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, 20152017

 

o¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT

 

For the transition period from___________ to____________

 

Commission File No.

000-25809001-37392

 

Apollo Medical Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware20-8046599
State of IncorporationIRS Employer Identification No.

 

700 North Brand Blvd., Suite 2201400

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$0.001 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    ¨     Nox

 

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¨     Nox

 

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.

Yesx     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).

Yesx     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 or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer¨Accelerated filer¨
Non-accelerated filer¨ (Do not check if a smaller reporting company)Smaller reporting company
Emerging growth company x¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes¨     Nox

 

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 OTCQBOTC Pink on September 30, 2014,2016, the last business day of the Registrant’s most recently completed second fiscal quarter, was $13,916,424.$13,438,161. Solely for purposes of the foregoing calculation, all of the registrant’s directors and officers as of September 30, 20142016 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,June 26, 2017, there were 4,863,3895,956,877 shares of common stock, $.001$0.001 par value per share, issued and outstanding; 1,111,111 shares of Series A Preferred Stock, $0.001 par value per share, issued and outstanding; and 555,555 shares of Series B Preferred Stock, $0.001 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 20152017 Annual Meeting of Stockholders of the Company to be filed with the Securities and Exchange Commission not later than 120 days after March 31, 2015.2017.

 

 

APOLLO MEDICAL HOLDINGS, INC.

FORM 10-K

FOR THE YEAR ENDED MARCH 31, 20152017

 

TABLE OF CONTENTS

 

PART I  
Item 1BusinessDescription of Business45
Item 1ARisk Factors2628
Item 1BUnresolved Staff Comments5051
Item 2PropertiesDescription of Properties5051
Item 3Legal Proceedings5051
Item 4Mine Safety Disclosures51
   
PART II  
Item 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities5152
Item 6Selected Financial Data5354
Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations5354
Item 7AQuantitative and Qualitative Disclosures about Market Risk6575
Item 8Financial Statements and Supplementary Data6575
Item 9Changes in and Disagreements with Accountants and Financial DisclosuresDisclosure6575
Item 9AControls and Procedures6575
Item 9BOther Information6676
   
PART III  
Item 10Directors, Executive Officers and Corporate Governance6777
Item 11Executive Compensation6777
Item 12Security Ownership of Certain Beneficial Owners and Management and relatedRelated Stockholder Matters6777
Item 13Certain Relationships and Related Transactions, and Director Independence6777
Item 14Principal Accounting Fees and Services67 77
   
PART IV  
Item 15Exhibits, Financial Statement Schedules68 78
 Signatures84

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PART I

 

Introductory CommentINTRODUCTORY 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. (individually, Holdings”), and its wholly owned subsidiaries and affiliated medical groups:groups, including variable interest entities (“VIEs”).

 

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 STATEMENTSThe Centers for Medicare & Medicaid Services (“CMS”) have not reviewed any statements contained in this report describing the participation of APAACO, Inc. (“APAACO”) in the Next Generation ACO (“NGACO”) model.

 

We caution readers that this ReportFORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements.” Forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All statements written, oral or otherwise,other than statements of historical fact are based on our current expectations or beliefs rather than historical facts concerning future events,“forward-looking statements” for purposes of federal and they are indicated by words or phrases such as,state securities laws, including, but not limited to, “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “think,” “plan,” “envision,” “continue,” “intend,” “target,” “contemplate,” “budgeted,” “will”any projections of earnings, revenue or other financial items; any statements of the plans, strategies and similarobjectives of management for future operations; any statements concerning proposed new services or comparable words, phrasesdevelopments; any statements regarding future economic conditions or terminology. performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

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 may include the words “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “think,” “plan,” “envision,” “intend,” “continue,” “target,” “contemplate,” “budgeted,” “will” and other similar or comparable words, phrases or terminology. These forward-looking statements onpresent our current expectations, assumptions, estimates and projections,assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and therefore there can be no assurance that any forward-looking statement contained herein, or otherwise, will prove to be accurate. The Company assumesundertake no obligation, to update suchany forward-looking statements.statement.

 

We have a relativelyAlthough we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. Some of the key factors impacting these risks and uncertainties include, but are not limited operating history compared to others in our industryto:

·risks related to our ability to raise capital as equity or debt to finance our ongoing operations and new acquisitions, for liquidity, or otherwise;

·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 impact of rigorous competition in the healthcare industry generally;

·the impact on our business, if any, as a result of changes in the way market share is measured by third parties;

·our dependence on a few key payors;

·whether or not we receive an “all or nothing” annual payment from the CMS in connection with our participation in the Medicare Shared Savings Program (the “MSSP”);

·the success of our focus on our NGACO, to which we have devoted, and intend to continue to devote, considerable effort and resources, financial and otherwise;

·changes in Federal and state programs and policies regarding medical reimbursements and capitated payments for health services we provide;

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·the overall success of our acquisition strategy in locating and acquiring new businesses, and the integration of any acquired businesses with our existing operations;

·industry-wide market factors and regulatory and other developments affecting our operations;

·the impact of intense competition in the healthcare industry;

·changing rules and regulations regarding reimbursements for medical services from private insurance, on which we are significantly dependent in generating revenue;

·changing government programs in which we participate for the provision of health services and on which we are also significantly dependent in generating revenue;

·industry-wide market factors, laws, regulations and other developments affecting our industry in general and our operations in particular;

·general economic uncertainty;

·the impact of any potential future impairment of our assets;

·risks related to changes in accounting literature or accounting interpretations;

·risks related to our ability to consummate the pending merger (the “Merger”) with Network Medical Management, Inc. (“NMM”) and, assuming the Merger is consummated, successfully integrate our operations with those of NMM; and

·the impact, including additional costs, of mandates and other obligations that may be imposed upon us as a result of new federal healthcare laws, including the Patient Protection and Affordable Care Act (the “ACA”), the rules and regulations promulgated thereunder, any executive or regulatory action with respect thereto and any changes with respect to any of the foregoing in the 115th Congress.

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. FactorsFor a detailed description of these and other factors that could have a material adverse effect on the operations and future prospects of the Company on a condensed basis includecause actual results to differ materially from those factors discussed under Item 1A.expressed in any forward-looking statement, please see “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:beginning at page 28 below.

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ITEM 1.·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.BUSINESS

 

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.

ITEM 1. DESCRIPTION OF BUSINESSOVERVIEW

 

ApolloMed isWe are a patient-centered, physician-centric integrated healthcare deliverypopulation health management 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 hasLed by a management team with over a decade of experience, we have built a company and culture that is focused on physicians providing high-quality medical care, population health management and care coordination for patients, particularly for senior patients and patients with multiple chronic conditions. We believe that ApolloMed iswe are well-positioned to take advantage of changes in the rapidly evolving 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,We implement and implements and operatesoperate 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 hasWe 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 Accountable Care OrganizationMSSP accountable care organization (“ACO”), which focuses on the provision ofproviding high-quality and cost-efficient care to Medicare FFS patients;

·NGACO, which started operations on January 1, 2017, and focuses on providing high-quality and cost-efficient care for Medicare fee-for-service patients;

 

·TwoAn independent practice associationsassociation (“IPAs”IPA”), which contractcontracts with physicians and provideprovides care to Medicare, Medicaid, commercial and dual eligibledual-eligible patients on fee-for-service or riska risk- and value basedvalue-based fee basis;

 

·Clinics,One clinic which provide primary carewe own, and which provides specialty care in the Greatergreater Los Angeles area; and

 

·Hospice care, Palliative care, and home health and hospice services, which include our at-home and final-stages-of-life services.end-of-life services; and

·A cloud-based population health management IT platform, which was acquired in January 2016, and includes digital care plans, a case management module, connectivity with multiple healthcare tracking devices and also integrates clinical data.

 

We operate in one reportable segment, the healthcare delivery segment. Our revenue streams, which are described in greater detail below in “Our Revenue Streams and Our Business Operations,”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;FFS reimbursement; and

 

·Risk and value-based contracts with health plans, third party IPAs, hospitals and the Medicare Shared Savings Program (“MSSP”)NGACO and MSSP sponsored by the Centers for Medicare & Medicaid Services (“CMS”),CMS, which are the primary revenue sources for our hospitalists, ACO,ACOs, IPAs and hospice/palliative care operations.

 

ApolloMed servesWe serve Medicare, Medicaid, HMOhealth maintenance organization (“HMO”) and uninsured patients primarily in California, as well as in Mississippi and Ohio (where our ACO has recently begun operations).California. We primarily provide services to patients, thatthe majority of whom are covered by private or public insurance, although we do derivewith a small portion of our revenue coming 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 ApolloMedus 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, ApolloMedwe became a publicly held company in June 2008. ApolloMed wasWe were 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, ApolloMedwe 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. 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.

In 2014, ApolloMedwe added several complementary operations by acquiring, (eithereither directly or through affiliated entities that are wholly-owned by Dr. Hosseinion)our Chief Executive Officer, Warren Hosseinion, M.D., as nominee shareholder on our behalf of, AKM Medical Group, Inc. (“AKM”) (an IPA), an IPA, outpatient primary care and specialty clinics and hospice/palliative care and home health entities. Our largest acquisition to date, which wasDuring fiscal 2016, we combined the operations of AKM into those of MMG.

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On July 21, 2014, through an affiliate wholly-owned by Dr. Hosseinion, was ofas nominee shareholder on our behalf, we acquired Southern California Heart Centers (“SCHC”), a specialty clinic that focuses on cardiac care and diagnostic testing. SCHC has a management services agreement (“MSA”) 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.

ApolloMed’s physician network consistsOn January 12, 2016, through our wholly-owned subsidiary Apollo Care Connect, Inc. (“Apollo Care Connect”), we acquired certain technology and other assets of hospitalists, primaryHealarium, Inc., which provides us with a population health management platform that includes digital care plans, a case management module, connectivity with multiple healthcare tracking devices and the ability to integrate with multiple electronic health records to capture clinical data.

On November 4, 2016, through an affiliate wholly-owned by Dr. Hosseinion, as nominee shareholder on our behalf, we acquired all the stock of Bay Area Hospitalist Associates, a Medical Corporation, a California professional corporation (“BAHA”) from Scott Enderby, D.O. (“Enderby”). BAHA is a hospitalist, intensivist and post-acute care practice with a presence at three acute care hospitals, one long-term acute care hospital and several skilled nursing facilities in San Francisco.

On December 21, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which NMM will merge into a wholly-owned subsidiary of ours. NMM is one of the largest healthcare management services organizations (“MSOs”) in the United States, delivering comprehensive healthcare management services to a client base consisting of health plans, IPAs, hospitals, physicians and specialist physicians primarilyother health care networks. NMM currently is responsible for coordinating the care for over 600,000 covered patients in Southern, Central and Northern California through ApolloMed'sa network of ten IPAs with over 2,000 contracted physicians. On a pro forma basis, the combined organization, would provide medical management for over 700,000 patients through a network of over 3,000 healthcare professionals and over 400 employees. The combination of ApolloMed and NMM brings together two complementary healthcare organizations to form one of the nation’s largest integrated population health management companies, which we believe will be well positioned for the ongoing transition of U.S. healthcare to value-based reimbursements. The transaction, which is expected to close in the second half of calendar year 2017, is subject to antitrust regulatory clearance and other closing conditions, as well as approval by ApolloMed and NMM stockholders.

On January 18, 2017, CMS announced that APAACO, which is owned 50% by us, had been approved to participate in the new NGACO program (the “NGACO Model”). Through the NGACO Model, CMS has partnered with APAACO and affiliated physician groups. ApolloMed operatesother ACOs experienced in coordinating care for populations of patients and whose provider groups are willing to assume higher levels of financial risk and reward under the NGACO Model. The NGACO program began on January 1, 2017. Previously, APAACO was approved by CMS to operate a Medicare ACO, which is an entity formed by certain health care providers that accepts financial accountability for the overall quality and cost of medical care furnished to Medicare FFS beneficiaries assigned to the entity. Typically, the health care providers participating in a Medicare ACO continue to bill Medicare under the traditional FFS system for services rendered to beneficiaries. However, a Medicare ACO may share in any Medicare savings achieved with respect to the aligned beneficiary population if the Medicare ACO satisfies minimum quality performance standards. A Medicare ACO may also share in any Medicare losses recognized with respect to the aligned beneficiary population. Medicare ACOs participating in a two-sided risk model are liable to CMS for a portion of the Medicare expenditures that exceed a benchmark.

We operate 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

·AMM
·Pulmonary Critical Care Management, Inc. (“PCCM”)
·Verdugo Medical Management, Inc. (“VMM”);
·ApolloMed ACO;
·Apollo Palliative Care Services, LLC (“APS”);
·Best ChoiceHospice Care LLC (“BCHC”);
·Holistic Care Home Health Care Inc. (“HCHHA”);
·Apollo Care Connect; and
·APAACO.

We have a controlling interest in ApolloMed Palliative Services, LLC (“ApolloMed Palliative”),APS, which owns two Los Angeles-based companies, Best Choice Hospice Care LLCBCHC and Holistic Health Home Health Care Inc. HCHHA. Our palliative care services focuses on providing relief from the symptoms and stress of a serious illness. The goal is to improve quality of life for both the patient and the patient’s family.

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,MSAs, pursuant to which AMM, PCCM or VMM, as applicable, manages allcertain non-medical services for the affiliated medicalphysician group and has exclusive authority over all non-medical decision making related to ongoing business operations.

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Through AMM, we manage our other affiliates, including:

·AMH;
·MMG;
·BAHA; and
·SCHC

Our physician network consists of hospitalists, primary care physicians and specialist physicians primarily through our owned and affiliated physician groups.

Through PCCM we manage Los Angeles Lung Center (“LALC”), and through VMM we manage Eli Hendel, M.D., Inc. (“Hendel”). On January 1, 2017, PCCM and VMM amended the MSAs entered into with LALC and Hendel, respectively. Based on our evaluation of current accounting guidance, we determined that we no longer hold an explicit or implicit variable interest in these entities. We have consolidated the results of these entities through December 31, 2016.

The management agreements ofMSAs that AMM, PCCM and VMM enter into with physician groups 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 eachDuring fiscal 2017, we entered into two MSAs with various hospitals to provide staffing.

On February 17, 2015, we 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, we provide certain business administrative services, including accounting, human resources management and supervision of AMM’s management agreements,all non-medical business operations. We have evaluated the management feeimpact of the Bay Area MSA and services provided are reviewed annually andhave determined that it triggers VIE accounting, which requires the management fee is adjustedconsolidation of the hospitalist group into our consolidated financial statements. On November 4, 2016, we acquired BAHA, through an affiliate wholly-owned by Dr. Hosseinion, as necessary to reflectnominee shareholder on our behalf. As of the fair market valuedate of AMM’s services. acquisition, we obtained a controlling interest in BAHA.

During fiscal 2016, we disposed of substantially all the assets of ACC. ACC was a clinic providing care in the Los Angeles area.

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. In January 2017, CMS announced that APAACO was approved to participate in the NGACO Model, which began on January 1, 2017 and the All-Inclusive Population-Based Payment (“AIPBP”) track, which began on April 1, 2017. The goal of the NGACO is to improve the quality of patient care and outcomes through more efficient and coordinated approach among providers.

  

On February 17, 2015, Our principal executive offices are located at 700 North Brand Blvd., Suite 1400, Glendale, California 91203 and our telephone number is (818) 396-8050.

ApolloMed entered into a long-term management services agreement (the “Bay Area MSA”) with a hospitalist group locatedwas incorporated in the San Francisco Bay Area. UnderState of Delaware on November 1, 1985 under the Bay Area MSA, ApolloMed will provide all business administrative services, including billing, accounting, human resources managementname of McKinnely Investment, Inc. On November 5, 1986 McKinnely Investment, Inc. changed its name to Acculine Industries, Incorporated and supervisionAcculine 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. Our website URL is http://apollomed.net. Information contained on, or accessible through, our website is not a part 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 groupis not incorporated by reference into, the Company’s consolidated financial statements. this Report.

 

OUR INDUSTRY OVERVIEW

 

U.S. healthcare spending has increased steadily over the past 20 years. According to the CMS,Centers for Medicare and Medicaid Spending (“CMS”), the estimated total U.S. healthcare expenditures are expected to grow by 5.7%5.6% for 20132016 through 2023, comprising 19.3% of2025, and 4.7 percent per year on a per capita basis. Health Spending is projected to grow 1.2% faster than the U.S. gross domestic product by 2023. CMS projects total U.S. healthcare spending to grow by an average annual growth rate(“GDP”) over the 2016 through 2025 period; as a result the health share of 6.0% from 2015 through 2023. By these estimates, U.S. healthcare spendingGDP is expected to exceed averagerise from 17.8% in 2015 to 19.9 percent by 2025.

CMS further reports that health spending growth by federal and state & local governments is projected to outpace growth by private businesses, households, and private payers over the projection period (5.9% compared to 5.4%, respectively) in part due to ongoing strong enrollment growth in U.S. gross domestic product 1.1 percentage annually.

These spending increases have been driven, in part,Medicare 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 projectedcoupled with continued government funding dedicated to increase even more.subsidizing premiums for lower income Marketplace enrollees.

 

Hospitalists

“Hospitalist” is the term used for doctors who are specialized in the care of patients in the hospital. This movement was initiated over a decade ago and has evolved due to many factors. These factors include:

·convenience;
·efficiency;

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·financial strains on primary care doctors;
·patient safety;
·cost-effectiveness for hospitals; and
·need for more specialized and coordinated care for hospitalized patients.

 

Hospital care expenditures represent the largest segment of U.S. healthcare industry spending. According to CMS estimates, total hospital spending is anticipated to slowgrow at an average rate of 5.5% per year for 2016 through 2025, compared to 4.1 percent4.9% for 2010 through 2015. The faster growth partly reflects anticipated increases in 2013, reaching $918.8 billion, compared with 4.9%growth in 2012. In 2015,the use and intensity of hospital spendingservices by Medicare’s beneficiaries over coming decade. Hospital price growth is projected to increase 5.1 percent duerise from 0.9% in 2015 to the continued effectsan average rate of the Affordable Care Act (ACA) insurance expansion combined with the effect of faster economic growth. For2.4% for 2016 through 2023, continued population aging combined with2015 related to expected faster growth in the improved economic conditions are expectedprices of inputs required to result in projected average annual growth of 6.2 percent.provide hospital care.

Hospitalists assume the inpatient care responsibilities that are otherwise provided by the patient’s primary care physician or other attending physician and are reimbursed by third parties using the same visit-based or procedural billing codes as would beare 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. Hospitalists have an increasingly important role in pushing quality through readmission prevention, infection control, electronic health records use, patient experience scores, core measures, and appropriate use of order sets.

 

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 40,00052,000 at the end of 2013,2016, making it one of the fastest-growing medical specialties in the U.S. The percentage of hospitals using hospitalists has risen from 29% in 2003 to 72% in 2014.

 

During fiscal 2017, we entered into four new hospitalist service agreements, pursuant to which we provide comprehensive hospitalist services to hospitals. As of March 31, 2015, ApolloMed Hospitalists2017, we 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:An IPA is an association of independent physicians, or other organization that contracts with independent physicians, and provides services to managed care organizations on a negotiated per capita rate, flat retainer fee, or negotiated fee-for-service (“FFS”) basis.

Medicare

 

The Medicare program was established in 1965 and became effective in 1967 as a federally fundedfederally-funded U.S. health insurance program for personspeople 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”)an 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%20.3% of the total population. According to the U.S. Census Bureau, more than 2 million Americans turn 65 in the U.S. each year.population.

 

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.per member per month (“PMPM”). According to the Kaiser Family Foundation (“Kaiser”), in 2013,2016 Medicare Advantage representsrepresented only 28%31% 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; according to Kaiser, it reached approximately 28%33% by the end of open enrollment period in 20132017 from approximately 13% in 2004. The reasons for this include:include that plan costs can be significantly lower than the corresponding cost for beneficiaries in the traditional Medicare FFS program, and 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.us. 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,PMPM, or capitation payment, which is often based on a percentage of the amount received by the health plan. Capitation payments to IPAs or 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.

 

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Integrated healthcare delivery companies such as ApolloMedwe 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.

ApolloMed arranges for the provision of

We provide managed care services through IPAs, namely MMG, and AKM, and haswe have entered into capitation agreements with health plans, either directly or through aan MSO.

 

Medicaid:Medicaid

 

Medicaid is a federalFederal 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 federalFederal government. The federalFederal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s federalFederal 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 federalFederal 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 to be provided by contracting either directly with providers or with IPAs and medical groups, such as MMG. MMG or AKM. Both MMG and AKM havehas entered into capitation agreements with health plans, either directly or through a Management Services Organization.an MSO.

 

Commercial:Commercial

 

Patients enrolled in health plans offered through their employers are generally referred to as commercial members. According to the Robert Wood Johnson Foundation,United States Census Bureau, in 20112014, the last year for which data is available, approximately 60%55.4% of non-elderly U.S. citizens received their healthcare benefits through their employer,employers, which contracted with health plans to administer these healthcare benefits. Nationally, commercial employer-sponsored health plan enrollment was approximately 159150 million in 2011.2015.

Dual Eligibles:Eligibles

 

A portion of Medicaid beneficiaries are dual eligibles, meaning that they are 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. InAbout 1.1 million low-income seniors and people with disabilities in California eight counties are participating inreceive health care services through both the duals pilot program.Medicare and Medi-Cal (Medicaid nationally) programs.

 

Health Reform Acts:Acts

 

In an effort to reduce the number of uninsured and to beginintending 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 seeksseek 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. ThisThe current enrollment numbers (as of February 2016) are roughly 20 million total between the ACA between the Marketplace. The uninsured rate remains at an all-time low with 10.9% of under 65 uninsured as of 4th quarter 2016 according to CDC data. We believe that this represents a significant new market opportunity for health plans and integrated healthcare delivery companies. Efforts to amend, or repeal and replace, the ACA and Health Reform Acts, could have a material impact on our business and market opportunities. See Item 1A, “Risk Factors” below.

 

As of March 31, 2015,2017, MMG and AKM delivered services to nearly 10,00015,000 members through a network of over 130140 primary care physicians and over 360380 specialist physicians.

 

Accountable Care OrganizationsACOs

 

One provision of the Health Reform Acts of 2010 required CMS to establish aan MSSP that promotes accountability and coordination of care through the creation of Accountable Care Organizations (“ACOs”),ACOs, which, as described below, are eligible to participate in some of the savings generated by such ACOs. The Medicare FFS program was designed for beneficiaries in the Medicare FFS program, which covers approximately 72% of Medicare recipients, or approximately 36 million eligible Medicare beneficiaries.program. 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.

