.
If an enterprise determines the entity in which it holds a variable interest is not subject to the VIE guidance in ASC 810, the enterprise
should apply the traditional voting control model (also outlined in ASC 810) which focuses on voting rights. In our case, the VIE
consolidation model applies to our controlled, but not owned, physician affiliated entities. Our determination regarding the
consolidation of our affiliates could be challenged, which could have a material adverse effect on our operations.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our developing palliative care business is subject to rules, prohibitions, regulations and reimbursement requirements that
differ from those that govern our primary home health and hospice operations.
We continue to develop our palliative care services, which is a type of care focused upon relieving pain and suffering in patients who
do not quality for, or who have not yet elected, the hospice benefit. The continued development of this business line exposes us to
additional risks, in part because the business line requires us to comply with additional Federal and state laws and regulations that
differ from those that govern our home health and hospice business. This line of business requires compliance with different Federal
and state requirements governing licensure, enrollment, documentation, prescribing, coding, billing and collection of coinsurance and
deductibles, among other requirements. Additionally, some states have prohibitions on the corporate practice of medicine and fee-
splitting, which generally prohibit business entities from owning or controlling medical practices or may limit the ability of Clinical
Professionals to share professional service income with non-professional or business interests. These requirements may vary
significantly from state to state. Reimbursement for palliative care and house calls services is generally conditioned on our clinical
professionals providing the correct procedure and diagnosis codes and properly documenting both the service itself and the medical
necessity for the service. Incorrect or incomplete documentation and billing information, or the incorrect selection of codes for the
level and type of service provided, could result in non-payment for services rendered or lead to allegations of billing fraud. Further,
compliance with applicable regulations may cause us to incur expenses that we have not anticipated, and if we are unable to comply
with these additional legal requirements, we may incur liability, which could have a material adverse effect on our business and
consolidated financial condition, results of operations and cash flows.
Our developing palliative care business line is subject to new licensing requirements, which will require us to expend
resources to comply with the changing requirements.
In October 2013, California enacted the Home Care Services Consumer Protection Act. The act establishes a licensing program for
home care organizations, and requires background checks, basic training, and tuberculosis screening for the aides that are employed
by home care organizations. Home care organizations and aides had until January 1, 2015 to comply with the new licensing and
background check requirements. Because we operate in California, the requirements of the act are expected to impose additional
costs on us.
We do not have a limited Knox-Keene License.
We do not hold a limited Knox-Keene license (a managed care plan license issued pursuant to the California Knox-Keene Health
Care Service Plan Act of 1975). If the Department of Managed Health Care were to determine that we have been inappropriately
taking risk for institutional and professional services as a result of our various hospital and physician arrangements without having a
limited Knox-Keene license, we may be required to obtain a limited Knox-Keene license to resolve such violations and we could be
subject to civil and criminal liability, any of which could have a material adverse effect on our business, financial condition or results of
operations.
Our revenue may be negatively impacted by the failure of our affiliated physicians to appropriately document services they
provide.
We rely upon our affiliated physicians to appropriately and accurately complete necessary medical record documentation and assign
appropriate reimbursement codes for their services. Reimbursement to us is conditioned on our affiliated physicians providing the
correct procedure and diagnosis codes and properly documenting the services themselves, including the level of service provided,
and the medical necessity for the services. If our affiliated physicians have provided incorrect or incomplete documentation or
selected inaccurate reimbursement codes, this could result in nonpayment for services rendered or lead to allegations of billing fraud.
This could subsequently lead to civil and criminal penalties, including exclusion from government healthcare programs, such as
Medicare and Medicaid. In addition, third-party payors may disallow, in whole or in part, requests for reimbursement based on
determinations that certain amounts are not covered, services provided were not medically necessary, or supporting documentation
was not adequate. Retroactive adjustments may change amounts realized from third-party payors and result in recoupments or
refund demands, affecting revenue already received.
Changes associated with reimbursement by third-party payors for the Company’s services may adversely affect operating
results and financial condition.
The medical services industry is undergoing significant changes with third-party payors that are taking measures to reduce
reimbursement rates or in some cases, denying reimbursement altogether. There is no assurance that third-party payors will continue
to pay for the services provided by our affiliated medical groups. Failure of third party payors 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.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Compliance with federal and state privacy and information security laws is expensive, and we may be subject to
government or private actions due to privacy and security breaches.
We must comply with numerous federal and state laws and regulations governing the collection, dissemination, access, use, security
and confidentiality of patient health information (“PHI”), including HIPAA and HITECH. As part of our medical record keeping, third-
party billing, and other services, we collect and maintain PHI in paper and electronic format. Therefore, new privacy or security laws,
whether implemented pursuant to federal or state action, could have a significant effect on the manner in which we handle
healthcare-related data and communicate with payors. In addition, compliance with these standards could impose significant costs
on us or limit our ability to offer services, thereby negatively impacting the business opportunities available to us. Despite our efforts
to prevent security and privacy breaches, they may still occur. If any non-compliance with existing or new laws and regulations related
to PHI results in privacy or security breaches, we could be subject to monetary fines, civil suits, civil penalties or even criminal
sanctions.
As a result of the expanded scope of HIPAA through HITECH, we may incur significant costs in order to minimize the amount of
“unsecured PHI” we handle and retain or to implement improved administrative, technical or physical safeguards to protect PHI. We
may incur significant costs in order to demonstrate and document whether there is a low probability that the PHI has been
compromised in order to overcome the presumption that an impermissible use or disclosure of PHI results in a reportable breach. We
may incur significant costs to notify the relevant individuals, government entities, and, in some cases, the media, in the event of a
breach and to provide appropriate remediation and monitoring to mitigate the possible damage done by any such breach.
Providers must be properly enrolled in governmental healthcare programs, such as Medicare and Medicaid, before they can
receive reimbursement for providing services, and there may be delays in the enrollment process.
Each time a new affiliated physician joins us, we must enroll the affiliated physician under our applicable group identification number
for Medicare and Medicaid programs and for certain managed care and private insurance programs before we can receive
reimbursement for services the physician renders to beneficiaries of those programs. The estimated time to receive approval for the
enrollment is sometimes difficult to predict and, in recent years, the Medicare program carriers often have not issued these numbers
to our affiliated physicians in a timely manner. These practices result in delayed reimbursement that may adversely affect our cash
flow and revenues.
We may face malpractice and other lawsuits that may not be covered by insurance.
Malpractice lawsuits are common in the healthcare industry. The medical malpractice legal environment varies greatly by state. The
status of tort reform, availability of non-economic damages or the presence or absence of other statutes, such as elder abuse or
vulnerable adult statutes, influence the incidence and severity of malpractice litigation. We may also be subject to other types of
lawsuits which may involve large claims and significant defense costs. Many states have joint and several liability for all healthcare
providers who deliver care to a patient and are at least partially liable. As a result, if one healthcare provider is found liable for medical
malpractice for the provision of care to a particular patient, all other healthcare providers who furnished care to that same patient,
including possibly our affiliated physicians, may also share in the full liability which may be substantial.
We currently maintain malpractice liability insurance coverage to cover professional liability and other claims for certain hospitalists
and clinic physicians. All of our physicians are required to carry first dollar coverage with limits of coverage equal to $1,000,000 for all
claims based on occurrence up to an aggregate of $3,000,000 per year. 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
physicians, and we cannot provide assurance that any future liabilities will not have a material adverse impact on our results of
operations, cash flows or financial position. Liabilities in excess of our insurance coverage, including coverage for professional liability
and other claims, could have a material adverse effect on our business, financial condition, and results of operations. In addition, our
professional liability insurance coverage generally must be renewed annually and may not continue to be available to us in future
years at acceptable costs and on favorable terms.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We have established reserves for potential medical liabilities losses which are subject to inherent uncertainties and a
deficiency in the established reserves may lead to a reduction in our net income.
The Company establishes reserves for estimates of incurred but not reported claims (“IBNR”) due to contracted physicians, hospitals,
and other professional providers and risk-pool liabilities. IBNR estimates are developed using actuarial methods and are based on
many variables, including the utilization of health care services, historical payment patterns, cost trends, product mix, seasonality,
changes in membership, and other factors. Many of the medical contracts are complex in nature and may be subject to differing
interpretations regarding amounts due for the provision of various services. Such differing interpretations may not come to light until a
substantial period of time has passed following the contract implementation. The inherent difficult in interpreting contracts and the
estimated level of necessary reserves could result in significant fluctuations in our estimates from period to period. It is possible that
actual losses and related expenses may differ, perhaps substantially, from the reserve estimates reflected in our financial statements.
If subsequent claims exceed our estimated reserves, we may be required to increase reserves, which would lead to a reduction in
our future net income.
Litigation expenses may be material.
In recent periods, we have incurred increased expenses for legal fees, in particular fees related to the defense of the lawsuits by
certain competitors that are described under “LEGAL PROCEEDINGS.” While we maintain the insurance coverage described above,
such insurance may not cover these lawsuits or some other types of commercial disputes. The defense of litigation, including fees of
external legal counsel, expert witnesses and related costs, is expensive and may be difficult to project accurately. In general, such
costs are unrecoverable even if we ultimately prevail in litigation, and could represent a significant portion of our limited capital
resources. To defend lawsuits, we also find it necessary to divert officers and other employees from their normal business functions to
gather evidence, give testimony and otherwise support litigation efforts. We expect to experience higher than normal litigation costs
until the lawsuits by our competitor are decided.
If we lose any material litigation, including the litigation described under “LEGAL PROCEEDINGS,” we could face material judgments
or awards. 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.
We may also in the future find it necessary to file lawsuits to recover damages or protect our interests. The cost of such litigation
could also be significant and unrecoverable, which may also deter us from aggressively pursuing even legitimate claims.
We may be subject to litigation related to the agreements that our IPAs enter into with primary care physicians.
It is common in the medical services industry for primary care physicians to be affiliated with multiple IPAs. Our IPAs often enter into
agreements with physicians who are also affiliated with our competitors. However, some of our competitors at times enter into
agreements with physicians that require the physician to provide services exclusively to that competitor. Our IPAs often have no
knowledge, and no way of knowing, whether a physician seeking to affiliate with us is subject to an exclusivity agreement unless the
physician informs us of that agreement. Our IPAs rely on the physicians seeking to affiliate with us to determine whether they are
able to enter into the proposed agreement. As described in “LEGAL PROCEEDINGS,” competitors have initiated lawsuits against us
based in part on interference with such exclusivity agreements, and may do so in the future.
Changes in the rates or methods of Medicare reimbursements may adversely affect our operations.
In order to participate in the Medicare program, we must comply with stringent and often complex enrollment and reimbursement
requirements. These programs generally provide for reimbursement on a fee-schedule basis rather than on a charge-related basis,
we generally cannot increase our revenue by increasing the amount we charge for our services. To the extent our costs increase, we
may not be able to recover our increased costs from these programs, and cost containment measures and market changes in non-
governmental insurance plans have generally restricted our ability to recover, or shift to non-governmental payors, these increased
costs. In attempts to limit federal and state spending, there have been, and we expect that there will continue to be, a number of
proposals to limit or reduce Medicare reimbursement for various services. Our business may be significantly and adversely affected
by any such changes in reimbursement policies and other legislative initiatives aimed at reducing healthcare costs associated with
Medicare, TRICARE and other government healthcare programs.
Our business also could be adversely affected by reductions in or limitations of reimbursement amounts or rates under these
government programs, reductions in funding of these programs or elimination of coverage for certain individuals or treatments under
these programs.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
44
Overall payments made by Medicare for hospice services are subject to cap amounts. Total Medicare payments to us for hospice
services are compared to the cap amount for the hospice cap period, which runs from November 1 of one year through October 31 of
the next year. CMS generally announces the cap amount in the month of July or August in the cap period and not at the beginning of
the cap period. We must estimate the cap amount for the cap period before CMS announces the cap amount. If our estimate
exceeds the later announced cap amount, we may suffer losses. CMS can also make retroactive adjustments to cap amounts
announced for prior cap periods. Payments to us in excess of the cap amount must be returned to Medicare. A second hospice cap
amount limits the number of days of inpatient care to not more than 20 percent of total patient care days within the cap period.
As part of its review of the Medicare hospice benefit, the Medicare Payment Advisory Commission recommended to Congress in its
“Report to Congress: Medicare Payment Policy—March 2009” (the “2009 MedPAC Report”) that Congress direct the Secretary of
Health and Human Services to change the Medicare payment system for hospice to:
·
·
have relatively higher payments per day at the beginning of a patient’s hospice care and relatively lower payments per day as the
length of the duration of the hospice patient’s stay increases; and
include relatively higher payments for the costs associated with patient death at the end of the hospice patient’s stay.
In addition, the Health Care Reform Act includes several provisions that could adversely impact hospice providers, including a
provision to reduce the annual market basket update for hospice providers by a productivity adjustment. We cannot predict if the 2009
MedPAC Report recommendation will be enacted, whether any additional healthcare reform initiatives will be implemented, or
whether the Health Care Reform Act or other changes in the administration of governmental healthcare programs or interpretations of
governmental policies or other changes affecting the healthcare system will adversely affect our revenues. Further, due to budgetary
concerns, several states have considered or are considering reducing or eliminating the Medicaid hospice benefit. Reductions or
changes in Medicare or Medicaid funding could significantly reduce our net patient service revenue and our profitability.
If we inadvertently employ or contract with an excluded person, we may face government sanctions.
Individuals and entities can be excluded from participating in the Medicare and Medicaid programs for violating certain laws and
regulations, or for other reasons such as the loss of a license in any state, even if the individual retains other licensure. This means
that they (and all others) are prohibited from receiving payment for their services rendered to Medicare or Medicaid beneficiaries, and
if the excluded individual is a physician, all services ordered (not just provided) by such physician are also non-covered and non-
payable. Entities which employ or contract with excluded individuals are prohibited from billing the Medicare or Medicaid programs for
the excluded individual’s services, and are subject to civil monetary penalties if they do. The U.S. Department of Health and Human
Services Office of the Inspector General (“OIG”) maintains a list of excluded individuals and entities. Although we have instituted
policies and procedures through our compliance program to minimize the risks, there can be no assurance that we will not
inadvertently hire or contract with an excluded person, or that any of our current employees or contracts will not become excluded in
the future without our knowledge. If this occurs, we may be subject to substantial repayments and civil penalties and the hospitals at
which we furnish services also may be subject to repayments and sanctions, for which they may seek recovery from us.
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. Further, our hospice related business could become subject to “quality star
ratings,” and, if sufficient quality is not achieved, reimbursement could be negatively impacted. These factors and events could have a
material adverse effect on our business, financial condition and results of operations.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Federal and state laws may limit our effectiveness at collecting monies owed to us from patients.
We utilize third parties, whom we do not and cannot control, to collect from patients any co-payments and other payments for services
that our physicians provide to patients. The federal Fair Debt Collection Practices Act restricts the methods that third-party collection
companies may use to contact and seek payment from consumer debtors regarding past due accounts. State laws vary with respect
to debt collection practices, although most state requirements are similar to those under the Fair Debt Collection Practices Act. If our
collection practices or those of our collection agencies are inconsistent with these standards, we may be subject to actual damages
and penalties. These factors and events could have a material adverse effect on our business, financial condition and results of
operations.
If we are unable to effectively adapt to changes in the healthcare industry, including changes to laws and regulations
regarding or affecting healthcare reform or 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 or that affect healthcare business. 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 the hospitals and other facilities where our physicians provide services. 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.
Further, certain regulations not specifically targeting the health care industry also could have material effects on our operations. For
example, the California Finance Lenders Law, Division 9, Sections 22000-22780 of the California Financial Code, could arguably
apply to the Company as a result of its various affiliate and subsidiary loans and similar arrangements. If a regulator were to take the
position that such loans were covered by the California Finance Lenders Law, we could be subject to regulatory action which could
impair our ability to continue to operate and may have a material adverse effect on our profitability and business.
We may incur significant costs to adopt certain provisions under the Health Information Technology for Economic and
Clinical Health Act.
HITECH was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009. Among the
many provisions of HITECH are those relating to the implementation and use of certified Electronic Health Records (“EHR”). Our
patient medical records are maintained and under the custodianship of the healthcare facilities in which we operate. However, to
adopt the use of EHRs utilized by these healthcare facilities, determine to adopt certain EHRs, or comply with any related provisions
of HITECH, we may incur significant costs which could have a material adverse effect on our business operations and financial
position.
Risks Related to Ownership of Our Securities
The market price of our common stock may be volatile, and the value of your investment could decline significantly.
The trading price for our common stock has been, and we expect it to continue to be, volatile. The price at which our common stock
trades depends upon a number of factors, including our historical and anticipated operating results, our financial situation, our ability
or inability to raise the additional capital we may need and the terms on which we raise it, and general market and economic
conditions. Other factors include:
·
·
·
·
·
variations in quarterly operating results;
changes in earnings estimates by analysts;
developments in the hospitalists markets;
announcements of acquisitions dispositions and other corporate level transactions;
announcements of financings and other capital raising transactions;
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
46
·
·
sales of stock by our larger stockholders; and
general stock market conditions.
Some of these factors are beyond our control. Broad market fluctuations may lower the market price of our common stock and affect
the volume of trading in our stock, regardless of our financial condition, results of operations, business or prospects. We have been
conditionally approved to uplist on Nasdaq Capital Market and, if we are successful in uplisting, we may be covered by more
analysts. Our failure to meet their expectations and the projections in their reports could have a material adverse effect on our results
of operations. There is no assurance that the market price of our shares of common stock will not fall in the future.
If any of our historical offerings or sales of our or our subsidiaries’ or affiliates’ unregistered securities were found to be in
violation of the Securities Act or state law, then the securities holders who purchased or received such securities may be
able to sue to recover the consideration paid for their securities (or the equivalent value if such shares were issued for
services) or for damages.
Historically, we have generally offered and sold our securities and the securities of our subsidiaries and affiliates in reliance on
Section 4(a)(2) of the Securities Act or other available federal exemptions for offering securities. Similar reliance has been placed on
exemptions under state laws from securities registration or qualification requirements. Our historical offerings or sales may not have
qualified or met the requirements of any of such federal or state law exemptions due to, among other things, the sophistication of the
investors, the adequacy of disclosure, the manner of distribution, or the existence of similar offerings in the past or in the future. If
rescission claims were successful, securities holders may be entitled to recover the consideration paid for the securities they
purchased with interest thereon (or, to the extent securities were offered for services, the value thereof), or for damages.
Furthermore, we could be forced to expend significant time and resources defending actions under these laws, even if we are
ultimately successful in any defense.
Investors may experience dilution of their ownership interests because of the future issuance of additional shares of our
common stock.
We have issued some of our directors, employees, consultants, lenders and other third parties securities that such parties may
exercise or convert into shares of our common stock, which exercise would result in the dilution of the ownership interests of our
present stockholders. For example, NNA has the right to exercise upon certain conditions being satisfied the warrants or the
convertible note it acquired in connection with the credit and investment agreements we entered into with NNA on March 28, 2014. If
NNA exercises such right, we will have to issue additional shares of common stock to NNA, which will dilute the ownership interests of
our other stockholders. We will have to issue additional shares of common stock in connection with any conversion of the 9%
convertible notes we previously issued.
Additionally, we may in the future issue additional authorized but previously unissued equity securities, resulting in further dilution of
the ownership interests of our present stockholders. We may also issue additional shares of our common stock or other securities that
are convertible into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, future sales
of our securities for capital raising purposes, or for other business purposes. For example, we will have to issue additional shares of
common stock to NNA if we fail to comply with NNA’s registration rights.
The future issuance of any such additional shares of common stock may create downward pressure on the trading price of our
common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible
securities in the future in conjunction with any capital raising efforts, including at a price (or exercise prices) below the price at which
shares of our common stock are currently traded at such time.
Investors may experience dilution of their ownership interests because of certain anti-dilution rights afforded NNA.
The exercise price under the Warrants (defined below in “Our Business – NNA Financing Arrangements”) and the conversion price
under the Convertible Note (defined below in “Our Business – NNA Financing Arrangements”) and the number of shares underlying
such securities would be adjusted under certain circumstances, resulting in our issuance of additional securities. This adjustment
would be triggered by the issuance of our common stock (or securities issuable into our common stock) at a price per share less than
$9.00 per share. The anti-dilution protections described above do not apply to certain exempt issuances, including the sale of our
common stock in a bona fide, firmly underwritten public offering pursuant to a registration statement under the 1933 Act and with a
purchase price per share of at least $20.00. In addition, these adjustments would terminate on the earlier of March 28, 2016 and the
Company’s closing of an equity financing yielding gross cash proceeds of at least $2,000,000.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
47
Additionally, we may in the future issue additional authorized but previously unissued equity securities, which may also trigger NNA’s
anti-dilution protections, and result in further dilution of the ownership interests of our stockholders.
There has been a limited trading market for our common stock to date.
There is limited trading volume in our common stock, which is quoted on the OTCQB under the trading symbol “AMEH.” It is
anticipated that there will continue to be a limited trading market for our common stock on the OTCQB, and it is often difficult to obtain
accurate price quotes for our stock on the OTCQB. A lack of an active market may impair our stockholders’ ability to sell shares at the
time they wish to sell shares or at a price that our stockholders consider reasonable. The lack of an active market may also reduce
the fair market value of shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and
may impair our ability to acquire other companies by using common stock as consideration.
Our Credit Agreement with NNA prohibits payments of dividends without their prior consent and do not anticipate paying
dividends on our common stock in the foreseeable future and, consequently, your ability to achieve a return on your
investment will depend solely on appreciation in the price of our common stock.
Our Credit Agreement with NNA prohibits payment of dividends without their prior consent and we do not expect to pay dividends on
our shares of common stock and intend to retain all future earnings to finance the continued growth and development of our business
and for general corporate purposes. Any future payment of cash dividends will depend upon obtaining the consent of NNA, our
financial condition, capital requirements, earnings and other factors deemed relevant by our Board of Directors.
Delaware law and our Certificate of Incorporation could discourage a change in control, or an acquisition of us by a third
party, even if the acquisition would be favorable to you, and thereby adversely affect existing stockholders.
The Delaware General Corporation Law contain provisions that may have the effect of making more difficult or delaying attempts by
others to obtain control of our Company, even when these attempts may be in the best interests of stockholders. Delaware law
imposes conditions on certain business combination transactions with “interested stockholders.” These provisions and others that
could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including
transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. These
provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
Our Certificate of Incorporation empowers the Board of Directors to establish and issue a class of preferred stock, and to determine
the rights, preferences and privileges of the preferred stock. These provisions give the Board of Directors the ability to deter,
discourage or make more difficult a change in control of our company, even if such a change in control could be deemed in the
interest of our stockholders or if such a change in control would provide our stockholders with a substantial premium for their shares
over the then-prevailing market price for the common stock.