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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 rewardrewards 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.system. 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 MSRminimum savings rate (“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 gradingincreasing to 2% for ACOs with more than 60,000 patients. The MSSP program is an all-or-nothing system, that is, an ACO either earns all of its allocable savings or none of it. In performance year 2014 (fiscal 2016), we did not receive an MSSP payment from CMS. Although we exceeded our total benchmark expenditures, generating $3.9 million in total savings and achieving an ACO Quality Score of 90.4% on its Quality Performance Report, CMS determined that we did not meet the minimum savings threshold in performance year 2015 and therefore did not receive the “all or nothing” annual shared savings payment in fiscal 2017. We are eligible to be considered for an all-or-nothing payment under this program for performance year 2016 (which, if it is paid, would be paid to us in fiscal 2018). However, we do not believe that we will be eligible to receive payments for performance years beginning 2017, because of our transition to, and business focus on, the NGACO Model, in which we are participating as of January 1, 2017.

 

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.

 

In January 2016, CMS announced the first batch of participants in the NGACO Model. CMS is implementing the NGACO Model under section 1115A of the Social Security Act, which authorizes CMS, through its Center for Medicare and Medicaid Innovation, to test innovative payment and service delivery models that have the potential to reduce Medicare, Medicaid or Children’s Health Insurance Program expenditures while maintaining or improving the quality of beneficiaries’ care. The purpose of the NGACO Model is to test an alternative Medicare ACO payment model. Specifically, this model will test whether health outcomes improve and Medicare Parts A and B expenditures for Medicare FFS beneficiaries decrease if Medicare ACOs (1) accept a higher level of financial risk compared to existing Medicare ACO payment models, and (2) are permitted to select certain innovative Medicare payment arrangements and to offer certain additional benefit enhancements to their assigned Medicare FFS beneficiaries. On January 18, 2017, CMS announced that APAACO had been approved to participate in the NGACO Model. Through this new model, CMS will partner with APAACO and other ACOs experienced in coordinating care for populations of patients and whose provider groups are willing to assume higher levels of financial risk and reward under the NGACO Model. APAACO began operations on January 1, 2017.

To position ourselves to participate in the NGACO Model, we have devoted, and intend to continue to devote, significant effort and resources, financial and otherwise, to the NGACO Model, and refocused away from certain other parts of our historic business and revenue streams, which will receive less emphasis in the future and could result in reduced revenue from these activities. No revenues were generated from the NGACO Model in fiscal 2017.

Hospice Care, Palliative Care;Care and 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 onupon 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, soas 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 OperationHospitalists

 

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

·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

·Evaluate patients in the emergency room to determine if they may be safely discharged to home, a skilled nursing facility or other facility

 

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·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 versus inpatient status and to evaluate proper coding

·Provide intensivist/ICU services for hospitals

·Provide out-of-network to in-network transfers of patients for health plans and IPAs

IPA

 

Our IPA Operation

Our IPAs are networksis a network of independent primary care physicians and specialists who collectively care for HMO patients under either a capitated payment or fee-for-serviceFFS arrangement. Under the capitated model, an HMO pays our IPAsIPA 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 IPAsIPA are exclusively in control of, and responsible for, all aspects of the practice of medicine for our patients. Each of our IPAsOur IPA 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:

Through our IPA, we provide the following services:

 

1.          Physician recruiting

·Physician recruiting

 

2.          Physician contracting

·Physician contracting

 

3.          Medical management, including utilization management and quality assurance

·Medical management, including utilization management and quality assurance

 

4.          Provider relations

·Provider relations

 

5.          Member services, including annual wellness evaluations

·Member services, including annual wellness evaluations

 

6.          Education of physicians on proper coding

·Education of physicians on proper coding

 

7.          Data collection and analysis

·Data collection and analysis

 

8.          Pre-negotiating contracts with specialists, labs, imaging centers, nursing homes and other vendors

·Pre-negotiating contracts with specialists, labs, imaging centers, nursing homes and other vendors

 

Our ACO OperationIPA entered into an agreement with an MSO to receive 98% of the gross revenue received for all enrollees attributable to us during the term of the provider service agreement (“PSA”) and we are responsible for all medical services required by the enrollees. 

 

ACOs

We currently own one MSSP ACO, ApolloMed ACO, and co-own one NGACO with NMM, APAACO. ACOs are entities that contract with CMS to serve the Medicare FFS population with the goal of better care for individuals, improved health for populations and lower costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved.

ApolloMed ACO

In 2012, we formed an MSSP ACO, ApolloMed ACO, which focuses on providing high-quality and cost-efficient care to Medicare FFS patients. Through our accountable care organization,ApolloMed ACO, we provide the following services for ourits 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

·Population health management, a population health management and analytics 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

·Care coordination in the inpatient and outpatient settings using case managers

 

3.          High-risk management of patients with multiple chronic conditions

·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”)

·Educating our physicians. For example, we have a partnership with Boehringer Ingelheim to educate our physicians on patients with chronic obstructive pulmonary disease

 

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

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6.          Promote use of evidence-based medicine by our physicians

 

·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

·Promote use of evidence-based medicine by our physicians

As of June 16, 2015,March 31, 2017, ApolloMed ACO had over 1,00030 physicians and nearly 40,0002,200 Medicare FFS beneficiaries in California, MississippiCalifornia. The decrease in physicians and Ohio.Medicare FFS beneficiaries compared to fiscal 2016 is primarily the result of providers enrolling in our NGACO and their patients becoming beneficiaries under our NGACO.

 

APAACO

On January 18, 2017, CMS announced that APAACO had been approved to participate in the NGACO Model. APAACO had applied to participate in the NGACO Model in 2016 and had received conditional approval from CMS in August 2016. The NGACO Model is a new CMS program that builds upon previous ACO programs. Through this new model, CMS will provide an opportunity to APAACO and other ACOs experienced in coordinating care for populations of patients and whose provider groups are willing to assume higher levels of financial risk and reward to participate in this new attribution-based risk sharing model. As discussed in more detail below, there are different levels of financial risk and reward a NGACO may select, and the extent of risk and reward may be limited on a percentage basis.

APAACO began operations on January 1, 2017. Under the NGACO Model, APAACO will be responsible for the medical management and care coordination of over 32,000 Medicare beneficiaries in California. This number may decrease due to beneficiaries who join a managed care (HMO) plan, pass away or move out of the our service area. In 2016, in advance of commencing our participation in the program, APAACO signed agreements with over 700 providers, including more than 590 physicians, 18 hospitals, more than 15 skilled nursing facilities and multiple labs, radiology centers, outpatient surgery centers, dialysis clinics and other service providers.  Under the terms of our agreements with these parties, the NGACO Model providers, including hospitals, agreed to receive 100% of their claims for ACO beneficiaries reimbursed by APAACO.  APAACO negotiated discounted Medicare rates with multiple physicians and other service providers, discounted diagnosis-related group rates with multiple hospitals and discounted resource utilization group rates with multiple skilled nursing facilities.

In connection with the approval by CMS for APAACO to participate in the NGACO Model, CMS and APAACO have entered into a Next Generation ACO Model Participation Agreement (the “Participation Agreement”). AMM has a long-term MSA with APAACO. The term of the Participation Agreement is two performance years, through December 31, 2018. CMS may offer to renew the Participation Agreement for an additional two performance years. Additionally, the Participation Agreement may be terminated sooner by CMS as specified therein, and CMS has the authority to alter or change the program over this time period.

Among many requirements to be eligible to participate in the NGACO Model, ACOs must have at least 10,000 assigned Medicare beneficiaries and must maintain that number throughout each performance year. APAACO started its performance year with 32,078 assigned Medicare beneficiaries.

The NGACO Model uses a prospectively-set cost benchmark, which is established prior to the start of each performance year. The benchmark is based on four factors:

Baseline: The 2017 performance year NGACO Model baseline for APAACO is based on calendar year 2014 expenditures. The baseline is updated each year to reflect the NGACO’s participant list for the given year.

Trend: A projected trend that is similar to the national projected trend used in the Medicare Advantage program.

Risk Adjustment: To account for differing medical condition acuity of an ACO’s beneficiaries. The risk adjustment is based on Hierarchical Condition Category (“HCC”) risk scores. The ACO’s full HCC risk score has an annual cap of up to 3%.

Discount: Unlike the MSSP ACO program, the NGACO Model does not utilize a Minimum Savings Rate. Instead, CMS applies a discount to the benchmark once the baseline has been calculated, trended and risk-adjusted. The base discount is 2.25% and can range from 0% to 3% depending on the three factors of (1) regional efficiency, (2) national efficiency and (3) quality score attained by the ACO.

NGACOs must provide a financial guarantee to CMS. The financial guarantee must be in an amount equal to 2% of its total capped Medicare Part A and Part B expenditures for beneficiaries. CMS allows the following forms of financial guarantees: (1) funds placed in an escrow amount; (2) a line of credit as evidenced by a letter of credit upon which only CMS may draw; or (3) a surety bond.

APAACO’s total capped Medicare Part A and Part B expenditures were approximately $335 million for performance year 1, and therefore APAACO submitted a letter of credit for $6.7 million to CMS.

As required by the Participation Agreement, APAACO shall maintain an aligned population of at least 10,000 beneficiaries during each performance year. APAACO and its participants may not participate in any other Medicare shared savings initiatives. APAACO shall require its participants and preferred providers to make medically necessary covered services available to beneficiaries in accordance with applicable laws, regulations and guidance.

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APAACO shall implement processes and protocols that relate to specified objectives for patient-centered care consistent with the NGACO model. In connection therewith, APAACO shall require its participants to comply with and implement these designated processes and protocols, and shall institute remedial processes and penalties, as appropriate, for participants that fail to comply with or implement a required process or protocol.

CMS shall use the APAACO’s quality scores calculated under the relevant provisions of the Participation Agreement to determine, in part, its “Performance Year Benchmark”. CMS shall assess APACO’s quality performance using the quality measures set forth in the Participation Agreement and the quality measure data required to be reported by APAACO as set forth in the Participation Agreement. CMS shall use APAACO’s performance on each of the quality measures to calculate its total quality score according to a methodology to be determined by CMS prior to the start of each performance year. For each performance year, CMS shall determine APAACO’s Performance Year Benchmark. No later than 15 days before the beginning of each performance year, CMS shall provide the ACO with a Performance Year Benchmark Report consisting of APAACO’s Performance Year Benchmark. On a quarterly basis during each performance year, CMS shall provide APAACO with a Quarterly Financial Report. The Quarterly Financial Report may comprise adjustments to the Performance Year Benchmark resulting from updated information regarding any factors that affect the Performance Year Benchmark calculation.

For each performance year, APAACO shall submit to CMS its selections for risk arrangement; the amount of a savings/loss cap; alternative payment mechanism; benefits enhancements, if any; and its decision regarding voluntary alignment under the NGACO Model. APAACO must obtain CMS consent before voluntarily discontinuing any benefit enhancement during a performance year.

For each performance year, CMS shall pay APAACO in accordance with the alternative payment mechanism, if any, for which CMS has approved APAACO; the risk arrangement for which APAACO has been approved by CMS; and as otherwise provided in the Participation Agreement. Following the end of each performance year, and at such other times as may be required under the Participation Agreement, CMS will issue a settlement report to APAACO setting forth the amount of any shared savings or shared losses and the amount of other monies owed. If CMS owes APAACO shared savings or other monies owed, CMS shall pay the ACO in full within 30 days after the date on which the relevant settlement report is deemed final, except as provided in the Participation Agreement. If APAACO owes CMS shared losses or other monies owed as a result of a final settlement, APAACO shall pay CMS in full within 30 days after the relevant settlement report is deemed final. If APAACO fails to pay the amounts due to CMS in full within 30 days after the date of a demand letter or settlement report, CMS shall assess simple interest on the unpaid balance at the rate applicable to other Medicare debts under current provisions of law and applicable regulations. In addition, CMS and the U.S. Department of the Treasury may use any applicable debt collection tools available to collect any amounts owed by APAACO.

Unless specifically permitted under the Participation Agreement, APAACO participants, preferred providers and other individuals or entities performing functions and services related to ACO activities are prohibited from providing gifts or other remuneration to beneficiaries to induce them to receive items or services from APAACO, its participants or preferred providers, or to induce them to continue to receive items or services from APAACO, its participants or preferred providers.

APAACO shall maintain the privacy and security of all NGACO-related information that identifies individual beneficiaries in accordance with the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), Privacy and Security Rules and all relevant HIPAA guidance applicable to the use and disclosure of protected health information by covered entities, as well as applicable state laws and regulations.

The Participation Agreement requires APAACO to report specified information on a publicly accessible website maintained by it, which information includes organizational information, shared savings and shares losses information, and performance on quality measures.

The NGACO Model offers two risk arrangement options. In Arrangement A, the ACO takes 80% of Medicare Part A and Part B risk. In Arrangement B, the ACO takes 100% of Medicare Part A and Part B risk. Under each risk arrangement, the ACO can cap aggregate savings and losses anywhere between 5% to 15%. The cap is elected annually by the ACO. APAACO has opted for Risk Arrangement A and a shared savings and losses cap of 5%.

The NGACO Model offers four payment mechanisms:

·Payment Mechanism #1: Normal fee-for-service.

·Payment Mechanism #2: Normal fee-for-service plus Infrastructure payments of $6 Per Beneficiary Per Month (“PBPM”).

·Payment Mechanism #3: Population-Based Payments (“PBP”). PBP payments provide ACOs with a monthly payment to support ongoing ACO activities. ACO participants and preferred providers must agree to percentage payment fee reductions, which are then used to estimate a monthly PBP payment to be received by the ACO.

·Payment Mechanism #4: AIPBP. Under this mechanism, CMS will estimate the total annual expenditures of the ACO’s aligned beneficiaries and pay that projected amount in PBPM payments. ACOs in AIPBP may have alternative compensation arrangements with their providers, including 100% fee-for-service, discounted fee-for-service, capitation or case rates.

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APAACO began operations on January 1, 2017. APAACO opted for, and was approved by CMS to participate in, the AIPBP track, which is the most advanced risk-taking payment model, effective April 1, 2017. APAACO is the only ACO in the United States out of 44 approved NGACOs that is participating in the AIPBP track. Under the AIPBP track, CMS will estimate the total annual expenditures for APAACO's patients and then pay that projected amount to us in a per-beneficiary, per-month payment. We would then be responsible for paying all Part A and Part B costs for in-network participating providers and preferred providers with whom it has contracted.

The NGACO Model provides ACOs with additional tools not found in the ACO programs, but that are used in the Medicare Advantage program to improve quality and lower cost, including preferred provider networks, negotiated discounts and beneficiary incentives.

AMM has entered into an agreementa long-term MSA with Prospect Medical Group (PMG) that, amongAPAACO (the “APAACO MSA”). Under the APAACO MSA, AMM provides APAACO with care coordination, data analytics and reporting, technology and other things, grantsadministrative capabilities to PMG a right of first refusalenable participating providers to acquire the ACO network of physicians who were contracted with PMGdeliver better care and introduced to ACO by PMG. This right takes effect only if ACO elects to sell itslower healthcare costs for their Medicare FFS beneficiaries. APAACO employs local operations and terminates on the termination of the agreement between ACOclinical staff to drive physician engagement and PMG. We estimate that no more than 20 physicians would be subject to PMG’s right of first refusal.care coordination improvements.

Our Care

Clinics

 

Our outpatient clinics provide both primary care as well as specialty services, such as cardiology and pulmonary services. ApolloMedWe also ownsown an imaging center complete with MRI, CT,magnetic resonance imaging (MRI), compound tomography (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 ofmanaging 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 the greater Los Angeles.Angeles area. The clinics we acquired in 2014 have served their communities for many years, handle approximately 20,00025,000 patient visits per year and provide adult primary care, pediatric specialty services and lab and imaging services.

 

OurHospice Care, Palliative Care and Home Health and Hospice ServiceCare Operations

 

Our hospice care, palliative care and home health and hospice operations provide hospice care, palliative care and home health services for patients using a combinationan interdisciplinary team composed 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 4028 hospice patients and 10080 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.during fiscal 2017. 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.decrease in patients compared to fiscal 2016 primarily as a function of restructuring our hospice/palliative care and home health operations. 

 

STRENGTHS AND COMPETITIVE ADVANTAGES

 

The following are some of the material opportunities that we believe exist for our Company.company.

 

Diversification

 

Through itsour subsidiaries and consolidated affiliates, ApolloMed haswe have been able to reduce itsour business risk and increase revenue opportunities by diversifying itsour service offerings and expand itsexpanding our ability to manage patient care across a horizontally integrated care network. Our revenue is spread across our operations. Additionally, with itsour ability to monitor and manage care within itsour wide network, ApolloMed iswe are a more attractive business partner to health plans, IPAs and health systems seeking to provide better access to care at lower costs.

 

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Strong Management Team

 

The ApolloMedOur management team and Board of Directors havehas, collectively, decades of experience managing physician practices, risk-based organizations, health plans, hospitals and health systems. Collectively, theyOur management team members have a keendeep understanding of the healthcare marketplace, emerging trends and an excitinga 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 ApolloMed2017, our 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 hasWe have long-standing relationships with multiple health plans, hospitals, hospital systems and IPAs which have been generatinggenerate recurring contractual revenue.

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Comprehensive and Effective Medical Management and Population Health Management Programs

 

ApolloMed hasWe have developed comprehensive and effective programs for patients with multiple chronic conditions as well as hospitalized patients. ApolloMed hasUsing our own proprietary risk assessment scoring tool, we have also developed itsour own protocol for identifying high-risk patients. In addition, ApolloMed haswe have developed expertise in population health management and care coordination, for its ACO and IPA patients.

OUR GROWTH STRATEGY

Our mission is to transform the deliveryfurther expanded as a result 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 environmentour recent acquisition of integrated care.

Our strategy is forward looking and aspirational in nature. WhileApollo Care Connect. Additionally, we have taken many concrete steps to achievedeveloped expertise in proper medical coding which results in improved Risk Adjustment Factor (“RAF”) scores and higher payments from health plans, both for our strategy, the disclaimers in this Report applicable to forward looking statements apply to this section,own IPA patients 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.other client IPAs. We have implemented several initiatives to maintainalso developed expertise in improving quality metrics, both in the inpatient 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.

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.outpatient setting. 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 continuehospitalists have been able 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 documentationmeasure quality metrics, patient satisfaction scores and reduce 30-day readmissions. In addition, our physicians consult with the hospital management teams to assist in Medicaid denial reviews, case managementfinancial metrics, 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.

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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, andoutpatient setting, we believe that we are strategically positioned to benefit from this expansion.

“Dual-eligibles” present another opportunityimproved the CMS Quality Score in our ACO and also improved the STAR rating of our IPA. CMS implemented a five-star quality rating 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 opportunitiesparticipants in the ACO market, both through starting new ACOsMedicare Advantage program 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.2008.

 

OUR REVENUE STREAMS AND OUR BUSINESS OPERATIONS

 

Our Revenue Streams

ApolloMed’s generatesWe generate 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,”FFS, capitation, case rates, and professional and institutional risk contracts. Our revenue streams consist of contracted, fee-for-service,FFS, capitation and MSSP revenue:revenue.

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Contracted revenue

 

Contracted revenue represents revenue generated under contractsmanagement agreements for which ApolloMed provideswe provide physician and other healthcare staffing and administrative services in return for a contractually negotiated fee. ContractContracted revenue consists primarily of billings based on hours of healthcare staffing provided at agreed-toagreed-upon hourly rates. Additionally, contractcontracted revenue also includes supplemental revenue from hospitals where ApolloMedwe may have a fee-for-servicean FFS 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.agreement. Additionally, ApolloMed deriveswe derive a portion of ApolloMed’sour revenue as a contractual bonus from collections received by ApolloMed’sour partners and such revenue is contingent upon the collection of third-party billings. In certain cases, the revenue is also subject to achieving certain quality metrics.

 

Fee-for-serviceFFS revenue

 

Fee-for-serviceFFS revenue represents revenue earned under contractsagreements in which ApolloMed billswe bill and collects the professional component of charges for medical services rendered by ApolloMed’sour contracted and employed physicians. Under the fee-for-serviceour FFS arrangements, ApolloMed billswe bill patients for services provided and receivesreceive payment from patients or their third-party payors. Fee-for-serviceFFS 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 theour consolidated financial statements. The recognition of net revenue (gross charges less contractual allowances) from suchpatient visits is dependent on such factors as proper completion of medical charts following a patient visit, the forwarding of such charts to ApolloMed’sour billing center for medical coding and entering into ApolloMed’sour 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 offor such services.

 

Capitation revenue

 

Capitation revenue represents revenue that ApolloMed generateswe generate based on agreements that generally make ApolloMed or its affiliatesus liable for excess medical costs. The use of capitation under provider service agreements (“PSAs”)PSAs is intended to control the use of health care resources by putting ApolloMed or its affiliatesus 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 to us 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 suboptimalnecessary care through under-utilization of health care services, many managed care organizationsto their patients, we monitor and measure rates of resource utilization in physician practices.practices and submit reports to appropriate regulators. 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 receiveswe receive incentives under “pay-for-performance” programs for quality medical care, based on various criteria.

 

Additionally, Medicare pays capitation using a “Risk Adjustment“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,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.

 

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Medicare Shared Savings ProgramMSSP Revenue

 

ApolloMed through itsThrough our subsidiary, ApolloMed ACO, participateswe participate 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 beare calculated annually and paid once a year by CMS on cost savings generated by the ACO participant relative to the ACO participants’ CMS benchmark. Under the MSSP program, an ACO either receives the full amount of its allocable cost savings or nothing. The MSSP is a newly formed program with minimal history of payments to ACO participants. ApolloMed considersUnder 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 MSSP’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. An 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 increasing to 2% for ACOs with more than 60,000 patients.

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. We received an MSSP payment in fiscal 2015 but we did not receive an MSSP payment in fiscal 2016 or fiscal 2017. We are eligible to be considered for an all-or-nothing payment under this program for performance year 2016 (which, if it is paid, would be paid to us in fiscal 2018). However, we do not believe that we will be eligible to receive payments for performance years beginning 2017, because of our transition to, and business focus on, the NGACO Model, in which we are participating as of January 1, 2017.

NGACO Model 

Through APAACO, we participate in the NGACO Model sponsored by CMS. For each performance year, CMS will determine APAACO’s Performance Year Benchmark. No later than 15 days before the beginning of each performance year, CMS will provide APAACO with a Performance Year Benchmark Report consisting of APAACO’s Performance Year Benchmark. On a quarterly basis during each performance year, CMS shall provide APAACO with a Quarterly Financial Report. The Quarterly Financial Report may comprise adjustments to the Performance Year Benchmark resulting from updated information regarding any factors that affect the Performance Year Benchmark calculation. For each performance year, APAACO will submit to CMS its selections for risk arrangement; the amount of a savings/loss cap; alternative payment mechanism; benefits enhancements, if any; and its decision regarding voluntary alignment under the NGACO model. APAACO must obtain CMS consent before voluntarily discontinuing any benefit enhancement during a performance year.

For each performance year, CMS will pay APAACO in accordance with the alternative payment mechanism, if any, for which CMS has approved APAACO; the risk arrangement for which APAACO has been approved by CMS; and as otherwise provided in the Participation Agreement. Following the end of each performance year, and at such other times as may be required under the Participation Agreement, CMS will issue a settlement report to APAACO setting forth the amount of any shared savings or shared losses and the amount of other monies owed. If CMS owes APAACO shared savings or other monies owed, CMS will pay APAACO in full within 30 days after the date on which the relevant settlement report is deemed final, except as provided in the Participation Agreement. If APAACO owes CMS shared losses or other monies owed as a result of a final settlement, APAACO shall pay CMS in full within 30 days after the relevant settlement report is deemed final. If APAACO fails to pay the amounts due to CMS in full within 30 days after the date of a demand letter or settlement report, CMS will assess simple interest on the unpaid balance at the rate applicable to other Medicare debts under current provisions of law and applicable regulations. In addition, CMS and the U.S. Department of the Treasury may use any applicable debt collection tools available to collect any amounts owed by APAACO.

Our NGACO operations began on January 1, 2017. APAACO was approved to participate in the AIPBP track, which is the most advanced risk-taking payment model, effective April 1, 2017. APAACO is the only ACO in the United States out of 44 approved NGACOs that is participating in the AIPBP model. Under the AIPBP track, CMS will estimate the total annual expenditures for APAACO's patients and then pay that projected amount to us in a per-beneficiary, per-month payment. We would then be responsible for paying all Part A and Part B costs for in-network participating providers and preferred providers with whom it has contracted.

No revenues were generated from the NGACO Model in fiscal 2017 and management is in the process of evaluating the appropriate revenue recognition.

Hospitalist Agreements

During the year, we entered into several new hospitalist agreements with hospitals, whereby we earn a stipend fee plus a fee based on an agreed percentage of fee-for-service collections. The fee is recorded at an amount net of the portion owed to the hospitals (we collect all fees on behalf of the hospitals). The fee revenue is further reduced by a portion subject to quality metrics which is only recorded as revenue upon our meeting these metrics. We considered the indicators of gross revenue and net revenue reporting and determined that revenue from this arrangement is recorded at net. 

Types of Revenue by Business Operation

 

Each of our synergistic operations generates revenue in the following manners:

 

·Hospitalist OperationHospitalists. - 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 OperationIPA. - MMG and AKM are traditional IPAs that earnearns revenue based on capitation payments from health plans. In California, health plans prospectively pay the IPA or medical group a fixed Per Member Per MonthPMPM 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 Operationand APAACO. - ApolloMed ACO isand APAACO are different versions of a “Shared Savings”“shared savings” performance model that, is ain each case, has contracted with CMS and earns revenue from MSSP based on cost-savings achieved. TheAs discussed above, 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 developsatisfaction on an all-or-nothing basis once 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.year.

 

·Care Clinics - ApolloMed Care Clinic’s clinics receives the majority of its revenuestheir revenue from traditional fee-for-serviceFFS models where the physicians are paid based on professional fee schedules from various health plans, and also receivesreceive capitated payments from IPAs, including from MMG.

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·Palliative Care, Home Health and Hospice Service Operations - ApolloMed Palliative,APS, which includes Best Choice HospiceBCHC and Holistic Home Health, receives both fee-for-serviceFFS and contracted revenues.revenue. Under the home health Prospective Payment System (“PPS”) of reimbursement, for Medicare and Medicare Advantage programs paid at episodic rates, ApolloMed estimateswe estimate 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 episodeepisode; (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 asexperience; and (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 day60-day episodic period or are subject to certain other factors during the episode. Medicare revenuesRevenues for Hospicehospice 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 hasWe have a few key payors that represent a significant portion of itsour net revenues.revenue. For the fiscal year ended March 31. 2015, three key31, 2017, four payors accounted for 60.3%approximately 47.2% of ApolloMed’sour net revenues.revenue. For the two monthsfiscal year ended March 31, 2014, four key2016, three payors accounted for 49.8%55.4% of ApolloMed’sour net revenues. For the twelve months ended January 31, 2014, three key payors accounted for 47.6% of ApolloMed’s net revenues.revenue.

  

  Year Ended
March 31,
2015
  Two Months
Ended
March 31,
2014
  Year
Ended
January
31, 2014
 
Medicare/Medi-Cal  34.8%  14.3%  17.8%
L.A Care  13.2%  12.1%  *
Healthnet  12.3%  *  *
Hollywood Presbyterian  *   11.8%  15.9%
California Hospital  *   11.6%  13.9%

*   Represents less than 10%

  Year Ended
March 31,
2017
  Year Ended
March 31,
 2016
 
Governmental - Medicare/Medi-Cal  18.8 %  29.8%
L.A Care  13.1 %  15.7%

Allied Physicians

  8.5 %  0.0%
HealthNet  6.8%  9.9%

 

GEOGRAPHIC COVERAGE

 

Our business and operations are located exclusively in California, and all of our revenue is derived from our operations in California. As of March 31, 2015,2017, through our managed physician practices, we provided hospitalist services at overmore than 20 acute-care hospitals and long-term acute care facilities in Southern and Central California, and operated primary care andone specialty medical clinicsclinic in the Los Angeles area. MMG and AKM each provides primary and specialist care through its contracted physicians to over 15,000 patients throughout the Greatergreater Los Angeles area. ApolloMed ACO hadhas nearly 40,0002,200 Medicare beneficiaries assigned to it by CMS in California. Additionally, we had approximately 32,000 beneficiaries in our NGACO, exclusively in California Mississippi and Ohio.at the start of our performance year in January 2017.

 

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 current intention is to implement our strategy through a combination of organic growth and acquisitions, as well as dispositions when appropriate. While we have taken many concrete steps to achieve our strategy, there is no guarantee that we will be successful in these endeavors and we may not achieve our strategic goals. The Company’s businessprincipal elements of our growth strategy are:

Pursue growth opportunities in established markets. We identify growth opportunities in established markets we serve by working with our local network physicians. Opportunities may include continued physician enrolment for MMG and operations are primarily in one state, California. While the Company operates through ApolloMed ACO, outsideadditional or expanded hospitalist contracts, new risk-based insurance contracts and new clinic acquisitions.

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 operations. We measure the health status of California, it has not derived any revenues from operations outsideour patients with the goal of California,directly improving their health.

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 it currently derives allenhance the delivery of its revenues from California.high-quality care, including clinical best practices, information technology and tools, coordination of care, home visits, annual wellness exams and population health.

 

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Drive physician collaboration and alignment. We foster a collaborative approach among our physicians to provide what we believe to be clinically superior healthcare services. We provide medical management, population health management and care coordination 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 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 programs such as clinical documentation improvement to improve RAF scores and certain programs, such as annual wellness visits, to improve Medicare Advantage STAR ratings.

Expand ambulatory services and further our population health strategies. We are flexible and competitive in a dynamic healthcare environment. We intend to continue to add medical management and population health management resources to our ambulatory care services. We intend to pursue further strategies in physician practice management and population health services, such as predictive analytics and telemedicine services. We also intend to pursue the expansion of certain strategic services, such as home health care, hospice and palliative care services in an attempt to create a more comprehensive network of healthcare services.

Pursue selective acquisitions. We believe that our philosophy, 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 regularly monitor opportunities to acquire hospitalist groups, IPAs, ACOs and clinics that fit our vision and long-term strategies.

Pursue selective dispositions. We regularly monitor the performance of our operations and have curtailed, cut back on or disposed of, certain operations that either are not performing to our expectations or are creating a financial strain on us.

Expand our relationships with payors and facilities in selective markets across the United States. We intend to explore ways to develop relationships with existing and new health plans and hospitals in selective markets across the United States in order to participate in the growing hospitalist medicine market, under value-based contracts.

Acquisitions and Dispositions

In furtherance of our growth strategy, we regularly evaluate opportunities to add to our portfolio of healthcare companies in areas where we do not have a presence, in order to expand our geographic footprint, in areas where we already have a presence to increase our market share, and in areas of practice that are complementary to our existing business model. Similarly, we periodically evaluate parts of our business that may not fit within our overall business model or may be underperforming and, when appropriate, we may dispose of such companies.

On January 12, 2016, through our wholly-owned subsidiary Apollo Care Connect, we acquired certain technology and other assets of Healarium, Inc. This acquisition provides us with a population health management platform that includes digital care plans, a case management module, connectivity with multiple healthcare tracking devices and the ability to integrate with multiple electronic health records to capture clinical data. We issued 275,000 shares of our common stock in exchange for the acquired assets and the seller paid us $200,000.

Also during fiscal 2016, we sold substantially all the assets of ApolloMed Care Clinic (“ACC”). ACC was as clinic providing care in Los Angeles area. The purchase price was $61,000 of which we received $10,000 in cash and the balance in the form of a non-interest bearing promissory note in the principal amount of $51,000. We also combined the operations of one of our IPAs, AKM, into those of our other IPA, MMG.

On November 4, 2016, through an affiliated wholly-owned by Dr. Hosseinion, as nominee shareholder on our behalf, we acquired all the stock of Bay Area Hospitalist Associates, a Medical Corporation, a California professional corporation (“BAHA”) from Scott Enderby, D.O. (“Enderby”). BAHA is a hospitalist, intensivist and post-acute care practice with a presence at three acute care hospitals, one long-term acute care hospital and several skilled nursing facilities in San Francisco.

Proposed Merger

On December 21, 2016, we entered into the Merger Agreement, pursuant to which NMM will merge into a wholly-owned subsidiary of ours. NMM is one of the largest healthcare MSOs in the United States, delivering comprehensive healthcare management services to a client base consisting of health plans, IPAs, hospitals, physicians and other health care networks. NMM currently is responsible for coordinating the care for over 600,000 covered patients in Southern, Central and Northern California through a network of ten IPAs with over 2,000 contracted physicians. On a pro forma basis, the combined organization, would provide medical management for over 700,000 patients through a network of over 3,000 healthcare professionals and over 400 employees. The combination of ApolloMed and NMM brings together two complementary healthcare organizations to form one of the nation’s largest integrated population health management companies, which we believe will be well positioned for the ongoing transition of U.S. healthcare to value-based reimbursements. The transaction, which is expected to close in the second half of calendar year 2017, is subject to antitrust regulatory clearance and other closing conditions, as well as approval by ApolloMed and NMM stockholders.

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For all purposes of this report, unless expressly indicated otherwise, we have discussed our present and intended operations, opportunities and challenges without consideration of the Merger or the effect of the Merger, if and should it be consummated.

CORPORATE PRACTICE OF MEDICINE

Our consolidated financial statements include our accounts and those of our subsidiaries and certain affiliated medical practices. Some states have laws that prohibit business entities with non-physician owners, such as us, from practicing medicine, which are generally referred to as corporate practice of medicine. States that have corporate practice of medicine laws require only physicians to practice medicine, exercise control over medical decisions or engage in certain arrangements with other physicians, such as fee-splitting. California is a corporate practice of medicine state. Therefore, in California, we operate by maintaining long-term management service agreements with our affiliates, each of which are owned and operated by physicians only, and which employ or contract with additional physicians to provide hospitalist services. Under MSAs, 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. These MSAs are not terminable by our affiliates, except in the case of gross negligence, fraud, or other illegal acts by us, or our bankruptcy.

Through the MSAs and our relationship with the physician owners of our medical affiliates, we have exclusive authority over all non-medical decisions related to the ongoing business operations of those 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 VIEs.

When necessary, Dr. Hosseinion, our Chief Executive Officer, serves as nominee shareholder, on our behalf, of affiliated medical practices, in order to comply with corporate practice of medicine laws and certain accounting rules applicable to consolidated financial reporting by our affiliates, as VIEs. 

 

COMPETITION

 

The healthcare industry is highly competitive.competitive and fragmented across all of our services and operations. 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.companies, many of which are substantially larger than us and have significantly greater financial and other resources, including personnel than we have.

 

Hospitalists

 

The market for hospitalists within this industry is highly fragmented. ApolloMedAMH faces competition primarily from numerous small inpatient practices as well as large physician groups.groups, many of whom have greater financial, personnel and other resources available to them. 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’sOur affiliated IPAs,IPA, MMG, and AKM, operate in a highly competitive market. They competecompetes with other IPAs, medical groups and hospitals. Somehospitals, many of our competitors maywhom have greater financial, personnel 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 (“Heritage”), as well as HealthCare Partners, which is owned by DaVita HealthCare Partners.Partners (“DaVita”).

 

ACCOUNTABLE CARE ORGANIZATIONACOs

 

ApolloMed ACO competesand APAACO compete with hospitals, sophisticated provider groups, and management service organizationsMSOs in the creation, administration, and management of ACOs. SomeACOs, many of our competitors maywhom have greater financial, personnel and other resources available to them. For example, in Los Angeles, our competitors with APAACO include Heritage California ACO which is part of the Heritage Provider Network and operates a PioneerDaVita Medical ACO and HealthCare Partners ACO, which is owned by DaVita HealthCare Partners and which participates in the MSSP.California.

 

PALLIATIVE CARE, HOME HEALTH AND HOSPICEHospice Care, Palliative Care and Home Health Care

 

The palliative care home health and hospice industries are highly competitive and fragmented. Palliative care and hospice providers with which we compete include not-for-profit and charity-funded programs that may have strong ties to their local communities and for-profit programs, that maymany of whom have greater financial, personnel and marketingother 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.companies and which have greater financial, personnel and other resources available to them.

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APS competes with hospice and home health agencies, many of whom have greater financial, personnel and other resources available to them. In Los Angeles, our competitors include Vitas and Lakeview.

 

PROFESSIONAL LIABILITY AND OTHER INSURANCE COVERAGE

 

Our business has an inherent and significant risk of claims of medical malpractice against our affiliated physicians and us. We and ourOur independent physician contractors and we pay premiums for third-party professional liability insurance that indemnifies us and our affiliated hospitalists and us 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 ourOur physicians carry first dollar coverage with limits of liability equal to not less than $1,000,000 for all claims based on occurrence up to an aggregate of $3,000,000 per year.

 

WeWhile we believe that our insurance coverage is appropriateadequate 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,business, 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 that we believe are in accordance with industry standards. We believe that ourthese insurance coverage islimits are 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.

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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.

·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 (“HHS”), 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.

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.

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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.

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.

 

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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. For example, California has adopted the Physician Outpatient Referral Act (“PORA”). PORA makes it unlawful for a healing arts licensee, including physicians and surgeons, and other licensed professionals, to refer a person for certain health care services if the licensee has a financial interest, with the person or entity that receives the referral. While the law also provides certain exemptions from this prohibition, failure to fit within an exemption in violation of PORA can lead to a misdemeanor offense that may subject a physician to civil penalties and disciplinary action by the Medical Board of California.

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 federalFederal 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.

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Health Information Privacy and Security Standards

 

Among other directives, the Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”),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)(“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 Secretary of HHS Secretary(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 Generalsstate Attorneys General 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 Penaltycivil monetary penalty fine or monetary settlement paid by the violator. This methodology for compensation to harmed individuals was initially required to be in place by February 17, 2012.2012; however, no rules or regulations implementing this methodology have yet been adopted by HHS. HHS may nonetheless eventually establish such methodology for compensation to harmed individuals.

 

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.

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Fee-Splitting and Corporate Practice Ofof Medicine

 

Some states, including California, have laws that prohibit business entities, such as our Companyus and itsour 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.

 

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The Company operates

We operate 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,MSAs, which might include a modification of the management fee, and/ or establishing an alternative structure.

 

Deficit Reduction Act Ofof 2005

 

Among other mandates, the Deficit Reduction Act of 2005 or the DRA,(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.

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.

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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 serviceservices 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 may also arebe subject to other state fraud and abuse statutes and regulations.regulations if we expand our operations beyond California. 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-serviceFFS 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”(the “DMHC”) of California licenses and regulates health care service plans pursuant to the California Knox-Keene Act.Health Care Service Plan Act of 1975, as amended (“Knox-Keene”). 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.

Further,

Furthermore, 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

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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’sOur affiliated hospitalists must satisfy and maintain their individual professional licensing in the stateseach state 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.Regulation

 

We have invested in new business lines consisting of (i) home health, (ii) hospice and (iii) palliative care, thatwhich 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.

Below, please find

The following is 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.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.

 

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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.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 takestake 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.

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 and 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.

 

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Federal regulations promulgated by OSHAthe Occupational Safety and Health Administration 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.

EMPLOYEES

As of March 31, 2017, we and our affiliated clinics had 149 employees, of whom 115 were full-time and 34 were part-time, and approximately 80 were employed or independent contractor physicians. We also had a broader physician network which, as of March 31, 2017, consisted 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. We believe that we enjoy a good working relationship with our employees.

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.

ITEM 1A.RISK FACTORS

 

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 fiscal year ended March 31, 2015,2017, we had a net loss of $1.3approximately $8.7 million, and as of March 31, 2015,2017, we had an accumulated deficit of $19.3approximately $37.7 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 andand/or try to raise working capital from other sources. These measures could materially and adversely affect our ability to operate our business as we presently do and execute our business model.

Going Concern

As shown in the accompanying consolidated financial statements, we have incurred net loss of approximately $8.7 million and used approximately $8.1 million in cash from operating activities during the year ended March 31, 2017, and, as of March 31, 2017 have an accumulated deficit and a stockholders’ deficit attributable to ApolloMed of approximately $37.7 million and $0.3 million, respectively. The primary source of liquidity as of March 31, 2017 is cash and cash equivalents of approximately $8.7 million. These factors raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.

We need to raise additional capital, which might not be available.

We require significant additional capital for general working capital and liquidity needs. If our cash flow and existing working capital are not sufficient to fund our general working capital and liquidity requirements, as well as any debt service requirements, we will have to raise additional funds by selling equity, issuing debt, borrowings, refinancing some or all of our existing debt or selling assets or subsidiaries. None of these alternatives for raising additional funds may be available, or available on acceptable terms to us, in amounts sufficient for us to meet our requirements. Our failure to obtain any required new financing may, if needed, require us to reduce or curtail certain existing operations and expandor make us unable to continue to operate our business.

The Merger has not yet been consummated and the failure to consummate the Merger could have a material adverse effect on our business.

On December 21, 2016, we entered into the Merger Agreement with NMM. Consummation of the Merger is subject to antitrust regulatory clearance and other closing conditions, as well as approval by NMM stockholders and our stockholders, none of which has yet occurred. If for any reason the Merger is not consummated, we would have significant financial obligations to NMM in connection with previous financing transactions in which we have engaged. Additionally, as we anticipate that NMM will be an important future source of working capital for us after the consummation of the Merger, we might lose such additional funding. Furthermore, there are several areas of operations in which NMM and we work together, including APAACO, which is owned 50% by NMM and 50% by us, as well as MSAs we have with certain NMM affiliates. If for any reason the Merger is not consummated, we cannot predict the effect this would have on areas where we operate together and for which we are dependent upon significant revenue.

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The pendency of the Merger could have an adverse effect on ourbusiness, financial condition, results of operations or business prospects.

The pendency of the Merger could disrupt our business in the following ways, among others:

·Our employees may experience uncertainty regarding their future roles in the company, which might adversely affect our ability to retain, recruit and motivate key personnel; and

·the attention of our management may be directed towards the completion of the Merger and other transaction-related considerations and may be diverted from our day-to-day business operations, and matters related to the Merger may require commitments of time and resources that could otherwise have been devoted to other opportunities that might have been beneficial to us.

Should they occur, any of these matters could adversely affect our business, financial condition, results of operations or business prospects.

Covenants in the Merger Agreement place certain restrictions on theconduct of our business prior to the closing of the Merger, including entering into a business combination with another party.

The Merger Agreement restricts NMM and us from taking certain specified actions with respect to the conduct of its business without the other party’s consent while the Merger is pending. These restrictions may prevent us from pursuing otherwise attractive business opportunities or other capital structure alternatives and making other changes to our business or executing certain of its business strategies prior to the completion of the Merger, which opportunities, alternatives or other changes could be favorable to our stockholders.

There is no assurance when or if the Merger will be completed. Any delay in completing the Merger may substantially reduce the benefits that we expect to obtain from the Merger and any failure to complete the Merger could harm our future business and operations.

Completion of the Merger is subject to the satisfaction or waiver of a number of conditions as set forth in the Merger Agreement. There can be no assurance that NMM or we will be able to satisfy the closing conditions or that closing conditions beyond our respective control will be satisfied or waived. In addition, NMM or we can agree at any time to terminate the Merger Agreement. NMM and we can also terminate the Merger Agreement under other specified circumstances.

If the Merger is not completed within the anticipated timeframe, such delay could result in additional transaction costs or other effects associated with uncertainty about the Merger. Furthermore, if the Merger is not completed, our ongoing businesses could be adversely affected and we will be subject to a variety of risks associated with the failure to complete the Merger, including without limitation the following:

·certain costs related to the Merger, such as legal and accounting fees, must be paid even if the Merger is not completed;

·if the Merger Agreement is terminated under certain circumstances, we may be required to pay NMM a termination fee of  $1.5 million;

·the attention of our management may have been diverted to the Merger rather than to our operations and the pursuit of other opportunities that could have been beneficial to us;

·the potential loss of key personnel during the pendency of the Merger as employees may experience uncertainty about their future roles with the company;

·reputational harm due to the adverse perception of any failure to successfully complete the Merger;

·the price of our stock may decline and remain volatile;

·we have been subject to certain restrictions on the conduct of our businesses which may have prevented us from making certain acquisitions or dispositions or pursuing certain business opportunities while the Merger was pending; and

·we may be subject to litigation related to the Merger or any failure to complete the Merger.

In addition, if the Merger Agreement is terminated, we might have an immediate financial need to raise additional capital to fund our business and meet our expenses, including both transactional and operational expenses.

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, andAgreements for 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 debtDebt agreements often include covenants that, among other things, generally:

·do not allow usthe borrower to borrow additional amounts or additional amounts above a certain limit, or that are senior to the existing debt, without the approval of NNA;the creditor;

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·require usthe borrower to obtain the consent of NNAthe creditor for acquisitions in excess of $500,000 an agreed upon amount and/or more and grant security interests in newly-acquired companies;

 

·do not allow usthe borrower to dispose of assets;

 

·do not allow usthe borrower to liquidate, wind up or dissolve any of ourits subsidiaries without the approval of NNA;creditor’s approval;

 

·do not allow usthe borrower to create any liens on any of ourits assets;

 

·do             require the borrower 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’sany security interests that the creditor has in ourthe borrower’s assets; and

 

·require usthe borrower to meet, on an ongoing basis, certain financial covenants, which may include 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,a creditor, and, if we were to fail to meet any financial covenant,covenants, there willwould be an event of default under the existing NNA agreements, and no assurance can be given that NNA willa creditor would waive such default, which in turn 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 offinancial condition and ability to continue 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.operations.

 

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.

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’sa former creditor’s registrable securities by October 24, 2015.December 31, 2017.

 

WeOn March 28, 2014, we entered into a Credit Agreement (the “Credit Agreement”) with NNA of Nevada, Inc. (“NNA”), an affiliate of Fresenius SE & Co. KGaA (“Fresenius”), which has been amended from time to time. Presently, we are required to prepare and file with the SEC a registration statement covering the sale of NNA’s registrable securities issued pursuant to the Credit Agreement by October 24, 2015.December 31, 2017. If we fail to do so on October 24, 2015,by such date, 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.shares of our 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.statement except in limited circumstances.