Although we have been conditionally approved, we may elect not to uplist to the Nasdaq Capital Market or we not
successfully obtain a listing on the Nasdaq Capital Market for our common stock. If we elect to uplist and obtain a listing,
we may not be able to comply with continued listing standards.
We have been conditionally approved, subject to the satisfaction of certain conditions and meeting all of the Nasdaq Capital Market
listing standards on the date we uplist, to list our common stock on the Nasdaq Capital Market. We currently do not meet the Nasdaq
Capital Market’s minimum initial listing standards, which generally mandate that we meet certain requirements relating to
stockholders’ equity, market capitalization, aggregate market value of publicly held shares and distribution requirements. We cannot
assure you that we will be able to meet those initial listing requirements at any point in the future. Even if we meet those listing
standards, we may elect not to uplist. If the Nasdaq Capital Market does not list our common stock for trading on its exchange, either
because we elect not to uplist or because we do not meet the listing standards, the consequences may include:
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
·
·
·
·
·
a limited availability of market quotations for our securities;
reduced liquidity with respect to our securities;
a determination that our shares of common stock are “penny stock,” which will require brokers trading in our shares of common
stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for
our shares of common stock;
a limited amount of news and analyst coverage for our Company; and
a decreased ability to issue additional securities or obtain additional financing in the future.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating
the sale of certain securities, which are referred to as “covered securities.” If we list on the Nasdaq Capital Market, such securities will
be covered securities However, we do not currently meet the listing standards of the Nasdaq Capital Market, and may elect not to
uplist even if we meet such standards in the future. As a result, our securities are not be covered securities and are subject to
regulation in each state in which we offer our securities.
Our failure to meet the continued listing requirements of the Nasdaq Capital Market (if our application to uplist is
unconditionally approved, and we elect to uplist) or the OTCQB could result in a delisting of our common stock.
Even if our application to list on the Nasdaq Capital Market is approved, we meet the initial listing standards and we elect to uplist,
thereafter if we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate governance
requirements or the minimum closing bid price requirement, the Nasdaq Capital Market may take steps to delist our common stock.
Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase
our common stock when you wish to do so. In the event of a delisting, we anticipate that we would take actions to restore our
compliance with the Nasdaq Capital Market’s listing requirements, but we can provide no assurance that any such action taken by us
would allow our common stock to remain listed on the Nasdaq Capital Market, stabilize our market price, improve the liquidity of our
common stock, prevent our common stock from dropping below the Nasdaq Capital Market’s minimum bid price requirement, or
prevent future non-compliance with the Nasdaq Capital Market’s listing requirements.
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 may be 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
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
· 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.
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.
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.
We engaged in a reverse stock split, which may decrease the liquidity of the shares of our common stock.
We effected a one-for-ten reverse stock split of our outstanding common stock in April 2015. The liquidity of the shares of our
common stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding
following the reverse stock split. In addition, the reverse stock split may increase the number of stockholders who own odd lots (less
than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling
their shares and greater difficulty affecting such sales.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. DESCRIPTION OF PROPERTIES
Our corporate headquarters are located at 700 North Brand Boulevard, Suite 220, Glendale, California 91203. On October 14, 2014,
the lease was amended by a Second Amendment which includes 16,484 rentable square feet and extends the term of the lease to
approximately six years after we obtain occupancy of the new premises. We anticipate occupying the new premises during the
second fiscal quarter of 2016. The Second Amendment sets the Headquarters base rent at $37,913 per month for the first year and
schedules annual increases in base rent each year until the final rental year, which is capped at $43,957 per month.
AMM leases the SCHC Premises located in Los Angeles, California, consisting of 8,766 rentable square feet, for a term of ten years.
The base rent for the SCHC Lease is $32,872 per month.
We also lease seven other offices (10,207 square feet collectively) throughout Los Angeles, California, with varying expiration dates
through 2020.
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 that are provided by our affiliated hospitalists. We may also become
subject to other lawsuits which could involve significant claims and/or significant defense costs. We have become involved in the
following two legal matters:
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On May 16, 2014, Lakeside Medical Group, Inc. and Regal Medical Group, Inc., two independent physician associations who
compete with us in the greater Los Angeles area, filed an action against us and two of our affiliates, MMG and AMEH in Los Angeles
County Superior Court. The complaint alleged that we and our two affiliates made misrepresentations and engaged in other acts in
order to improperly solicit physicians and patient-enrollees from Plaintiffs. The Complaint sought compensatory and punitive
damages. On June 30, 2014, we filed a motion requesting the Court to stay the court proceeding and order the parties to arbitrate this
dispute subject to existing arbitration agreements. On August 11, 2014, the Plaintiffs filed a request for dismissal without prejudice of
the action. On August 12, 2014, the Plaintiffs served us and our affiliates with Demands for Arbitration before Judicial Arbitration
Mediation Services (JAMS) in Los Angeles. We are currently examining the merits of the claims to be arbitrated, and it is too early to
state whether the likelihood of an unfavorable outcome is probable or remote, or to estimate the potential loss if the outcome should
be negative. We are aware that punitive damages previously sought in the court proceeding are not available in arbitration. We are
preparing a defense to the allegations and we intend to vigorously defend the action.
On August 28, 2014, Lakeside Medical Group, Inc. and Regal Medical Group, Inc., filed a similar lawsuit against Warren Hosseinion,
our Chief Executive Officer. Dr. Hosseinion is defending the action and is currently being indemnified by us subject to the terms of an
indemnification agreement and our charter. We have an existing Directors and Officers insurance policy. On September 9, 2014, Dr.
Hosseinion filed a motion requesting the Court to stay the court proceeding and, pursuant to existing arbitration agreements, order the
parties to arbitrate the dispute as part of the pending arbitration proceedings before JAMS (as discussed above). On October 29,
2014, the Plaintiffs filed a request for dismissal without prejudice of the action. On November 13, 2014, Plaintiffs served Dr.
Hosseinion with Demands for Arbitration before JAMS in Los Angeles, and on November 19, 2014, we agreed to consolidate the two
proceedings against Dr. Hosseinion with the two existing proceedings against us and our other affiliates. The parties are currently
pursuing mediation of the dispute. We continue to examine the merits of the claims to be arbitrated against Dr. Hosseinion, and it is
too early to state whether the likelihood of an unfavorable outcome is probable or remote, or to estimate the potential loss if the
outcome should be negative. We are aware that punitive damages previously sought in the court proceeding against Dr. Hosseinion
are not available in arbitration.
Other than the two specific items disclosed above, the merits of which we continue to examine and analyze, 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.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Market Information
Our common stock is quoted on the OTCQB under the symbol, “AMEH,”
The following table sets forth, during the fiscal quarters presented, the high and low bid prices of our common stock as reported by
the OTCQB. On May 16, 2014, the Board of Directors of our Company approved a change to the Company’s fiscal year end from
January 31 to March 31. For continuity of reporting our stock price, we reflected fiscal quarters in the following table based on our
current March 31 fiscal year-end and adjusted our stock price to reflect the effects of our reverse stock split. The OTCQB quotations
below reflect inter-dealer prices, without retail markup, markdown or commissions and may not necessarily represent actual
transactions.
Fiscal Year ended March 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year ended March 31, 2014
First Quarter
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
High
Low
$
7.00 $
6.50
5.30
5.49
4.40
2.50
3.00
3.60
High
Low
$
7.50 $
2.60
Second Quarter
Third Quarter
Fourth Quarter
7.20
100.10
6.50
3.00
3.81
4.30
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On June 30, 2015, the closing price of our common stock as quoted on OTCQB was $6.90. This amount reflects a one-for-ten (1:10)
reverse stock split of our outstanding common stock that we effected on April 24, 2015.
Reverse Stock Split
On April 24, 2015, the Company filed an amendment to its articles of incorporation to effect a 1-for-10 reverse stock split of its
common stock. The number of authorized, but unissued, shares was not affected. No fractional shares were issued following the
reverse stock split and we paid cash in lieu of any fractional shares resulting from the reverse stock split.
Stockholders
As of May 5, 2015, as reported by the Company’s stock transfer agent, there were approximately 348 holders of record of our
common stock.
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 Credit Agreement with NNA, restricts the payment of dividends without their prior consent. Our future dividend
policy will depend on obtaining NNA’s prior consent, 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
The following table provides information about our common stock that may be issued upon the exercise of options, warrants and
rights under all of our existing equity compensation plans and agreements as of March 31, 2015, including our 2010 Equity Incentive
Plan (as amended) and our 2013 Equity Incentive Plan. The material terms of each of these plans and agreements are described in
the notes to our March 31, 2015 consolidated financial statements, which are part of this Report. Each of these plans was approved
by our stockholders.
52
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Number of
shares of
common stock
to be issued
upon exercise of
outstanding
options,
warrants, and
rights
Weighted-
average
exercise price
of outstanding
options,
warrants, and
rights
Number of
shares of
common stock
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected)
776,500 $
-
776,500 $
4.69
-
4.69
48,600
-
48,600
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following management’s discussion and analysis together with our consolidated financial statements and the
related notes which have been included in this Annual Report. This discussion contains forward-looking statements about our
business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we
describe under “Risk Factors” and elsewhere in this Annual Report.
Overview
We are a patient-centered, physician-centric integrated healthcare delivery company with a management team with over a decade of
experience working at providing coordinated, outcomes-based medical care in a cost-effective manner. We have built a company and
culture that is focused on physicians providing high quality care, population management and care coordination for patients,
particularly for senior patients and patients with multiple chronic conditions. We believe that we are well-positioned to take advantage
of changes in the U.S. healthcare industry as there is a growing national movement towards more results-oriented healthcare
centered on the triple aim of patient satisfaction, high-quality care and cost efficiency.
We operate in one reportable segment, the healthcare delivery segment, and implement and operate innovative health care models
to create a patient-centered, physician-centric experience. Accordingly, we report our consolidated financial statements in the
aggregate, including all of our activities in one reportable segment. We have the following integrated, synergistic operations:
·
·
·
·
·
Hospitalists, which includes our contracted physicians who focus on the delivery of comprehensive medical care to hospitalized
patients;
An ACO, which focuses on the provisions of high-quality and cost-efficient care to Medicare FFS patients;
Two IPAs, which contract with physicians and provide care to Medicare, Medicaid, commercial and dual eligible patients on fee-
for-service or risk and value based fee bases;
Clinics, which provide primary care and specialty care in the Greater Los Angeles area; and
Palliative care, home health and hospice services, which include, our at-home, pain management and final stages of life services.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our revenue streams are diversified among our various operations and contract types, and include:
·
·
Traditional fee-for-service reimbursement, which is the primary revenue source for our clinics; and
Risk and value-based contracts with health plans, IPAs, hospitals and the CMS’s MSSP, which are the primary revenue sources
for our hospitalists, ACO, IPAs and palliative care operations.
We serve Medicare, Medicaid, HMO and uninsured patients primarily in California, as well as in Mississippi and Ohio (where our ACO
has recently begun operations). We primarily provide services to patients that are covered by private or public insurance, although we
do derive a small portion of our revenue from non-insured patients. We provide care coordination services to 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.
Our mission is to transform the delivery of healthcare services in the communities we serve by implementing innovative population
health models and creating a patient-centered, physician-centric experience in a high performance environment of integrated care.
The original business owned by ApolloMed was ApolloMed Hospitalists (“AMH”), a hospitalist company, which was incorporated in
California in June, 2001 and which began operations at Glendale Memorial Hospital. Through a reverse merger, ApolloMed became
a publicly held company in June 2008. ApolloMed was initially organized around the admission and care of patients at inpatient
facilities such as hospitals. We have grown our inpatient strategy in a competitive market by providing high-quality care and
innovative solutions for our hospital and managed care clients. In 2012, we formed an ACO, ApolloMed ACO, and an IPA, MMG, and
in 2013 we expanded our service offering to include integrated inpatient and outpatient services through MMG. In 2014, we added
several complementary operations by acquiring an IPA and outpatient primary care and specialty clinics, as well as hospice/palliative
care and home health entities.
Our physician network consists of hospitalists, primary care physicians and specialist physicians primarily through our owned and
affiliated physician groups. We operate through the following subsidiaries: AMM, PCCM, VMM and ApolloMed ACO. Through our
wholly-owned subsidiary, AMM, we manage affiliated medical groups, which consist of AMH, ACC, MMG, AKM, SCHC, and Bay
Area Hospitalist Associates, A Medical Corporation ("BAHA"). Through our wholly-owned subsidiary, PCCM, we manage LALC, and
through our wholly-owned subsidiary VMM, we manage Hendel. We also have a controlling interest in ApolloMed Palliative, which
owns two Los Angeles-based companies, Best Choice Hospice Care LLC and Holistic Health Home Health Care Inc. AMM, PCCM
and VMM each operate as a physician practice management company and are in the business of providing management services to
physician practice corporations under long-term management service agreements. Our ACO participates in the MSSP, the goal of
which is to improve the quality of patient care and outcomes through more efficient and coordinated approach among providers.
Our recent financial highlights, as more fully discussed below, include that for the year ended March 31, 2015, we had:
·
Net revenue of $33.0 million, an increase of 195% from $11.2 million for the twelve months ended March 31, 2014 (unaudited),
which net revenue consisted of approximately $11.3 million from our hospitalists, approximately $10.3 million from our IPAs,
approximately $5.4 million from our ACO,* approximately $4.5 million from our clinics, and $1.5 million from our palliative care
services; and
· Generated loss from operations of $0.7 million, a decrease of 84% compared to a loss from operations of $4.4 million (unaudited)
in the comparable period of 2014.
* Approximately $5.4 million of the revenue for the year ended March 31, 2015, was derived from a receivable from CMS (the
payment for which was received in October, 2014) related to our ACO's portion of shared savings achieved during the period of July
1, 2012 to December 31, 2013. No assurance can be made that such a payment will be made in the future, and if any payment is
made, it would be made on an annual basis.
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Recent Developments
Management Services Agreement
On February 17, 2015, we entered into the Bay Area MSA with a hospitalist group (“BAHA”) located in the San Francisco Bay area.
Under the Bay Area MSA, we will provide all business administrative services, including billing, accounting, human resources
management and supervision of all non-medical business operations. We have evaluated the impact of the Bay Area MSA and
determined it triggers variable interest entity accounting which requires the consolidation of the hospitalist group into our consolidated
financial statements.
Reverse Stock Split and NASDAQ Listing Submission
On April 24, 2015, we filed an amendment to our articles of incorporation to effect a 1-for-10 reverse stock split of its common stock.
All share and per share amounts relating to the common stock, stock options and warrants included in the financial statements and
footnotes have been retroactively adjusted to reflect the reduced number of shares resulting from this action. The number of
authorized, but unissued, shares is not affected. No fractional shares will be issued following the reverse stock split and we paid cash
in lieu of any fractional shares resulting from the reverse stock split.
In conjunction with the reverse stock split, we submitted an initial listing application to the NASDAQ Stock Market to have our
common stock approved for listing on the NASDAQ Capital Market.
NNA Amendments
On May 13, 2015, the Company entered into an Amendment to First Amendment and Acknowledgement (the “Amendment”) with
NNA of Nevada, Inc., an affiliate of Fresenius Medical Care North America. The Amendment amended the First amendment and
Acknowledgement, dated as of February 6, 2015 (the “Acknowledgement”), among the Company, NNA, Warren Hosseinion, M.D.,
and Adrian Vazquez, M.D. and included an extension until June 12, 2015 of a deadline previously contemplated by the
Acknowledgement, for the Company to file a registration statement covering the sale of NNA’s registrable securities. The
Acknowledgement was filed as an exhibit to the Company’s Current Report on Form 8-K on February 11, 2015.
On July 7, 2015, the Company entered into an Amendment to First Amendment and Acknowledgement (the “New Amendment”) with
NNA of Nevada, Inc., an affiliate of Fresenius Medical Care North America. The New Amendment amended the First amendment and
Acknowledgement, dated as of February 6, 2015 (as amended by the Amendment, the “Acknowledgement”), among the Company,
NNA, Warren Hosseinion, M.D., and Adrian Vazquez, M.D. and included an extension until October 24, 2015 of a deadline previously
contemplated by the Acknowledgement, for the Company to file a registration statement covering the sale of NNA’s registrable
securities. The Acknowledgement was filed as an exhibit to the Company’s Current Report on Form 8-K on July 10, 2015.
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 (U.S. GAAP), 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:
Principles 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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 of Notes to Consolidated Financial Statements as of
and for the year ended March 31, 2015 which 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 (1) Apollo Medical Holdings, Inc. and its wholly owned subsidiaries
AMM, PCCM, and VMM, (2) our controlling interest in ApolloMed ACO, and ApolloMed Palliative, which is a newly formed entity
which provides home health and hospice medical services which owns BCHC and HCHHA and in which a non-controlling interest in
ApolloMed Palliative contributed $586,111 in cash; and (3) physician practice corporations (“PPCs”) managed under long-term
management service agreements including AMH, MMG, ACC, LALC, Hendel, AKM, SCHC and BAHA. Some states have laws that
prohibit business entities, such as ApolloMed, 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
PPCs, 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. Each
management agreement typically has a term from 10 to 20 years unless terminated by either party for cause. The management
agreements are not terminable by the PPCs, except in the case of material breach or bankruptcy of the respective PPM.
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Through the management agreements and our relationship with the stockholders of the PPCs, we have exclusive authority over all
non-medical decision making related to the ongoing business operations of the PPCs. Consequently, we consolidate the revenue and
expenses of each PPC from the date of execution of the applicable management agreement.
All intercompany balances and transactions have been eliminated in consolidation.
Business Combinations
We use the acquisition method of accounting for all business combinations, which requires assets and liabilities of the acquiree to be
recorded at fair value (with limited exceptions), to measure the fair value of the consideration transferred, including contingent
consideration, to be determined on the acquisition date, and to account for acquisition related costs separately from the business
combination.
Revenue Recognition
Revenue consists of contracted, fee-for-service, and capitation revenue. Revenue is recorded in the period in which services are
rendered. 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
Contracted revenue represents revenue generated under contracts for 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 a 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
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 physicians. Under the fee-for-service arrangements, we bill patients for
services provided and receive payment from patients or their third-party payors. 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 payor
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 the Company’s billing center for
medical coding and entering into tour billing system and the verification of each patient’s submission or representation at the time
services are rendered as to the payor(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.
56
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Capitation revenue
Capitation revenue (net of capitation withheld to fund risk share deficits) is recognized in the month in which we are obligated to
provide services. Minor ongoing adjustments to prior months’ capitation, primarily arising from contracted health maintenance
organizations (each, an “HMO”) finalizing of monthly patient eligibility data for additions or subtractions of enrollees, are recognized in
the month they are communicated to us. Managed care revenues of the Company consist primarily of capitated fees for medical
services provided by us under a provider service agreement (“PSA”) or capitated arrangements directly made with various managed
care providers including HMOs and management service organizations (“MSOs”). Capitation revenue under the PSA and HMO
contracts is prepaid monthly to us based on the number of enrollees electing us as their healthcare provider. Additionally, Medicare
pays capitation using a “Risk Adjustment model,” which compensates managed care organizations and providers based on the health
status (acuity) of each individual enrollee. Health plans and providers with higher acuity enrollees will receive more and those with
lower acuity enrollees will receive less. Under Risk Adjustment, capitation is determined based on health severity, measured using
patient encounter data. Capitation is paid on an interim basis based on data submitted for the enrollee for the preceding year and is
adjusted in subsequent periods after the final data is compiled. Positive or negative capitation adjustments are made for Medicare
enrollees with conditions requiring more or less healthcare services than assumed in the interim payments. Since we cannot reliably
predict these adjustments, periodic changes in capitation amounts earned as a result of Risk Adjustment are recognized when those
changes are communicated by the health plans to us.
HMO contracts also include provisions to share in the risk for enrollee hospitalization, whereby we can earn additional incentive
revenue or incur penalties based upon the utilization of hospital services. Typically, any shared risk deficits are not payable until and
unless we generate future risk sharing surpluses, or if the HMO withholds a portion of the capitation revenue to fund any risk share
deficits. At the termination of the HMO contract, any accumulated risk share deficit is typically extinguished. Due to the lack of access
to information necessary to estimate the related costs, shared-risk amounts receivable from the HMOs are only recorded when such
amounts are known. Risk pools for the prior contract years are generally final settled in the third or fourth quarter of the following
fiscal year.
In addition to risk-sharing revenues, we also receive incentives under “pay-for-performance” programs for quality medical care, based
on various criteria. These incentives, which are included in other revenues, are generally recorded in the third and fourth quarters of
the fiscal year and are recorded when such amounts are known.
Under full risk capitation contracts, an affiliated hospital enters into agreements with several HMOs, pursuant to which, the affiliated
hospital provides hospital, medical, and other healthcare services to enrollees under a fixed capitation arrangement (“Capitation
Arrangement”). Under the risk pool sharing agreement, the affiliated hospital and medical group agree to establish a Hospital Control
Program to serve the enrollees, pursuant to which, the medical group is allocated a percentage of the profit or loss, after deductions
for costs to affiliated hospitals. We participate in full risk programs under the terms of the PSA with health plans, whereby we are
wholly liable for the deficits allocated to the medical group under the arrangement.
Medicare Shared Savings Program Revenue
Through our subsidiary, ApolloMed ACO, participates in the MSSP sponsored by the CMS. The MSSP allows ACO participants to
share in cost savings it generates in connection with rendering medical services to Medicare patients. Payments to ACO participants,
if any, will be calculated annually by CMS on cost savings generated by the ACO participant relative to the ACO participants’ CMS
benchmark. The MSSP is a newly formed program with limited history of payments to ACO participants. We consider revenue, if any,
under the MSSP, as contingent upon the realization of program savings as determined by CMS, and are not considered earned and
therefore are not recognized as revenue until notice from CMS that cash payments are to be imminently received.
57
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
At least annually, 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 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 (i.e., fiscal year-end).
At least annually, indefinite-lived intangible assets are tested 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 Liability Costs
We are responsible for integrated care that the associated physicians and contracted hospitals provide to its enrollees. We provide
integrated care to health plan enrollees through a network of contracted providers under sub-capitation and direct patient service
arrangements, company-operated clinics and staff physicians. Medical costs for professional and institutional services rendered by
contracted providers are recorded as cost of services in the consolidated statements of income. Costs for operating medical clinics,
including the salaries of medical and non-medical personnel and support costs, are also recorded in cost of services.
An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical payables in
the consolidated balance sheets. Medical payables include claims reported as of the balance sheet date and estimates of incurred
but not reported claims (“IBNR”). Such estimates are developed using actuarial methods and are based on many variables, including
the utilization of health care services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and
other factors. The estimation methods and the resulting reserves are continually reviewed and updated. Many of the medical
contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various
services. Such differing interpretations may not come to light until a substantial period of time has passed following the contract
implementation. We have a $20,000 per member professional stop-loss, none on institutional risk pools. Any adjustments to reserves
are reflected in current operations.