 

We will have to obtain athe consent fromof NNA before filing any registration statement except in limited circumstances, and there can be no assurance that NNA will provide such a consent.consent, if required. If NNA does not provide such 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 advantageousnecessary to raise capital needed to operate our business.

 

The Company has a limited operating history thatnature of our business and rapid changes in the healthcare industry makes it difficult to reliably predict future growth and operating results.

 

The predecessorRapidly changing Federal and state healthcare laws, and the regulations thereunder, make it difficult to ApolloMed was incorporatedanticipate the nature and amount of medical reimbursements, third party private payments and participation in California in 2001, and served initially as the management company for our affiliated medical group, ApolloMed Hospitalists. In addition, ApolloMed wascertain government programs. For example, we were awarded a participation agreement under CMS’ MSSP in July 2012. ApolloMed has limited experience operating2012, to operate as an ACO. ACO or managed care organization. Further, MMG is growing rapidly and has received a one-time true-upan “all or nothing” payment inunder the fourth quarterMSSP program for services rendered throughoutin fiscal year 2015, that make it difficult to predict its future cash flow and results based on current results. Accordingly, we havebut did not receive such a limited operating history upon which you can evaluate our business prospects, whichpayment for fiscal 2016 or fiscal 2017. This makes it difficult to forecast ApolloMed’sour future operatingearnings, cash flow and results and cash flows.of operations. The evolving nature of the current medical services industry increases these uncertainties. You must consider

We may encounter difficulties in managing our growth.

We may not be able to successfully grow and expand. Successful implementation of our business plan requires that we manage our growth, including potentially rapid and substantial growth, which could result in an increase in the Company’s business prospects in lightlevel of the risks, uncertaintiesresponsibility for management personnel and problems frequently encountered by companies with limitedstrain on our human and capital resources. To manage growth effectively, we will be required, among other things, to continue to implement and improve our operating histories.and financial systems and controls to expand, train and manage our employee base. Our ability to predictmanage our operations and growth at any timeeffectively requires us to continue to expend funds to enhance our operational, financial and management controls, reporting systems and procedures and attract and retain sufficient numbers of qualified personnel. If we are unable to implement and scale improvements to all our control systems in an efficient and timely manner, or if we encounter deficiencies in existing systems and controls, then we will not be able to make available the futureservices required to successfully execute our business plan. Failure to attract and retain sufficient numbers of qualified personnel could further strain our human resources and impede our growth or result in ineffective growth. Moreover, the management, systems and controls currently in place or to be implemented may not be limited.adequate for such growth, and the steps taken to hire personnel and to improve such systems and controls might not be sufficient. If we are unable to manage our growth effectively, the failure to do may have a material adverse effect on our business, results of operations and financial condition.

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)fiscal 2015, we acquired Southern California Heart Centers,SCHC, AKM, Medical Group, a Los Angeles based IPA, Best Choice Hospice Care LLCBCHC and Holistic Health Home Health Care Inc.,HCHHA, and launched ApolloMedACC and APS. In fiscal 2016, we formed Apollo Care ClinicConnect and ApolloMed Palliative Services, LLC. combined the operations of AKM into those of MMG, and disposed of substantially all the assets of ACC. In fiscal 2017, we acquired BAHA and formed APAACO to operate under the NGACO Model.

As a result of our rapid expansion we may be unable to successfully integrate the various entities we have acquired or formed. Further,Additionally, 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.future, integrate into our entire operations or result in a diversion of management focus and attention to others parts of our business.

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TheOur growth strategy of the Company may not prove viable and expected growth and value may not be realized.

 

Our business strategy is to grow 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 both organically and 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 iswe are not 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.could be adversely affected. The process of integrating acquired entities involves risks. Thesesignificant risks, which 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 iscan be 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.

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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.revenue.

 

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, results of operations and income.financial condition. Furthermore, our acquisition strategy involves a number of risks and uncertainties, including:

·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.financial condition.

 

·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 compensation payments to be paid in connection with our acquisitions may result in significant fluctuations to our results of operations.

 

In connection with some of our recent acquisitions we are required to make certain contingent compensation 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 compensation payments were are required to make may have an adverse effect on our operations.financial condition.

 

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,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.

 

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Our growth strategy incurs significant costs, which could adversely affect our financial condition.

Our growth-by-acquisition strategy involves significant costs, including financial advisory, legal and accounting fees, and may include additional costs, including costs of fairness opinions, labor costs, termination payments, contingent payments and bonuses, among others. These costs could put a strain on our available cash and cash flow, which in turn could adversely affect our overall financial condition.

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 iswe are unable to respond to and manage changing business conditions, or the scale of itsour operations, then the quality of itsour services, itsour ability to retain key personnel and itsour business could be harmed.adversely affected.

 

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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 MonthPMPM 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.losses.

 

Our future growth could be harmed if we lose the services of certain key personnel.Dr. Hosseinion.

 

Our success depends to a significant extent on the continued contributions of our key management personnel, includingparticularly our Chief Executive Officer, Warren Hosseinion, M.D., for the management of our business and implementation of our business strategy. We have entered into an employment agreementsagreement with Dr. Hosseinion and we hold a $5 million key man life insurance policy. The loss of Dr. Hosseinion or other key management personnelHosseinion’s services 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 our founders, Warren Hosseinion, M.D. and Adrian Vazquez, M.D., combined currently own more than 40% 35%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 approximately 70%of our outstanding common stock. As a result, our executive officers, directors and holders of greater than 5% of our outstanding common stock, willassuming they agree, have the ability to control all matters submitted to our stockholders for approval, including:including among other things:

  

·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.

 

TheThis concentration of ownership includesis underscored by the fact that Dr. Hosseinion (who currently owns approximately 21%19% of our shares)common stock) and Dr. Vazquez (who currently owns approximately 19%16% of our shares)common stock) together currently own over 40%more than 35% 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.Drs. 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 holdingholdings of such a significant blockso much of sharesour common stock may harm the value of our shares and discourage investors from being involvedinvesting in our Company. Theyus. Drs. Hosseinion and Vazquez could also use their concentrated holdingsseek 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 may support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders domay not support.

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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 and similar laws, or federalFederal law, or are terminated as a result of changes in state law, it could have a material impact on our profitability.results of operations and financial condition.

 

There are various state laws, including laws in California, regulating the corporate practice of medicine which prohibitprohibits us from owning various health carehealthcare entities. TheseThis corporate practice of medicine prohibitions are intended to prevent unlicensed persons from interfering with or inappropriately influencing thea 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 besuch as effectivehaving Dr. Hosseinion hold shares in providing controlsuch practices as direct ownership.nominee shareholder for our benefit. If thosethese agreements and arrangements were held to be invalid under state laws prohibiting the corporate practice of medicine, a significant portion of our revenues couldwould be affected, which may result in a material adverse effect uponon our Company. Further,results of operations and financial condition. Additionally, any changes to federalFederal or state law that made regulated or prohibitedprohibit such agreements or arrangements could also have a material adverse effect upon our profitabilityresults of operations and operations.financial condition.

 

We rely on certain key affiliated entities that are owned by key personnel who could stopIf we lost the services to our Company. Any failure by our key affiliated entities or their equity holders to perform their obligations underof Dr. Hosseinion for any reason, the contractual arrangements would havewith our VIEs could be in jeopardy.

Because of corporate practice of medicine laws, many of our affiliated physician practice groups are either wholly-owned or primarily owned by Dr. Hosseinion as nominee shareholder for our benefit. If Dr. Hosseinion died, was incapacitated or otherwise was no longer affiliated with our company, there could be a material adverse effect on the relationship between each of those VIEs and us and, therefore, our business financial condition and resultsas a whole could be adversely affected.

The contractual arrangements we have with ours VIEs is not as secure as direct ownership of operations. We also own the majority, and not all, of the equity of our key subsidiaries.such entities.

We consolidate in our financial reporting and business structure variousBecause of corporate practice of medicine laws, we enter into contractual arrangements to manage certain affiliated physician practice groups.groups, which allows us to consolidate those groups with us for financial reporting purposes. 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 arrangementsarrangements.

Further, many of thoseAny failure by our key affiliated entities are either wholly-owned or primarily owned by Dr. Hosseinion. If Dr. Hosseinion died, was incapacitated or otherwise was no longer affiliatedtheir equity holders to perform their obligations under the contractual arrangements they have with our Company there could beus would have a material adverse effect on our business. Additionally, MMGbusiness, results of operations and otherfinancial condition. We also own the majority, and not all, of the equity of certain subsidiaries.

Several of our affiliated medical physician practice groups are or may be owned by other medical doctorsphysicians 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.us. Although the terms of the contractual agreementsMSAs we have with these affiliates provide that theythe MSA will be binding on the successors of the entities’such affiliates’ equity holders, as those successors are not a partyparties to the agreements,MSAs, it is uncertain whether the successors in case of the death, bankruptcy or divorce of an equity holder willwould be subject to or will be willing to honor the obligations of such agreements.MSAs.

 

In addition, although we consolidate in our financial reporting and business structure ApolloMed ACO and ApolloMed Palliative,APS, individuals other than Dr. Hosseinion, who acts as nominee shareholder for our benefit of AMM, also own approximately 30%20% of the equity of ApolloMed ACO and 49%44% of the equity in ApolloMed Palliative.APS.  Additionally, we consolidate APAACO in our financial reporting, although we own 50% of the equity in that entity.

 

ApolloMed’sOur operations are dependent on a few key payors.

 

We had threefour payors during the year ended March 31, 20152017 that accounted for 34.8%18.8%, 13.2%13.1%, 8.5% and 12.3%6.8% of net revenues, respectively. During the year ended January 31, 2014, weWe had three payors during the fiscal year ended March 31, 2016 that accounted for 17.8%29.8%, 15.9%15.7% and 13.9%9.9% of net revenues, (unaudited), respectively. We believe that going forward, a substantial portionmajority of itsour revenue couldwill continue to 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 or at all, for any reason, would materially and adversely affect our results of operations and financial condition.

A decline in the number of patients we serve could have a material adverse effect on our results of operations.

Like any business, a material decline in the number of patients we serve, whether they or a third party government or private entity is paying for their healthcare, could also have a material adverse effect on our results of operations.operations and financial condition.

ACOs are relatively new and undergoing changes, additionally CMS may change or discontinue 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 has been altered and may be further 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 us and alter our strategic direction, thereby producing stockholder risk and uncertainty. In addition, we could be terminated from the MSSP if we do not comply with the MSSP participation requirements.

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ApolloMed ACO may not generate savings through its participation in the MSSP, and revenue, if any, revenue generatedearned by such participation will be periodic and will occur, if at all,only once annually on an annual“all or nothing” 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 formedrelatively new program with limited history of payments to ACO participants. As a result of the uncertain nature of the MSSP program, the Company considerswe consider 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.

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 Companywe will meet the conditions necessary for receipt of future payments. Further, the Company’sFurthermore, our ability to continue to generate savings for the MSSP program depends on many factors, many of which are outside of the Company’sour 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.

 

During the fiscal year ended March 31, 2015, we were awarded and received approximately a $5.4 million payment related to savings achieved from July 1, 2012, through December 31, 2013, which represented 16% of our net revenue during the year ended March 31, 2015. During the fiscal years ended March 31, 2016 and 2017, we did not receive any MSSP payment. We are eligible to be considered for an all-or-nothing payment under this program for performance year 2016 (which, if it is paid, would be paid to us in fiscal 2018). However, we do not believe that we will be eligible to receive payments for performance years beginning 2017, because of our transition to, and business focus on, the NGACO Model, in which we are participating as of January 1, 2017.

Moreover, if amounts are payable to us under the MSSP, they will be paid on an annual basis significantly after the time they are earned. Additionally, since MSSP payments, if any, are made once annually, we would not receive such payments spread out over our fiscal year and, consequently, revenue may be materially lower in quarters when any MSSP-related payments are not received by us.

The success of our emphasis on the new NGACO Model is uncertain.

To position ourselves to participate in the NGACO Model, we have devoted, and intend to continue to devote, significant effort and resources, financial and otherwise, to the NGACO Model, and refocused away from certain other parts of our historic business and revenue streams, which will receive less emphasis in the future and could result in reduced revenue from these activities. It is unknown at this time if this strategic decision will be successful in terms of our emphasis on the NGACO Model and/or placing less emphasis on certain other parts of our core business and revenue streams.

The results of the NGACO Model are unknown.

The NGACO Model is a new CMS program that builds upon previous ACO programs, including the MSSP program. Through the NGACO Model, CMS will provide an opportunity to APAACO and other NGACOs experienced in coordinating care for populations of patients, and whose provider groups are willing to assume higher levels of financial risk and reward, to participate in this new attribution-based risk sharing model. In January 2017, CMS approved APAACO to participate in the NGACO Model and CMS and APAACO have entered into a Participation Agreement with a term of two performance years through December 31, 2018. CMS may offer to renew the Participation Agreement for an additional two performance years. Additionally, the Participation Agreement may be terminated sooner by CMS as specified therein and CMS has the flexibility to alter or change the program over this time period. The number of Medicare ACOs continues to rise in total but there are still a growing number of program types and demonstrations that could be consolidated and impact APAACO.

The NGACO Model program has certain political risks.

If the ACA is amended or repealed and replaced, or if CMMI is terminated, the NGACO Model program could be discontinued or significantly altered. In addition, CMS leadership could be changed and influenced by Congress and/or the current Administration. Additionally, CMS or CMMI may elect to combine any existing programs, including bundled payments, which could greatly alter the NGACO Model program.

APAACO’s participation in the NGACO Model program subjects it to certain regulatory risks.

Among many requirements to be eligible to participate in the NGACO Model program, APAACO must have at least 10,000 assigned Medicare beneficiaries and must maintain that number throughout each performance year. Although APAACO started its 2017 performance year with more than 32,000 assigned Medicare beneficiaries, there can be no assurance that APAACO will maintain the required number of assigned Medicare beneficiaries, and, if that number were not maintained, APAACO would become ineligible for the program.

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APAACO is subject to changing state laws and regulations.

NGACOs are required to comply with all applicable state laws and regulations regarding provider-based risk-bearing entities. If these laws or regulations change, for example, to require a Knox-Keene license in California, which we do not have, APAACO could be required to cease its NGACO operations.

APAACO may experience losses due to the NGACO Model Program.

APAACO is responsible for savings and losses from claims. The NGACO Model uses a prospectively-set cost benchmark, which is established prior to the start of each performance year. The benchmark is based on various factors, including baseline expenditures with the baseline updated each year to reflect the NGACO’s participant list for the given year. The 2017 performance year NGACO Model baseline for APAACO is based on calendar year 2014 expenditures that are then trended. Regional, population and time adjustments could potentially underestimate APAACO’s actual expenditures for its Medicare Part A and Part B beneficiaries.

If claims cost rise from benchmark, or 2014 and/or 2017 are statistically anomalies, APAACO could experience losses due to the NGACO Model program, which could be significant prior to any adjustment in benchmarked expenditures.

Additionally, given that APAACO is providing care coordination but does not employ any physicians nor provide direct patient care, the degree of influence APAACO has could be limited and out of its direct control. Because of APAACO’s limited influence, it is possible APAACO may not be able to influence provider and preferred provider behavior, utilization and patient costs.

APAACO’s dependence on CMS creates uncertainty and subjects APAACO to potential liability.

APAACO relies on CMS for design, oversight and governance of the NGACO Model program. Accurate data, claims benchmarking and calculations, timely payments and periodic process reviews are key to program success. In addition to APAACO’s administrative and care coordination operating costs, APAACO may not generate savings through its participation in the NGACO Model. Any savings generated, if at all, will be earned in arrears and uncertain in both timing and amount.

APAACO chose to participate in the AIPBP payment mechanism, which entails certain special risks.

APAACO chose to participate in the AIPBP payment mechanism, and is the only NGACO to have chosen this payment mechanism. Under the AIPBP payment mechanism, CMS will estimate the total annual Part A and Part B Medicare expenditures of APAACO’s assigned Medicare beneficiaries and pay that projected amount in per beneficiary per month payments. APAACO chose “Risk Arrangement A”, comprising 80% risk for Part A and Part B Medicare expenditures and a shared savings and losses cap of 5%, or as a result a 4% effective shared savings and losses cap when factoring in 80% risk impact. APAACO’s benchmark Medicare Part A and Part B expenditures for beneficiaries for its 2017 performance year are approximately $335 million, and under “Risk Arrangement A” of the AIPBP payment mechanism APAACO could therefore have profits or be liable for losses of up to 4% of such benchmarked expenditures, or approximately $13.4 million. While performance can be monitored throughout the year, end results will not be known until 2018.

CMS has indicated that its initial financial reports to participants in the NGACO Model may not be complete.

The NGACO Model is new and CMS is implementing extensive reporting protocols in connection therewith. CMS has indicated that it does not anticipate initial reports under the NGACO Model to be indicative of final results of actual risk-sharing and revenues to which we are entitled, especially for the period January 1, 2017 through March 31, 2017, which is the first quarter of the NGACO program and the fourth quarter of our 2017 fiscal year. This is because there are inherent biases in reporting the results at such an early juncture. Were that to be the case, we might not report accurately our revenues for this period, which could be subject to adjustment in a later period once we receive final results from CMS.

APAACO requires significant capital reserves for program participation.

NGACOs must provide a financial guarantee to CMS. The financial guarantee must be in an amount of 2% of the NGACO’s benchmark Medicare Part A and Part B expenditures. APAACO’s benchmark Medicare Part A and Part B expenditures for beneficiaries for its 2017 performance year being approximately $335 million, APAACO submitted a letter of credit for $6.7 million for the 2017 program year. If APAACO reaches the maximum of its shared losses of $13.4 million, it may need to pay another $6.7 million to CMS or CMS may change or alter the risk reserve process or amount. Additionally, the incurred but not reported (“IBNR”) methodology utilized by CMS could have a negative impact on APAACO and affect working capital and capital requirements.

APAACO is responsible for savings and losses related to care received by its patients at Out-of-Network Providers which could negatively impact our ability to control claim costs.

Medicare beneficiaries in a NGACO Model program are not required to receive their care from a narrow network of contracted providers and facilities, which could make it challenging for APAACO to control the financial risks of those beneficiaries. CMS notified APAACO that its Medicare beneficiaries historically have received approximately 62% of their care at non-contracted, out-of-network ("OON") providers. While not responsible for paying claims for OON providers, APAACO may have difficulty managing patient care and costs as compared to in-network providers. Additionally, APAACO is responsible for savings and losses of this population using OON providers, which could adversely impact our financial results.

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In addition, if APAACO is successful under its Participation Agreement with CMS in encouraging more of its patients to receive their care with contracted, in-network providers, there is the possibility that the monthly AIPBP payments will be insufficient to cover current expenditures, since the AIPBP payments will be based on historical in-network/out-of-network ratios. This could potentially result in negative cash-flow problems for APAACO, if increased payments need to be made to contracted, in-network providers, especially if CMS fails to monitor this in-network/OON ratio on a frequent periodic basis and reconciliation payments are materially delayed.

There is uncertainty regarding the initial design and administration of the NGACO Model program.

Due to the newness of the NGACO Model program and the fact that APAACO is the only company participating in the AIPBP track, APAACO is subject to initial program challenges including, but not limited to, process design, data and other related program aspects. APAACO has already experienced various apparent errors in the NGACO Model program and APAACO has been working with CMS, including senior CMS management, on these issues, but the resolution and impact on APAACO remains uncertain. Moreover, there is the potential for new or additional issues to be experienced with CMS which could negatively impact APAACO. Among other things, the AIPBP claims processing methodology is complex and could create reimbursement delays to contracted APAACO providers, which could cause some providers to terminate their agreements with APAACO. For example, services provided by contracted APAACO providers with Dates of Service (“DOS”) from January 1, 2017 to March 31, 2017 were to be paid by CMS. All services provided with DOS from April 1, 2017 onward were to be paid by APAACO. However, a flaw in the claims processing system of one of CMS’ contractors caused payments to contracted APAACO providers to be unpaid or to be paid at a reduced rate from January 1, 2017 to March 31, 2017. Various providers expressed dissatisfaction about this and several decided to terminate their agreements with APAACO. Consequently, there is the actual and potential risk of damaging goodwill with APAACO’s contracted providers, which could have a material adverse effect on the operations and financial condition of APAACO in particularly and our results of operations and financial condition on a consolidated basis.

APAACO has also experienced weaknesses in the NGACO Model program beneficiary alignment methodology. For example, some patients see more than one primary care provider (“PCP”) in a calendar year. CMS could attribute a patient to one PCP rather than another, which could create potential liability for APAACO. For example, when APAACO sent letters to its patients, as required by CMS, it received several calls from PCPs who did not join APAACO, but whose patients were attributed to another PCP. There could also be liability where a PCP has a capitated contract with APAACO, but the PCP’s patient also sees another PCP, whether that PCP was contracted with APAACO or not. APAACO’s expenditures could increase due to CMS having paid an additional PCP, or to the extent that APAACO has to pay for a PCP that is not an APAACO contracted provider.

AIPBP operations and benchmarking calculations are complex.

AIPBP operations and benchmarking calculations are complex and can lead to errors in the application of the NGACO Model program, which could create reimbursement delays to our providers and adversely affect APAACO’s performance and results of operations. For example, APAACO has discovered a feature in the AIPBP claims files that do not allow APAACO to break down certain claims amounts by individual patient codes. This feature has created confusion for APAACO contracted providers in reconciling their payments, causing some providers to terminate their agreements with APAACO. This feature could also create uncertainty with those agreements with providers that include capitation plus carve-outs for certain procedures. APAACO has sought to address its concerns about such feature with CMS and CMS has informed APAACO that CMS’ contractor is unable to remedy this situation for at least the foreseeable future.

CMS relies on multiple third-party contractors to manage the NGACO Model program, which could hinder performance.

In addition to CMS reliance, CMS relies on various third parties to effect the NGACO program. This may be other departments of the U.S. government, such as the Center for Medicare and Medicaid Innovation (“CMMI”). CMS relies on multiple third party contractors to manage the NGACO Model program, including claims and auditing. Due to such reliance, there is the potential for errors, delays and poor communication among the differing entities involved, which are beyond the control of APAACO. This could negatively impact APAACO’s results of operations specifically and our results of operations on a consolidated basis.

Third parties used by APAACO could hinder performance.

APAACO uses select third parties. This could create operational and performance risk if, for example, the third party does not perform its responsibilities properly. Additionally, APAACO has contracted with participating Part A and Part B providers and was able to contract discounted Medicare, Diagnosis-Related Group and Resource Utilization Group rates with multiple providers. However, APAACO providers could decide to change or discontinue these contractual rates or to terminate their agreements with APAACO.

Risk-sharing arrangements that Maverick Medical Group, Inc.MMG 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.MMG also has a key contract with Prospect Medical Group (“PMG”) and its management service organization, which if terminated could materially affect our business.

 

MMG’sUnder risk-sharing arrangements into which MMG has entered, MMG is responsible for a portion of the cost of hospital services or other services that are not capitated. These 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 revenuesrevenue and income.adversely affect our results of operations.

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If MMG is not able to satisfy DMHC requirements, MMG could become subject to sanctions and its ability to do business in California could be limited or terminated.

 

MMGThe DMHC has further entered intoinstituted financial solvency regulations. The regulations are intended to provide a contract with PMG’s management serviceformal mechanism for monitoring the financial solvency of a risk-bearing organization (“PMSO”RBO”) that has a term through September 28, 2020 and automatically renews unless either party provides notice, pursuantin California, including capitated physician groups, such as MMG. Under DMHC regulations, our affiliated physician groups are required to, which, among other services, PMSO provides claims processing, authorizationsthings:

·Maintain, at all times, a minimum “cash-to-claims ratio” (where “cash-to-claims ratio” means the organization’s cash, marketable securities, and certain qualified receivables, divided by the organization’s total unpaid claims liability). The regulations currently require a cash-to-claims ratio of 0.75; and

·Submit periodic reports to the DMHC containing various data and attestations regarding performance and financial solvency, including incurred but not reported calculations and documentation, and attestations as to whether or not the organization was in compliance with the Knox-Keene Act requirements related to claims payment timeliness, had maintained positive tangible net equity (i.e. at least $1.00), and had maintained positive working capital (i.e. at least $1.00).

In the event that a physician organization is not in compliance with any of the above criteria, the organization would be required to describe in a report submitted to the DMHC the reasons for non-compliance and credentialing for certain physicians.actions to be taken to bring the organization into compliance. Additionally, under another contract with PMG that has a term through September 28, 2015 and automatically renews unless either party provides notice, MMG accessesthese regulations, the DMHC can make public some health plan contracts by using PMG asof the risk-bearing contracting party with those health plans. Any disruption or changeinformation contained in the conditionreports, including, but not limited to, whether or not a particular physician organization met each of PMG’s operations,the criteria. In the event our affiliated physician groups are not able to meet certain of the financial solvency requirements, and fail to meet subsequent corrective action plans, our affiliated physician groups could be subject to sanctions, or any changeslimitations on, or removal of, its ability to do business in California.

MMG is currently attempting to confirm that it is in compliance with certain financial requirements of the DMHC.

Our IPA, MMG, was not in compliance with certain DMHC financial requirements, including tangible net equity (“TNE”). We have increased our contractsintercompany line of credit to MMG to provide additional capital in attempt to comply partially with PMSOthe DMHC’s requirements. Through a plan of remediation that we presented to the DMHC and which plan it approved, we must contribute additional funds, cut costs, increase revenue or PMG, coulda combination of the above, which we have done. As a material adverse effectresult of the foregoing actions we took, MMG had positive TNE as of the third quarter of fiscal 2017 and has maintained positive TNE to date. Since DMHC requirements are that an RBO should have positive TNE for one full quarter to be taken off a corrective action plan (“CAP”), we believe that MMG is currently in compliance with DMHC requirements. The DMHC is currently reviewing filings we have made to confirm this compliance. However, there can be no assurance that MMG will remain in compliance with DMHC requirements. To the extent that we are required to contribute additional capital to MMG in the future, we would have less available cash to use on other parts of 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’sour 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, aan economic downturn would put continued cost containment pressures on Medicaid outlays for our services in California and the other states in which we operate.California. In addition, an economic downturn coupled withand/or 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 federalFederal 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.

The Company’sOur success depends, to a significant degree, upon theour 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 ofOur ability to procure new contracts by the Company may be dependent upon the continuing results achieved at the current facilities, upon pricing and operational considerations, as well asand 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.

 

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Competition for physicians is intense, and we may not be able to hire and retain qualified 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 contractlocum 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. OurEven though our physician turnover rate has remained stable over at least the last three years. Ifyears, if the turnover rate were to increase significantly, our growth could be impeded.adversely affected.

 

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 shrinkingsegment of the labor market has created turnover as many seek to take advantage of the supply of available positions, each offeringmany of which offer 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 palliative, home health and hospice operations, which are particularly dependent on nurses for patient care.

 

The health carehealthcare industry is highly competitive.

 

There are many other companies and individuals currently providing health care services.services, many of which have been in business longer than we have been, and/or have substantially more financial and personnel resources than we have. 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 havehas 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, and 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.California, where all of our operations, providers and patients are located.

 

Further,Additionally, as we have expanded into palliative, home health and hospice care through the launch of ApolloMed Palliative,APS, we face competitors that have traditionally concentrated in this segment and that may have greater resources and specialized expertise than us.we have. In many areas in which our palliative, home health and hospice care programs are located, we compete with a large number of organizations, including:

·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 compete successfully compete with these competitors in palliative, home health and hospice care, and may expend significant resources without success.

 

We are reliantrely on referrals from third parties for our services.

 

Our business is reliantrelies in part 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.

 

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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, 2015,2017, we derived approximately 13%49% of our net revenue for physician services from contracts directly with hospitals, other inpatient and post-acute care 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 physician practice groups to operate at such facilities, which would negatively impact our revenue, results of operations and profitability.financial condition.

 

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 the 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 adversely impact our net revenue. In particular, we rely on some key governmental payors. We assume the financial risks relating to uncollectible and delayed payments. In particular, we rely on some key governmental payors. 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.

Decreases in payor rates could adversely affect us.

Decreases in payor rates, either prospectively or retroactively, could have a significant adverse effect on our revenue, cash flow and results of operations. For example, during fiscal 2016, Health Net, Inc. reduced payor rates to their payees, including us, retroactive to July 1, 2015 and LA Care reduced payor rates to their payees, including us, retroactive to January 1, 2016.

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 savingsMSSP payments and otherwise have a material adverse effect on our business, financial condition and results of operations. Further,operations and financial condition. Additionally, our failure to successfully operate our billing systems could lead to potential violations of healthcare laws and regulations.

 

WeIn the recent past, we have identified material weaknesses in our internal controls, andwhich we have remediated. However, we cannot provide assurances that these weaknesses will be effectively remediatednot recur 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 maycould lead to a decline in our stock price.price, or result in action against us.

 

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. WeIn the recent past, we have identified a number of material weaknesses in our disclosure controls and procedures. These material weaknesses could allowhave allowed the reporting of inaccurate or incomplete information regarding our business in our public filings and will require the Companyhave required us to devote substantial resources to mitigating and resolving the weaknesses we have identified. Despite these efforts, we cannot provide assurances that these weaknesses will not recur or that additional material weaknesses will not occur in the future.

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Additionally, we intend to continue to grow our business, in part, through the acquisition of new entities. Whenentities and the consummation of the Merger. If and when we acquire such existing entities, or consummate the Merger, 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.

 

WeAs a public company, 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 effectcreating pressure on our business,financial resources and, accordingly, our results of operations and financial condition.

 

WeFrom time to time we may write offbe required to write-off intangible assets, such as goodwill.goodwill, due to impairment.

 

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.

 

ACOsWe currently derive 100% of our revenues in California and are newvulnerable to changes in California healthcare laws and unproven and CMS may discontinue, alter or radically change the MSSP program.regulations.

 

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’sOur business and operations are primarilylocated 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, financial requirements or other aspects of regulation of the healthcare industry could producehave an adverse effect on the continuedour business, results of operations of Company.and financial condition.

A prolonged disruption of the capital andand/or credit markets may adversely affect our future access to capital, our cost of capital and our ability to continue operations.

 

We have relied substantially on the capital and credit markets for liquidity and to execute our business strategies, which include increasing our revenue base throughincludes 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 andand/or 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 if we are able to raise capital, and future access to capital markets may be adversely affected.

 

Our intellectual property rights are valuable, andWe may be required to use a significant amount of cash on hand and/or raise capital if we are unablerequired to protect them or are subject to intellectual property rights claims,repay the holder of our business may be harmed.$4,990,000 convertible note.

 

Our intellectual property rights, including those rights relatedOn March 30, 3017, we issued a Convertible Promissory Note to our “ApolloMed” unregistered trademarkAlliance Apex, LLC (“Alliance”) for $4.99 million (the “Alliance Note”). The Alliance Note is due and some other trademarks, copyrightspayable to Alliance on (i) December 31, 2017, or (ii) the date on which the Merger is terminated, whichever occurs first (“Maturity Date”). Upon the closing, on or before the Maturity Date, of the Merger, the Alliance Note, together with accrued and trade secrets, are important assets for us. We do not hold any patents protecting our intellectual property. Various events outsideunpaid interest, shall automatically be converted (a “Mandatory Conversion”) into shares of our control posecommon stock, at a threat to our intellectual property rights as well as to our business. For example, we may beconversion price of $10.00 per share, subject to third-party intellectual property rights claims,adjustment for stock splits, stock dividends, reclassifications and our technologies may not be able to withstand any such claims. Regardlessother similar recapitalization transactions that occur after the date of the meritsAlliance Note. If the Merger is not consummated, we will be obligated to repay the Alliance Note, which would require a significant amount of cash on hand or the claims, any intellectual property claims could be time-consuming and expensiveneed to litigate or settle. In addition, if any claims against us are successful, we may haveraise capital to pay substantial monetary damagesoff or discontinue any of our practicesrefinance the Alliance Note. There can be no assurance that are foundis such event arose, we would have sufficient cash on hand to be in violation of another party’s rights. We also may haverepay the Alliance Note or could raise capital on favorable terms, or at all, 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,repay 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.Alliance Note.

 

We attempt to protectUncertain or adverse economic conditions may have a negative impact on our trade secrets and other critical confidential information through contractual agreements, which may be breached.industry, business, results of operations or financial position.

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 agreementsUncertain or arrangements, and our confidential information may be leaked and used by other companies that compete in our industry. Any such use of our informationadverse economic conditions could have a negative effect on the fundamentals of our business, results of operations and/or financial position. These conditions could have a negative impact on our industry. There can be no assurance that we will not experience any material adverse effect on our business as a result of future economic conditions or that the actions of the U.S. Government, Federal Reserve or other governmental and regulatory bodies, for the purpose of stimulating the economy or financial markets will achieve their intended effect. Additionally, some of these actions may adversely affect financial institutions, capital providers, our customers or our financial condition, results of operations or the price of our securities. Potential consequences of the foregoing include:

·our ability to issue equity and/or borrow capital on terms and conditions that we find acceptable, or at all, may be limited, which could limit our ability to access capital;

·potential increased costs of borrowing capital if interest rates rise;

·adverse terms imposed on us by any equity investor;

·the possible impairment of some or all of the value of our goodwill and other intangible assets; and

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·the possibility that any then-existing lenders could refuse to fund any commitment to us or could fail, and we may not be able to replace or refinance the financing commitment of any such lender on satisfactory terms, or at all.

Actual or perceived difficulties in the global capital and credit markets have adversely affected, and uncertain or adverse economic conditions may negatively affect, our business.Ongoing uncertain economic conditions may affect our financial performance or our ability to forecast our business with accuracy.

Our operations and performance depend primarily on California and U.S. economic conditions and their impact on purchases of, or capitated rates for, our delivery of healthcare services. As a result of the global financial crisis that began in 2008, which was experienced on a broad and extensive scope and scale, and the last recession in the United States, general economic conditions deteriorated significantly, and, although the markets have improved significantly, the overall economic recovery since that time has been uneven. Declines in consumer and business confidence and private as well as government spending during and since the last recession, together with significant reductions in the availability and increases in the cost of credit and volatility in the capital and credit markets, as well as government budgeting, have adversely affected the business and economic environment in which we operate and can affect the profitability of our business. Our business is significantly exposed to risks associated with government spending and private payor reimbursement rates. Economic conditions may remain uncertain for the foreseeable future. We believe that this general economic uncertainty may continue in future periods, as our patients, private payors and government payors alter their purchasing activities in response to the new economic reality, and, among other things, our patients may change or scale back healthcare spending, and private and government payors could reduce reimbursement rates, which we have experienced. Additional consequences of such adverse effects could include the delay or cancellation of consumer spending for discretionary and non-reimbursed healthcare. Future disruption of the credit markets, increases in interest rates and/or sluggish economic growth in future periods could adversely affect our patients’ spending habits, private payors’ access to capital (which supports the continuation and expansion of their businesses) and governmental budgetary processes, and, in turn, could result in reduced revenue to us. The continuation or recurrence of any of these conditions may adversely affect our cash flow, results of operations and financial condition. This uncertainty may also affect our ability to prepare accurate financial forecasts or meet specific forecasted results. If we are unable to adequately respond to or forecast further changes in demand for healthcare services, our results of operations, financial condition and business plans.prospects may be materially and adversely affected.

  

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 before the end of their terms, at the end of their term or are not renewed, or are terminated before the end of their term, we would lose the revenuesrevenue generated by those agreements. Any such terminationterminations could have a material adverse effect on our results of operations, financial results, operationscondition and future business plans.

 

Many of our agreements with hospitals and medical groups include prohibitions onagainst 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.If there is a change in accounting principles or the interpretation thereof by the Financial Accounting Standards Board (“FASB”) affecting consolidation of VIEs, it could impact our consolidation of total revenues derived from such affiliated physician groups.

 

ApolloMed ACOOur financial statements are consolidated and include the accounts of our majority-owned subsidiaries and various non-owned affiliated physician groups that are 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 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 entered intoa controlling financial interest in a VIE requires that a qualitative determination be made, and is not solely based on voting rights.

If an agreement with PMG that prevents ApolloMed ACO from selling its operations without PMG’s havingenterprise determines 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 beentity in which it holds a variable interest is not subject to PMG’s purchase option,the VIE guidance in Accounting Standards Codification (“ASC”) 810, the enterprise should apply the traditional voting control model (also outlined in ASC 810) which takesfocuses 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 only if ApolloMed ACO elects to sell itson our 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.

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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 ofproviding healthcare services, we are subject to a myriad ofnumerous 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, when or how 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”)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;

·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;

 

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·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”))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”)ACA and its implementation, amendment, or repeal and replacement, may have on our business, financial condition or results of operations.operations or financial condition.

 

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 numbercontinued implementation 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 majorityprovisions of the measures contained inACA, the adoption of new regulations thereunder and ongoing legal challenges create an uncertain environment for how the ACA just recently became effective,may affect our business, results of operations and financial condition.

However, 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 starting in 2010, 2011 and 2012.2010. Although the expansion of health insurance coverage should increase revenues from providing care to previously uninsured individuals, many of these provisions of the ACA, as currently provided, will continue to become effective beyond 2015,2017, 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 HHS 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 opposeopposed their state’s participation in the expanded Medicaid program, which could resultresulted in the ACA not providing coverage to some low-income persons in those states. In addition, several bills have been, and may continueare continuing to be, introduced in Congress to repeal or amend all or significant provisions of the ACA.

ACA, or repeal and replace the ACA with another law.

 

The ACA changeschanged 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.expanded Medicaid program.

 

The Health Care Reform Act also mandatesActs mandated changes specific to home health and hospice benefits under Medicare. For home health, the Health Care Reform Act mandatesActs mandated the 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 requiresActs require the HHS Secretary of Health and Human Services to test different models for delivery of care, some of which would involve home health services. ItThey also requiresrequire the HHS 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 ActActs further directsdirect the HHS Secretary to rebase payments for home health, which will result in a decrease in home health reimbursement beginning in 2014 that will beis being phased-in over a four-year period. The HHS 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.

 

The impact that changes in healthcare laws could have on us is uncertain but could be material.

Despite the enactment of the ACA and its being upheld by the U.S. Supreme Court as constitutional, continuing legal and political challenges to specific parts of the ACA have added uncertainty about the current state of healthcare laws in the United States. This uncertainty has intensified following the 2016 President election and the publicly announced intention of the leadership of the majority in the 115th Congress to “repeal and replace” the ACA, related Health Care Reform Acts and possibly other healthcare laws, and of the Administration to seek to have regulators amend or rescind certain regulations thereunder.

It is impossible to know what impact such efforts, assuming they are successful, will have on us. However, any changes in healthcare laws or regulations that reduce, curtail or eliminate payments, government-subsidized programs, government-sponsored programs, and/or the expansion of Medicare or Medicaid, among other actions, could have a material adverse effect on our business, results of operations and financial condition.

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Just as the fate of the ACA is uncertain, so is the future of ACOs, which were established under the ACA to improve care and reduce costs. We operate an ACO and have been approved by CMS to operate an ACO under the NGACO Model. Under the MSSP and NGACO programs and pursuant to the Participation Agreement we have entered into with CMS for our NGACO Model, our ACO operations will always be subject to the nation’s healthcare laws, as amended, repealed or replaced from time to time.

It is impossible to know what impact such ‘repeal and replace” or similar efforts, assuming they are successful, will have on us. However, any changes in healthcare laws or regulations that reduce, curtail or eliminate payments, reimbursements, government-subsidized programs, government-sponsored programs, and/or the expansion of Medicare or Medicaid, among other actions, could have a material adverse effect on our business, results of operations and financial condition. 

Providers in the healthcare industry are sometimes 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 DRADeficit Reduction Act 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,”review”, have affected and are expected to continue to affect our facilities.operations. 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.

 

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 partynominee shareholder designated by us, through Physician Shareholdersphysician shareholder 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 eventsor California law is interpreted to invalidate these arrangements, there could havebe a material adverse effect on our business, financial condition or results of operations.operations and financial condition.

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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.

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.services. 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 Professionalsclinical 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.license.

 

We do not hold a limited Knox-Keene license, (awhich is a managed care plan license issued pursuant to the California Knox-Keene Health Care Service Plan Act of 1975).in California. If the Department of Managed Health CareDMHC 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.operations and financial condition.

 

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 onupon, in part, 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 our operating results and financial condition.

 

The medical services industry is undergoing significant changes with government and other third-party payors that are taking measures to reduce reimbursement rates or, in some cases, denying reimbursement altogether. There is no assurance that government or other third-party payors will continue to pay for the services provided by our affiliated medical groups. FailureFurthermore, there has been, and continues to be, a great deal of discussion and debate about the repeal and replacement of existing government reimbursement programs, such as the ACA. As a result, the future of healthcare reimbursement programs is uncertain, making long-term business planning difficult and imprecise. The failure of government or other third party payors to cover adequately cover the medical services so provided by the Company willus could have a material adverse effect on our business, results of operations and financial condition, business and prospects.condition.

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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.flow.

 

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 liabilityliabilities 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.

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 establishesWe establish reserves for estimates of incurred but not reported claims (“IBNR”)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 difficultdifficulty 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 futureassets or 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 projectforecast 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, weit is also find it necessary for us 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.

 

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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 anawards against us. An unfavorable resolution of one or more of themthe proceedings in which we are involved now or in the future could have a material adverse effect on our business, assets, cash flow and financial condition, results of operations, or cash flows in a future period.condition.

 

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,” competitorsCompetitors have initiated lawsuits against us based in part on interference with such exclusivity agreements, and may do so in the future. An adverse outcome in one or more of such lawsuits could adversely affect our business, assets, cash flow and financial condition.

 

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, meaning that generally we generally cannot increase our revenue by increasing the amount we charge for our services. To the extent that 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. In April of 2015, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) was signed into law, which made numerous changes to Medicare, Medicaid, and other healthcare related programs. These changes include new systems for establishing the annual updates to payment rates for physicians’ services in Medicare. Our business may be significantly and adversely affected by MACRA and any such changes in reimbursement policies and other legislative initiatives aimed at or having the effect of reducing healthcare costs associated with Medicare, TRICARE (which provides civilian health benefits for U.S Armed Forces military personnel, military retirees, and their dependents) 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.

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. WeAccordingly, 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. Paymentsperiods, in which case 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 ActActs 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 ActActs 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.

 

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We may be impacted by eligibility changes to government and private insurance programs.

Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or participate in governmental programs may increase. A shift in payor mix from managed care and other private payors to government payors or the uninsured may result in a reduction in our rates of reimbursement or an increase in our uncollectible receivables or uncompensated care, with a corresponding decrease in our net revenue. Changes in the eligibility requirements for governmental programs also could increase the number of patients who participate in such programs or the number of uninsured patients. Even for those patients who remain with private insurance, changes in those programs could increase patient responsibility amounts, resulting in a greater risk for us of uncollectible receivables. Further, our hospice related business could become subject to “quality star ratings,”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.operations and financial condition.

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 (the “FDCPA”) 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.FDCPA. 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.operations and financial condition.

 

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 the healthcare business. Itindustry. As has been the trend in recent years, it is reasonable to believeassume that there maywill continue to 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 new healthcare reform legislation or regulations, nor is it possible at this time to estimate the impact of potential new legislation or regulations on our business. It is possible that future legislation enacted by Congress or state legislatures, or regulations promulgated by regulatory authorities at the Federal or state level, 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 adverseaverse 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.

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 Recordselectronic 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.

 

The healthcare industry is becoming increasingly reliant on use of technology.

The role of technology is greatly increasing in the delivery of healthcare, which provides risk to traditional physician-driven healthcare delivery companies such as ours. We need to understand and integrate with electronic health records, databases, cloud-based billing systems and many other technology applications in the delivery of our services. Additionally, consumers are using mobile applications and care and cost research in selecting and usage of healthcare services. We rely on employees and third parties with technology knowledge and expertise and could be at risk if resources are not properly established, maintained or secured.

We may be exposed to cybersecurity risks.

While we have not experienced any cybersecurity incidents, the nature of our business and the requirements of healthcare privacy laws such as HIPAA and HITECH, impose significant obligations on us to maintain the privacy and protection of patient medical information. Any cybersecurity incident could expose us to violations of HIPAA and/or HITECH that, even unintended, could cause significant financial exposure to us in the form of fines and costs of remediation of any such incident.

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Risks Related to the Ownership of Our Securities

 

TheOur stock is thinly traded, the market price of our common stock may beis volatile, and the value of your investment could fluctuate, and decline, significantly.

 

TheOur stock is thinly traded. In part because of that, and for other reasons, the trading price forof 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 of operations, our financial situation, the announcement and consummation of certain transactions, our ability or inability to raise the additional capital we may need and the terms on which we raise it,capital and general market and economic conditions.trading volume. 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;

·sales of stock by our stockholders generally and our larger stockholders;stockholders in particular;

·general inefficiencies of trading on junior markets or quotations systems, including the need to comply on a state-by-state basis with state “blue sky” securities laws for the resale of our common stock on OTC Pink; and

 

·general stock market and economic conditions.

Some of these factors are beyond our control. BroadThere has been a limited trading market fluctuations may lower the market price offor 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.date.

 

If anyThere has been limited trading volume in our common stock, which is quoted on OTC Pink under the trading symbol “AMEH”. It is anticipated that there will continue to be a limited trading market for our common stock on OTC Pink and it is often difficult to obtain accurate price quotes for our stock on OTC Pink. 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 our historical offerings or salescommon stock. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our or our subsidiaries’ or affiliates’ unregistered securities were foundability 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 oracquire 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.companies by using common stock as consideration.

 

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, officers, other employees, consultants, lenders and other third parties securities, including options, warrants, convertible preferred stock and convertible debt, that such parties may exercise or convert into shares of our common stock, which exercisestock. Such conversions or exercises would result in the issuance of additional shares of our common stock, resulting in 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,Moreover, 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.