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, insurance companies, and amounts due from hospitals and patients. Accounts receivable are recorded and
stated at the amount expected to be collected.
We maintain 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.
Fair Value of Financial Instruments
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 that 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:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
58
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
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 fair values of our financial instruments are measured on a recurring basis. The carrying amount reported in the 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 NNA Term Loan and the
Convertible Notes approximates fair value which is determined by using interest rates that are available for similar debt obligations
with similar terms at the balance sheet date.
Non-controlling Interests
The non-controlling interests recorded in our consolidated financial statements includes the pre-acquisition equity of those PPC’s in
which we have determined that it has a controlling financial interest and for which consolidation is required as a result of management
contracts entered into with these entities owned by third-party physicians. The nature of these contracts provide us with a monthly
management fee to provide the services described above, and as such, the adjustments to non-controlling interests in any period
subsequent to initial consolidation would relate to either capital contributions or distributions by the non-controlling parties as well as
income or losses attributable to certain non-controlling interests. Non-controlling interests also represent third-party minority equity
ownership interests which are majority owned by us.
Stock-Based Compensation
We maintain a stock-based compensation program for employees, non-employees, directors and consultants, which is more fully
described in Note 9 to our consolidated financial statements. The value of stock-based awards so measured is recognized as
compensation expense on a cumulative straight-line basis over the vesting terms of the awards, adjusted for expected forfeitures. We
sell certain of our restricted common stock to our employees, directors and consultants with a right (but not obligation) of repurchase
feature that lapses based on performance of services in the future.
Recently Adopted Accounting Changes and Recently Issued and Adopted Accounting Pronouncements
There have been no accounting changes or recently adopted accounting pronouncements. See Note 2 to our consolidated financial
statements for recently issued accounting pronouncements.
Change in Fiscal Year
On May 16, 2014, our Board of Directors approved a change in fiscal year end from January 31 to March 31, effective March 31,
2014. The comparative financial information provided for the twelve months ended March 31, 2014 and for the two months ended
March 31, 2013, is unaudited and includes all normal recurring adjustments necessary for a fair statement of the results for the period.
Results of Operations and Operating Data
Year Ended March 31, 2015 vs. Twelve Months Ended March 31, 2014 (Unaudited)
2014
Net revenues
Costs and expenses:
Cost of services
General and administrative
Depreciation and amortization
Total costs and expenses
2015
(Unaudited)
$ 32,989,742 $ 11,157,876 $ 21,831,866
Change
Percentage
change
195.7%
22,067,421
11,282,221
334,434
33,684,076
9,942,340
5,582,360
32,620
15,557,320
12,125,081
5,699,861
301,814
18,126,756
122.0%
102.1%
925.2%
116.5%
Loss from operations
$
(694,334) $
(4,399,444) $
3,705,110
(84.2)%
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
59
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Net revenues
Costs and expenses:
Cost of services
General and administrative
Depreciation
Total costs and expenses
Loss from operations
% of Net Revenues
2015
2014
(Unaudited)
100.0%
100.0%
66.9%
34.2%
1.0%
102.1%
89.1%
50.0%
0.3%
139.4%
(2.1)%
(39.4)%
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 (decrease) was attributable to:
$
5,685,793
8,169,015
1,464,096
5,382,617
5,289
(30,540)
628,930
392,846
133,820
Incremental revenue from the acquisitions of AKM and SCHC
Increase in MMG services due to increase in patient lives. MMG’s net revenue in the fourth quarter of
2015 included a one-time true-up payment for services rendered throughout fiscal year 2015. Such
amounts will be paid as earned on a go-forward basis.
Incremental revenue from the acquisitions of BCHC and HCHHA
ACO shared savings revenue
Increase in clinic revenues due to ACC acquisitions
Decrease in hospitalist revenue, primarily driven by the Affordable Care Act which reduced Medicare
reimbursement
Incremental revenue from consolidating BAHA as a variable interest entity effective February 17, 2015
Increase in revenue from LALC and Hendel
Other
Cost of services are comprised primarily of physician compensation and related expenses. The (increase) decrease was attributable
to:
$
(4,454,924)
(5,885,201)
(712,667)
(635,409)
(1,400,000)
423,027
697,947
(446,811)
288,957
Incremental costs of service from the acquisitions of AKM and SCHC
Increase in MMG claim costs due to higher patient lives
Incremental costs of service from the acquisitions of BCHC and HCHHA
Increase in ACC clinic costs due to acquisitions in October 2013
Participating physician share of ACO savings revenue
Decrease in other physician related costs
Decrease in physician stock-based compensation
Incremental costs of service from consolidating BAHA as a variable interest entity effective February 17,
2015
Other
Cost of services as percentage of net revenues decreased principally due to the lower cost of ACO shared savings revenue.
General and administrative expenses include all non-physician 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 in general and administrative expenses was attributable to:
$
284,788
(2,269,720)
(402,659)
(1,031,220)
(1,254,030)
(1,063,631)
(161,181)
197,792
Decrease in stock-based compensation to employees, partially offset by higher valuation of ApolloMed
ACO shares to ApolloMed ACO physicians
Increase in legal and professional fees related to Lakeside litigation and to support corporate initiatives.
Increase in personnel, services and related expenses related to the ACO initiative.
Increase in administrative personnel and facilities costs to support growth in the business
Incremental general and administrative expenses from the acquisitions of AKM and SCHC
Incremental general and administrative expenses from the acquisitions of BCHC and HCHHA
Incremental general and administrative expenses from consolidating BAHA as a variable interest entity
effective February 17, 2015
Other
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
60
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Depreciation and amortization expense
$
334,434 $
32,620 $
301,814
Depreciation and amortization increased primarily due to the acquisitions of AKM, SCHC, BCHC and HCHHA which added additional
depreciation expense of approximately $194,000 and additional amortization expense of $88,000 related to the intangible assets
acquired during the current fiscal year (See Note 3 – Acquisitions in the Consolidated Financial Statements).
2015
2014
(Unaudited)
Change
Interest expense
2014
2015
1,326,407 $
$
(Unaudited)
Change
777,648 $
548,759
Interest expense increased in 2015 primarily due to higher interest expense due to an increase in borrowings primarily related to the
2014 NNA financing.
Change in fair value of warrant and conversion liability
$
833,545 $
2015
2014
(Unaudited)
Change
- $
833,545
The change in fair value of the warrant and conversion liability resulted from the change in the fair value measurement of the
Company’s warrant and conversion feature liability, which considers among other things, expected term, the volatility of the
Company’s share price, interest rates, and the probability of additional financing of the underlying NNA Term Loan and the NNA
Convertible Note.
Net loss attributable to Apollo Medical Holdings, Inc.
2014
2015
(1,802,601) $
$
(Unaudited)
Change
(5,641,637) $
3,839,036
Net loss attributable to Apollo Medical Holdings, Inc. decreased primarily due to ApolloMed ACO shared savings revenue, partially
offset by higher cost of medical services in ACC, MMG, SCHC, BCHC, and HCHHA; and an increase in legal and professional fees
and stock-based compensation.
For the year ended March 31, 2015, cash used in operating activities was $271,910. This was the result of a net loss of $1,347,957,
a decrease in working capital of $168,759 and a $833,545 change in the fair value of the warrant and conversion liability, offset by
cash provided by non-cash expenses of $2,078,351. Non-cash expenses primarily include depreciation expense, issuance stock-
based compensation expense, amortization of financing costs, and accretion of debt discount.
Cash provided by working capital was due to:
Increase in accounts payable and accrued liabilities
Increase in medical liabilities
Increase in due from affiliates
Cash used by working capital was due to:
Increase in accounts receivable, net
Increase in other receivables
Increase in other assets
Increase in prepaid expenses and advances
$
$
$
$
$
$
$
851,277
249,610
55,358
(912,205)
(188,236)
(106,510)
(118,054)
For the year ended March 31, 2015, cash used in investing activities was $3,200,375 related to the acquisitions of BCHC, HCHHA,
AKM and SCHC aggregating $3,356,145 (net of cash and cash equivalents acquired of $660,893) the increase in cash due to the
consolidation of our variable interest entities of $271,395, an increase in restricted cash of $510,000 and investment in office and
technology equipment, partially offset by the proceeds of $438,884 from the sale of marketable securities.
61
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
For the year ended March 31, 2015, net cash provided by financing activities was $1,655,049 primarily as the result of the issuance
of convertible notes payable of $2,000,000, $1,000,000 proceeds from the NNA line of credit, the contributions by a non-controlling
interest of $725,278, offset by principal payments on the term loan of $936,083, debt issuance costs of $533,646, the repurchase of
common stock of $500 and distributions of $600,000 to a non-controlling interest shareholder.
Two Months Ended March 31, 2014 vs. Two Months Ended March 31, 2013 (Unaudited)
Our results of operations were as follows for the two months ended March 31:
Net revenues
Costs and expenses:
Cost of services
General and administrative
Depreciation
Total costs and expenses
2014
2,336,522 $
$
2013
(Unaudited)
Change
Percentage
change
1,662,951 $
673,571
40.5%
2,050,913
826,870
5,765
2,883,548
1,184,786
531,120
4,506
1,720,412
866,127
295,750
1,259
1,163,136
73.1%
55.7%
27.9%
67.6%
Loss from operations
$
(547,026) $
(57,461) $
(489,565)
852.0%
The following table sets forth consolidated statements of operations for the two months ended March 31 stated as a percentage of net
revenues:
Net revenues
Costs and expenses:
Cost of services
General and administrative
Depreciation
Total costs and expenses
Loss from operations
% of Net revenues
2014
2013
(Unaudited)
100.0%
100.0%
87.8%
35.4%
0.2%
123.4%
71.2%
31.9%
0.3%
103.5%
-23.4%
-3.5%
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:
$
$
96,561
577,010
New hospital contracts, increased same-market area growth and expansion of services with existing
medical group clients at new hospitals.
Increase in MMG services due to increase in patient lives.
Cost of services are comprised primarily of physician compensation and related expenses. The increase was attributable to:
$
$
(202,867)
(663,260)
Increase in physician costs attributable to new physicians hired to support new contracts.
Increase in MMG and ACC services
Cost of services as percentage of net revenues increased principally due to higher medical costs associated with ACC’s clinic
operation and higher proportion of Medi-Cal patient lives added to MMG for the two months ended March 31, 2014.
General and administrative expenses include all non-physician 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. We also funded initiatives associated with establishment of ApolloMed ACO, MMG, and ACC, which had
limited or no revenue for the two months ended March 31, 2014. The increase in general and administrative expenses was
attributable to:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
62
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
$
$
$
(92,734)
(191,279)
(11,737)
Increase in board, legal and professional fees to support the continuing growth of our operations.
Increase in administrative personnel and facilities costs to support growth in the business
Increase in stock-based compensation to employees, directors and consultants
Interest expense
Other income
Total other expense
2014
$
$
184,578 $
(28,816)
155,762 $
2013
(Unaudited)
Change
86,114 $
(1,476)
84,638 $
77,924
(27,340)
50,584
Other expense increased in 2014 primarily due to higher interest expense due to an increase in borrowings partially offset by a gain
from extinguishment of debt associated the 2014 NNA Financing to pay off the medical clinic acquisition promissory notes.
Net loss attributable to Apollo Medical Holdings, Inc.
$
766,442 $
224,399 $
542,043
Net loss attributable to Apollo Medical Holdings, Inc. increased primarily due to higher cost of medical services in ACC and MMG and
an increase in spending associated with the ACO, ACC and MMG initiatives.
2013
2014
(Unaudited)
Change
Liquidity and Capital Resources
At March 31, 2015, we had cash equivalents of approximately $5.0 million compared to cash and cash equivalents of approximately
$6.8 million at March 31, 2014. At March 31, 2015, we had borrowings totaling $8.6 million compared to borrowings at March 31,
2014 of $6.8 million.
We incurred the following net operating loss and cash used in operating activities for the year ended March 31, 2015:
Loss from operations
Cash used in operating activities
Our accumulated deficit and stockholders’ deficit at March 31, 2015 was as follows:
Accumulated deficit
Stockholders' deficit attributable to Apollo Medical Holdings, Inc.
$
$
(694,334)
(271,910)
$ (19,340,521)
$ (2,817,673)
To date, we have funded our operations from internally generated cash flow and external sources, including the proceeds from the
issuance of debt and equity securities, which have provided funds for near-term operations and growth. On March 28, 2014, we
entered into an equity and debt arrangement with NNA to provide $12,000,000 in funding, which included a $2,000,000 investment in
the Company's common stock, $8,000,000 in term and revolving loans (of which the $1,000,000 revolving loan was drawn in
December 2014), and a $2,000,000 convertible note commitment, which was drawn by the Company on July 31, 2014. We used
approximately $3,500,000 in cash to finance the acquisitions of BCHC, HCHHA, AKM and SCHC during the year ended March 31,
2015.
We believe our cash balances on hand as of March 31, 2015 of $5.0 million and availability under our lines of credit of approximately
$380,000 will be sufficient to meet our working capital requirements for at least the next twelve months. Cash flows from operations is
unpredictable. ApolloMed ACO has limited experience operating an ACO or managed care organization and its revenues, if any, are
difficult to predict. Further, MMG is growing rapidly and received a one-time true-up payment in the fourth quarter of 2015 for services
rendered throughout fiscal year 2015. Such amounts will be paid as earned on a go-forward basis. That make it difficult to predict its
future cash flow and results. As a result, we may require additional funding to meet certain obligations until sufficient cash flows are
generated from anticipated operations. If available funds are not adequate, we may need to obtain additional sources of funds or
reduce operations. There is no assurance we will be successful in doing so.
63
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We cannot assure that additional funding will be available on favorable terms, or at all. If we fail to obtain additional funding when
needed, we may not be able to execute our business plans and our business may suffer, which would have a material adverse effect
on our financial position, results of operations and cash flows.
Contractual Obligations and Commercial Commitments
Debt Agreements
The following is an overview of our total outstanding debt obligations as of March 31, 2015:
Description of Debt
Lender Name
Interest Rate
March 31,
2015
Term loan due March 28, 2019, net of debt
discount of $1,060,401
Line of credit payable due March 28, 2019
8% Senior subordinated convertible promissory
notes due March 28, 2019, net of debt discount
of $985,255
9% Senior subordinated convertible notes due
February 15, 2016, net of debt discount of
$62,682
Unsecured revolving line of credit due June 5,
2016
NNA of Nevada, Inc.
NNA of Nevada, Inc.
8.00% $
3 mo. LIBOR + 6%
5,467,098
1,000,000
NNA of Nevada, Inc.
8.00%
1,014,745
Various
Union Bank
9.00%
1,037,818
7.75%
$
94,764
8,614,425
The above table excludes contingent payment arrangements associated with our acquisitions of AKM, SCHC, BCHC, and HCHHA.
The aggregate maximum of contingent payments under these arrangements is $1,550,000, of which $250,000 has been paid as of
March 31, 2015.
Employment Agreements
We have various employment and consulting agreements with several individuals, which provide for, among other items, annual base
salaries and potential bonuses. These contracts contain change of control, termination and severance clauses that require us to
make payments to certain of these employees if certain events occur as defined in their respective contracts.
Lease Agreements
Our corporate headquarters are located at 700 North Brand Boulevard, Suite 220, Glendale, California 91203. On October 14, 2014,
the lease was amended by a Second Amendment which includes 16,484 rentable square feet and extends the term of the lease to be
for approximately six years after we begin operations in the new premises. We anticipate occupying the new premises during the
second fiscal quarter of 2016. The Second Amendment sets the Headquarters base rent at $37,913 per month for the first year and
schedules annual increases in base rent each year until the final rental year, which is capped at $43,957 per month.
AMM leases the SCHC Premises located in Los Angeles, California, consisting of 8,766 rentable square feet, for a term of ten years.
The base rent for the SCHC Lease is $32,872 per month.
We also lease seven other offices (10,207 square feet collectively) throughout Los Angeles, California, with varying expiration dates
through 2020.
64
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Future minimum rental payments required under the operating leases are as follows:
Year ending March 31,
2016
2017
2018
2019
2020
Thereafter
Total
$
771,754
834,522
916,395
920,630
905,117
2,482,251
$ 6,830,669
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of or for the year ended March 31, 2015.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s financial statements for the fiscal year ended March 31, 2015 are included in this annual report, beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective on May 12, 2014, the Company’s principal accountant, Kabani & Company, Inc. (“Kabani”), was dismissed as the
Company’s independent registered public accounting firm. Kabani’s issued report on the Company’s financial statements for the
fiscal year ended January 31, 2014 and 2013, did not contain an adverse opinion or disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles. The Company’s decision to change accountants was recommended
and approved by the Board of Directors on May 12, 2014.
In connection with the audit of the Company's consolidated financial statements for the years ended January 31, 2014, and 2013, and
through the subsequent interim period preceding the dismissal of Kabani, there were no disagreements with Kabani on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of Kabani, would have caused it to make reference to the subject matter of the disagreement(s) in
connection with its report.
There were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K in connection with the dismal of Kabani.
Effective on May 12, 2014, the Board of Directors recommended, approved and directed the selection of BDO USA, LLP (“BDO”) as
the Company’s new independent registered public accounting firm.
During the two most recent fiscal years ended January 31, 2014 and 2013, and the subsequent interim period prior to the
engagement of BDO, neither the Company, nor anyone on its behalf, consulted BDO regarding either (i) the application of accounting
principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the
Company’s financial statements, where either a written report was provided to the Company or oral advice was provided, that BDO
concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-
K and the related instructions) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation S-K).
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 March 31, 2015,
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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 Report on Internal Control
over Financial Reporting” below.
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”) (1992) 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 March 31, 2015.
65
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
A material weakness is a significant control deficiency 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 adequate 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 adequately 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 March 31, 2015, our internal controls over our financial
reporting are not effective. The Company is reviewing and considering what remediation steps need to be taken to address each
material weakness. We continue to add qualified employees and consultants to address these issues and we will start the written
documentation of our internal control policies and procedures. We will continue to broaden the scope of our accounting and billing
capabilities and realign 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 does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting since the Company is a Smaller Reporting Company.
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 March 31, 2015) that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
66
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item will be contained in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission not later than 120 days following the end of the Company’s fiscal year ended
March 31, 2015, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item will be contained in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission not later than 120 days following the end of the Company’s fiscal year ended
March 31, 2015, which information is incorporated herein by reference
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Certain information required by this Item will be contained in the Company’s Proxy Statement for the 2015 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later than 120 days following the end of the Company’s
fiscal year ended March 31, 2015, which information is incorporated herein by reference. The other information required by this Item
appears in this report under “Item 5 — Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities,” which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item will be contained in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission not later than 120 days following the end of the Company’s fiscal year ended
March 31, 2015, which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item will be contained in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission not later than 120 days following the end of the Company’s fiscal year ended
March 31, 2015, which information is incorporated herein by reference.
67
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Please see the Reports of our Independent Registered Public Accounting Firms, and the related consolidated financial
statements beginning on page F-1 of this Form 10-K.
(b) Exhibits Index
Exhibit No.
2.1
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
Description
Stock Purchase Agreement dated July 21, 2014 by and between SCHC Acquisition, A Medical Corporation, the
Shareholders of Southern California Heart Centers, A Medical Corporation and Southern California Heart Centers,
A Medical Corporation (filed as an exhibit to a Quarterly Report on Form 10-Q on August 14, 2014, and
incorporated herein by reference).
Restated Certificate of Incorporation (filed as an exhibit to a Current Report on Form 8-K on January 21, 2015, and
incorporated herein by reference).
Certificate of Amendment to Restated Certificate of Incorporation (filed as an exhibit to a Current Report on Form 8-
K on April 27, 2015, and incorporated herein by reference).
Restated Bylaws (filed as an exhibit to a Current Report on Form 8-K on January 21, 2015, and incorporated herein
by reference).
Form of Investor Warrant, dated October 16, 2009, for the purchase of 2,500 shares of common stock (filed as an
exhibit to an Annual Report on Form 10-K/A on March 28, 2012, and incorporated herein by reference).
Form of Investor Warrant, dated October 29, 2012, for the purchase of common stock (filed as an exhibit to a
Quarterly Report on Form 10-Q on December 17, 2012 and incorporated herein by reference).
Form of Amendment to October 16, 2009 Warrant to Purchase Shares of Common Stock, dated October 29, 2012
(filed as an exhibit to a Quarterly Report on Form 10-Q on December 17, 2012 and incorporated herein by
reference).
Form of 9% Senior Subordinated Callable Convertible Note, dated January 31, 2013 (filed as an exhibit to an
Annual Report on Form 10-K on May 1, 2013 and incorporated herein by reference).
Form of Investor Warrant for purchase of 3,750 shares of common stock, dated January 31, 2013 (filed as an exhibit
to an Annual Report on Form 10-K on May 1, 2013, and incorporated herein by reference).
Convertible Note, issued by Apollo Medical Holdings, Inc. to NNA of Nevada, Inc., dated March 28, 2014 (filed as
an exhibit to a Current Report on Form 8-K on March 31, 2014, and incorporated herein by reference).
Common Stock Purchase Warrant to purchase 100,000 shares, issued by Apollo Medical Holdings, Inc. to NNA of
Nevada, Inc., dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K on March 31, 2014, and
incorporated herein by reference).
Common Stock Purchase Warrant to purchase 200,000 shares, issued by Apollo Medical Holdings, Inc. to NNA of
Nevada, Inc., dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K on March 31, 2014, and
incorporated herein by reference).
Common Stock Purchase Warrant to purchase 100,000 shares, issued by Apollo Medical Holdings, Inc. to NNA of
Nevada, Inc., dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K on March 31, 2014, and
incorporated herein by reference).
Common Stock Purchase Warrant to purchase 100,000 shares, issued by Apollo Medical Holdings, Inc. to NNA of
Nevada, Inc., dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K on March 31, 2014, and
incorporated herein by reference).
Agreement and Plan of Merger among Siclone Industries, Inc. and Apollo Acquisition Co., Inc. and Apollo Medical
Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on June 19, 2008 and incorporated herein by
reference).
10.2
2010 Equity Incentive Plan (filed as Appendix A to Schedule 14C Information Statement filed on August 17, 2010
and incorporated herein by reference).
10.3
Board of Directors Agreement dated March 22, 2012, by and between Apollo Medical Holdings, Inc. and Suresh
Nihalani (filed as an exhibit to an Annual Report on Form 10-K/A on March 28, 2012, and incorporated herein by
reference).
10.4
2013 Equity Incentive Plan of Apollo Medical Holdings, Inc. dated April 30, 2013 (filed as an exhibit to an Annual
Report on Form 10-K on May 8, 2014, and incorporated herein by reference).
10.5
Board of Directors Agreement dated May 22, 2013 by and between Apollo Medical Holdings, Inc., and David
Schmidt (filed as an exhibit to an Annual Report on Form 10-K on May 8, 2014, and incorporated herein by
reference).