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 existingour stockholders.

 

The Delaware General Corporation Law containcontains provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our Company,us, even when these attempts may be in the best interests of our stockholders. Delaware law imposes conditions on certain business combination transactions with “interested stockholders.”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 classone or more classes 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.

50

 

We have been conditionally approved, subject toIn the satisfaction of certain conditions and meeting all of the Nasdaq Capital Market listing standards on the date we uplist, to listpast, 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:

·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 behas been subject to the “penny stock” rules of the SEC and it could become subject to that rule again.Additionally, trading in our securities is very limited, which makes transactions in our common stock cumbersome, increases stock price volatility and may reduce the value of an investment in our securities.

 

The SEC has adopted Rule 3a51-1 ofunder the Securities and Exchange Act, of 1934, as amended, which establishes the definition of a “penny stock,”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. During the last 52 weeks, our common stock has traded at both below and above $5.00 per share. For any transaction involving a penny stock, unless exempt, Rule 15g-9 under the Exchange Act requires:

 

·a broker or dealer to approve a person’s account for transactions in penny stocks; and

 

·a broker or dealer receives a written agreement for the transaction from the investor, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

 

·obtain financial information and investment experience objectives of the person; and

·make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

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 ofpurchase or sell our common stock and cause a decline in the market value of our stock.stock or underscore our stock’s volatility in the market.

 

We engagedAdditionally, our common stock is relatively thinly traded and on a number of days there are no market transactions in a reverseour common stock. This could contribute to stock split, which may decreaseprice volatility or supply/demand imbalances that could adversely affect the liquidity of the sharesprice of our common stock.stock from time to time, making an investment in our common stock less attractive to certain investors.

 

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

Not applicable.

ITEM 2. DESCRIPTION OF PROPERTIES

ITEM 2.PROPERTIES

 

Our corporate headquarters are located at 700 North Brand Boulevard, Suite 220,1400, Glendale, California 91203.  Under the original lease of the premises, we occupied space in Suite 220. On October 14, 2014, theour lease was amended by a Second Amendment (the “Second Lease Amendment”), pursuant to which includeswe relocated our corporate headquarters to a larger suite in the same office building in October 2015. The Second Lease Amendment relocates the leased premises from Suite No. 220 to Suite Nos. 1400, 1425 and 1450, which collectively include 16,484 rentable square feet (the “New Premises”). The New Premises were improved with an allowance of $659,360, provided by the landlord, for construction and installation of equipment for the New Premises. The Second Lease Amendment also extends the term of the lease tofor approximately six years after we obtain occupancy ofoccupy the new premises. We anticipate occupying the new premises during the second fiscal quarter of 2016.New Premises and increases our security deposit. The Second Lease Amendment sets the HeadquartersNew Premises 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. However, the base rent will be abated by up to $228,049 subject to other terms of the lease.

 

AMM leases the SCHC Premisespremises located in Los Angeles, California, consisting of 8,766 rentable square feet, for a term of ten years. The base rent for the SCHC Leaselease is $32,872approximately $33,000 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

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:

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.

ITEM 4.MINE SAFETY DISCLOSURES.

 

Not applicable.

 

51

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

ITEM 5.MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our common stock is quoted on the OTCQBOTC Pink under the symbol, “AMEH,”“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.OTC Pink. The OTCQB quotations below reflect inter-dealer prices, without retail markup, markdown or commissions and may not necessarily represent actual transactions.

 

 High Low  High Low 
Fiscal Year ended March 31, 2015        
Fiscal Year ended March 31, 2017        
First Quarter $7.00  $4.40  $7.50  $3.75 
Second Quarter  6.50   2.50   6.00   3.55 
Third Quarter  5.30   3.00   9.00   1.41 
Fourth Quarter  5.49   3.60   10.25   7.50 

  

 High Low  High Low 
Fiscal Year ended March 31, 2014        
Fiscal Year ended March 31, 2016        
First Quarter $7.50  $2.60  $9.75  $3.75 
Second Quarter  7.20   3.00   10.00   6.00 
Third Quarter  100.10   3.81   7.25   4.75 
Fourth Quarter  6.50   4.30   6.00   4.00 

On June 30, 2015,26, 2017, the closing price of our common stock as quoted on OTCQBOTC Pink 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.$10.00.

 

Stockholders

 

As of May 5, 2015,June 26, 2017, as reported by the Company’s stock transfer agent, there were approximately 348351 holders of record of our common stock. We believe that the number of beneficial owners of our common stock substantially exceeds this number.

 

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.

Recent Sales of Unregistered Securities

On October 14, 2015, we sold 1,111,111 units (the “Series A Units”), each Series A Unit consisting of one share of our Series A Preferred Stock (the “Series A Preferred Stock”) and a stock purchase warrant (the “Series A Warrant”) to purchase one share of our common stock at an exercise price of $9.00 per share, for which NMM paid us $10,000,000. We used the proceeds primarily to repay certain outstanding indebtedness owed by us to NNA and the balance for working capital. For accounting purposes this preferred stock was classified as temporary or mezzanine equity.

On November 17, 2015, we agreed to issue a total of 600,000 shares of our Common Stock to NNA pursuant to the Second Amendment and Conversion Agreement among NNA, Warren Hosseinion, M.D., Adrian Vazquez, M.D. and us (the “Conversion Agreement”). Pursuant to the Conversion Agreement, we agreed to issue to NNA (i) 275,000 shares of our common stock and to pay accrued and unpaid interest of $47,112, in full satisfaction of NNA’s conversion and other rights under the 8% Convertible Note dated March 28, 2014, issued by us to NNA, in the principal amount of $2,000,000; and (ii) 325,000 shares of our common stock in exchange for all stock purchase warrants held by NNA (the “NNA Warrants”), under which NNA had the right to purchase 300,000 shares of our common stock at an exercise price of $10.00 per share and 200,000 shares at an exercise price of $20.00 per share, in each case subject to anti-dilution adjustments.

On January 13, 2016, we issued 275,000 shares of our common stock to the sole shareholder of Healarium, Inc., the assets of which we purchased for such consideration and a payment by the seller to us of $200,000.

52

On March 30, 2016, we sold NMM 555,555 units (the “Series B Units”) each Series B Unit consisting of one share of our Series B Preferred Stock (the “Series B Preferred Stock”) and a stock purchase warrant (the “Series B Warrant”) to purchase one share of our common stock at an exercise price of $10.00 per share, for which NMM paid us $4,999,995.

The securities described above were all issued in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Rule 506(b) of Regulation D promulgated by the SEC thereunder. For more information regarding these issuances, see “Management’s Discussion and Analysis and Results of Operations – Liquidity and Capital Resources”.

In connection with the conversion by several holders of our 9% Notes into an aggregate 138,463 shares of our common stock, (i) on or about August 23, 2016, we issued an aggregate 45,717 shares of our common stock to four such individuals; and (ii) on or about September 22, 2016, we issued an aggregate 26,124 shares of our common stock to three such individuals. As of March 31, 2017, an aggregate 66,622 shares of our common stock had not yet been issued to the remaining four such individuals. We received no proceeds in connection with any of these exercises or issuances. The foregoing issuances were exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof, and/or Rule 506(b) of Regulation D or Regulation S promulgated thereunder.

In connection with the exercise by several holders of certain warrants into an aggregate 150,000 shares of our common stock, on or about October 21, 2016, we issued an aggregate 140,000 shares of our common stock to ten such individuals. As of March 31, 2017, an aggregate 10,000 shares of our common stock had not yet been issued to the remaining one such individual. We received approximately $172,000 in connection with these exercises. The foregoing issuances were exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof, and/or Rule 506(b) of Regulation D or Regulation S promulgated thereunder.

On November 4, 2016, in connection with our acquisition of all of the stock of BAHA, we issued a stock purchase warrant to Dr. Enderby to purchase up to 24,000 shares of our common stock at an exercise price of $4.50 per share (the “Enderby Warrant”), which was the closing price of our common stock on the trading day immediately preceding the closing date of that acquisition. The Enderby Warrant may be exercised in equal monthly installments of 1,000 shares over a 24-month period commencing on December 4, 2016 and terminating on November 4, 2018. The Enderby Warrant contains additional provisions typical of an agreement of this type, including exercise procedures; a “cashless exercise” feature; adjustment of the warrant exercise price and/or the number of shares for which the Warrant may be exercised in the event of certain events, such as stock dividends, stock splits, recapitalizations and similar transactions; governing law and venue for litigation of disputes.

On November 17, 2016, we issued the Chindris Warrant to purchase up to 5,000 shares of our common stock at an exercise price of $9.00 per share.

All the securities described above that were issued in November 2016 were issued in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended.

  

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, 2015,2017, including our 2010 Equity Incentive Plan (as amended) and(the “2010 Plan”), our 2013 Equity Incentive Plan.Plan (the “2013 Plan”) and our 2015 Equity Incentive Plan (the “2015 Plan”). The material terms of each of these plans and agreements are described in the notesNotes to our March 31, 2015 consolidated financial statements,Consolidated Financial Statements, which are part of this Report. Each of these plans was approved by our stockholders.report.

Plan Category 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)
 
Equity compensation plans approved by stockholders  776,500  $4.69   48,600 
Equity compensation plans not approved by stockholders  -   -   - 
Total  776,500  $4.69   48,600 

Plan Category 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)
 
Equity compensation plans approved by stockholders  1,165,350  $4.24   1,023,600 
Equity compensation plans not approved by stockholders  -   -   - 
Total  1,165,350  $4.24   1,023,600 

53

ITEM 6. SELECTED FINANCIAL DATA

ITEM 6.SELECTED FINANCIAL DATA

 

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 deliverypopulation health management company withworking to provide coordinated, outcomes-based medical care in a cost-effective manner. Led by a management team with over a decade of experience, working at providing coordinated, outcomes-based medical care in a cost-effective manner. Wewe have built a company and culture that is focused on physicians providing high qualityhigh-quality medical care, population health 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 rapidly evolving 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 MSSP ACO, which focuses on the provisions ofproviding high-quality and cost-efficient care to Medicare FFS patients;

 

·Two IPAs,A NGACO, which contractstarted operations on January 1, 2017, and focuses on providing high-quality and cost-efficient care for Medicare fee-for-service patients;

·An IPA, which contracts with physicians and provideprovides care to Medicare, Medicaid, commercial and dual eligibledual-eligible patients on fee-for-service or riska risk- and value basedvalue-based fee bases;basis;

 

·Clinics,One clinic which provide primary carewe own, and which provides specialty care in the Greatergreater Los Angeles area;

·Hospice care, Palliative care, and home health services, which include our at-home and end-of-life services; and

 

·PalliativeA cloud-based population health management IT platform, which was acquired in January 2016, and includes digital care home healthplans, a case management module, connectivity with multiple healthcare tracking devices and hospice services, which include, our at-home, pain management and final stages of life services.also integrates clinical data.

We operate in one reportable segment, the healthcare delivery segment. 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;FFS reimbursement; and

 

·Risk and value-based contracts with health plans, third party IPAs, hospitals and the CMS’sNGACO and MSSP sponsored by CMS, which are the primary revenue sources for our hospitalists, ACO,ACOs, IPAs and hospice/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).California. We primarily provide services to patients, thatthe majority of whom are covered by private or public insurance, although we do derivewith a small portion of our revenue coming 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.

 

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The originalinitial business owned by ApolloMed was ApolloMed Hospitalists (“AMH”),us is AMH, a hospitalist company, which was incorporated in California in June, 2001 and which began operations at Glendale Memorial Hospital. Through a reverse merger, ApolloMedwe became a publicly held company in June 2008. ApolloMed wasWe were 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.outpatient. 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. In 2016, we formed APAACO, to participate in the NGACO Model, for which we were approved by CMS in January 2017.

 

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").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,APS, 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. 

Revenues earned by ApolloMed ACO are 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 achievement of the minimum savings rate as determined by MSSP for the relevant period.

 

Our recentHighlights

The following describes certain developments in fiscal 2017 to date that are important to understanding our overall results of operations and financial highlights,condition.

Operations and Financings

We achieved approximately 30% growth in net revenues from fiscal 2016, almost entirely from our hospitalist operations. We employed locum tenens to full-fill the contracts in the initial phase which increased our cost of sale substantially. Notwithstanding that growth, our net loss increased by approximately 6% during the same period.

On November 4, 2016, we acquired BAHA, through an affiliate wholly-owned by Dr. Hosseinion, as more fullynominee shareholder on our behalf. BAHA was managed by us under long-term MSA since February 17, 2015 and the results were consolidated in our financial statements as under VIE accounting. As of the date of acquisition, we obtained a controlling interest in BAHA.

On January 18, 2017, CMS announced that APAAACO has been approved to participate in the new NGACO Model. Through the NGACO Model, CMS has partnered with APAACO and other ACOs experienced in coordinating care for populations of patients and whose provider groups are willing to assume higher levels of financial risk and reward under the NGACO Model. The NGACO program began on January 1, 2017. To position ourselves to participate in the NGACO Model, we have devoted, and intend to continue to devote, significant effort and resources, financial and otherwise, to the NGACO Model, and refocused away from certain other parts of our historic business and revenue streams, which will receive less emphasis in the future and could result in reduced revenue from these activities. We currently anticipate that revenue from the NGACO Model will be a significant source of revenue for us in fiscal 2018 and future periods, although no assurance of that can be given at this time.

During fiscal 2017, we raised an aggregate $10.39 million, which consists of a $5.0 million loan received from NMM, a $4.99 million loan received from Alliance and a $0.4 million loan received from an individual, the last mentioned of which was repaid in accordance with its terms.

Proposed Merger

On December 21, 2016, we entered into the Merger Agreement, pursuant to which NMM will merge into a wholly-owned subsidiary of ours. NMM is one of the largest healthcare MSOs in the United States, delivering comprehensive healthcare management services to a client base consisting of health plans, IPAs, hospitals, physicians and other health care networks. NMM currently is responsible for coordinating the care for over 600,000 covered patients in Southern, Central and Northern California through a network of ten IPAs with over 2,000 contracted physicians. On a pro forma basis, the combined organization, would provide medical management for over 700,000 patients through a network of over 3,000 healthcare professionals and over 400 employees. The combination of ApolloMed and NMM brings together two complementary healthcare organizations to form one of the nation’s largest integrated population health management companies, which we believe will be well positioned for the ongoing transition of U.S. healthcare to value-based reimbursements. The transaction, which is expected to close in the second half of calendar year 2017, is subject to antitrust regulatory clearance and other closing conditions, as well as approval by ApolloMed and NMM stockholders.

For all purposes of this report, unless expressly indicated otherwise, we have discussed below, include thatour present and intended operations, opportunities and challenges without consideration of the Merger or the effect of the Merger, if and should it be consummated.

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Results of Operations

The following sets forth selected data from of our results of operations for the years presented:

  For the Year Ended       
  March 31,       
        $  % 
  2017  2016  Change  Change 
             
Net revenues  57,427,701   44,048,740   13,378,961   30%
                 
Costs and expenses                
Cost of services  48,735,537   34,000,786   14,734,751   43%
General and administrative  18,583,372   16,962,687   1,620,685   10%
Depreciation and amortization  645,742   351,396   294,346   84%
                 
Total costs and expenses  67,964,651   51,314,869   16,649,782   32%
                 
Loss from operations  (10,536,950)  (7,266,129)  (3,270,821)  45%
                 
Other (expense) income:                
Interest expense  (82,905)  (542,296)  451,391   -85%
Gain (loss) on change in fair value of warrant and conversion feature liabilities  1,633,333   (408,692)  2,042,025   -500%
Gain on deconsolidation of variable interest entity  242,411   -   242,411   100%
Loss on debt extinguishment  -   (266,366)  266,366   -100%
Other income  14,701   239,057   (224,356)  -94%
                 
Total other income (expense), net  1,807,540   (978,297)  2,785,837   -285%
                 
Loss before benefit from income taxes  (8,729,410)  (8,244,426)  (484,984)  6%
                 
Benefit from income taxes  (47,495)  (71,037)  23,542   -33%
                 
Net loss  (8,681,915)  (8,173,389)  (508,526)  6%
                 
Net income attributable to noncontrolling interest  287,901   1,170,655   (882,754)  -75%
                 
Net loss attributable to Apollo Medical Holdings, Inc. $(8,969,816) $(9,344,044) $374,228   -4%

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Year Ended March 31, 2017 Compared to Year Ended March 31, 2016

Net revenues

Net revenues for the year ended March 31, 2015, we had:2017 increased by approximately $13.4 million, from $44.0 million to $57.4 million, or 30%, as compared to the same period of 2016. The increase in net revenues was primarily due to an increase of $12.2 million from AMH and BAHA as a result of new hospitalist contracts, an increase of $4.3 million in MMG revenues due to the growth in capitated membership and increase in full risk surplus in 2017 from a deficit in 2016 that was driven by a decrease in hospital admits and utilization, and increase in memberships and an increase in $0.1 million in Apollo Care Connect revenue. The increases were partially offset by the decrease of $2.1 million from BCHC and HCHHA due to lower patient census, a decrease of $1.1 million from LALC and Hendel due to deconsolidation during the fourth quarter of fiscal 2017 and lower patient visits.

 

·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.

Cost of services

 

* Approximately $5.4 millionCost of the revenueservices for the year ended March 31, 2015,2017 increased by approximately $14.7 million, from $34.0 million to $48.7 million, or 43%, as compared to the same period of 2016. The increase was derivedprimarily due to a $14.4 million increase in AMH and BAHA cost of services that was primarily related to the new hospitalist contracts that started in 2016 and use of contract labor, a $2.8 million increase in MMG due to increases in the PCP capitation and SPC capitation due to increase in membership, increase in claims offset by increases in claims recovery due to high claims eligible for stop loss. Such increases were partially offset by the decrease of $1.0 million from BCHC and HCHHA due to lower patient census, a $0.6 million decrease in SCHC as a result of favorable margins in the current year as compared to the same period of the prior year, decrease of $0.6 million in ACC due to the sale of substantially all its assets during the 2016 fiscal year and related cessation in operations, decrease of $0.3 million in LALC and Hendel due to deconsolidation during the fourth quarter of fiscal 2017.

General and administrative

General and administrative costs for the year ended March 31, 2017 increased by approximately $1.6 million, from $17.0 million to $18.6 million, or 10%, as compared to the same period of 2016. There was an approximate $2.7 million increase relating to AMM from the increase in overheads to manage 30% increase in revenue and merger related cost incurred in fiscal 2017, a $1.1 million increase from SCHC due to increase in operating costs, a $0.9 million increase from AMH and BAHA from the increase in overheads to manage $12.2 million increase in revenue compared to same period in fiscal 2016, $0.4 million increase from Apollo Care Connect due to new operations, which is attributable to the increase in revenues in the current year. The increases were partially offset by a decrease of $1.9 million from MMG as a result of a decrease in payroll and related expenses and management fees, $0.5 million from ACC as a result of a cessation in operations, a decrease of $0.4 million from BCHC and HCHHA due to operational restructure and decreases in revenue, a decrease of $0.3 million from ACO expenses, and a decrease of $0.3 million from LALC and Hendel as a result of the deconsolidation in the fourth quarter of fiscal 2017.

Depreciation and amortization

Depreciation and amortization expense for the year ended March 31, 2017, increased by approximately $0.3 million, from $0.3 million to $0.6 million, or 84%, as compared to the same period of 2016. This increase was primarily due to an increase in depreciation and amortization expense related to the amortization of intangible assets of Apollo Care Connect.

Interest expense

Interest expense for the year ended March 31, 2017, decreased by approximately $0.4 million, from $0.5 million to $0.1 million, or 85%, as compared to the same period of 2016. This decrease was primarily due to the prior year amortization expense of the debt discount as a result of the out of period correction adjustment to properly state our warrant liability, unamortized debt discount and deferred financing costs that did not occur in the current year. 

Gain (loss) on change in fair value of warrant and conversion feature liabilities

The net change in fair value of warrant and conversion feature liabilities for the year ended March 31, 2017, changed by approximately $2.0 million, from a receivableloss of $0.4 million to a gain of $1.6 million, or 500%, as compared to the same period of 2016. This gain resulted from CMS (the payment forthe change in the fair value measurement of our warrant, which was received in October, 2014) relatedconsider, among other things, expected term, the volatility of our share price, interest rates, associated with the conversion feature of the Series A Warrant issued to our ACO's portionNMM.

Gain on deconsolidation of shared savings achievedVIE

For the year ended March 31, 2017, we recorded a gain on deconsolidation of VIE of $0.2 million due to the deconsolidation of LALC and Hendel during the periodfourth quarter of July 1, 2012fiscal 2017.

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Loss on Extinguishment of Debt, Net

For the year ended March 31, 2016, we incurred a loss on debt extinguishment of $0.3 million in connection with the repayment of NNA debt and conversion of our then outstanding debt to DecemberNNA into shares of our common stock.

Other income

For the year ended March 31, 2013. No2017, the net other income decreased by $0.2 million to $14,701 as a result of the reduction in provider incentives from the health plan.

Benefit from income taxes

For the year ended March 31, 2017, income tax benefit of approximately $0.1 million remained consistent with the prior year.

Net income attributable to noncontrolling interests

For the year ended March 31, 2017, net income attributable to noncontrolling interest decreased by $0.9 million from $1.2 million to $0.3 million, primarily due to the deconsolidation of LALC and Hendel during the fourth quarter of fiscal 2017 and acquisition of the noncontrolling interest in BAHA in November 2016, the results of BAHA are since considered as controlling interest.

Net loss

As a result of the foregoing factors, we incurred a net loss for the year ended March 31, 2017 of approximately 8.7 million compared to a net loss of approximately $8.2 million for the year ended March 31, 2016, an increase in net loss of approximately $0.5 million or 6%. Net loss per share was $1.49 for the year ended March 31, 2017 compared to a net loss per share of $1.79 for the year ended March 31, 2016, a decrease in net loss per share of $0.30.

Liquidity and Capital Resources

We have a history of operating losses. We had net loss of approximately $8.7 million and approximately $8.2 million for the years ended March 31, 2017 and 2016, respectively. We had negative cash flow from operations of approximately $8.1 million and approximately $1.8 million for the years ended March 31, 2017 and 2016, respectively. Cash flows used in investing activities were approximately $1.4 million and approximately $0.2 million for the years ended March 31, 2017 and 2016, respectively. Cash flows provided by financing activities were approximately $8.9 million for the year ended March 31, 2017, compared to cash flows provided by financing activities of approximately $6.3 million for the year ended March 31, 2016. We expect to have positive cash flow from operations for our 2018 fiscal year.

As of March 31, 2017, we have an accumulated deficit of approximately $37.7 million. At March 31, 2017, we had cash equivalents of approximately $8.7 million compared to cash and cash equivalents of approximately $9.3 million at March 31, 2016. At March 31, 2017, we had net borrowings from notes and lines of credit totaling approximately $9.9 million compared to net borrowings at March 31, 2016 of approximately $0.2 million and availability under lines of credit of approximately $0.2 million.