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
68
10.6
10.7
10.8
10.9
10.10
10.11
Board of Directors Agreement dated October 17, 2012 by and between Apollo Medical Holdings, Inc., and Mark
Meyers (filed as an exhibit to an Annual Report on Form 10-K on May 8, 2014, and incorporated herein by
reference).
Intercompany Revolving Loan Agreement, dated February 1, 2013, by and between Apollo Medical Management,
Inc. and Maverick Medical Group, Inc. (filed as an exhibit to a Quarterly Report on Form 10-Q on June 14, 2013,
and incorporated herein by reference).
Intercompany Revolving Loan Agreement, dated July 31, 2013 by and between Apollo Medical Management, Inc.
and ApolloMed Care Clinic (filed as an exhibit to a Quarterly Report on Form 10-Q on September 16, 2013, and
incorporated herein by reference).
Consulting and Representation Agreement between Flacane Advisors, Inc. and Apollo Medical Holdings, Inc., dated
January 15, 2015 (filed as an exhibit to a Current Report on Form 8-K on January 21, 2015, and incorporated herein
by reference).
Intercompany Revolving Loan Agreement dated as of September 30, 2013, between Apollo Medical Management,
Inc. and ApolloMed Hospitalists, a Medical Corporation (filed as an exhibit to a Quarterly Report on Form 10-Q on
December 20, 2013, and incorporated herein by reference).
Form of Settlement Agreement and Release, between Apollo Medical Holdings, Inc. and each of the Holders listed
on Exhibit A to the First Amendment, effective December 20, 2013 (filed as an exhibit to a Current Report on Form
8-K on December 24, 2013, and incorporated herein by reference).
10.12
Credit Agreement, between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated March 28, 2014 (filed as
an exhibit to a Current Report on Form 8-K on March 31, 2014, and incorporated herein by reference).
10.13
Investment Agreement, between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated March 28, 2014
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
(filed as an exhibit to a Current Report on Form 8-K on March 31, 2014, and incorporated herein by reference).
Collateral Assignment of Physician Shareholder Agreement and Management Agreement, between Apollo Medical
Holdings, Inc., Apollo Medical Management, Inc., and NNA of Nevada, Inc., dated March 28, 2014 (acknowledged
by ApolloMed Care Clinic, and Warren Hosseinion, M.D.) (filed as an exhibit to a Current Report on Form 8-K on
March 31, 2014, and incorporated herein by reference).
Collateral Assignment of Physician Shareholder Agreement and Management Agreement, between Apollo Medical
Holdings, Inc., Apollo Medical Management, Inc., and NNA of Nevada, Inc., dated March 28, 2014 (acknowledged
by Maverick Medical Group Inc. and Warren Hosseinion, M.D.) (filed as an exhibit to a Current Report on Form 8-K
on March 31, 2014, and incorporated herein by reference).
Collateral Assignment of Physician Shareholder Agreement and Management Agreement, between Apollo Medical
Holdings, Inc., Apollo Medical Management, Inc., and NNA of Nevada, Inc., dated March 28, 2014 (acknowledged
by ApolloMed Hospitalists and Warren Hosseinion, M.D.) (filed as an exhibit to a Current Report on Form 8-K on
March 31, 2014, and incorporated herein by reference).
Shareholders Agreement, between Apollo Medical Holdings, Inc., Warren Hosseinion, M.D., Adrian Vazquez, M.D.,
and NNA of Nevada, Inc., dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K on March 31,
2014, and incorporated herein by reference).
Registration Rights Agreement, between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated March 28,
2014 (filed as an exhibit to a Current Report on Form 8-K on March 31, 2014, and incorporated herein by
reference).
Employment Agreement, between Apollo Medical Management, Inc. and Warren Hosseinion, M.D., dated March
28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by
reference).
Employment Agreement, between Apollo Medical Management, Inc. and Adrian Vazquez, M.D., dated March 28,
2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by reference).
Hospitalist Participation Service Agreement, between ApolloMed Hospitalists and Warren Hosseinion, M.D., dated
March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by
reference).
Hospitalist Participation Service Agreement, between ApolloMed Hospitalists and Adrian Vazquez, M.D., dated
March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by
reference).
Stock Option Agreement, between Warren Hosseinion, M.D. and Apollo Medical Holdings, Inc., dated March 28,
2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by reference).
Stock Option Agreement, between Adrian Vazquez, M.D. and Apollo Medical Holdings, Inc., dated March 28, 2014
(filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by reference).
69
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Amended and Restated Management Services Agreement, between Apollo Medical Management, Inc. and
ApolloMed Care Clinic, dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3,
2014, and incorporated herein by reference).
Amended and Restated Management Services Agreement, between Apollo Medical Management, Inc. and
Maverick Medical Group Inc., dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April
3, 2014, and incorporated herein by reference).
Amended and Restated Management Services Agreement, between Apollo Medical Management, Inc. and
ApolloMed Hospitalists, dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3,
2014, and incorporated herein by reference).
Physician Shareholder Agreement, granted and delivered by Warren Hosseinion, M.D., in favor of Apollo Medical
Management, Inc. and Apollo Medical Holdings, Inc., for the account of ApolloMed Care Clinic, dated March 28,
2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by reference).
Physician Shareholder Agreement, granted and delivered by Warren Hosseinion, M.D., in favor of Apollo Medical
Management, Inc. and Apollo Medical Holdings, Inc., for the account of Maverick Medical Group, Inc., dated March
28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by
reference).
Physician Shareholder Agreement, granted and delivered by Warren Hosseinion, M.D., in favor of Apollo Medical
Management, Inc. and Apollo Medical Holdings, Inc., for the account of ApolloMed Hospitalists, dated March 28,
2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3, 2014, and incorporated herein by reference).
Amendment No. 1 to Intercompany Revolving Loan Agreement, between Apollo Medical Management, Inc. and
ApolloMed Care Clinic, dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3,
2014, and incorporated herein by reference).
Amendment No. 1 to Intercompany Revolving Loan Agreement, between Apollo Medical Management, Inc. and
Maverick Medical Group Inc., dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April
3, 2014, and incorporated herein by reference).
Amendment No. 1 to Intercompany Revolving Loan Agreement, between Apollo Medical Management, Inc. and
ApolloMed Hospitalists, dated March 28, 2014 (filed as an exhibit to a Current Report on Form 8-K/A on April 3,
2014, and incorporated herein by reference).
Board of Directors Agreement dated March 7, 2012 by and between Apollo Medical Holdings, Inc., and Gary
Augusta (filed as an exhibit to an Annual Report on Form 10-K on May 8, 2014, and incorporated herein by
reference).
Board of Directors Agreement dated February 15, 2012 by and between Apollo Medical Holdings, Inc., and Ted
Schreck (filed as an exhibit to an Annual Report on Form 10-K on May 8, 2014, and incorporated herein by
reference).
Board of Directors Agreement dated October 22, 2012 by and between Apollo Medical Holdings, Inc., and Mitchell
R. Creem (filed as an exhibit to an Annual Report on Form 10-K on May 8, 2014, and incorporated herein by
reference).
Consulting Agreement as of May 20, 2014 by and among Apollo Medical Holdings, Inc. and Bridgewater Healthcare
Group, LLC (filed as an exhibit to a Current Report on Form 8-K/A on July 3, 2014, and incorporated by reference
herein)
Board of Directors Agreement dated May 22, 2013 by and between Apollo Medical Holdings, Inc., and Warren
Hosseinion, M.D. (filed as an exhibit to a Current Report on Form 8-K on September 16, 2014, and incorporated by
reference herein)
Contribution Agreement, dated as of October 27, 2014, by and between Dr. Sandeep Kapoor, M.D, Marine
Metspakyan and Apollo Palliative Services LLC (filed as an exhibit to a Current Report on Form 8-K on October 31,
2014, and incorporated herein by reference).
Contribution Agreement, dated as of October 27, 2014, by and between Rob Mikitarian and Apollo Palliative
Services LLC (filed as an exhibit to a Current Report on Form 8-K on October 31, 2014, and incorporated herein by
reference).
Membership Interest Purchase Agreement, entered into as of October 27, 2014, by and among Apollo Palliative
Services LLC, Apollo Medical Holdings, Inc., Dr. Sandeep Kapoor, M.D., Marine Metspakyan and Best Choice
Hospice Care, LLC (filed as an exhibit to a Current Report on Form 8-K on October 31, 2014, and incorporated
herein by reference).
Stock Purchase Agreement entered into as of October 27, 2014, by and among Apollo Palliative Services LLC, Rob
Mikitarian and Holistic Care Home Health Agency, Inc. (filed as an exhibit to a Current Report on Form 8-K on
October 31, 2014, and incorporated herein by reference).
70
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.43
10.44
10.45
10.46
10.47
10.48
16.1
21.1+
23.1+
23.2+
31.1+
31.2+
32.1+
32.2+
101*
+
Second Amendment to Lease Agreement dated October 14, 2014 by and among Apollo Medical Holdings, Inc. and
EOP-700 North Brand, LLC (filed as an exhibit on Quarterly Report on Form 10-Q on November 14, 2014, and
incorporated herein by reference).
Lease Agreement, dated July 22, 2014, by and between Numen, LLC and Apollo Medical Management, Inc. (filed
as an exhibit to a Current Report on Form 8-K/A on December 8, 2014, and incorporated herein by reference).
First Amendment and Acknowledgement, dated as of February 6, 2015, among Apollo Medical Holdings, Inc., NNA
of Nevada, Inc., Warren Hosseinion, M.D. and Adrian Vazquez, M.D. (filed as an exhibit to a Current Report on
Form 8-K on February 10, 2015, and incorporated herein by reference).
Board of Directors Agreement dated April 9, 2015 by and between Apollo Medical Holdings, Inc., and Lance Jon
Kimmel (filed as an exhibit to a Current Report on Form 8-K on April 13, 2015, and incorporated herein by
reference).
Amendment to the First Amendment and Acknowledgement, dated as of May 13, 2015, among Apollo Medical
Holdings, Inc., NNA of Nevada, Inc., Warren Hosseinion, M.D. and Adrian Vazquez, M.D. (filed as an exhibit to a
Current Report on Form 8-K on May 15, 2015, and incorporated herein by reference).
Amendment to the First Amendment and Acknowledgement, dated as of July 7, 2015, among Apollo Medical
Holdings, Inc., NNA of Nevada, Inc., Warren Hosseinion, M.D. and Adrian Vazquez, M.D. (filed as an exhibit to a
Current Report on Form 8-K on July 10, 2015, and incorporated herein by reference).
Letter re change in certifying accountant (filed as an exhibit to a Current Report on Form 8-K on May 15, 2014, and
incorporated by reference herein)
Subsidiaries of Apollo Medical Holdings, Inc.
Consent of BDO USA, LLP
Consent of Kabani & Company, Inc.
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
The following materials formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Financial
Statements (Unaudited) as of :
Filed herewith.
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
71
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
SIGNATURES
Date: July 14, 2015
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 indicated on July 14, 2015.
SIGNATURE
TITLE
/S/ WARREN HOSSEINION, M.D.
Warren Hosseinion, M.D.,
/S/ GARY AUGUSTA
Gary Augusta
/S/ MITCH CREEM
Mitch Creem
/S/ TED SCHRECK
Ted Schreck
/S/ SURESH NIHALANI
Suresh Nihalani
/S/ DAVID SCHMIDT
David Schmidt
Chief Executive Officer and Director
Executive Chairman and Director
Chief Financial Officer (Principal
Financial and Accounting Officer) and Director
Director
Director
Director
72
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CONSOLIDATED FINANCIAL STATEMENTS - TABLE OF CONTENTS:
Report of independent registered public accounting firm
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
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Apollo Medical Holdings, Inc.
Glendale, California
We have audited the accompanying consolidated balance sheets of Apollo Medical Holdings, Inc. as of March 31, 2015 and 2014
and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended March 31, 2015 and
the period from February 1, 2014 through March 31, 2014. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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. at March 31, 2015 and 2014, and the results of its operations and its cash flows for the year ended
March 31, 2015 and the period from February 1, 2014 through March 31, 2014, in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO USA, LLP
Los Angeles, California
July 14, 2015
F-2
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 sheet of Apollo Medical Holdings, Inc. as of January 31, 2014 and the
related consolidated statements of operations, stockholders' deficit, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 2014 and the results of their operations and their cash flows for the year then ended,
in conformity with U.S. generally accepted accounting principles.
As discussed in note 12, the Company restated its financial statements for the year ended January 31, 2014.
/s/ Kabani & Company, Inc.
Certified Public Accountants
Los Angeles, California
May 7, 2014 except for note 12 which is as of March 6, 2015 and note 9 which is as of April 24, 2015
F-3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and cash equivalents
Accounts receivable, net
Other receivables
Due from Affiliates
Prepaid expenses
Deferred financing costs, net, current
Total current assets
Deferred financing costs, net, non-current
Property and equipment, net
Restricted cash
Intangible assets, net
Goodwill
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
March 31,
March 31,
2015
2014
January 31,
2014
$
5,014,242 $
3,801,584
208,288
36,397
278,922
513,646
9,853,079
264,708
582,470
530,000
1,377,257
2,168,833
218,716
$ 14,995,063 $
6,831,478 $
1,508,461
-
24,041
42,200
-
8,406,180
366,286
94,948
20,000
59,627
494,700
41,636
9,483,377 $
1,451,407
1,509,589
-
1,599
53,543
97,806
3,113,944
144,345
85,685
20,000
62,427
494,700
38,681
3,959,782
Accounts payable and accrued liabilities
Medical liabilities
Notes and lines of credit payable, net of discount, current portion
Convertible notes payable, net of discount, current portion
Total current liabilities
Notes and lines of credit payable, net of discount, non-current portion
Convertible notes payable, net of discount, non-current portion
Warrant liability
Deferred tax liability
Total liabilities
$
3,352,204 $
1,260,549
327,141
1,037,818
5,977,712
6,234,721
1,457,103
2,144,496
171,215
15,985,247
1,442,086 $
552,561
322,230
-
2,316,877
5,467,099
962,978
2,354,624
4,954
11,106,532
1,087,660
285,625
3,178,693
-
4,551,978
-
1,100,522
-
-
5,652,500
COMMITMENTS, CONTINGENCIES and SUBSEQUENT EVENTS (Notes 10
and 11 )
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, 4,863,389,
4,913,455 and 4,695,247 shares issued and outstanding as of March 31, 2015,
March 31, 2014 and January 31, 2014, respectively
Additional paid-in-capital
Accumulated deficit
Stockholders' deficit attributable to Apollo Medical Holdings, Inc.
Non-controlling interests
Total stockholders' deficit
-
-
-
4,863
16,517,985
(19,340,521)
(2,817,673)
1,827,489
(990,184)
4,913
15,127,587
(17,537,920)
(2,405,420)
782,265
(1,623,155)
4,695
14,147,634
(16,771,478)
(2,619,149)
926,431
(1,692,718)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$ 14,995,063 $
9,483,377 $
3,959,782
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 OPERATIONS
Year Ended
March 31,
2015
Two Months
Ended March 31,
2014
Year Ended
January 31,
2014
$ 32,989,742 $
2,336,522 $ 10,484,305
22,067,421
11,282,221
334,434
33,684,076
2,050,913
826,870
5,765
2,883,548
9,076,213
5,286,610
31,361
14,394,184
(694,334)
(547,026)
(3,909,879)
Net revenues
Costs and expenses
Cost of services
General and administrative
Depreciation and amortization
Total costs and expenses
Loss from operations
Other (expense) income
Interest expense
Gain on change in fair value of warrant and conversion feature liabilities
Other
Total other expense
(1,326,407)
833,545
3,031
(489,831)
(184,578)
-
28,816
(155,762)
(679,184)
-
49,702
(629,482)
Loss before provision for income taxes
(1,184,165)
(702,788)
(4,539,361)
Provision for income taxes
Net loss
163,792
7,820
19,513
(1,347,957)
(710,608)
(4,558,874)
Net income attributable to noncontrolling interests
(454,644)
(55,834)
(461,424)
Net loss attributable to Apollo Medical Holdings, Inc.
$
(1,802,601) $
(766,442) $
(5,020,298)
NET LOSS PER SHARE:
BASIC AND DILUTED
$
(0.37) $
(0.16) $
(1.37)
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
BASIC AND DILUTED
4,891,652
4,717,521
3,666,165
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 STOCKHOLDERS' DEFICIT
Common
Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interests
Stockholders'
Deficit
Shares Amount
3,484,344 $
-
3,484 $10,663,912 $ (11,751,180) $
-
50,936
-
Balance at January 31, 2013
Issuance of warrants
Issuance of common stock for loan
fees
Issuance of stock for stock-based
compensation
Unvested stock-based
compensation
Issuance of stock options for stock-
based compensation
Shares issued in connection with
private placement offering
Shares issued in connection with
convertible notes redemption
Fair value of embedded conversion
feature reacquired in connection
with convertible notes redemption
Distributions to non-controlling
interest shareholder
Net loss
Balance at January 31, 2014
Net income (loss)
Stock-based compensation expense
Shares issued in NNA financing
8% notes share conversion
Distributions to non-controlling
interest
Balance at March 31, 2014
Net income (loss)
Issuance of warrants
Contribution by non-controlling
interest
Distributions to non-controlling
interest
Issuance of membership interest in
subsidiary
Stock-based compensation expense
Pre-acquisition net equity of non-
controlling interest in variable
interest entity
Repurchase of common stock
Partial shares paid out in connection
with 1 for 10 reverse stock split
Balance at March 31, 2015
10,000
10
44,990
137,167
137
718,236
-
-
-
333,838
- 1,252,378
182,500
183
729,817
881,236
881
863,417
-
-
(509,890)
-
-
-
-
-
-
-
-
-
4,695,247
-
-
200,000
18,208
-
4,913,455
-
-
-
-
-
-
-
(5,020,298)
4,695 14,147,634 (16,771,478)
(766,442)
-
-
-
-
60,187
868,036
51,730
-
-
200
18
-
-
-
4,913 15,127,587 (17,537,920)
(1,802,601)
-
-
132,000
-
-
-
-
-
-
-
-
-
-
-
-
- 1,258,848
-
(50,050)
-
(50)
-
(450)
-
-
-
-
-
-
692,405 $
-
(391,379)
50,936
-
45,000
12,602
730,975
-
333,838
-
1,252,378
-
730,000
-
864,298
-
(509,890)
(240,000)
461,424
926,431
55,834
-
-
-
(240,000)
(4,558,874)
(1,692,718)
(710,608)
60,187
868,236
51,748
(200,000)
782,265
454,644
-
(200,000)
(1,623,155)
(1,347,957)
132,000
725,278
725,278
(600,000)
(600,000)
274,148
-
274,148
1,258,848
191,154
-
191,154
(500)
(16)
4,863,389 $
-
-
-
4,863 $16,517,985 $ (19,340,521) $
-
1,827,489 $
-
(990,184)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
APOLLO MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
March 31,
2015
Two Months
Ended March 31,
2014
Year Ended
January 31,
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
$
(1,347,957) $
(710,608) $
(4,558,874)
Provision for doubtful accounts
Depreciation and amortization expense
Gain on extinguishment of debt
Gain on sale of marketable securities
Deferred income taxes
Stock-based compensation expense
Amortization of financing costs
Amortization of debt discount
Change in fair value of warrant and conversion feature liability
Changes in assets and liabilities:
Accounts receivable
Other receivable
Due from affiliates
Prepaid expenses and advances
Other assets
Accounts payable and accrued liabilities
Medical liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of $660,893 of cash and cash equivalents acquired during
the year ended March 31, 2015
Increase in cash on consolidation of variable interest entity
Proceeds from sale of marketable securities
Property and equipment acquired
Increase in restricted cash
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible note payable
Proceeds from line of credit
Proceeds from issuance of common stock
Principal payments on notes payable
Payment of line of credit payable
Payment of medical clinic acquisition notes payable
Payments in connection with convertible note redemption
Contributions by non-controlling interest
Distributions to non-controlling interest shareholder
Debt issuance costs
Repurchase of common stock
Net cash provided by financing activities
64,811
334,434
-
(49,791)
(51,922)
1,258,848
121,578
400,394
(833,545)
(912,205)
(188,236)
55,358
(118,054)
(106,510)
851,277
249,610
(271,910)
(3,356,145)
271,395
438,884
(44,509)
(510,000)
(3,200,375)
2,000,000
1,000,000
-
(936,083)
-
-
-
725,278
(600,000)
(533,646)
(500)
1,655,049
-
5,765
(23,000)
-
4,954
60,187
25,965
19,406
-
1,128
-
(22,442)
11,342
(2,952)
621,360
-
(8,895)
-
31,361
(24,783)
-
-
2,157,857
255,396
136,751
-
72,916
-
4,049
19,084
(27,700)
455,738
-
(1,478,205)
-
-
-
(12,228)
-
(12,228)
(250,000)
-
-
(22,931)
-
(272,931)
-
7,000,000
2,000,000
.
(2,811,878)
(256,000)
(98,252)
-
(200,000)
(232,676)
-
5,401,194
220,000
2,811,878
730,000
(530,000)
-
-
(707,911)
-
(240,000)
(258,151)
-
2,025,816
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS
(1,817,236)
5,380,071
274,680
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD
6,831,478
1,451,407
1,176,727
CASH & CASH EQUIVALENTS, END OF PERIOD
$
5,014,242 $
6,831,478 $
1,451,407
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
$
768,845 $
84,720 $
247,465
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Income taxes paid
$
32,197 $
3,824 $
19,513
$
Non-Cash Financing Activities:
Convertible note warrant
Convertible note conversion feature
Acquisition related warrant consideration
Acquisition related consideration fair value of units issued by consolidated
subsidiary
Acquisition related deferred tax liability
Pre-acquisition net equity of non-controlling interest in variable interest entity
NNA term loan discount
Shares issued in connection with convertible notes redemption
Fair value of warrant liabilities
NNA shares issuance discount
Shares issuable and issued for deferred financing costs
Notes payable issued in connection with medical clinic acquisitions
Settlement of stock issuable liability with issuance of shares
Fair value of embedded conversion feature reacquired in connection with
convertible notes redemption
487,620 $
578,155
132,000
274,148
218,183
191,154
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
1,254,363
51,748
2,354,624
1,100,261
-
-
-
50,936
-
-
-
-
-
-
864,298
-
-
45,000
299,900
159,334
-
509,890
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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. (the “Company” or “ApolloMed”) and its affiliated physician groups are a patient-centered, physician-
centric integrated healthcare delivery company working to provide coordinated, outcomes-based medical care in a cost-effective
manner. ApolloMed has built a company and culture that is focused on physicians providing high quality care, population
management and care coordination for patients, particularly for senior patients and patients with multiple chronic conditions.