These factors among others raise substantial doubt about our ability to continue as a going concern. Our long-term ability to continue as a going concern is dependent upon our ability to increase revenue, reduce costs, achieve a satisfactory level of profitable operations, and obtain additional sources of suitable and adequate financing. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern. Our ability to continue as a going concern is also dependent our ability to further develop our business. We may also have to reduce certain overhead costs through the reduction of salaries and other means, and settle liabilities through negotiation. There can be no assurance that management’s attempts at any or all of these endeavors will be successful.

To date, we have funded our operations from a combination of internally generated cash flow and external sources, including the proceeds from the issuance of equity and/or debt securities. We expect to continue to fund our working capital requirements, capital expenditures and payments of principal and interest on outstanding indebtedness, with cash on hand, cash flows from operations, available borrowings under our lines of credit and, if available, additional financings of equity and/or debt. Management does not believe that we have sufficient liquidity to meet our obligations for at least the next twelve months without some additional funds, such as funds available from raising capital. However, no assurance can be madegiven that any such a paymentfunds will be madeavailable at all or available on favorable terms. We are substantially dependent upon the consummation of the Merger to meet our liquidity requirements. See “The Proposed Merger and January 2017 Loan” below.

For the year ended March 31, 2017, cash used in operating activities was approximately $8.1 million. This was the result of net loss of $8.7 million offset by add-backs of non-cash items of $0.4 million and the change in working capital of $0.1 million. Non-cash expenses primarily include provision for doubtful accounts, net of recoveries, depreciation and amortization expense, impairment on intangible assets, gain on deconsolidation of VIE, stock-based compensation expense, deferred taxes, amortization of deferred financing costs and the change in the future,fair value of the warrant liabilities. Cash provided by changes in working capital was primarily due to the $3.7 million increase in accounts payable and ifaccrued liabilities, offset by a decrease in medical liabilities of $0.9 million and increase of $2.8 million in accounts receivables.

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On March 1, 2016, we sold substantially all the assets of ACC to an unrelated third party. In connection with the sale, we received cash of $10,000 and the purchaser issued a non-interest bearing promissory note to us in the amount of $51,000, of which $5,000 was repaid prior to year-end of fiscal year 2016. We recognized a loss on disposal in the amount of $476,745 related to this transaction, which consisted of the write-off of the remaining goodwill and intangible assets of ACC in the amount of $461,500 and $27,427, respectively, offset by the gain on the sale of net tangible assets in the amount of $12,182. In addition, during the year ended March 31, 2016, we determined that the remaining goodwill and intangible assets of AKM in the amount of $83,943 and $123,342, respectively, were not recoverable. Accordingly, we recorded an impairment charge in the aggregate amount of $207,285 for the year ended March 31, 2016.

For the year ended March 31, 2017, cash used in investing activities was approximately $1.4 million. This was the result of $0.3 million used for the purchase of fixed assets, $0.2 million for the change in restricted cash and $0.9 million for the divesture of noncontrolling interest related to the deconsolidation of VIE.

For the year ended March 31, 2017, net cash provided by financing activities was $8.9 million which included proceeds of $5 million received from the NMM financing, $4.99 million received from issuance of promissory note, $0.4 million from a loan payable, and $0.1 million from our line of credit, and $0.2 million in proceeds from the exercise of warrants, offset by the aggregate of $0.6 million in principal payments, and $1.2 million distribution to a noncontrolling interest physician practice.

Deconsolidation of VIE

On January 1, 2017, PCCM and VMM amended the MSAs entered into with LALC and Hendel respectively. Based on the Company’s evaluation of current accounting guidance, it was determined that the Company no longer holds an explicit or implicit variable interest in these entities. The Company has consolidated the results of these entities through December 31, 2016. In connection with the amendments, the Company recorded a gain on deconsolidation of $242,411, in the consolidated statement of operations, the deconsolidation of the net assets of the LALC and Hendel entities and related noncontrolling interest of $1,023,183 in the consolidated balance sheet, and a decrease in cash and cash equivalents and in the consolidated statements of cash flows in the amount of $858,670. 

NNA Financing

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 were to mature on March 28, 2019, subject to NNA’s right to accelerate payment on the occurrence of certain events. The Term Loan could have been prepaid at any time without penalty or premium. The loans extended under the Credit Agreement were secured by substantially all of our assets, and were guaranteed by our subsidiaries and consolidated entities. The guarantees of these subsidiaries and consolidated entities were in turn secured by substantially all of the assets of the subsidiaries and consolidated entities providing the guaranty. Any entity that subsequently became a subsidiary or consolidated entity would have been 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 (as defined below).

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 was to mature on March 28, 2019, subject to NNA’s right to accelerate payment is made, it would be made on the occurrence of certain events. We were able to redeem amounts outstanding under the NNA Convertible Note on 60 days’ prior notice to NNA. Amounts outstanding under the NNA Convertible Note were convertible at NNA’s sole election into shares of our common stock at an annual basis.initial conversion price of $10.00 per share. Our obligations under the NNA Convertible Note were guaranteed by our subsidiaries and consolidated entities (including any subsidiaries or consolidated entities that are acquired or formed in the future).

Recent Developments

Management Services Agreement

On February 17,6, 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 Bay Area MSARegistration 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 a hospitalist group (“BAHA”) located inrespect to 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 impacttiming of the Bay Area MSA and determined it triggers variable interest entity accounting which requiresfiling deadline for a resale registration statement for the consolidationbenefit of the hospitalist group into our consolidated financial statements.NNA.

 

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.

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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 Companywe entered into an Amendment to First Amendment and Acknowledgement (the “Amendment”) with NNA of Nevada, Inc., an affiliate of Fresenius Medical Care North America.NNA. 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 Companywe 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.NNA. 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 24,15, 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 wasIf the 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.

On August 18, 2015, we entered into a Waiver and Consent (the “Waiver”) with NNA, whereby NNA waived and consented to certain provisions of the Credit Agreement and the Convertible Note.  Under the terms of the Waiver, NNA (i) agreed to treat BAHA as an exhibit“Immaterial Subsidiary” until October 15, 2015 such that until such date BAHA is not subject to most of the requirements of the Credit Agreement and Convertible Note, including the financial covenants contained therein; (ii) waived events of default which have occurred under the Credit Agreement and Convertible Note as a result of payments made by us to Adrian Vazquez, M.D. and Warren Hosseinion, M.D. in fiscal years 2014 and 2015, which were not permitted under the Credit Agreement or the Convertible Note; (iii) waived an event of default which occurred under the Credit Agreement and Convertible Note as a result of our failure to satisfy a consolidated net worth covenant for the fiscal quarter ended June 2015; and (iv) waived an event of default which occurred under the Credit Agreement and Convertible Note as a result of an outstanding principal balance under an Intercompany Loan Agreement which exceeded the permitted amount by $213,276, with such waiver granted by NNA until October 15, 2015 and subject to a maximum excess loan balance of $250,000 during such time.

Under the Investment Agreement, we issued to NNA the NNA Warrants.

The Credit Agreement, Investment Agreement and NNA Convertible Note contained various representations, warranties and covenants that we made, including the following:

·        We and our subsidiaries and consolidated entities were 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 were prohibited from creating or acquiring new subsidiaries without NNA’s prior approval. We were further prohibited from creating or acquiring any subsidiary that is not wholly-owned by us or one of our subsidiaries;

·        We were 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 were 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 were prohibited from being acquired by merger or consolidation without NNA’s prior consent. With certain exceptions, neither we nor any of our subsidiaries or consolidated entities was permitted to sell or dispose of any assets;

·        With certain exceptions, neither we nor any of our subsidiaries or consolidated entities were permitted to incur any indebtedness or permit any liens to be placed on their properties without NNA’s prior consent;

·        With certain exceptions, neither we nor any of our subsidiaries or consolidated entities were permitted to 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 included 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 did 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 (i) March 28, 2016 or (ii) 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.

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·        We were required to make cash payments to NNA on a ratable basis if we made any payments to holders of restricted stock units, phantom equity rights, equity appreciation rights or any other payments calculated in reference to the Company’s Current Reportvaluation or changes in valuation of our common stock or equity.

Under the Investment Agreement, we also granted the following rights to NNA 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.

·        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, 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 December 31, 2017. If we fail to do so, on such date, 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 shares of our 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 the earlier of (i) June 30, 2018 or (ii) the 5th trading day after the date we are notified by the SEC that such registration statement will not be reviewed or will not be subject to further review to have such registration statement declared effective by the SEC.

On October 14, 2015, NNA converted $1,402,500 of convertible notes and accrued interest, as well as exercised warrants, into an aggregate 600,000 shares of our Common Stock. On October 15, 2015, we repaid all outstanding principal and accrued and unpaid interested owed to NNA under the Credit Agreement, as described below under “NMM Investments – October 2015 Investment by NMM, Repayment of NNA Debt and Conversion of NNA Warrants”.

NMM Investments

October 2015 Investment by NMM, Repayment of NNA Debt and Conversion of NNA Warrants

On October 14, 2015, we entered into a Securities Purchase Agreement (the “2015 Agreement”) with NMM, pursuant to which we sold to NMM, and NMM purchased from us, in a private offering of securities, 1,111,111 Series A Units, each Series A Unit consisting of one share of our Series A Preferred Stock and a Series A Warrant to purchase one share of our common stock at an exercise price of $9.00 per share. NMM paid us an aggregate $10,000,000 for the Series A Units, the proceeds of which we used primarily to repay certain outstanding indebtedness owed by us to NNA and the balance for working capital.

The Series A Preferred Stock has a liquidation preference in the amount of $9.00 per share plus any declared and unpaid dividends. The Series A Preferred Stock can be voted for the number of shares of our common stock into which the Series A Preferred Stock could then be converted, which initially is one-for-one.

The Series A Preferred Stock is convertible into shares of our common stock, at the option of NMM, at any time after issuance at an initial conversion rate of one-for-one, subject to adjustment in the event of stock dividends, stock splits and certain other similar transactions. The Series A Preferred Stock is mandatorily convertible not sooner than the earlier to occur of (i) the later of (x) January 31, 2017 or (y) 60 days after the date on which we file our quarterly report on Form 8-K10-Q for the period ending September 30, 2016 (the “Redemption Expiration Date”); or (ii) the date on which we receive the written, irrevocable decision of NMM not to require a redemption of the Series A Preferred Stock (as described in the following paragraph), in the event that we engage in one or more transactions resulting in gross proceeds of not less than $5,000,000, not including any transaction with NMM.

At any time prior to conversion and through the Redemption Expiration Date, the Series A Preferred Stock was redeemable at the option of NMM, on one occasion, in the event that our net revenue for the four quarters ending September 30, 2016, as reported in our periodic filings under the Exchange Act, were less than $60,000.000. In such event, we shall have up to one year from the date of the notice of redemption by NMM to redeem the Series A Preferred Stock, the Series A Warrants and any shares of our common stock issued in connection with the exercise of any Series A Warrants theretofore (collectively the “Redeemed Securities”), for the aggregate price paid therefor by NMM, together with interest at a rate of 10% per annum from the date of the notice of redemption until the closing of the redemption. We did not attain the $60,000,000 net revenues milestone by such date. NMM relinquished its redemption rights relating to the Series A Preferred Stock pursuant to the terms of a Consent and Waiver Agreement dated as of December 21, 2016 by and between the Company and NMM, which was entered into in connection with the entering into of the Merger Agreement.

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Any mandatory conversion described above shall not take place until such time as it is determined that that conditions for the redemption of the Redeemed Securities have not been satisfied or, if such conditions exist, NMM has decided not to have such securities redeemed.

The Series A Warrants may be exercised at any time after issuance and through October 14, 2020, for $9.00 per share, subject to adjustment in the event of stock dividends and stock splits. Alternatively, the Series A Warrants may be exercised pursuant to a “cashless exercise” feature, for that number of shares of Common Stock determined by dividing (x) the aggregate Fair Market Value (as defined in the Series A Warrant) of the shares in respect of which the Series A Warrant is being converted minus the aggregate Warrant Exercise Price (as defined in the Series A Warrant) of such shares by (y) the Fair Market Value of one share of our common stock. The Series A Warrants are not separately transferable from the Series A Preferred Stock. The Series A Warrants are subject to redemption in the event that the Series A Preferred Stock is redeemed by NMM, as described above.

Pursuant to the 2015 Agreement, NMM has the right to designate to the Nominating/Corporate Governance Committee of the Board of Directors one person to be nominated as a director of the Company. NMM has designated Thomas S. Lam, M.D., and he was first elected as a director on January 19, 2016.

Without the written consent of NMM, between the Closing Date and the six month anniversary of the Closing Date, we shall not acquire, sell all or substantially all of its assets to, effect a change of control, or merge, combine or consolidate with, any other person engaged in the business of being an MSO, ACO or IPA, or enter into any agreement with respect to any of the foregoing.

The 2015 Agreement contains other provisions typical of a transaction of this nature, including without limitation, representation and warranties, mutual indemnification by the parties, governing law and venue for resolution of disputes.

The securities sold to NMM have not been registered under the Securities Act and there are no registration rights with respect thereto.

On October 15, 2015, we repaid, from the proceeds of the sale of the securities to NMM under the 2015 Agreement, our outstanding term loan and revolving credit facility with NNA pursuant to the Credit Agreement, in the aggregate amount of $7,304,506, consisting of principal plus accrued interest. As of March 31, 2016, no amount remained outstanding to NNA.

On November 17, 2015, we entered into the Conversion Agreement, pursuant to which we issued 275,000 shares of our common stock and paid accrued and unpaid interest of $47,112, to NNA, in full satisfaction of NNA’s conversion and other rights under their Convertible Note in the principal amount of $2,000,000. Pursuant to the Conversion Agreement, we issued a total of 325,000 shares of our common stock to NNA in exchange for all NNA Warrants, under which NNA originally had the right to purchase 300,000 shares of our common stock at an exercise price of $10 per share and 200,000 shares of our Common Stock at an exercise price of $20 per share, in each case subject to anti-dilution adjustments. We received no proceeds from NNA in connection with the exercise of the NNA Warrants.

The Conversion Agreement also amended certain terms of the Registration Rights Agreement dated March 28, 2014 between us and NNA, with respect to the timing of the filing deadline for a resale registration statement covering NNA’s registrable securities. The Conversion Agreement also amended the Investment Agreement dated March 28, 2014 between us and NNA, (i) to delete NNA’s right to subscribe to purchase a pro rata share of certain new equity securities that may be issued by us in the future and (ii) to provide that NNA must hold at least 200,000 shares of our common stock to have the right (y) to appoint a representative to attend all meetings of the Company’s Board of Directors and any committee thereof in a nonvoting observer capacity, and (z) to have a representative nominated as a member of the Company’s Board and each committee thereof, including without limitation the Company’s compensation committee. NNA nominated Mark Fawcett as its representative on the Board and Mr. Fawcett was first elected as a director on January 12, 2016.

March 2016 Investment

On March 30, 2016, we entered into a Securities Purchase Agreement (the “2016 Agreement”) with NMM, pursuant to which we sold to NMM, and NMM purchased from us, in a private offering of securities, 555,555 Series B Units, each Series B Unit consisting of one share of our Series B Preferred Stock and a Series B Warrant to purchase one share of our common stock at an exercise price of $10.00 per share. NMM paid us an aggregate $4,999,995 for the Series B Units, the proceeds of which will be used by us for working capital.

The Series B Preferred Stock has a liquidation preference in the amount of $9.00 per share plus any declared and unpaid dividends. The Series B Preferred Stock can be voted for the number of shares of our common stock into which the Series B Preferred Stock could then be converted, which initially is one-for-one.

The Series B Preferred Stock is convertible into shares of our common stock, at the option of NMM, at any time after issuance at an initial conversion rate of one-for-one, subject to adjustment in the event of stock dividends, stock splits and certain other similar transactions. The Series B Preferred Stock is mandatorily convertible in the event that we engage in one or more transactions resulting in gross proceeds of not less than $5,000,000, not including any transactions with NMM.

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The Series B Warrants may be exercised at any time after issuance and through March 31, 2021, for $10.00 per share, subject to adjustment in the event of stock dividends and stock splits. Alternatively, the Series B Warrants may be exercised pursuant to a “cashless exercise” feature, for that number of shares of our common stock determined by dividing (x) the aggregate Fair Market Value (as defined in the Series B Warrant) of the shares in respect of which the Series B Warrant is being converted minus the aggregate Warrant Exercise Price (as defined in the Series B Warrant) of such shares by (y) the Fair Market Value of one share of our common stock. The Series B Warrants are not separately transferable from the Series B Preferred Stock.

The 2016 Agreement contains other provisions typical of a transaction of this nature, including without limitation, representation and warranties, mutual indemnification by the parties, governing law and venue for resolution of disputes.

The securities sold to NMM have not been registered under the Securities Act and there are no registration rights with respect thereto.

The Proposed Merger and January 2017 Loan

On December 21, 2016, we entered into the Merger Agreement with NMM. Under the terms of the Merger Agreement, Apollo Acquisition Corp., a California corporation and wholly-owned subsidiary of the Company (“Merger Subsidiary”), will merge with and into NMM, with NMM becoming a wholly-owned subsidiary of Holdings. The Merger is intended to qualify for federal income tax purposes as a tax-deferred reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986. In the Merger, NMM will receive such number of shares of Holdings common stock such that, at the closing, NMM shareholders will own 82% and Holding’s stockholders will own 18% of the issued and outstanding shares. Consummation of the Merger is subject to various closing conditions, including, among other things, approval by the stockholders of the Company and the stockholders of NMM. As part of the Merger Agreement, the Company and NMM have made various mutual representations and warranties.

The Merger Agreement also provides that Thomas Lam, M.D., current Chief Executive Officer of NMM, and Warren Hosseinion, M.D., will be Co-Chief Executive Officers of the combined company upon closing of the transaction. Kenneth Sim, M.D., who currently serves as Chairman of NMM, will be Executive Chairman of the Company. Gary Augusta, current Executive Chairman of the Company, will be President, Mihir Shah will continue as Chief Financial Officer, and Hing Ang, current Chief Financial Officer of NMM will be the Chief Operating Officer. Adrian Vazquez, M.D. and Albert Young, M.D. will be Co-Chief Medical Officers. The Board of Directors will consist of nine directors, five appointees (including three independent directors) from NMM and four appointees (including two independent directors) from the Company.

Thomas Lam, M.D., who is also one of our directors, and Kenneth Sim, M.D. entered into voting agreement (the “Voting Agreements”) with us. Under the Voting Agreements, Dr. Sim and Dr. Lam have agreed, among other things, to vote in favor of the approval and adoption of the Merger and the Merger Agreement.

As required by the terms of the Merger Agreement, on January 3, 2017 NMM provided a working capital loan to us in the principal amount of $5,000,000, which is evidenced by a promissory note (the “NMM Note”). The NMM Note has a term of two years, with our payment obligations commencing on February 1, 2017 and continuing on a quarterly basis thereafter until January 2019 (the “NMM Maturity Date”). Under the terms of the NMM Note, we must pay NMM interest on the principal balance outstanding at the Prime Rate (as such term is defined in the NMM Note) plus 1%. All outstanding principal and accrued but unpaid interest under the NMM Note is due and payable in full on the NMM Maturity Date. We may voluntarily prepay the outstanding principal and interest in whole or in part without penalty or premium. Upon the occurrence of any Event of Default (as such term is defined in the NMM Note), the unpaid principal amount of, and all accrued but unpaid interest on, the NMM Note will become due and payable immediately at the option of NMM. In such event, NMM may, at its option, declare the entire unpaid balance of the NMM Note, together with all accrued interest, applicable fees, and costs and charges, including costs of collection, if any, to be immediately due and payable in cash.

In connection with the financing between us and Alliance described below under “Other Financings”), Alliance requested NMM to guaranty repayment of the Alliance Note (as defined below) if it is not converted into shares of our Common Stock in accordance therewith. In connection with the issuance of such guaranty, the parties to the Merger Agreement entered into an Amendment to Agreement and Plan of Merger as of March 30, 2017 (the “Merger Agreement Amendment”). Pursuant to the Merger Agreement Amendment, certain shares of our Common Stock, including shares issuable to Alliance upon conversion of the Alliance Note, are excluded from the calculation of “Parent Shares” (as defined in the Merger Agreement) for purposes of calculating the “Exchange Ratio” (as defined in the Merger Agreement). Additionally, as consideration for excluding the shares issuable upon conversion of the Alliance Note from the definition of Parent Shares and the calculation of Exchange Ratio and NMM’s issuing the guaranty, we agreed to issue NMM a stock purchase warrant for 850,000 shares of our Common Stock at an exercise price of $11.00 per share, such warrant to be issued as part of the Merger Consideration (as defined in the Merger Agreement), payable at the closing of the Merger. We currently anticipate that the Merger will close in the second half of calendar year 2017.

However, if the Merger Agreement is terminated and the Merger is not consummated, we might have an immediate need to raise additional capital to fund our business and meet our expenses, including both transactional and operational expenses.

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Other Financings

On November 17, 2016, Liviu Chindris, M.D. loaned us $400,000 and we issued our promissory note to Dr. Chindris in such principal amount (the “Chindris Note”), bearing interest at a rate of 12% per annum. The Chindris Note required repayment of the outstanding principal and accrued interest, in full, on or before February 18, 2017. We repaid the Chindris Note in full on February 17, 2017. In connection with the Chindris Note, Holdings issued a stock purchase warrant to Dr. Chindris (the “Chindris Warrant”) for the purchase up to 5,000 shares of our Common Stock at an exercise price of $9.00 per share. The relative fair value of the Chindris warrant was $6,880 and was recorded as debt discount to be amortized over the term of the Chindris Note using the straight-line method, which approximates the effective interest method. We amortized $6,880 of debt discount to interest expense for the year ended March 31, 2017.

On March 30, 2017, Alliance loaned us $4,990,000 and we issued our convertible promissory note to Alliance in such principal amount (the “Alliance Note”), bearing interest at a rate of 6% per annum. Upon the closing, on or before the maturity date of December 31, 2017 (the Alliance Maturity Date”), of the Merger, the original principal amount of the Alliance Note, together with all accrued and unpaid interest thereon, shall automatically be converted into 499,000 shares of our common stock, at a conversion price of $10.00 per share (the “Mandatory Conversion”), subject to adjustment for stock splits, stock dividends, reclassifications and other similar recapitalization transactions that occur after the date of the Alliance Note.

If the closing of the Merger has not occurred on or before the Alliance Maturity Date, then the entire then-outstanding principal balance under the Alliance Note and all accrued, unpaid interest thereon, shall be due and payable on the Maturity Date; provided, however, if the Mandatory Conversion has not occurred on or before the Alliance Maturity Date, then we shall have 45 days following the Alliance Maturity Date to repay the outstanding principal, together with accrued and unpaid interest, on the Alliance Note.