ApolloMed serves Medicare, Medicaid and HMO patients and uninsured patients primarily in California, as well as in Mississippi and
Ohio (where our ACO has recently begun operations). We primarily provide services to patients that are covered by private or public
insurance, although we do derive a small portion of our revenue from non-insured patients. We provide care coordination services to
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.
ApolloMed’s physician network consists of hospitalists, primary care physicians and specialist physicians primarily through
ApolloMed’s owned and affiliated physician groups. ApolloMed operates through the following subsidiaries: Apollo Medical
Management, Inc. (“AMM”), Pulmonary Critical Care Management, Inc. (“PCCM”), Verdugo Medical Management, Inc. (“VMM”), and
ApolloMed Accountable Care Organization, Inc. (“ApolloMed ACO”). Through its wholly-owned subsidiary, AMM, ApolloMed
manages affiliated medical groups, which consist of ApolloMed Hospitalists (“AMH”), a hospitalist company, ApolloMed Care Clinic
(“ACC”), Maverick Medical Group, Inc. (“MMG”), AKM Medical Group, Inc. (“AKM”), Southern California Heart Centers (“SCHC”) and
Bay Area Hospitalist Associates, A Medical Corporation (BAHA). Through its wholly-owned subsidiary, PCCM, ApolloMed manages
Los Angeles Lung Center (“LALC”), and through its wholly-owned subsidiary VMM, ApolloMed manages Eli Hendel, M.D., Inc.
(“Hendel”). ApolloMed also has a controlling interest in ApolloMed Palliative Services, LLC (“ApolloMed Palliative”), which owns two
Los Angeles-based companies, Best Choice Hospice Care LLC (“BCHC”) and Holistic Health Home Health Care Inc. (“HCHHA”).
AMM, PCCM and VMM each operate as a physician practice management company and are in the business of providing
management services to physician practice corporations under long-term management service agreements, pursuant to which AMM,
PCCM or VMM, as applicable, manages all non-medical services for the affiliated medical group and has exclusive authority over all
non-medical decision making related to ongoing business operations. ApolloMed ACO participates in the Medicare Shared Savings
Program (“MSSP”), the goal of which is to improve the quality of patient care and outcomes through more efficient and coordinated
approach among providers. ApolloMed ACO participates in the MSSP, the goal of which is to improve the quality of patient care and
outcomes through more efficient and coordinated approach among providers.
Liquidity and Capital Resources
The Company has a history of operating losses and as of March 31, 2015 has an accumulated deficit of $19,340,521, and during the
year ended March 31, 2015 net cash used in operating activities was $271,910.
The primary sources of liquidity as of March 31, 2015 include cash on hand of $5,014,242 and availability under lines of credit of
approximately $380,000. Management has established a business plan, which they believe will result in future profitability. However,
the Company may require additional funding to meet certain obligations until sufficient cash flows are generated from anticipated
operations. Management believes that ongoing requirements for working capital, debt service and covenants compliance and planned
capital expenditures will be adequately funded from current sources for at least the next twelve months. If available funds are not
adequate, the Company may need to obtain additional sources of funds or reduce operations; however, there is no assurance that
the Company will be successful in doing so.
Change in Fiscal Year
On May 16, 2014, the Board of Directors of the Company approved a change to the Company's fiscal year end from January 31 to
March 31.
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company’s consolidated financial statements include the accounts of (1) Apollo Medical Holdings, Inc. and its wholly owned
subsidiaries AMM, PCCM, and VMM, (2) the Company’s controlling interest in ApolloMed ACO, and ApolloMed Palliative, a newly
formed entity which provides home health and hospice medical services and owns BCHC and HCHHA and in which a non-controlling
interest in ApolloMed Palliative contributed $586,111 in cash; and (3) physician practice corporations (“PPCs”) managed under long-
term management service agreements including AMH, MMG, ACC, LALC, Hendel, AKM, SCHC and BAHA. Some states have laws
that prohibit business entities, such as ApolloMed, 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, the Company operates by maintaining long-term management
service agreements with the PPCs, which are each owned and operated by physicians, and which employ or contract with additional
physicians to provide hospitalist services. Under the management agreements, the Company provides and performs all non-medical
management and administrative services, including financial management, information systems, marketing, risk management and
administrative support. Each management agreement typically has a term from 10 to 20 years unless terminated by either party for
cause. The management agreements are not terminable by the PPCs, except in the case of material breach or bankruptcy of the
respective PPM.
On February 17, 2015, AMM entered into a management services agreement with BAHA. BAHA was determined to be a variable
interest entity and AMM the primary beneficiary. The financial statements of BAHA have been consolidated as a variable interest
entity with those of the Company from February 17, 2015.
Through the management agreements and the Company’s relationship with the stockholders of the PPCs, the Company has
exclusive authority over all non-medical decision making related to the ongoing business operations of the PPCs. Consequently, the
Company consolidates the revenue and expenses of each PPC from the date of execution of the applicable management agreement.
All intercompany balances and transactions have been eliminated in consolidation.
Business Combinations
The Company uses the acquisition method of accounting for all business combinations, which requires assets and liabilities of the
acquiree to be recorded at fair value (with limited exceptions), to measure the fair value of the consideration transferred, including
contingent consideration, to be determined on the acquisition date, and to account for acquisition related costs separately from the
business combination.
Reportable Segments
The Company operates as one reportable segment, the healthcare delivery segment, and implements and operates innovative health
care models to create a patient-centered, physician-centric experience. The Company reports its consolidated financial statements in
the aggregate, including all activities in one reportable segment.
Revenue Recognition
Revenue consists of contracted, fee-for-service, and capitation revenue. Revenue is recorded in the period in which services are
rendered. 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 the Company’s billing arrangements and how net revenue is recognized for each.
Contracted revenue
Contracted revenue represents revenue generated under contracts for which the Company provides 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
the Company’s staff and contractors. Additionally, contract revenue also includes supplemental revenue from hospitals where the
Company may have a fee-for-service contract arrangement or provide physician advisory services to the medical staff at a 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
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, the Company derives a portion of the Company’s revenue as a contractual bonus
from collections received by the Company’s 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.
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fee-for-service revenue
Fee-for-service revenue represents revenue earned under contracts in which the Company bills and collects the professional
component of charges for medical services rendered by the Company’s contracted physicians. Under the fee-for-service
arrangements, the Company bills patients for services provided and receives payment from patients or their third-party payors. 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 payor 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 the Company’s billing center for medical coding and entering into the Company’s billing system and the
verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for
payment of such services. Revenue is recorded based on the information known at the time of entering of such information into the
Company’s billing systems as well as an estimate of the revenue associated with medical services.
Capitation revenue
Capitation revenue (net of capitation withheld to fund risk share deficits) is recognized in the month in which the Company is
obligated to provide services. Minor ongoing adjustments to prior months’ capitation, primarily arising from contracted health
maintenance organizations (each, an “HMO”) finalizing of monthly patient eligibility data for additions or subtractions of enrollees, are
recognized in the month they are communicated to the Company. Managed care revenues of the Company consist primarily of
capitated fees for medical services provided by the Company under a provider service agreement (“PSA”) or capitated arrangements
directly made with various managed care providers including HMO’s and management service organizations (“MSOs”). Capitation
revenue under the PSA and HMO contracts is prepaid monthly to the Company based on the number of enrollees electing the
Company as their healthcare provider. Additionally, Medicare pays capitation using a “Risk Adjustment model,” which compensates
managed care organizations and providers based on the health status (acuity) of each individual enrollee. Health plans and providers
with higher acuity enrollees will receive more and those with lower acuity enrollees will receive less. Under Risk Adjustment,
capitation is determined based on health severity, measured using patient encounter data. Capitation is paid on an interim basis
based on data submitted for the enrollee for the preceding year and is adjusted in subsequent periods after the final data is compiled.
Positive or negative capitation adjustments are made for Medicare enrollees with conditions requiring more or less healthcare
services than assumed in the interim payments. Since the Company cannot reliably predict these adjustments, periodic changes in
capitation amounts earned as a result of Risk Adjustment are recognized when those changes are communicated by the health plans
to the Company.
HMO contracts also include provisions to share in the risk for enrollee hospitalization, whereby the Company can earn additional
incentive revenue or incur penalties based upon the utilization of hospital services. Typically, any shared risk deficits are not payable
until and unless the Company generates future risk sharing surpluses, or if the HMO withholds a portion of the capitation revenue to
fund any risk share deficits. At the termination of the HMO contract, any accumulated risk share deficit is typically extinguished. Due
to the lack of access to information necessary to estimate the related costs, shared-risk amounts receivable from the HMOs are only
recorded when such amounts are known. Risk pools for the prior contract years are generally final settled in the third or fourth quarter
of the following fiscal year.
In addition to risk-sharing revenues, the Company also receives incentives under “pay-for-performance” programs for quality medical
care, based on various criteria. These incentives, which are included in other revenues, are generally recorded in the third and fourth
quarters of the fiscal year and are recorded when such amounts are known.
Under full risk capitation contracts, an affiliated hospital enters into agreements with several HMOs, pursuant to which, the affiliated
hospital provides hospital, medical, and other healthcare services to enrollees under a fixed capitation arrangement (“Capitation
Arrangement”). Under the risk pool sharing agreement, the affiliated hospital and medical group agree to establish a Hospital Control
Program to serve the enrollees, pursuant to which, the medical group is allocated a percentage of the profit or loss, after deductions
for costs to affiliated hospitals. The Company participates in full risk programs under the terms of the PSA, with health plans whereby
the Company is wholly liable for the deficits allocated to the medical group under the arrangement. The related liability is included in
medical liabilities in the accompanying consolidated balance sheets at March 31, 2015, March 31, 2014 and January 31, 2014 (see
"Medical Liabilities" in this Note 2, below).
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Medicare Shared Savings Program Revenue
The Company through its subsidiary, ApolloMed ACO, participates in the MSSP sponsored by the Centers for Medicare & Medicaid
Services (“CMS”). The MSSP allows ACO participants to share in cost savings it generates in connection with rendering medical
services to Medicare patients. Payments to ACO participants, if any, will be calculated annually by CMS on cost savings generated by
the ACO participant relative to the ACO participants’ CMS benchmark. The MSSP is a newly formed program with limited history of
payments to ACO participants. The Company considers revenue, if any, under the MSSP, as contingent upon the realization of
program savings as determined by CMS, and are not considered earned and therefore are not recognized as revenue until notice
from CMS that cash payments are to be imminently received.
During the second quarter of 2014, CMS announced that ApolloMed ACO generated $10.98 million in program savings from cost
savings created in connection with rendering medical services to Medicare patients in 2012. In connection with these cost savings,
the Company earned and received $5.38 million which has been reported in “Net revenue” in the consolidated financial statements
for the year ended March 31, 2015. Revenue from the MSSP is determined and awarded annually. Future ACO program savings for
services performed in calendar year 2013 and 2014 are not estimable.
Cash and Cash Equivalents
Cash and cash equivalents consists of highly liquid investments with an initial maturity of three months or less at date of purchase to
be cash equivalents.
Restricted Cash
Restricted cash primarily consists of cash held as collateral to secure standby letters of credits as required by certain contracts. The
certificates have an interest rate of 0.15%.
Goodwill and 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.
At least annually, 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 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 (i.e., fiscal year-end).
At least annually, indefinite-lived intangible assets are tested 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.
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, 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. The Company also regularly analyses
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.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Concentrations
The Company had major payors that contributed the following percentage of net revenue:
Medicare/Medi-Cal
L.A Care
Healthnet
Hollywood Presbyterian
California Hospital
Year Ended
March 31,
2015
Two Months
Ended
March 31,
2014
Year
Ended
January
31, 2014
34.8%
13.2%
12.3%
*
*
14.3%
12.1%
*
11.8%
11.6%
17.8%
*
*
15.9%
13.9%
Receivables from one of these payors amounted to the following percentage of total accounts receivable:
March 31,
2015
March 31,
2014
January 31,
2014
22.1%
21.7%
31.5%
Medicare/Medi-Cal
* Represents less than 10%
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. Property and equipment consisted of
the following:
Website
Computers
Software
Machinery and equipment
Furniture and fixtures
Leasehold improvements
March 31, 2015 March 31, 2014
$
4,568 $
125,478
165,439
355,988
88,939
402,035
1,142,447
(559,977)
582,470 $
January 31,
2014
4,568
31,010
165,439
143,920
43,366
49,780
438,083
(352,398)
85,685
4,568 $
40,397
165,439
143,920
37,394
56,144
447,862
(352,914)
94,948 $
Less accumulated depreciation and amortization
$
Depreciation and amortization expense was $207,063, $516, and $25,388 for the year ended March 31, 2015, the two months ended
March 31, 2014, and the year ended January 31, 2014, respectively.
Medical Liabilities
The Company is responsible for integrated care that the associated physicians and contracted hospitals provide to its enrollees under
risk-pool arrangements. The Company provides integrated care to health plan enrollees through a network of contracted providers
under sub-capitation and direct patient service arrangements, company-operated clinics and staff physicians. Medical costs for
professional and institutional services rendered by contracted providers are recorded as cost of services in the accompanying
consolidated statements of operations. Costs for operating medical clinics, including the salaries of medical personnel, are also
recorded in cost of services, while non-medical personnel and support costs are included in general and administrative expense.
F-12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in
the accompanying consolidated balance sheets. Medical liabilities include claims reported as of the balance sheet date and estimates
of incurred but not reported claims (“IBNR”). Such estimates are developed using actuarial methods and are based on many
variables, including the utilization of health care services, historical payment patterns, cost trends, product mix, seasonality, changes
in membership, and other factors. The estimation methods and the resulting reserves are periodically reviewed and updated. Many of
the medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of
various services. Such differing interpretations may not come to light until a substantial period of time has passed following the
contract implementation. The Company has a $20,000 per member professional stop-loss, none on institutional risk pools. Any
adjustments to reserves are reflected in current operations.
The Company’s medical liabilities was as follows:
Two
Months
Ended
March 31, 2014
Year Ended
January 31,
2014
Year Ended
March 31, 2015
Balance, beginning of period
$
552,561 $
285,625 $
-
Incurred health care costs:
Current year
4,211,231
167,000
288,601
Acquired medical liabilities (see Note 4 )
458,378
Claims paid:
Current year
Prior years
Total claims paid
(3,245,283)
(90,367)
(3,335,650)
-
-
-
-
Risk pool settlement
Accrual for net deficit from full risk capitation contracts
(384,869)
544,041
-
99,936
-
(2,976)
-
(2,976)
-
-
Adjustments
Balance, end of period
(785,143)
1,260,549 $
$
-
552,561 $
-
285,625
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Deferred Financing Costs
Costs relating to debt issuance have been deferred and are amortized over the lives of the respective loans, using the effective
interest method (see Note 6).
At March 31, 2015, there is approximately $514,000 of deferred financing costs related to the Company’s upcoming public offering
which is anticipated to close during the second quarter of fiscal 2016. These costs include legal, accounting and regulatory fees and
will be charged against the net proceeds from the offering.
Income Taxes
Federal and state income taxes are computed at currently enacted tax rates less tax credits using the asset and liability method.
Deferred taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax
rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently
payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items
of income and expense are recognized for financial reporting and income tax purposes, changes in the recognition of tax positions
and any changes in the valuation allowance caused by a change in judgment about the realizability of the related deferred tax assets.
A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
The Company uses a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or
expected to be taken in a tax return in order to be recognized in the financial statements. Once the recognition threshold is met, the
tax position is then measured to determine the actual amount of benefit to recognize in the financial statements.
Stock-Based Compensation
The Company maintains a stock-based compensation program for employees, non-employees, directors and consultants, which is
more fully described in Note 9. The value of stock-based awards so measured is recognized as compensation expense on a
cumulative straight-line basis over the vesting terms of the awards, adjusted for expected forfeitures. The Company sells certain of its
restricted common stock to its employees, directors and consultants with a right (but not obligation) of repurchase feature that lapses
based on performance of services in the future.
The Company accounts for share-based awards granted to persons other than employees and directors under ASC 505-50 Equity-
Based Payments to Non-Employees. As such the fair value of such shares is periodically re-measured using an appropriate valuation
model and income or expense is recognized over the vesting period .
Fair Value of Financial Instruments
The Company’s 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
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 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 NNA Term Loan and the Convertible Notes approximates fair value which is determined by using interest rates that are available
for similar debt obligations with similar terms at the balance sheet date.
Warrant liability
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The fair value of the warrant liability of $2,144,496 at March 31, 2015 issued in connection with the 2014 NNA financing was
estimated using the Monte Carlo valuation model which used the following inputs: term of 6.0 years, risk free rate of 1.53%, no
dividends, volatility of 57.4%, share price of $5.00 per share based on the trading price of the Company’s common stock adjusted for
a marketability discount, and a 100% probability of down-round financing. The fair value of the warrant liability of $2,354,624 at March
31, 2014 was estimated using the Monte Carlo valuation model which used the following inputs: term of 7 years, risk free rate of
2.31%, no dividends, volatility of 71.4%, share price of $4.50 per share based on the trading price of the Company’s common stock
adjusted for a marketability discount, and a 50% probability of down-round financing. At January 31, 2014, there was no warrant
liability.
Conversion feature liability
The fair value of the $442,358 conversion feature liability (included in convertible note payable) at March 31, 2015 issued in
connection with the 2014 NNA financing 8% Convertible Note was estimated using the Monte Carlo valuation model which used the
following inputs: term of 4.0 years, risk free rate of 1.1%, no dividends, volatility of 47.6%, share price of $5.00 per share based on the
trading price of the Company’s common stock adjusted for a marketability discount, and a 100% probability that the Company will
participate in a “down-round” financing at price per share lower than the initial NNA Financing 8% Convertible Note conversion price
of $10.00 per share.
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The carrying amounts and fair values of the Company's financial instruments are presented below as of:
March 31, 2015
Liabilities:
Warrant liability
Conversion feature liability
March 31, 2014
Liabilities:
Warrant liability
Fair Value Measurements
Level 1
Level 2
Level 3
Total
$
$
- $
-
- $
- $
-
- $
2,144,496 $
442,358
2,586,854 $
2,144,496
442,358
2,586,854
Fair Value Measurements
Level 1
Level 2
Level 3
Total
$
- $
- $
2,354,624 $
2,354,624
The following summarizes the activity of Level 3 inputs measured on a recurring basis for the year ended March 31, 2015 and for the
two months ended March 31, 2014:
Balance at February 1, 2014
Liability incurred (Note 7)
Balance at March 31, 2014
Liability incurred (Note 7)
Gain on change in fair value of warrant and conversion feature liability
Balance at March 31, 2015
Warrant
Liability
$
$
$
- $
2,354,624
2,354,624
487,620
(697,748)
2,144,496 $
Conversion
Feature
Liability
- $
-
-
578,155
(135,797)
442,358 $
Total
-
2,354,624
2,354,624
1,065,775
(833,545)
2,586,854
The change in fair value of the warrant and conversion feature liability of $833,545 for the year ended March 31, 2015 is included in
the accompanying consolidated statements of operations.
Non-controlling Interests
The non-controlling interests recorded in the Company’s consolidated financial statements includes the pre-acquisition equity of
those PPC’s in which the Company has determined that it has a controlling financial interest and for which consolidation is required
as a result of management contracts entered into with these entities owned by third-party physicians. The nature of these contracts
provide the Company with a monthly management fee to provide the services described above, and as such, the adjustments to non-
controlling interests in any period subsequent to initial consolidation would relate to either capital contributions or distributions by the
non-controlling parties as well as income or losses attributable to certain non-controlling interests. Non-controlling interests also
represent third-party minority equity ownership interests which are majority owned by the Company.
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Basic and Diluted Earnings per Share
Basic net income (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 income (loss) by the weighted average number of shares of
the Company’s common stock issued and outstanding during such period. Diluted net income (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.
The following table sets forth the number of shares excluded from the computation of diluted earnings per share, as their inclusion
would be anti-dilutive:
Options
Warrants
Convertible Notes
New Accounting Pronouncements
412,387
119,430
50,431
582,248
Year Ended March 31,
2015
Two Months Ended
March 31, 2014
434,430
143,550
-
577,980
Year Ended
January 31, 2014
514,651
156,202
-
670,853
In May 2014, the Financial Accounting Standards Board (“FASB”) amended the FASB Accounting Standards Codification and created
a new Topic ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). This amendment prescribes that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. The amendment supersedes the revenue recognition
requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the
Codification. For annual and interim reporting periods the mandatory adoption date of ASC 606 is January 1, 2017, and there will be
two methods of adoption allowed, either a full retrospective adoption or a modified retrospective adoption. The Company is currently
evaluating the impact of ASC 606, but as the current time does not know what impact the new standard will have on revenue
recognized and other accounting decisions in future periods, if any, nor what method of adoption will be selected if the impact is
material.
In August 2014, the FASB amended the FASB Accounting Standards Codification and amended Subtopic 205-40, “Presentation of
Financial Statements – Going Concern.” This amendment prescribes that an entity should evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one
year after the date that the financial statements are issued. The amendments will become effective for the Company’s annual and
interim reporting periods beginning April 1, 2017. The Company will begin evaluating going concern disclosures based on this
guidance upon adoption.
In November 2014, the FASB issued ASU No. 2014-17, Business Combinations: Pushdown Accounting. This ASU provides
companies with the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which
an acquirer obtains control of the acquired entity. The election to apply pushdown accounting can be made either in the period in
which the change of control occurred, or in a subsequent period. The Company has elected to apply push down accounting for the
AKM stand-alone financial statements. The Company’s adoption of this standard did not have a material effect on the consolidated
financial statements of the Company.
In January 2015, the FASB issued ASU No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of
Extraordinary Items. This standard update eliminates the concept of extraordinary items from generally accepted accounting
principles in the United States (U.S. GAAP) as part of an initiative to reduce complexity in accounting standards while maintaining or
improving the usefulness of the information provided to the users of the financial statements. The presentation and disclosure
guidance for items that are unusual in nature or occur infrequently will be retained and expanded to include items that are both
unusual in nature and infrequent in occurrence. This standard update is effective for fiscal years beginning after December 15, 2015;
however, earlier adoption is permitted. The adoption of this standard update is not expected to have a significant impact on our
consolidated financial statements.
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which is included in ASC 810,
Consolidation. This update changes the guidance with respect to the analyses that a reporting entity must perform to determine
whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised
consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal entities, (2) evaluating
fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary
determination, (4) the effect of related parties on the primary beneficiary determination, and (5) certain investment funds. The
guidance will be effective for the Company's interim and annual reporting periods beginning April 1, 2016. The standard allows the
Company to transition to the new model using either a full or modified retrospective approach, and early adoption is permitted. The
Company is currently evaluating the impact this standard will have on its business practices, financial condition, results of operations,
and disclosures.
In April 2015, the FASB) issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30). This ASU requires that debt
issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount
of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not
affected by this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after
December 15, 2015, and interim periods within those years. Early adoption is permitted for financial statements that have not been
previously issued and retrospective application is required for each balance sheet presented. The adoption of this standard update is
not expected to have a significant impact on the Company’s consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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. Actual results may materially differ from
these estimates under different assumptions or conditions.
Reclassifications
Certain reclassifications have been made to the accompanying January 31, 2014 consolidated financial statements to conform them
to March 31, 2014 and March 31, 2015 presentation. The reclassification is between deferred taxes and accounts payable and
accrued liabilities for $4,954 on the consolidated balance sheets and statement of cash flows. There is also a reclassification of
restricted cash of $20,000 from current assets to non currents assets on the consolidated balance sheets.
3. Acquisitions
Apollo Palliative Services LLC and Affiliates Acquisitions
On October 27, 2014, AMM made an initial capital contribution of $613,889 (the “Initial Contribution”) to ApolloMed Palliative (“APS”)
in exchange for 51% of the membership interests of ApolloMed Palliative. ApolloMed Palliative used the Initial Contribution, in
conjunction with funds contributed by other investors in ApolloMed Palliative, to finance the closing payments for the acquisitions
described immediately below. In connection with this arrangement, the Company entered into a consulting agreement with one of
ApolloMed Palliative’s members. The consulting agreement has a 6 year term, and provides for the member to receive $15,000 in
cash per month, and for the member to be eligible to receive stock-based awards under the Company’s 2013 Equity Incentive Plan as
determined by the Company’s Board of Directors. Immediately prior to closing the transactions described below, and as condition
precedent to ApolloMed Palliative closing the transactions, the selling equity owners in each transaction described below contributed
specific equity interests to ApolloMed Palliative in return for interests in ApolloMed Palliative pursuant to contributions agreements.
Best Choice Hospice Care LLC
Subject to the terms and conditions of that certain Membership Interest Purchase Agreement (the “BCHC Agreement”), dated October
27, 2014, by and among ApolloMed Palliative, the Company, the members of BCHC, and BCHC, ApolloMed Palliative agreed to
purchase all of the remaining membership interests in BCHC for $900,000 in cash and $230,862 of equity consideration in APS,
subject to reduction if BCHC’s working capital was less than $145,000 as of the closing of the transaction. APS agreed to pay a
contingent payment of up to a further $400,000 (the “BCHC Contingent Payment”) to one seller and one employee of BCHC. The
BCHC Contingent Payment will be paid in two installments of $100,000 to each of the seller and the employee within sixty days of
each of the first and second anniversaries of the transaction, and is contingent upon, as of each applicable date, the seller’s and the
employee’s employment, as applicable, continuing or having been terminated without cause and, for the employee, meeting certain
productivity targets. The Company absolutely, unconditionally and irrevocably guaranteed payment of the BCHC Contingent Payment
if ApolloMed Palliative fails to make any payment. The contingent payments were accounted for as post-combination compensation
consideration and will be accrued ratably over the two year term of the agreement. As of March 31, 2015, $109,848 has been
expensed and is included in accounts payable and accrued liabilities.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company accounted for the acquisition as a business combination using the acquisition method of accounting which requires,
among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date and be
recorded on the balance sheet. The process for estimating the fair values of identifiable intangible assets involves the use of
significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The value of
the 16% equity interest in APS of $230,862 was determined by aggregating the fair value of BCHC and HCHHA “refer below” which
are the only assets in APS and applying the 16% ownership interest in APS to the aggregated amount. The acquisition-date fair value
of the consideration transferred was as follows:
Cash consideration
Fair value of equity consideration
Working capital adjustment
$
$
900,000
230,862
(106,522)
1,024,340
Transaction costs are not included as a component of consideration transferred and were expensed as incurred. The related
transaction costs expensed for the year ended March 31, 2015 were approximately $110,000 and are included in general and
administrative expenses in the consolidated statements of operations.
Under the acquisition method of accounting, the total purchase price was allocated to the underlying tangible and intangible assets
acquired and liabilities assumed based on their respective fair values, with the remainder allocated to goodwill. Goodwill is deductible
for tax purposes. The final allocation of the total purchase price to the net assets acquired and liabilities assumed and included in the
Company’s consolidated balance sheet at March 31, 2015 is as follows:
$
$
77,020
253,193
467
7,130
532,000
398,467
1,268,277
243,937
243,937
1,024,340
Life
(yrs.)
Indefinite $
Additions
462,000
51,000
19,000
532,000
5
5
F-18
Cash and cash equivalents
Accounts receivable
Prepaid expenses and other current assets
Property and equipment
Identifiable intangible assets
Goodwill
Total assets acquired
Accounts payable and accrued liabilities
Total liabilities assumed
Net assets acquired
The intangible assets acquired consisted of the following:
Medicare license
Trade name
Non-compete agreements
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The fair value of the Medicare license was determined based on the present value of a five year projected opportunity cost of not
being able to operate with a Medicare license using a discount rate of 13%. The trade name was computed using the relief from
royalty method, assuming a 1% royalty rate, and the non-compete agreements were valued using a with-and-without method.
Holistic Health Home Health Care Inc.
Subject to the terms and conditions of that certain Stock Purchase Agreement (the “HCHHA Agreement”), dated October 27, 2014, by
and among ApolloMed Palliative, the sole shareholder of HCHHA, and HCHHA, ApolloMed Palliative agreed to purchase all of the
remaining shares of HCHHA for $300,000 in cash and $43,286 of equity consideration in APS, subject to reduction if HCHHA’s
working capital was less than $50,000 as of the closing of the transaction. ApolloMed Palliative agreed to pay a contingent payment
of up to a further $150,000 (the “HCHHA Contingent Payment”). The HCHHA Contingent Payment will be paid in two installments of
$75,000 to the seller within sixty days of each of the first and second anniversaries of the transaction, and is contingent upon, as of
each applicable date, the seller’s employment continuing or having been terminated without cause and the seller meeting certain
productivity targets. The contingent payments were accounted for as compensation consideration and will be accrued ratably over the
term of the agreement. As of March 31, 2015, $41,245 has been expensed and is included in accounts payable and accrued
liabilities.
The Company accounted for the acquisition as a business combination using the acquisition method of accounting which requires,
among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date and be
recorded on the balance sheet. The process for estimating the fair values of identifiable intangible assets involves the use of
significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The value of
the 3% equity interest in APS of $43,286 was determined by aggregating the fair value of BCHC and HCHHA which are the only
assets in APS and applying the 3% ownership interest in APS to the aggregated amount. The acquisition-date fair value of the
consideration transferred was as follows:
Cash consideration
Fair value of equity consideration
Working capital adjustment
$
$
300,000
43,286
(21,972)
321,314
Transaction costs are not included as a component of consideration transferred and were expensed as incurred. The related
transaction costs expensed for the year ended March 31, 2015 were approximately $16,000 and are included in general and
administrative expenses in the consolidated statements of operations.
Under the acquisition method of accounting, the total purchase price was allocated to the underlying tangible and intangible assets
acquired and liabilities assumed based on their respective fair values, with the remainder allocated to goodwill. Goodwill is not
deductible for tax purposes. The final allocation of the total purchase price to the net assets acquired and liabilities assumed and
included in the Company’s consolidated balance sheet at March 31, 2015 is as follows:
Cash and cash equivalents
Accounts receivable
Property and equipment
Identifiable intangible assets
Goodwill
Total assets acquired
Accounts payable and accrued liabilities
Deferred tax liability
Total liabilities assumed
Net assets acquired
F-19
$
(37,087)
149,599
3,035
284,000
268,989
668,536
232,570
114,652
347,222
321,314
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The intangible assets acquired consisted of the following:
Medicare license
Trade name
Non-compete agreements
Indefinite $
Life
(yrs.)
5
5
Additions
242,000
38,000
4,000
284,000
$
The fair value of the Medicare license was determined based on the present value of a five year projected opportunity cost of not
being able to operate with a Medicare License using a discount rate of 16.0%. The trade name was computed using the relief from
royalty method, assuming a 1% royalty rate, and the non-compete agreements were valued using a with-and-without method.
SCHC
On July 22, 2014, pursuant to a Stock Purchase Agreement dated as of July 21, 2014 (the “Purchase Agreement”) by and among the
SCHC, a Medical Corporation that provides professional medical services in Los Angeles County, California, the shareholders of
SCHC (the “Sellers”) and a Company affiliate, SCHC Acquisition, A Medical Corporation (the “Affiliate”), solely owned by Dr. Warren
Hosseinion as physician shareholder and the Chief Executive Officer of the Company, the Affiliate acquired all of the outstanding
shares of capital stock of SCHC from the Sellers. The purchase price for the shares was (i) $2,000,000 in cash, (ii) $428,391 to pay
off and discharge certain indebtedness of SCHC (iii) warrants to purchase up to 100,000 shares of the Company’s common stock at
an exercise price of $10.00 per share and (iv) a contingent amount of up to $1,000,000 payable, if at all, in cash. The acquisition was
funded by an intercompany loan from AMM, which also provided an indemnity in favor of one of the Sellers relating to certain
indebtedness of SCHC that remained outstanding following the closing of the acquisition. Following the acquisition of SCHC, the
Affiliate was merged with and into SCHC, with SCHC being the surviving corporation. The indebtedness of SCHC was paid off
following the acquisition and did not remain outstanding as of December 31, 2014.
In connection with the acquisition of SCHC, AMM entered into a management services agreement with the Affiliate on July 21, 2014.
As a result of the Affiliate’s merger with and into SCHC, SCHC is now the counterparty to this management services agreement and
bound by its terms. Pursuant to the management services agreement, AMM will manage all non-medical services for SCHC, will have
exclusive authority over all non-medical decision making related to the ongoing business operations of SCHC, and is the primary
beneficiary of SCHC, and the financial statements of SCHC will be consolidated as a variable interest entity with those of the
Company from July 21, 2014.
The Company accounted for the acquisition as a business combination using the acquisition method of accounting which requires,
among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date and be
recorded on the balance sheet. The process for estimating the fair values of identifiable intangible assets involves the use of
significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The
acquisition-date fair value of the consideration transferred was as follows:
Cash consideration
Fair value of warrant consideration
$
$
2,428,391
132,000
2,560,391
The fair value of the warrant consideration of $132,000 was classified as equity. and was determined using the Black-Scholes option
pricing model using the following inputs: share price of $5.40 (adjusted for a lack of control discount), exercise price of $1.00,
expected term of 4 years, volatility of 54% and a risk free interest rate of 1.35%.
F-20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
A contingent payment obligation of $1,000,000 was considered a post-combination transaction and therefore it will be recorded as
post-combination compensation expense over the term of the arrangement and not as purchase consideration. The compensation
expense will be accrued in each reporting period based upon achievement of certain physician productivity measures through June
30, 2016. Approximately $375,000 has been expensed during the year-ended March 31, 2015 of which $125,000 is included in
accounts payable and accrued liabilities as of March 31, 2015.
Transaction costs are not included as a component of consideration transferred and were expensed as incurred. The related
transaction costs expensed for the year ended March 31, 2015 were approximately $124,000, and are included in general and
administrative expenses in the consolidated statements of operations.
Under the acquisition method of accounting, the total purchase price was allocated to the underlying tangible and intangible assets
acquired and liabilities assumed based on their respective fair values, with the remainder allocated to goodwill. Goodwill is not
deductible for tax purposes. The final allocation of the total purchase price to the net assets acquired and liabilities assumed and
included in the Company’s consolidated balance sheet at March 31, 2015 is as follows:
Cash and cash equivalents
Accounts receivable
Receivable from affiliate
Prepaid expenses and other current assets
Property and equipment
Identifiable intangible assets
Goodwill
Other assets
Total assets acquired
Accounts payable and accrued liabilities
Note payable to financial institution
Deferred tax liability
Total liabilities assumed
Net assets acquired
The intangible assets acquired consisted of the following:
Network relationships
Trade name
Non-compete agreements
$
264,601
750,433
67,714
82,430
607,315
416,000
922,734
66,762
3,177,989
134,426
463,582
19,590
617,598
$
2,560,391
Life
(yrs.)
5
5
3
Additions
$
$
220,000
102,000
94,000
416,000
The network relationships were valued using the multi-period excess earnings method based on projected revenue and earnings over
a 5 year period. The trade name was computed using the relief from royalty method, assuming a 1% royalty rate, and the non-
compete agreements were valued using a with-and-without method.
F-21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
AKM
In May 2014, AMM entered into a management services agreement with AKM Acquisition Corp, Inc. (“AKMA”), a newly-formed
provider of physician services and an affiliate of the Company owned by Dr. Warren Hosseinion as a physician shareholder, to
manage all non-medical services for AKMA. AMM has exclusive authority over all non-medical decision making related to the ongoing
business operations of AKMA and is the primary beneficiary; consequently, AMM consolidated the revenue and expenses of AKMA
from the date of execution of the management services agreements. On May 30, 2014, AKMA entered into a stock purchase
agreement (the “AKM Purchase Agreement”) with the shareholders of AKM Medical Group, Inc. (“AKM”), a Los Angeles, CA-based
independent practice association. Immediately following the closing, AKMA merged with and into AKM, with AKM being the surviving
entity and assuming the rights and obligations under the management services agreement. Under the AKM Purchase Agreement all
of the issued and outstanding shares of capital stock of AKM were acquired for approximately $280,000, of which $140,000 was paid
at closing and $136,822 (the “Holdback Liability”) is payable, if at all, subject to the outcome of incurred but not reported risk-pool
claims and other contingent claims that existed at the acquisition date.
Under the AKM Purchase Agreement, former shareholders of AKM are entitled to be paid the Holdback Amount of up to
approximately $376,000 within 6 months of the Closing Date. No later than 30 days after the six month period, AKM will prepare a
closing statement which will state the actual cash position (as defined) (“Actual Cash Position”) of AKM. If the actual cash position of
AKM is less than $461,104 (the “Target Amount”), the former shareholders of AKM will pay the difference between the Target
Amount and the Actual Cash Position, which will be deducted from the Holdback Amount, but in no case will exceed the amount
previously paid to the former shareholders of AKM in connection with the transaction. If the Actual Cash Position exceeds the Target
Amount, then that difference will be added to the Holdback Amount. Any indemnification payment made by the former shareholders of
AKM will also be paid from the Holdback Amount; if the Holdback Amount is insufficient, the former shareholders of AKM are liable for
paying the balance, which cannot exceed amounts previously paid to the former shareholders of AKM under the AKM Purchase
Agreement. The Company determined the fair value was determined based on the cash consideration discounted at the Company's
cost of debt.
The Company accounted for the acquisition as a business combination using the acquisition method of accounting which requires,
among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date and be
recorded on the balance sheet. The process for estimating the fair values of identifiable intangible assets involves the use of
significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The
acquisition-date fair value of the consideration transferred was as follows:
Cash consideration
Holdback consideration paid to seller
Working capital adjustment paid to seller
Total purchase consideration
$
$
140,000
140,000
236,236
516,236
Under the acquisition method of accounting, the total purchase price was allocated to AKM’s net tangible assets based on their
estimated fair values as of the closing date, with the remainder allocated to goodwill. Goodwill is not deductible for tax purposes. The
allocation of the total purchase price to the net assets acquired and included in the Company’s consolidated balance sheet is as
follows:
Cash consideration
Holdback consideration
Total consideration
Cash and cash equivalents
Marketable securities
Accounts receivable
Prepaid expenses and other assets
Intangibles
Goodwill
Accounts payable and accrued liabilities
Deferred tax liability
Medical payables
Net assets acquired
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
$
$
$
$
140,000
376,236
516,236
356,359
389,094
31,193
26,311
213,000
83,943
(40,439)
(84,847)
(458,378)
516,236
The intangible assets acquired consisted of the following:
Payor relationships
Trade name
Non-compete agreements
F-22
Life
(yrs.)
5
4
3
Additions
$
$
107,000
66,000
40,000
213,000
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Transaction costs are not included as a component of consideration transferred and were expensed as incurred. The related
transaction costs expensed for the year ended March 31, 2015 were approximately $37,000.
Pro Forma Financial Information
The results of operations for BCHC, HCHHA, AKM and SCHC are included in the consolidated statements of operations from the
acquisition date of each. The pro forma results of operations are prepared for comparative purposes only and do not necessarily
reflect the results that would have occurred had the acquisitions occurred at the beginning of the years presented or the results which
may occur in the future. The following unaudited pro forma results of operations for the year ended March 31, 2015 assume the
BCHC, HCHHA, AKM and SCHC acquisitions had occurred on April 1, 2014:
Net revenue
Net loss
Basic and diluted loss per share
Year Ended
March 31, 2015
(unaudited)
$
$
$
37,036,240
(2,244,224)
(0.46)
From the applicable closing date to March 31, 2015, revenues and net loss related to AKM, SCHC, BCHC and HCHHA included the
accompanying consolidated statements of operations were $7,149,889 and $(568,269), respectively.
Medical Clinic Acquisitions
During the year ended January 31, 2014, ACC entered into three medical clinic acquisitions from third parties not affiliated with one
another, as follows:
Whittier
On September 1, 2013, ACC acquired certain assets, excluding working capital, of a medical clinic in the Los Angeles, California area
(“Whittier”). The Company accounted for the acquisition as a business combination using the acquisition method of accounting which
requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date
and be recorded on the balance sheet. The process for estimating the fair values of identifiable intangible assets involves the use of
significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates.
Under the acquisition method of accounting, the total purchase price is allocated to Whittier’s net tangible and intangible assets based
on their estimated fair values as of the closing date. The allocation of the total purchase price to the net assets acquired is included in
our consolidated balance sheet. The acquisition-date fair value of the consideration transferred and the total purchase consideration
allocated to the acquisition of the net tangible and intangible assets based on their estimated fair values were as of the closing date
as follows:
Cash consideration
Fair value of promissory note due to seller
Total purchase consideration
Property and equipment
Exclusivity Agreement
Noncompete Agreement
Goodwill
Total fair value of assets acquired
F-23
$
$
$
$
100,000
145,000
245,000
10,000
40,000
20,000
175,000
245,000
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The acquired intangible assets consists of an exclusivity agreement principally relating to an independent practice association and a
non-compete agreement with the selling physician. The weighted-average amortization period for such intangible assets acquired is
outlined in the table below:
Exclusivity Agreement
Noncompete Agreement
Total identifiable intangible assets
Weighted-average
Assets
Acquired
Amortization
Period (years)
$
$
40,000
20,000
60,000
4
5
Property and equipment fair value was determined using historical cost adjusted for usage and management estimates.
The fair value of the exclusivity and non-compete agreements was estimated using the income approach. The income approach uses
valuation techniques to convert future amounts to a discounted single present value amount. The measurement is based on the value
indicated by current market expectations about those future amounts. The fair value considered our estimates of future incremental
earnings that may be achieved by the intangible assets.
The promissory note issued will be paid in installments of $15,000 per month for ten months commencing 90 days from the closing
date under a non-interest bearing promissory note to be secured by the assets of the clinic. The Company determined the fair value of
the note using an interest rate of 5.45 % per annum to discount future cash flows, which is based on Moody’s Baa-rated corporate
bonds at the valuation date.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future
economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically,
the goodwill recorded as part of the acquisition includes benefits that the Company believes will result from gaining additional
expertise and intellectual property in the clinical care area and expand the reach of the Company’s Maverick Medical Group IPA.
Goodwill is not amortized and is not deductible for tax purposes.
Transaction costs are not included as a component of consideration transferred and were expensed as incurred. The related
transaction costs expensed for the year ended January 31, 2014 were approximately $7,500.
This acquisition was not considered a material business combination.
Fletcher
On January 6, 2014, ACC acquired certain assets, excluding working capital, of a medical clinic in the Los Angeles, California area
(“Fletcher”). The Company accounted for the acquisition as a business combination using the acquisition method of accounting which
requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date
and be recorded on the balance sheet. The process for estimating the fair values of identifiable intangible assets involves the use of
significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The
acquisition-date fair value of the consideration transferred was as follows:
Cash consideration
Fair value of promissory note due to seller
Total purchase consideration
$
75,000
73,400
$ 148,400
Under the acquisition method of accounting, the total purchase price is allocated to Fletcher’s net tangible and intangible assets
based on their estimated fair values as of the closing date. The allocation of the total purchase price to the net assets acquired and
included in our consolidated balance sheet is as follows:
F-24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Property and equipment
Noncompete Agreement
Goodwill
Total fair value of assets acquired
Estimated
Fair
Value
10,000
6,000
132,400
148,400
The acquired intangible assets consisted of an exclusivity agreement principally relating to an independent practice association and a
non-compete agreement with the selling physician. The weighted-average amortization period for such intangible assets acquired is
outlined in the table below:
Noncompete Agreement
Total identifiable intangible assets
Weighted-average
Assets
Acquired
Amortization
Period (years)
$
6,000
6,000
3
Property and equipment fair value was determined using their historical cost adjusted for usage and management estimates.
The fair value of the non-compete agreement was estimated using the income approach. The income approach uses valuation
techniques to convert future amounts to a single discounted present value amount. The measurement is based on the value indicated
by current market expectations about those future amounts. The fair value considered our estimates of future incremental earnings
that may be achieved by the intangible assets.
The promissory note issued will be paid in installments of $15,000 per month for five months commencing April 1, 2014 under a non-
interest bearing promissory note to be secured by the assets of the clinic. The Company determined the fair value of the note using
an interest rate of 5.30% per annum to discount future cash flows, which is based on Moody’s Baa-rated corporate bonds at the
valuation date.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future
economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically,
the goodwill recorded as part of the acquisition includes benefits that the Company believes will result from gaining additional
expertise and intellectual property in the clinical care area and expand the reach of the Company’s Maverick Medical Group IPA.
Goodwill is not amortized and is not deductible for tax purposes.
Transaction costs are not included as a component of consideration transferred and were expensed as incurred. The related
transaction costs expensed for the year ended January 31, 2014 were approximately $5,300.
Eagle Rock
On December 7, 2013 ACC, acquired certain assets, excluding working capital, of a medical clinic in the Los Angeles, California area
(“Eagle Rock”). The Company accounted for the acquisition as a business combination using the acquisition method of accounting
which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase
date and be recorded on the balance sheet. The process for estimating the fair values of identifiable intangible assets involves the
use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The
acquisition-date fair value of the consideration transferred as of the closing date is as follows:
Cash consideration
Fair value of promissory note due to seller
Total purchase consideration
$
$
75,000
81,500
156,500
F-25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Under the acquisition method of accounting, the total purchase price is allocated to Eagle Rock’s net tangible and intangible assets
based on their estimated fair values as of the closing date. The allocation of the total purchase price to the net assets acquired and
included in our consolidated balance sheet is as follows:
Noncompete Agreement
Goodwill
Total fair value of assets acquired
Estimated
Fair Value
$
$
2,400
154,100
156,500
The acquired intangible assets consists of an exclusivity agreement principally relating to an independent practice association and a
non-compete agreement with the selling physician. The weighted-average amortization period for such intangible assets acquired is
outlined in the table below:
Noncompete Agreement
Total identifiable intangible assets
Weighted-average
Amortization
Acquired Period (years)
Assets
$
2,400
2,400
3
Property and equipment fair value was determined using their historical cost adjusted for usage and management estimates.
The fair value of the non-compete agreement was estimated using the income approach. The income approach uses valuation
techniques to convert future amounts to a single discounted present value amount. Our measurement is based on the value indicated
by current market expectations about those future amounts. The fair value considered our estimates of future incremental earnings
that may be achieved by the intangible assets.
The promissory note issued will be paid in installments of $10,000 per month for eight months commencing March 1, 2014 under a
non-interest bearing promissory note to be secured by the assets of the clinic. The Company determined the fair value of the note
using an interest rate of 5.46 % per annum to discount future cash flows, which is based on based on index of Moody's Baa-rated
corporate bonds as of the valuation date.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future
economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically,
the goodwill recorded as part of the acquisition includes benefits that the Company believes will result from gaining additional
expertise and intellectual property in the clinical care area and expand the reach of the Company’s Maverick Medical Group IPA.
Goodwill is not amortized and is not deductible for tax purposes.
Transaction costs are not included as a component of consideration transferred and were expensed as incurred. The related
transaction costs expensed for the year ended January 31, 2014 were approximately $5,900.
This acquisition is not considered a material business combination.
F-26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. Goodwill and Intangible Assets
Goodwill
The following is a summary of goodwill activity:
Balance at January 31, 2014
Balance at March 31, 2014
Acquisition of AKM
Acquisition of SCHC
Acquisition of BCHC
Acquisition of HCHHA
Balance at March 31, 2015
Intangible Assets, Net
$
$
494,700
494,700
83,943
922,734
398,467
268,989
$
2,168,833
Intangible assets, net consisted of the following:
Indefinite -lived assets:
Medicare license
Amortized intangible assets:
Exclusivity
Non-compete
Payor relationships
Network relationships
Trade name
Totals
Weighted-
average life
(Yrs.)
Balance at
January
31, 2014 Additions
Balance at
March 31,
2014
Additions
Balance at
March 31,
2015
$
- $
- $
- $
704,000 $
704,000
4
4
5
5
5
40,000
28,400
-
-
-
68,400
-
-
-
-
-
-
40,000
28,400
-
-
-
-
157,000
107,000
220,000
257,000
68,400 1,445,000
40,000
185,400
107,000
220,000
257,000
1,513,400
Accumulated amortization
(5,973)
(2,800)
(8,773)
(127,370)
(136,143)
Total intangibles, net
$
62,427 $
(2,800) $
59,627 $ 1,317,630 $
1,377,257
Included in depreciation and amortization on the consolidated statements of operations is amortization expense of $127,371, $2,800
and $5,973 for the year ended March 31, 2015, two months ended March 31, 2014 and year ended January 31, 2014, respectively.
Future amortization expense is estimated to be as follows for each for the five years ending March 31 thereafter:
2016
2017
2018
2019
2020
Total
$
$
186,167
185,001
146,537
114,658
40,894
673,257
F-27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
Accounts payable
Physician share of MSSP
Accrued compensation
Income taxes payable
Accrued interest
Accrued professional fees
6. Notes and Lines of Credit Payable
Notes and lines of credit payable consist of the following:
March 31,
March 31,
January 31,
2015
1,377,817 $
62,000
1,469,132
185,051
55,529
202,675
3,352,204 $
2014
819,380 $
-
546,078
4,149
19,780
52,699
1,442,086 $
2014
467,636
-
452,562
287
47,722
119,453
1,087,660
$
$
Term loan payable to NNA due March 28, 2019, net of debt discount of
$1,060,401 (March 31, 2015) and $1,305,435 (March 31, 2014)
Line of credit payable to NNA due March 28, 2019
Unsecured revolving line of credit due to financial institution due June 5, 2016
Medical Clinic Acquisition Promissory Notes
Secured Revolving Credit Facility
March 31,
March 31,
January 31,
2015
2014
2014
$
$
5,467,098 $
1,000,000
94,764
-
-
6,561,862 $
5,694,565 $
-
94,764
-
-
5,789,329 $
-
-
94,764
272,051
2,811,878
3,178,693
F-28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
NNA Credit Agreements
On October 15, 2013, the Company entered into a $2.0 million secured revolving credit facility (the “Revolving Credit Agreement”)
with NNA of Nevada, Inc., (“NNA), an affiliate of Fresenius Medical Care North America. On December 20, 2013 the Company
entered into the First Amendment to the Credit Agreement (the “Amended Credit Agreement”), which increased the revolving credit
facility from $2 million to $4 million. The proceeds of the Amended Credit Agreement were used by the Company to repay the
Medical Clinic Acquisition Promissory Notes, to repay the Senior Secured Note (8%) with SpaGus Capital Partners, LLC, to refinance
certain other indebtedness of the Company, and for working capital and for general corporate purposes. The Amended Credit
Agreement was refinanced on March 28, 2014 in connection with 2014 NNA financing.
2014 NNA Financing
On March 28, 2014, the Company entered into a Credit Agreement (the “Credit Agreement”) pursuant to which NNA, extended to the
Company (i) a $1,000,000 revolving line of credit (the “Revolving Loan”) and (ii) a $7,000,000 term loan (the “Term Loan”). The
Company drew down the full amount of the Revolving Loan on October 23, 2014. The Term Loan and Revolving Loan mature on
March 28, 2019, subject to NNA’s right to accelerate payment on the occurrence of certain events. The Term Loan may be prepaid at
any time without penalty or premium. The loans extended under the Credit Agreement are secured by substantially all of the
Company’s assets, and are guaranteed by the Company’s subsidiaries and consolidated medical corporations. The guarantees of
these subsidiaries and consolidated entities are in turn secured by substantially all of the assets of the subsidiaries and consolidated
entities providing the guaranty.
Concurrently with the Credit Agreement, the Company entered into a Pledge and Security Agreement with NNA (the “Pledge and
Security Agreement”), whereby all of the issued and outstanding shares, interests or other equivalents of capital stock of a direct
subsidiary of the Company (not including any entity that carries on the practice of medicine) are considered pledged interests.
Pledged interests as of the date of the Pledge and Security Agreement include 100% of AMM, PCCM, VMM common stock and
72.77% of ApolloMed ACO common stock.
Concurrently with the Credit Agreement, the Company entered into an Investment Agreement with NNA (the “Investment
Agreement”), pursuant to which it issued to NNA an 8% Convertible Note in the original principal amount of $2,000,000 (the
“Convertible Note”). The Company drew down the full principal amount of the Convertible Note on July 30, 2014 (see Note 7). The
Convertible Note matures on March 28, 2019, subject to NNA’s right to accelerate payment on the occurrence of certain events. The
Company may redeem amounts outstanding under the Convertible Note on 60 days’ prior notice to NNA. Amounts outstanding under
the Convertible Note are convertible at NNA’s sole election into shares of the Company’s common stock at an initial conversion price
of $10.00 per share. The Company’s obligations under the Convertible Note are guaranteed by its subsidiaries and consolidated
medical corporations.
On February 6, 2015, the Company entered into a First Amendment and Acknowledgement (the “Acknowledgement”) with NNA,
Warren Hosseinion, M.D., and Adrian Vazquez, M.D. The Acknowledgement amended some provisions of, and/or provided waivers in
connection with, each of (i) the Registration Rights Agreement between the Company and NNA, dated March 28, 2014 (the
“Registration Rights Agreement”), (ii) the Investment Agreement, (iii) the NNA Convertible Note, and (iv) the NNA Warrants. The
amendments to the Registration Rights Agreement included amendments with respect to the timing of the filing deadline for a resale
registration statement for the benefit of NNA.
Under the Investment Agreement, the Company issued to NNA warrants to purchase up to 300,000 shares of the Company’s
common stock at an initial exercise price of $10.00 per share and warrants to purchase up to 200,000 shares of the Company’s
common stock at an initial exercise price of $20.00 per share (collectively, the “Warrants”).
The Company determined the fair value of the proceeds of $9.0 million in part based on the following inputs for the warrant liability:
term of 7 years, risk free rate of 2.31%, no dividends, volatility of 71.4%, share price of $4.50 per share and a 50% probability of
down-round financing. The common stock issuance was recorded at $899,739 (a discount of $1,100,261 to the face amount), the
Term Loan was recorded at $5,745,637 (a discount of $1,254,363 to the face amount), and a corresponding warrant liability of
$2,354,624 was recorded.
The Term Loan accrues interest at a rate of 8.0% per annum. A portion of the principal amount of the Term Loan is repaid on the last
business day of each calendar quarter, which provides for quarterly payments of $87,500 in the first year, $122,500 in the second
year, $122,500 in the third year, $175,000 in the fourth year, and $210,000 in the fifth year. The Term Loan reflected an original issue
discount of $1,305,435 associated with the issuance of 300,00 warrants to acquire the Company’s common stock (see Note 9) and
payment of a fee to NNA of $80,000 of which $51,072 was considered a debt discount, $7,998 was recorded to equity, and $20,930
allocated to warrant liability was immediately recorded as interest expense. The discount will be amortized to interest expense over
the expected term of the loan using the effective interest method.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
F-29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Revolving Loan bears interest at the rate of three month LIBOR plus 6.0% per annum. The Company had borrowed $1,000,000
under the Revolving Loan at March 31, 2015 and zero at March 31, 2014. As of March 31, 2015, there are no remaining amounts
available to be borrowed under the Revolving Loan. The Term Loan and Revolving Loan mature on March 28, 2019.
The Company incurred $235,119 in third party costs related to the 2014 NNA financing, which were allocated to the related debt and
equity instruments based on their relative fair values, of which $150,101 was classified as deferred financing costs which will be
deferred and amortized over the life of the loan using the effective interest method.
The Credit Agreement and the Convertible Note provide for certain financial covenants. On February 16, 2015, the Company and
NNA agreed to amend the tangible net worth covenant computation. The Company was in compliance with the amended financial
covenants as of March 31, 2015.
In addition, the Credit Agreement and the Convertible Note include: (1) certain negative covenants that, subject to exceptions, limit
the Company’s ability to, among other things incur additional indebtedness, engage in future mergers, consolidations, liquidations
and dissolutions, sell assets, pay dividends and distributions on or repurchase capital stock, and enter into or amend other material
agreements; and (2) certain customary representations and warranties, affirmative covenants and events of default, which are set
forth in more detail in the 2014 NNA financing credit agreement and Convertible Note.
Unsecured revolving line of credit
Included in “Notes and lines of credit payable” in the accompanying consolidated balance sheet is a $100,000 revolving line of credit
with a financial institution of which $94,764 was outstanding at March 31, 2015, March 31, 2014, and January 31, 2014. Borrowings
under the line of credit bear interest at the prime rate (as defined) plus 4.50% (7.75% per annum at March 31, 2015, 7.75% per
annum at March 31, 2014 at 7.75% at January 31, 2014), interest only is payable monthly, and the line of credit matures June 5,
2016. The line of credit is unsecured.
Medical Clinic Acquisition Promissory Notes
In connection with the September 1, 2013 acquisition of a Los Angeles, CA medical clinic, ACC issued a non-interest bearing
promissory note to the seller, which was due in ten installments of $15,000 per month commencing December 1, 2013. The
Company determined the fair value of the note using an interest rate of 5.45% per annum to discount future cash flows, which was
based on Moody’s Baa-rated corporate bonds at the valuation date. The note was secured by substantially all assets of the clinic.
In connection with the January 6, 2014 acquisition of Fletcher Medical Clinic, ACC issued a non-interest bearing promissory note to
the seller, which was due in installments of $15,000 per month for five months commencing April 1, 2014 under a non-interest bearing
promissory note. The Company determined the fair value of the note using an interest rate of 5.30% per annum to discount future
cash flows, which was based on Moody’s Baa-rated corporate bonds at the valuation date. The note was secured by substantially all
assets of the acquired clinic.
In connection with the December 7, 2013 acquisition of Eagle Rock Medical Clinic, ACC issued a non-interest bearing promissory
note to the seller, which was due in installments of $10,000 per month for eight months commencing March 1, 2014 under a non-
interest bearing promissory. The Company determined the fair value of the note using an interest rate of 5.46 % per annum to
discount future cash flows, which was based on based on index of Moody's Baa-rated corporate bonds at of the valuation date. The
note was secured by substantially all assets of the acquired clinic.
The medical clinic acquisition promissory notes described above were repaid in connection with the equity and debt financing with
NNA of Nevada, Inc. that closed on March 28, 2014 (see 2014 NNA financing above).
Senior Secured Note
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.
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 in the amount of $500,000 provided
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 matured and was repaid, including accrued unpaid interest, on
October 16, 2013.
Other lines of credit
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LALC has a line of credit of $230,000 as of March 31, 2015. The Company has borrowed zero under this line of credit as of March 31,
2015.
BAHA has a line of credit of $150,000 as of March 31, 2015. The Company has borrowed zero under this line of credit as of March
31, 2015. The line of credit is subject to renewal on April 27, 2016.
Interest expense associated with the notes and lines of credit payable consisted of the following:
Year Ended March
31, 2015
Two Months Ended
March 31, 2014
Year Ended
January 31, 2014
68,634
161,091
229,725
38,260 $
13,880
52,140 $
Interest expense
Amortization of loan fees and discount
595,067 $
288,054
883,121 $
$
$
F-30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
7. Convertible Notes Payable
Convertible notes payable consist of the following:
9% Senior Subordinated Convertible Notes due February 15, 2016, net of debt
discount of $62,682 (March 31, 2015), $137,393 (March 31, 2014) and $149,478
(January 31, 2014)
8% Convertible Note Payable to NNA due March 28, 2019, net of debt discount
of $985,255 (March 31, 2015)
Conversion feature liability
Other convertible note
March 31,
March 31,
January 31,
2015
2014
2014
$
1,037,818 $
962,978 $
950,522
1,014,745
442,358
-
2,494,921 $
-
-
-
962,978 $
-
-
150,000
1,100,522
$
9% Senior Subordinated Convertible Notes due February 15, 2016
The 9% Notes, issued January 31, 2013, bear interest at a rate of 9% per annum, payable semi-annually on August 15 and February
15, and mature February 15, 2016, and are subordinated. 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 $4.00 per share of the Company’s common stock, subject to adjustment
for stock splits, stock dividends and reverse stock splits. On 60 days’ prior notice, 9% Notes are 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 9% Notes are callable at a price of 105% of the 9% Notes’ par value, and if the ADVT is less
than $100,000, the 9% Notes are callable at a price of 110% of the 9% Notes’ par value.
In connection with the issuance of the 9% Notes, the holders of the 9% Notes received warrants to purchase 66,000 shares of the
Company’s common stock at an exercise price of $4.50 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, and were classified in equity. The $186,897 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: term of 5.0 years, risk free rate of 0.70%, and volatility of 36.7%.
8% Convertible Note Payable to NNA
The NNA 8% Convertible Note commitment provided for the Company to borrow up to $2,000,000. On July 31, 2014, the Company
exercised its option to borrow $2,000,000, received $2,000,000 of proceeds and recorded a debt discount of $1,065,775 related to the
fair value of a conversion feature liability and a warrant liability discussed below. Borrowings bear interest at the rate of 8.0 % per
annum payable semi-annually, are due March 28, 2019, and are convertible into shares of the Company’s common stock initially at
$10.00 per share. The conversion price will be subject to adjustment in the event of subsequent down-round equity financings, if any,
by the Company. The conversion feature included a non-standard anti-dilution feature that has been bifurcated and recorded as a
conversion feature liability at the issuance date of $578,155. The fair value of the conversion feature liability issued in connection with
2014 NNA financing 8% Convertible Note at March 31, 2015 was estimated using the Monte Carlo valuation model which used the
following inputs: term of 4.0 years, risk free rate of 1.1%, no dividends, volatility of 47.6%, share price of $4.25 per share based on the
trading price of the Company’s common stock adjusted for a marketability discount, and a 100% probability of down-round financing.
In addition the Company was required to issue 100,000 warrants to NNA with an exercise price of $10.00 per share. The fair value of
the warrant liability related to 100,000 common shares issuable in connection with NNA 8% Convertible Note as of March 31, 2015
was estimated using the Monte Carlo valuation model which used the following inputs: term of 6.0 years, risk free rate of 1.5%, no
dividends, volatility of 57.4%, share price of $4.25 per share based on the trading price of the Company’s common stock adjusted for
a marketability discount, and a 100% probability of down-round financing.
8% Senior Subordinated Convertible Promissory Notes due February 1, 2015
On or about February 21, 2013, the Company redeemed the 8% Senior Subordinated Convertible Promissory Notes for cash and/or
conversion into shares of the Company’s common stock.
Interest expense associated with the convertible notes payable consisted of the following:
Interest expense
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Year Ended March
31, 2015
Two Months Ended
March 31, 2014
Year Ended January
31, 2014
$
209,369 $
18,518 $
218,403
Amortization of loan fees and discount
$
229,156
438,525 $
24,452
42,970 $
231,055
449,458
Aggregate maturities of long term debt at March 31, 2015, gross of discount and net of conversion feature liability, are as follows:
2016
2017
2018
2019
$ 1,684,765
490,000
700,000
7,847,500
$10,722,265
F-31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
8. Income Taxes
Income tax provision (benefit) consists of the following:
Current
Federal
State
Deferred
Federal
State
Year Ended
March 31,
2015
Two Months
Ended
March 31,
2014
Year Ended
January 31,
2014
$
147,945 $
67,769
215,714
(36,390)
(15,532)
(51,922)
- $
2,866
2,866
3,855
1,099
4,954
-
19,513
19,513
-
-
-
Provision for income taxes
$
163,792 $
7,820 $
19,513
The Company uses the liability method of accounting for income taxes as set forth in ASC 740. 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 March 31, 2015, the Company had federal and California tax net operating loss carryforwards of approximately $6.6
million and $6.6 million, respectively. The federal and California net operating loss carryforwards will expire at various dates from
2026 through 2035. 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 (liabilities) as of March 31, 2015, March 31, 2014 and January 31, 2014
are shown below. A valuation allowance of $4,447,029, $3,963,239 and $4,163,638 as of March 31, 2015, March 31, 2014 and
January 31, 2014, 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:
Current deferred tax assets:
State taxes - current
Stock options
Accrued payroll and related costs
Accrued hospital pool deficit
Other
Net current deferred tax assets before valuation allowance
Valuation Allowance
Net current deferred tax assets
Noncurrent deferred tax (liabilities) assets:
Net operating loss carryforward
Property and equipment
Acquired intangible assets
Other
Net noncurrent deferred tax liabilities before valuation allowance
Valuation Allowance
Net noncurrent deferred tax liabilities
Net deferred tax liabilities
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
March 31,
2015
March 31,
2014
January 31,
2014
17,062
2,177,276
1,529
-
65,920
2,261,787
(2,234,631)
27,156
589
1,675,822
1,529
28,649
-
1,706,589
(1,706,589)
-
2,208,522
(3,170)
(194,883)
3,558
2,014,027
(2,212,398)
(198,371)
(171,215) $
2,248,422
-
(4,954)
8,228
2,251,696
(2,256,650)
(4,954)
(4,954) $
$
3,808
1,649,986
1,529
28,649
-
1,683,972
(1,683,972)
-
-
1,990,962
-
-
488,704
2,479,666
(2,479,666)
-
-
The provision for income taxes differs from the amount computed by applying the federal income tax rate as follows:
Tax provision at U.S. Federal statutory rates
State income taxes net of federal benefit
Non-deductible permanent items
Non-taxable entities
Other
Change in valuation allowance
Effective income tax rate
Year Ended
March 31, 2015
Two Months Ended
March 31, 2014
Year Ended
January 31, 2014
34.0%
(3.2)%
(5.9)%
(4.3)%
0.5%
(34.9)%
(13.8)%
34.0%
(0.4)%
(0.1)%
0.3%
(0.1)%
(34.8)%
(1.1)%
34.0%
(0.3)%
(0.1)%
-
3.2%
(37.2)%
(0.4)%
As of March 31, 2015, March 31, 2014, and January 31, 2014, 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, 2011 through
2015. The Company does not anticipate material unrecognized tax benefits within the next 12 months.
F-32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
9. Stockholders’ Equity
Reverse Stock Split
On April 24, 2015, the Company filed an amendment to its articles of incorporation to effect a 1-for-10 reverse stock split of its
common stock, effective April 27, 2015. All share and per share amounts relating to the common stock, stock options and warrants to
purchase common stock, including the respective exercise prices of each such option and warrant, and the conversion ratio of the
Notes included in the financial statements and footnotes have been retroactively adjusted to reflect the reduced number of shares
resulting from this action. The par value and the number of authorized, but unissued, shares were not adjusted as a result of the
reverse stock split. No fractional shares will be issued following the reverse stock split and the Company has paid cash in lieu of any
fractional shares resulting from the reverse stock split.
Common Stock Placement
On March 28, 2014, the Company entered into an equity and debt investment for up to $12.0 million with NNA. As part of the
investment, the Company entered into the Investment Agreement with NNA, pursuant to which the Company sold NNA 200,000
shares of the Company’s common stock (the “Purchased Shares”) at a purchase price of $10.00 per share. In addition with the
issuance of common shares, the Company issued to NNA 100,000 warrants to purchase the Company’s common stock for $10.00
per share. The Company used the Monte Carlo Method to value the warrants, which used the following inputs: term of 7 years, risk
free rate of 2.31%, no dividends, volatility of 71.4%, share price of $4.50 per share and a 50% probability of down-round financing.
The Company determined that the fair value of the shares issued was approximately $900,000, or $868,236 after the relative fair
value adjustment, which approximates $4.50 per share. The Company also entered into a registration rights agreement (“RRA”) with
NNA, which the Company and NNA amended on February 6, 2015, which requires the Company to file a registration statement to
register its shares with the SEC no later than June 26, 2015. Effective July 7, 2015, the Company amended the First Amendment to
extend the previous registration statement deadline to October 24, 2015. The RRA requires the Company to use commercially
reasonable best efforts to cause the RRA to be declared effective by the SEC. If the Initial Registration Statement is not filed with the
SEC on or prior to the filing deadline, the Company must pay to NNA an amount in common stock based upon its then fair market
value, as liquidated damages equal to 1.50% of the aggregate purchase price paid by NNA.
During the year ended January 31, 2014, the Company issued 18,250 shares of common stock for proceeds of $730,000.
Repurchase of Common Stock
On October 23, 2014, the Company entered into a Settlement Agreement with Raouf Khalil (“Khalil”) whereby the Company
reconveyed to Khalil all of the shares of Aligned Healthcare, Inc. (“AHI”) common stock that the Company acquired from Khalil under
the Stock Purchase Agreement, dated as of February 15, 2011 (the “Purchase Agreement”). In addition, in consideration of a $10,000
cash payment, Khalil reconveyed to the Company 50,000 shares of the Company’s common stock, constituting all of the remaining
shares that he still owned that were issued to him under the Purchase Agreement. Following these reconveyances, the Company no
longer owns any of the outstanding shares of AHI’s capital stock, and neither Khalil nor any of the other Aligned Affiliates own any
shares of the Company’s capital stock.
Equity Incentive Plans
The Company’s amended 2010 Equity Incentive Plan (the “2010 Plan”) allowed the Board to grant up to 1,200,000 shares of the
Company’s common stock, and provided for awards including incentive stock options, non-qualified options, restricted common stock,
and stock appreciation rights. As of March 31, 2015, there were no shares available for grant.
On April 29, 2013 the Company’s Board of Directors approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”), pursuant
to which 500,000 shares of the Company’s common stock were reserved for issuance thereunder. The Company received approval of
the 2013 Plan from the Company’s stockholders on May 19, 2013. The Company issues new shares to satisfy stock option and
warrant exercises under the 2013 Plan. As of March 31, 2015 there were approximately 48,600 shares available for future grants
under the 2013 Plan.
Share Issuances
A summary of the Company’s restricted stock sold to employees, directors and consultants with a right of repurchase of unlapsed or
unvested shares is as follows:
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
F-33
Weighted
Average
Remaining
Vesting
Life
(In years)
1.5
-
-
-
1.3 $
-
-
-
0.3 $
Shares
101,296
-
(10,555)
-
90,741
-
(78,519)
-
12,222
Unvested or unlapsed shares at January 31, 2014
Granted
Vested/lapsed
Forfeited
Unvested or unlapsed shares, beginning of period at March 31,
2014
Granted
Vested / lapsed
Forfeited
Unvested or unlapsed shares at March 31, 2015
Options
Weighted
Average
Per Share
Intrinsic
Value
Weighted-
average
Per Share
Grant Date
Fair Value
4.10
- $
-
-
-
-
-
-
- $
-
-
-
0. 50 $
4.10
-
-
-
4.10
In July 2014, the Company issued 56,500 options to acquire the Company’s common stock to certain employees and consultants.
The Company determined that the weighted average fair value of the options of $2.80 per share using the Black-Scholes method with
the following weighted-average inputs: term of 6 years, risk free rate of 1.63%, no dividends, volatility of 63.7%, exercise price of
$10.00 per share, share price of $5.90 per share.
In October 2014, in connection with services provided to the Company, the Company issued to various employees and consultants
options to purchase an aggregate of 7,500 shares of common stock of the Company, which options have an exercise price of $10.00
and vest evenly and monthly over a three year period. The Company determined that the weighted average fair value of the options
of $1.70 per share using the Black-Scholes method with the following weighted-average inputs: term of 6 years, risk free rate of
1.62%, no dividends, volatility of 62.9%, share price of $4.30 per share.
On various dates in October, November and December 2014, in connection with services provided to the Company, the Company
issued to a certain consultant options to purchase an aggregate of 1,500 shares of common stock of the Company, which options
have an exercise price of $10.00 and vested upon grant. The Company determined that the weighted average fair value of the
options of $1.50 per share using the Black-Scholes method with the following weighted-average inputs: term of 6 years, risk free rate
of 1.62%, no dividends, volatility of 62.9%, share price of $3.90 per share.
On November 18, 2014, in connection with services provided to the Company, the Company issued options to purchase 10,000
shares of common stock of the Company to an employee, which options have an exercise price of $10.00 and vest evenly and
monthly over a one year period. The Company determined that the weighted average fair value of the options of $1.80 per share
using the Black-Scholes method with the following weighted-average inputs: term of 6 years, risk free rate of 1.47%, no dividends,
volatility of 62.1%, share price of $4.60 per share.
On December 13, 2014, in connection with services provided to the Company, the Company issued to various physicians and
consultants options to purchase 10,000 shares of common stock of the Company, which options have an exercise price of $10.00 and
vest evenly and monthly over a three year period. The Company determined that the weighted average fair value of the options of
$1.50 per share using the Black-Scholes method with the following weighted-average inputs: term of 6 years, risk free rate of 1.62%,
no dividends, volatility of 62.9%, share price of $3.90 per share.
In December 2014, the Company issued 6,000 options to an employee. The Company determined that the weighted average fair
value of the options of $1.20 using the Black Scholes method with the following inputs: term of 6 years / risk free rate of 1.47%, no
dividends, volatility of 62.1%, and an exercise price of $10.00 share price of $3.46. These options vest evenly over 3 years.
In June 2014, the Company issued 40,000 options to an employee. The Company determined that the weighted average fair value of
the options of $1.60 using the Black Scholes method using the following inputs: term of 6 years, risk free rate of 1.62%, no dividends,
volatility factor of 62.9%, exercise price of $9.00 per share, share price of $4.00 per share. These options vest evenly over 3 years.
On various dates in January, February and March 2015, in connection with services provided to the Company, the Company issued
to certain consultants and employees options to purchase an aggregate of 30,500 shares of common stock of the Company, which
options have an exercise price of $10.00 and vested upon grant. The Company determined that the weighted average fair value of
the options of $1.10 per share using the Black Scholes method with the following weighted average inputs: term 6 years, risk free rate
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
of 1.48%, no dividends, weighted average volatility factor of 62.1%, share price of $3.40 per share.
F-34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Stock option activity is summarized below:
Balance, January 31, 2014
Granted
Cancelled
Exercised
Expired
Forfeited
Balance, March 31, 2014
Granted
Cancelled
Exercised
Expired
Forfeited
Balance, March 31, 2015
Vested and exercisable, March 31, 2015
ApolloMed ACO 2012 Equity Incentive Plan
Weighted
Average
Per Share
Exercise
Price
Weighted
Average
Remaining
Life
(Years)
Weighted
Average
Per Share
Intrinsic
Value
1.70
-
2.30
-
-
2.10
2.00
10.00
-
-
-
-
4.69
2.20
9.0 $
-
7.9
-
-
8.5
8.7 $
-
-
-
-
-
7.4 $
5.1 $
1.60
-
-
-
-
-
1.10
-
-
-
-
-
1.50
2.40
Shares
735,800 $
-
(88,767)
-
-
(18,333)
628,700 $
162,000
(14,200)
-
-
-
776,500 $
658,306 $
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
purpose of the ACO Plan is 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.
The following table summarizes the restricted stock award in the ACO Plan:
Balance, January 31, 2014
Granted
Released
Balance, March 31, 2014
Granted
Released
Balance, March 31, 2015
Vested and exercisable, March 31, 2015
Weighted
Average
Remaining
Vesting
Life
(Years)
Weighted
Average
Per Share
Intrinsic
Value
Weighted
Average
Per Share
Fair Value
1.0 $
-
-
0.8 $
-
-
0.1 $
0.02 $
-
-
0.02 $
-
-
0.70 $
0.03
-
-
0.03
0.77
-
0.07
Shares
3,752,000
-
-
3,752,000
184,000
(183,996)
3,752,004
3,651,675
Awards of restricted stock under the ACO 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.
As of March 31, 2015, total unrecognized compensation costs related to non-vested stock-based compensation arrangements
granted under the Company’s 2010 and 2013 Equity Plans, and the ACO Plan’s are as follows:
Common stock options
Restricted stock
ACO Plan restricted stock
$
$
$
246,834
72,440
27,720
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The weighted-average period of years expected to recognize these compensation costs is 1.7 years.
Stock-based compensation expense related to common stock and common stock option awards is recognized over their respective
vesting periods and was included in the accompanying consolidated statement of operations as follows:
F-35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Stock-based compensation expense:
Cost of services
General and administrative
Warrants
Warrants consisted of the following:
Outstanding at January 31, 2014
Granted
Exercised
Cancelled
Outstanding at March 31, 2014
Granted
Exercised
Cancelled
Outstanding at March 31, 2015
Year Ended
March 31, 2015
Two Months Ended
March 31, 2014
Year Ended
January 31, 2014
$
$
13,376 $
1,245,472
1,258,848 $
15,703 $
44,484
60,187 $
616,902
1,540,955
2,157,857
$
$
Weighted
Average
Per Share
Intrinsic
Value
Number of
Warrants
0.40
-
-
-
0.20
-
-
-
0.46
314,500
400,000
-
-
714,500
200,000
-
-
914,500
Weighted
average
exercise price per
share
Exercise Price Per
Share
Warrants
outstanding
Weighted
average
remaining
contractual life
Warrants
exercisable
$
$
$
$
$
$
$
$
$
$
1.15
1.15
4.50
5.00
4.50
4.00
125,000
25,000
50,000
10,000
82,500
22,000
10.00
200,000
20.00
200,000
10.00
100,000
10.00
100,000
914,500
1.3
1.3
1.3
2.6
2.8
2.8
6.0
6.0
6.0
3.3
4.3
125,000 $
25,000 $
50,000 $
10,000 $
82,500 $
22,000 $
- $
- $
- $
100,000 $
414,500 $
1.15
1.15
4.50
5.00
4.50
4.00
10.00
20.00
10.00
10.00
4.60
In connection with the 2014 NNA financing, NNA received warrants to purchase up to 200,000 shares of the Company’s common
stock at an exercise price of $10.00 per share and up to 200,000 shares at an exercise price of $20.00 per share, subject to
adjustment for stock splits, reverse stock splits and stock dividends, and which are exercisable after March 28, 2017 and before
March 28, 2021. The warrants also contained down-round protection under which the exercise price of the warrants is subject to
adjustment in the event the Company issues future common shares at a price below $9.00 per share. The Company determined that
the warrants should be classified as liabilities under ASC 815-40, which requires the Company to determine the fair value of the
warrants at the transaction date and at each subsequent reporting date (see Notes 2 and 6). Following the funding of the Convertible
Note on July 30, 2014, additional warrants to purchase up to 100,000 shares of the Company’s common stock at an exercise price of
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
$10.00 per share were issued and are exercisable after March 28, 2017 and before March 28, 2021 (see Note 6). On July 21, 2014,
in connection with the SCHC acquisition, the Company issued warrants to purchase up to 100,000 shares of the Company’s common
stock at an exercise price of $10.00 per share. The warrants are exercisable at any date prior to July 21, 2018.
F-36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Authorized stock
At March 31, 2015 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 9% Senior Subordinated Callable Notes, the exercise of all outstanding warrants
exercisable into shares of common stock, and shares granted and available for grant under the Company’s 2013 Plan. The amount of
shares of common stock reserved for these purposes is as follows at March 31, 2015:
Common stock issued and outstanding
Conversion of 9% Notes
Conversion of 8% Notes
Warrants outstanding
Stock options outstanding
Remaining shares issuable under 2013 Equity Incentive Plan
10. Commitments and Contingencies
Lease commitments
4,863,389
275,000
200,000
914,500
776,500
90,000
7,119,389
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 are as follows:
Year ending March 31,
2016
2017
2018
2019
2020
Thereafter
Total
Rent expense recorded was as follows:
$
$
771,754
834,522
916,395
920,630
905,117
2,482,251
6,830,669
Year Ended
March 31,
2015
Two Months
Ended
March 31,
2014
Year Ended
January 31,
2014
Rent expense
$
685,579 $
39,735 $
210,302
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. The Company believes that it is in compliance
with all applicable laws and regulations.
F-37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Legal
On May 16, 2014, Lakeside Medical Group, Inc. and Regal Medical Group, Inc., two independent physician associations who
compete with the Company in the greater Los Angeles area, filed an action against the Company and two affiliates of the Company,
MMG and AMEH, in Los Angeles County Superior Court. The complaint alleged that the Company and its two affiliates made
misrepresentations and engaged in other acts in order to improperly solicit physicians and patient-enrollees from Plaintiffs. The
Complaint sought compensatory and punitive damages. On June 30, 2014, the Company and its affiliates filed a motion requesting
the Court to stay the court proceeding and order the parties to arbitrate this dispute subject to existing arbitration agreements. On
August 11, 2014, the Plaintiffs filed a request for dismissal without prejudice of the action. On August 12, 2014, the Plaintiffs served
the Company and its affiliates with Demands for Arbitration before Judicial Arbitration Mediation Services in Los Angeles. The
Company is currently examining the merits of the claims to be arbitrated, and it is too early to state whether the likelihood of an
unfavorable outcome is probable or remote, or to estimate the potential loss if the outcome should be negative. The Company is
aware that punitive damages previously sought in the court proceeding are not available in arbitration. The Company and its affiliates
are preparing a defense to the allegations and the Company intends to vigorously defend the action.
On August 28, 2014, Lakeside Medical Group, Inc. and Regal Medical Group, Inc., filed a similar lawsuit against Warren Hosseinion,
the Company’s Chief Executive Officer. Dr. Hosseinion is defending the action and is currently being indemnified by the Company
subject to the terms of an indemnification agreement and the Company’s charter. The Company has an existing Directors and
Officers insurance policy. On September 9, 2014, Dr. Hosseinion filed a motion requesting the Court to stay the court proceeding and,
pursuant to existing arbitration agreements, order the parties to arbitrate the dispute as part of the pending arbitration proceedings
before JAMS (as discussed above). On October 29, 2014, the Plaintiffs filed a request for dismissal without prejudice of the action. On
November 13, 2014, Plaintiffs served Dr. Hosseinion with Demands for Arbitration before JAMS in Los Angeles, and on November
19, 2014, the parties agreed to consolidate the two proceedings against Dr. Hosseinion with the two existing proceedings against the
Company and its affiliates. The parties are currently pursuing mediation of the dispute. The Company continues to examine the merits
of the claims to be arbitrated against Dr. Hosseinion, and it is too early to state whether the likelihood of an unfavorable outcome is
probable or remote, or to estimate the potential loss if the outcome should be negative. The Company is aware that punitive
damages previously sought in the court proceeding against Dr. Hosseinion are not available in arbitration.
In the ordinary course of the Company’s business, the Company becomes involved in pending and threatened legal actions and
proceedings, most of which involve claims of medical malpractice related to medical services provided by the Company’s affiliated
hospitalists. The Company may also become subject to other lawsuits which could involve significant claims and/or significant
defense costs. The Company believes, based upon the Company’s review of pending actions and proceedings, that the outcome of
such legal actions and proceedings will not have a material adverse effect on the Company’s 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 the Company’s business, financial condition,
results of operations, or cash flows in a future period.
Liability Insurance
The Company believes that the Company’s insurance coverage is appropriate based upon the Company’s claims experience and the
nature and risks of the Company’s business. In addition to the known incidents that have resulted in the assertion of claims, the
Company cannot be certain that the Company’s insurance coverage will be adequate to cover liabilities arising out of claims asserted
against the Company, the Company’s affiliated professional organizations or the Company’s affiliated hospitalists in the future where
the outcomes of such claims are unfavorable. The Company believes that the ultimate resolution of all pending claims, including
liabilities in excess of the Company’s insurance coverage, will not have a material adverse effect on the Company’s 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 the Company’s business.
Although the Company currently maintains 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 the
Company in future years at acceptable costs, and on favorable terms.
Employment and Consulting Agreements
In connection with the 2014 NNA Financing, AMM entered into Employment Agreements with each of Warren Hosseinion, M.D., the
Company’s Chief Executive Officer (the “Hosseinion Employment Agreement”) and Adrian Vazquez, M.D. (the “Vazquez Employment
Agreement” and, together with the Hosseinion Employment Agreement, the “Employment Agreements”), pursuant to which Dr.
Hosseinion and Dr.Vazquez have agreed to serve as senior executives of AMM. The Employment Agreements provide for (i) base
salary of $200,000 per year, (ii) Participation in any incentive compensation plans and stock plans that are available to other similarly
positioned employees of AMM, and (iii) reimbursement of expenses incurred on behalf of AMM. In addition to compensation under his
Employment Agreement and Hospitalist Participation Service Agreement, Dr. Hosseinion also received a $32,917 payout of unused
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
vacation time and an incentive compensation payment of $17,282. In addition to compensation under his Employment Agreement
and Hospitalist Participation Service Agreement, Dr. Vazquez received $60,000 as compensation for additional clinical work
performed during the fiscal year and $29,824 as payout of unused vacation time.
Also on March 28, 2014, AMH entered into Hospitalist Participation Service Agreements with each of Dr. Hosseinion (the “Hosseinion
Hospitalist Participation Agreement”) and Dr. Vazquez (the “Vazquez Hospitalist Participation Agreement” and, together with the
Hosseinion Hospitalist Participation Agreement, the “Hospitalist Participation Agreements”), pursuant to which Dr. Hosseinion and Dr.
Vazquez provide physician services for AH. The Hospitalist Participation Agreements provide for (i) base salary of $195,000 per year,
(ii) a $55,000 annual car and communications allowance, and (iii) reimbursement of reasonable business expenses. The Hospitalist
Participation Agreements replaced, and thereby terminated, prior hospitalist participation service agreements between AH and each
of Dr. Hosseinion and Dr. Vazquez.
As a condition of the Company causing its affiliates to enter into the Hospitalist Participation Service Agreements and the
Employment Agreements, on March 28, 2014, the Company entered into Stock Option Agreements with each of Dr.
Hosseinion (the “Hosseinion Stock Option Agreement”) and Dr. Vazquez (the “Vazquez Stock Option Agreement” and,
together with the Hosseinion Stock Option Agreement, the “Stock Option Agreements”). The Stock Option Agreements
provide that each of Dr. Hosseinion and Dr. Vazquez grant the Company the option to purchase (at fair market value) all
equity interests in the Company held by Dr. Hosseinion or Dr. Vazquez, as applicable, in the event that (i) either the
applicable Hospitalist Participation Service Agreement or the applicable Employment Agreement is terminated by the
Company for cause due to a willful or intentional breach by Dr. Hosseinion or Dr. Vazquez, as applicable, (ii) Dr.
Hosseinion or Dr. Vazquez, as applicable, commits fraud or any felony against the Company or any of its affiliates, (iii) Dr.
Hosseinion or Dr. Vazquez, as applicable, directly or indirectly solicits any patients, customers, clients, employees, agents
or independent contractors of the Company or any of its affiliates for competitive purposes or (iv) Dr. Hosseinion or Dr.
Vazquez, as applicable, directly or indirectly Competes (as such term is defined in the Stock Option Agreements) with the
Company or any of its affiliates.
In June 2014, the Company entered into a consulting arrangement with Bridgewater Healthcare, LLC, in which Mr. Mitchell R. Creem
will provide CFO services to the Company in return for cash compensation of $10,000 per month and 500 vested options per month
with an exercise price of $10.00 per share effective May 20, 2014.
F-38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On January 15, 2015, AMM entered into a Consulting and Representation Agreement (the “Augusta Consulting Agreement”) with
Flacane Advisors, Inc. (the “Augusta Consultant”), which is effective from January 15, 2015, supersedes the prior agreement with the
Augusta Consultant, and remains in effect until March 31, 2015 and will carryover to December 31, 2015 unless it is replaced by a
new agreement. We anticipate that we will enter into a new consulting agreement with Mr. Augusta following the termination of the
current agreement. Under the Augusta Consulting Agreement, the Augusta Consultant is paid $25,000 per month and is also eligible
to receive options to purchase shares of the Company’s common stock as determined by our Board of Directors. The Augusta
Consultant provides business and strategic services and makes Mr. Augusta available as the Company’s Executive Chairman of the
Board of Directors. Mr. Augusta is subject to a Directors Agreement with the Company dated March 7, 2012.
11. Subsequent Events
On June 30, 2015, ACC entered into a Settlement Agreement and Release (the Agreement) with the prior owners of Whittier medical
clinic to unwind the Company’s purchase of Whittier medical clinic on September 1, 2013 and release both parties (ACC and prior
owner) of certain rights and obligations previously set out in the Asset Purchase Agreement and various other agreements entered
into by both parties on or about September 1, 2013. As a result of the Agreement, the prior owner will pay ACC $2,953. No future
obligations remain. Subsequent to June 30, 2015, the Company no longer owns or operates the Whittier medical clinic.
On July 7, 2015, the Company entered into an Amendment to First Amendment and Acknowledgement (the “New Amendment”) with
NNA of Neveda, Inc., an affiliate of Fresenius Medical Care North America. The New Amendment amended the First Amendment and
Acknowledgement, dated as of February 6, 2015 (as amended by the Amendment “Acknowledgement”), among the Company, NNA,
Warren Hosseinion, M.D., and Adrian Vazquez, M.D. and included an extension until October 24, 2015 of a deadline previously
contemplated by the Acknowledgment, for the Company to file a registration statement covering the sale of NNA’s registrable
securities.
12. Restatement as of and for the Year Ended January 31, 2014
The consolidated financial statements as of and for the year ended January 31, 2014, were previously restated as part of a Form S-1
filed with the Securities and Exchange Commission on May 7, 2015.
F-39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
13. Valuation and Qualifying Accounts
Allowance for doubtful accounts:
Year Ended
Two Months Ended
March 31, 2015
March 31, 2014
Balance at beginning of period
$
30,670 $
50,474 $
Year Ended
January 31, 2014
78,822
Charged to operations
64,811
-
-
Write-off of accounts receivable
-
(19,804)
(28,348)
Balance at end of period
$
95,481 $
30,670 $
50,474
F-40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Subsidiaries of Apollo Medical Holdings, Inc.
Name
Jurisdiction of Operations
EXHIBIT 21.1
Apollo Medical Management, Inc.
Pulmonary Critical Care Management, Inc.
ApolloMed Accountable Care Organization, Inc.
Verdugo Medical Management, Inc.
Apollo Palliative Services, LLC
Delaware
California
California
California
California
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Apollo Medical Holdings, Inc.
Glendale, California
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-153138) of Apollo Medical
Holdings, Inc. of our report dated July 14, 2015, relating to the consolidated financial statements which appears in this Form 10-K.
/s/ BDO USA, LLP
Los Angeles, California
July 14, 2015
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference and use in the annual March 31, 2015 Form 10-K report of Apollo Medical Holdings,
Inc. of our report dated May 7, 2014 (except for note 12 which is as of March 6, 2015 and note 9 for which is as of April 24, 2015 ),
relating to our audit of the consolidated financial statements of Apollo Medical Holdings, Inc. as of and for the year ended January 31,
2014, which is incorporated by reference and appears in this report. We also consent to the reference to us under the caption
“Experts” in this registration statement.
Exhibit 23.2
/s/ Kabani & Company, Inc.
Certified Public Accountants
Los Angeles, California
July 14, 2015
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT 31.1
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: July 14, 2015
/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, Mitchell Creem, 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: July 14, 2015
/s/ MITCHELL CREEM
MITCHELL CREEM
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 March 31, 2015 (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: July 14, 2015
/s/ WARREN HOSSEINION, M.D.
WARREN HOSSEINION, M.D.
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 March 31, 2015 (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: July 14, 2015
/s/ MITCHELL CREEM
MITCHELL CREEM
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.