In the case of an Event of Default (as defined in the Alliance Note),the entire outstanding principal and all accrued and unpaid interest under the Alliance Note shall automatically become immediately due and payable, without presentment, demand, protest or notice of any kind. If any other event of default occurs and is continuing, Alliance, by written notice to us, may declare the outstanding principal and interest under the Alliance Note to be immediately due and payable. After maturity (by acceleration or otherwise), the unpaid balance (both as to principal and unpaid pre-maturity interest) shall bear interest at a default rate equal to the lesser of (a) three percent (3%) over the rate of interest in effect immediately prior to maturity or (ii) the then maximum legal rate allowed under the laws of the State of California. Additionally, we shall pay all costs of collection incurred by Alliance, including reasonable attorney’s fees incurred in connection with the Alliance’s reasonable collection efforts.

We have granted Alliance both “demand” and “piggyback” registration rights to register the shares of our Common Stock issuable upon conversion of the Alliance Note, subject to a good faith, pro rata clawback provision.

Contractual Obligations and Commercial Commitments

Debt Agreements

As of March 31, 2017, we have a line of credit with an outstanding principal amount of $62,500.

We also have the NMM Note in the principal amount of $5,000,000. Interest is due quarterly at the rate of the Prime Rate plus 1%, with the entire principal balance being due on January 3, 2019.

In addition, we have the Alliance Note in the principal amount of $4.99 million. The note is due and payable to Alliance on (i) December 31, 2017, or (ii) the date on which the Change of Control Transaction (see Note 10 – NMM transaction) is terminated, whichever occurs first (“Maturity Date”). Upon the closing, on or before the Maturity Date, of the Change of Control Transaction, the Note and accrued interest, shall automatically be converted (a “Mandatory Conversion”) into shares of the Company’s common stock, at a conversion price of $10.00 per share, subject to adjustment for stock splits, stock dividends, reclassifications and other similar recapitalization transactions that occur after the date of the Note. NMM has guaranteed the note in exchange for warrants to purchase 850,000 shares of common stock, to be issued as Merger Consideration, at an exercise price of $11 per share, that will only be granted in the case that the proposed merger between the Company and NMM occurs (such warrant will not vest and will expire if the contemplated Merger does not occur).

We have contingent payment arrangements associated with our acquisitions of AKM, SCHC, BCHC, HCHHA and BAHA. The aggregate maximum of contingent payments under these arrangements was $1,650,000, of which $ 954,904 was paid in fiscal 2015 and fiscal 2016 and $154,415 was paid in fiscal 2017, respectively.

Employment Agreements

We have entered into employment with several of our key personnel, including our executive officers, which provide for, among other items, annual base salaries, discretionary bonuses and participation in our equity incentive plans. These agreements also 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 agreements.

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On December 20, 2016, AMM entered into substantially similar employment agreements with each of Warren Hosseinion, M.D., our Chief Executive Officer (the “Hosseinion Employment Agreement”), Gary Augusta, our Chairman of the Board of Directors (the “Augusta Employment Agreement”), Mihir Shah, our Chief Financial Officer (the “Shah Employment Agreement”) and Adrian Vazquez, M.D., our Chief Medical Officer (individually, the “Vazquez Employment Agreement” and, together with the Hosseinion Employment Agreement, the Augusta Employment Agreement and the Shah Employment Agreement, the “Executive Employment Agreements”). The Executive Employment Agreements replaced employment agreements previously entered into with (i) Dr. Hosseinion and Dr. Vazquez on March 28, 2014, as amended on January 12, 2016 and as amended and restated on June 29, 2016, and (ii) Mr. Shah on July 10, 2015.21, 2016. Mr. Augusta’s consulting agreement through Flacane Advisers, Inc. has been terminated.

The Executive Employment Agreements provide that Dr. Hosseinion, Mr. Shah and Dr. Vazquez to continue their respective then-current base salaries, which is $450,000 per year each in the case of Drs. Hosseinion and Vazquez, and $260,000 in the case of Mr. Shah. The Augusta Employment Agreement provides for a base salary of $300,000 per year for Mr. Augusta.

Hosseinion Employment Agreement

The Hosseinion Employment Agreement has a term of three years, with automatic renewals for successive one-year periods unless either party gives written notice not to renew at least 60 days prior to the expiration of the current term. Dr. Hosseinion’s annual base salary is $450,000, which is subject to review on an annual basis. Dr. Hosseinion is also eligible to receive an annual cash bonus for each fiscal year on such terms and conditions as the Board of Directors shall determine in its discretion, which authority the Board of Directors has delegated to the Compensation Committee. Dr. Hosseinion is entitled to participate in any long-term incentive plan that may be available to similarly positioned executives. Dr. Hosseinion also accrues 20 business days of paid time off per calendar year, and any accrued but unused days are paid in cash at the end of the year.

Dr. Hosseinion is eligible to participate in any employee benefit plan which is or may, in the future, be made available by us to our employees; is entitled to prompt reimbursement of reasonable and usual business expenses; shall have paid by us premiums for medical, dental and vision care coverage, as well as premiums for short-term and long-term disability insurance, and term life insurance providing for no less than $2,000,000 of coverage.

AMM may terminate the Hosseinion Employment Agreement in the event of death or disability, without cause upon thirty (30) days prior written notice, or for Cause (as defined in the Hosseinion Employment Agreement). Dr. Hosseinion may terminate the Hosseinion Employment Agreement at any time and for any reason, including, but not limited to, Good Reason (as defined in the Hosseinion Employment Agreement).

Upon termination of Dr. Hosseinion’s employment by AMM for Cause or by Dr. Hosseinion without Good Reason, he shall be entitled to any accrued but unpaid base salary, annual bonus, paid time off and expense reimbursement. Upon termination of Dr. Hosseinion’s employment without Cause or by Dr. Hosseinion for Good Reason, in addition to any accrued but unpaid base salary, paid time off and expense reimbursement, he shall be entitled to receive an amount equal to 24 months of his base salary in effect before the employment terminates. Dr. Hosseinion shall also be entitled to an amount in cash equal to the premiums that AMM pays for Dr. Hosseinion under its group medical, dental and vision programs for 12 months following the date of termination.

The Hosseinion Employment Agreement also contains restrictive covenants for AMM’s benefit and customary provisions regarding confidentiality of information and assignment of inventions.

Augusta Employment Agreement

The Augusta Employment Agreement has a term of three years, with automatic renewals for successive one-year periods unless either party gives written notice not to renew at least 60 days prior to the expiration of the current term. Mr. Augusta’s annual base salary is $300,000, which is subject to review on an annual basis. Mr. Augusta is also eligible to receive an annual cash bonus for each fiscal year on such terms and conditions as the Board of Directors shall determine in its discretion, which authority the Board of Directors has delegated to the Compensation Committee. Mr. Augusta is entitled to participate in any long-term incentive plan that may be available to similarly positioned executives. Mr. Augusta also accrues 20 business days of paid time off per calendar year, and any accrued but unused days are paid in cash at the end of the year.

Mr. Augusta is eligible to participate in any employee benefit plan which is or may, in the future, be made available by us to our employees; is entitled to prompt reimbursement of reasonable and usual business expenses; shall have paid by us premiums for medical, dental and vision care coverage, as well as premiums for short-term and long-term disability insurance, and term life insurance providing for no less than $2,000,000 of coverage.

AMM may terminate the Augusta Employment Agreement in the event of death or disability, without cause upon thirty (30) days prior written notice, or for Cause (as defined in the Augusta Employment Agreement). Mr. Augusta may terminate the Augusta Employment Agreement at any time and for any reason, including, but not limited to, Good Reason (as defined in the Augusta Employment Agreement).

Upon termination of Mr. Augusta’s employment by AMM for Cause or by Mr. Augusta without Good Reason he shall be entitled to any accrued but unpaid base salary, annual bonus, paid time off and expense reimbursement. Upon termination of Mr. Augusta’s employment without Cause or by Mr. Augusta for Good Reason, in addition to any accrued but unpaid base salary, paid time off and expense reimbursement, he shall be entitled to receive an amount equal to 24 months of his base salary in effect before the employment terminates. Mr. Augusta shall also be entitled to an amount in cash equal to the premiums that AMM pays for Mr. Augusta under its group medical, dental and vision programs for 12 months following the date of termination.

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The Augusta Employment Agreement also contains restrictive covenants for AMM’s benefit and customary provisions regarding confidentiality of information and assignment of inventions.

Vazquez Employment Agreement

The Vazquez Employment Agreement has a term of three years, with automatic renewals for successive one-year periods unless either party gives written notice not to renew at least 60 days prior to the expiration of the current term. Dr. Vazquez’s annual base salary is $450,000, which is subject to review on an annual basis. Dr. Vazquez is also eligible to receive an annual cash bonus for each fiscal year on such terms and conditions as the Board of Directors shall determine in its discretion, which authority the Board of Directors has delegated to the Compensation Committee. Dr. Vazquez is entitled to participate in any long-term incentive plan that may be available to similarly positioned executives. Dr. Vazquez also accrues 20 business days of paid time off per calendar year, and any accrued but unused days are paid in cash at the end of the year.

Dr. Vazquez is eligible to participate in any employee benefit plan which is or may, in the future, be made available by us to our employees; is entitled to prompt reimbursement of reasonable and usual business expenses; shall have paid by us premiums for medical, dental and vision care coverage, as well as premiums for short-term and long-term disability insurance, and term life insurance providing for no less than $2,000,000 of coverage.

AMM may terminate the Vazquez Employment Agreement in the event of death or disability, without cause upon thirty (30) days prior written notice, or for Cause (as defined in the Vazquez Employment Agreement). Dr. Vazquez may terminate the Vazquez Employment Agreement at any time and for any reason, including, but not limited to, Good Reason (as defined in the Vazquez Employment Agreement).

Upon termination of Dr. Vazquez’s employment by AMM for Cause or by Dr. Vazquez without Good Reason he shall be entitled to any accrued but unpaid base salary, annual bonus, paid time off and expense reimbursement. Upon termination of Dr. Vazquez’s employment without Cause or by Dr. Vazquez for Good Reason, in addition to any accrued but unpaid base salary, paid time off and expense reimbursement, he shall be entitled to receive an amount equal to 24 months of his base salary in effect before the employment terminates. Dr. Vazquez shall also be entitled to an amount in cash equal to the premiums that AMM pays for Dr. Vazquez under its group medical, dental and vision programs for 12 months following the date of termination. 

The Vazquez Employment Agreement also contains restrictive covenants for AMM’s benefit and customary provisions regarding confidentiality of information and assignment of inventions.

Shah Employment Agreement

The Shah Employment Agreement has a term of three years, with automatic renewals for successive one-year periods unless either party gives written notice not to renew at least 60 days prior to the expiration of the current term. Mr. Shah’s annual base salary is $260,000, which is subject to review on an annual basis. Mr. Shah is also eligible to receive an annual cash bonus for each fiscal year on such terms and conditions as the Board of Directors shall determine in its discretion, which authority the Board of Directors has delegated to the Compensation Committee. Mr. Shah is entitled to participate in any long-term incentive plan that may be available to similarly positioned executives. Mr. Shah also accrues 20 business days of paid time off per calendar year, and any accrued but unused days are paid in cash at the end of the year.

Mr. Shah is eligible to participate in any employee benefit plan which is or may, in the future, be made available by us to our employees; is entitled to prompt reimbursement of reasonable and usual business expenses; shall have paid by us premiums for medical, dental and vision care coverage, as well as premiums for short-term and long-term disability insurance, and term life insurance providing for no less than $2,000,000 of coverage.

AMM may terminate the Shah Employment Agreement in the event of death or disability, without cause upon thirty (30) days prior written notice, or for Cause (as defined in the Shah Employment Agreement). Mr. Shah may terminate the Shah Employment Agreement at any time and for any reason, including, but not limited to, Good Reason (as defined in the Shah Employment Agreement).

Upon termination of Mr. Shah’s employment by AMM for Cause or by Mr. Shah without Good Reason he shall be entitled to any accrued but unpaid base salary, annual bonus, paid time off and expense reimbursement. Upon termination of Mr. Shah’s employment without Cause or by Mr. Shah for Good Reason, in addition to any accrued but unpaid base salary, paid time off and expense reimbursement, he shall be entitled to receive an amount equal to 24 months of his base salary in effect before the employment terminates. Mr. Shah shall also be entitled to an amount in cash equal to the premiums that AMM pays for Mr. Shah under its group medical, dental and vision programs for 12 months following the date of termination. 

The Shah Employment Agreement also contains restrictive covenants for AMM’s benefit and customary provisions regarding confidentiality of information and assignment of inventions.

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Effective June 29, 2016, AMH entered into substantially similar Amended and Restated Hospitalist Participation Service Agreements with each of Dr. Hosseinion (the “Hosseinion Hospitalist Participation Agreement”) and Dr. Vazquez (individually, the ”Vazquez Hospitalist Participation Agreement” and, together with the Hosseinion Hospitalist Participation Agreement, the “Hospitalist Participation Agreements”), replacing agreements between AMH and Drs. Hosseinion and Vazquez that had originally been entered into on March 28, 2014 and amended on January 12, 2016. Pursuant to the Hospitalist Participation Agreements, Drs. Hosseinion and Vazquez provide physician services for AMH. The purpose of the new Hospitalist Participation Agreements is to align payment and benefit provisions, and make other technical changes, to the employment agreements that were previously in effect with each of Drs. Hosseinion and Vazquez. Each of the Hospitalist Participation Agreements provides for (i) hourly compensation rates for covered inpatient intensive medicine services; (ii) AMH’s obligation to secure and pay for medical malpractice insurance, with specified minimum coverage, on behalf of Drs. Hosseinion and Vazquez; and (iii) maintain or purchase a “tail” policy for at least five years following the termination of the respective Hospitalist Participation Agreements. The Hospitalist Participation Agreements contain other provisions typical for an agreement of this type, including non-disclosure, non-solicitation, termination and arbitration of disputes provisions. The Hosseinion Hospitalist Participation Agreement replaced, and thereby terminated, the prior hospitalist participation service agreement between AMH and Dr. Hosseinion, and the Vazquez Hospitalist Participation Agreement replaced, and thereby terminated, the prior hospitalist participation service agreement between AMH and Dr. Vazquez.

As a condition of our causing our affiliates to enter into the Hospitalist Participation Agreements, also on March 28, 2014 we entered into substantially similar stock option agreements with each of Dr. Hosseinion (the “Hosseinion Stock Option Agreement”) and Dr. Vazquez (individually, the “Vazquez Stock Option Agreement” and, together with the Hosseinion Stock Option Agreement, the “Executive Stock Option Agreements”). Each Executive Stock Option Agreement provides that Dr. Hosseinion or Dr. Vazquez grant us the option to purchase (at fair market value) all equity interests in the Company held by Dr. Hosseinion or Dr. Vazquez, as the case may be, in the event that (i) their respective Hospitalist Participation Agreement or Executive Employment Agreement is terminated by us for cause due to a willful or intentional breach by Dr. Hosseinion or Dr. Vazquez, as the case may be; (ii) Dr. Hosseinion or Dr. Vazquez commits fraud or any felony against us or any of our affiliates; (iii) Dr. Hosseinion or Dr. Vazquez directly or indirectly solicits any patients, customers, clients, employees, agents or independent contractors of our or any of our affiliates for competitive purposes; or (iv) Dr. Hosseinion or Dr. Vazquez directly or indirectly Competes (as such term is defined in the Executive Stock Option Agreements) with us or any of our affiliates.

Lease Agreements

Our corporate headquarters are located at 700 North Brand Boulevard, Suite 1400, Glendale, California 91203.  Under the lease of the premises, we occupy spaces in Suite Nos. 1400, 1425 and 1450, which collectively include 16,484 rentable square feet (the “Premises”). The Premises were improved with an allowance of $659,360, provided by the landlord, for construction and installation of equipment for the Premises. The lease requires base rent of $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 and schedules annual increases in base rent each year until the final rental year, which is capped at $43,957 per month. However, the base rent will be abated by up to $228,049 subject to other terms of the lease.

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 approximately $33,000 per month.

Future minimum rental payments required under the operating leases are as follows:

Year ending March 31,

2018 $982,000 
2019  977,000 
2020  994,000 
2021  1,012,000 
2022  716,000 
Thereafter  910,000 
     
  $5,591,000 

MMG

The DMHC oversees the performance of RBOs in California. An RBO is measured for TNE, working capital, cash to claims ratio and claims timeliness. MMG is an RBO in California and is required to maintain positive TNE. In the fourth quarter of the fiscal year ended March 31, 2016, MMG reported negative TNE. MMG submitted a CAP to the DMHC, which the DMHC approved. MMG has up to one year to cure the deficiency. As a result of actions we took, including amending our existing loan agreement with MMG and entering into a subordination agreement with respect to that loan, as discussed below, MMG had positive TNE as of the third quarter of fiscal 2017 and has maintained positive TNE to date. Since DMHC requirements are that an RBO should have positive TNE for one full quarter to be taken off a CAP, we believe that MMG is currently in compliance with DMHC requirements. The DMHC is currently reviewing filings we have made to confirm this compliance.

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In connection with DMHC’s approval of our CAP for MMG, on November 22, 2016, AMM entered into an Intercompany Revolving Loan Agreement (the “MMG Loan Agreement”) with MMG, pursuant to which AMM has agreed to lend MMG up to $2,000,000 (the “Commitment Amount”) in one or more advances (collectively, “Advances”) that MMG may request from time to time during the term of the MMG Loan Agreement. Interest on outstanding Advances shall accrue interest at a rate equal to the greater of 10% per annum or the LIBOR rate then in effect, and is payable monthly on the first business day of each month. In an Event of Default (as defined in the MMG Loan Agreement), interest on Advances shall accrue interest at a default rate equal to 3% per annum above the interest rate then in effect. Additionally, in an Event of Default, MMG may, among other things, accelerate all payments due under the MMG Loan Agreement.

The MMG Loan Agreement replaces substantially similar loan agreements between the parties (other than with respect to the Commitment Amount), including without limitation that certain Intercompany Revolving Loan Agreement dated as of February 1, 2013, that certainAmendment No. l to Intercompany Revolving Loan Agreement dated as of March 28, 2014, that certain Intercompany Revolving Loan Agreement dated as of June 27, 2014, and that certain Amendment No. 2 to Intercompany Revolving Loan Agreement dated as of March 30, 2016, all of which were terminated. See “Intercompany Loans” below.

Also on November 22, 2016, and also at the request of the DMHC in connection with its review and approval of the corrective action plan for MMG, AMM and MMG entered into a Subordination Agreement (the “Subordination Agreement”), pursuant to which AMM has agreed to irrevocably and fully subordinate its right to repayment of Advances, together with interest thereon, under the Loan Agreement, to all other present and future creditors of MMG. AMM also agreed that the payment by MMG of principal and interest of Advances under the MMG Loan Agreement will be suspended and will not mature when, excluding the liability of MMG to pay AMM principal and interest under the MMG Loan Agreement, if after giving effect to the payment, MMG would not be in compliance with the financial solvency requirements, as defined in and calculated under Knox-Keene and the rules promulgated thereunder. AMM further agreed that, in the event of the liquidation or dissolution of MMG, the payment by MMG of principal and interest to AMM under the MMG Loan Agreement shall be fully subordinated and subject to the prior payment or provision for payment in full of all claims of all other present and future creditors of MMG.

Upon the written consent of the director of the DMHC, all previous subordination agreements between AMM and MMG, including without limitation that certain Subordination Agreement dated June 27, 2014 between AMM and MMG and that certain Amended and Restated Subordination Agreement between AMM and MMG dated as of March, 30, 2016, were terminated. The Subordination Agreement may not be cancelled, terminated, rescinded or amended by mutual consent or otherwise, without the prior written consent of the director of the DMHC.

In December 2016, in response to a request by Humana Insurance Company and Humana Health Plan, Inc. (collectively “Humana”), MMG arranged for City National Bank (“CNB”) to provide an irrevocable standby letter of credit in an amount up to $235,000 through December 31, 2017, and entered into a security agreement in favor of CNB, as required by the Independent Practice Association Participation Agreement effective January 1, 2015, including the addenda and attachments thereto, and as amended.

Lines of credit

Hendel had a $100,000 revolving line of credit with MUFG Union Bank, N.A., of which $0 and $88,764 was outstanding at March 31, 2017 and 2016, respectively. Borrowings under the line of credit bore interest at the prime rate (as defined) plus 4.50% (8.50% and 8.00% per annum at March 31, 2017 and 2016, respectively), interest only is payable monthly, and the line of credit matured on March 31, 2017. The line of credit was unsecured. Hendel is no longer consolidated effective January 1, 2017 and its operations are not included in our March 31, 2017 consolidated financial statements subsequent to January 1, 2017.

LALC had a line of credit of $230,000 with JPMorgan Chase Bank, N.A. Borrowing under the line of credit bears interest at a rate of 5.25% and is auto-renewed on an annual basis. We have not borrowed any amount under this line of credit as of March 31, 2017 and 2016. The line of credit is unsecured. LALC is no longer consolidated effective January 1, 2017 and its operations are not included in our March 31, 2017 consolidated financial statements subsequent to January 1, 2017.

BAHA has a line of credit of $150,000 with First Republic Bank. Borrowings under the line of credit bear interest at the prime rate (as defined) plus 3.0% (7.0% and 6.5% per annum at March 31, 2017 and 2016, respectively). We have an outstanding balance of $62,500 and $100,000 as of March 31, 2017 and 2016, respectively. The line of credit is unsecured.

Intercompany Loans

Each of AMH, ACC, MMG, AKM and SCHC has entered into an Intercompany Loan Agreement with AMM under which AMM has agreed to provide a revolving loan commitment to each of the affiliated entities in an amount set forth in each Intercompany Loan Agreement. Each Intercompany Loan Agreement provides that AMM’s obligation to make any advances automatically terminates concurrently with the termination of the Management Agreement with the applicable affiliated entity. In addition, each Intercompany Loan Agreement provides that (i) any material breach by Dr. Hosseinion of the applicable Physician Shareholder Agreement or (ii) the termination of the Management Agreement with the applicable affiliated entity constitutes an event of default under the Intercompany Loan Agreement. The following tables summarize the various intercompany loan agreements for the year ended March 31, 2017 and 2016:

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          Year Ended March 31, 2017 
Entity Facility  Expiration Interest
Rate
per
Annum
  Maximum
Balance
During
Period
  Ending
Balance
  Principal
Paid
During
Period
  Interest
Paid
During
Period
 
AMH $10,000,000  30-Sep-18  10% $4,904,147  $4,904,147  $-  $- 
ACC  1,000,000  31-Jul-18  10%  1,287,843   1,287,843   5,000   - 
MMG  2,000,000  1-Feb-18  10%  1,918,724   1,255,111   725,107   - 
AKM  5,000,000  30-May-19  10%  -   -   -   - 
SCHC  5,000,000  21-Jul-19  10%  3,079,916   3,079,916   50,000   - 
BAHA  250,000  22-Jul-21  10%  1,171,525   1,171,525         
Total $23,250,000        $12,362,155  $11,698,542  $780,107  $- 

          Year Ended March 31, 2016 
Entity Facility  Expiration Interest
Rate
per
Annum
  Maximum
Balance
During
Period
  Ending
Balance
  Principal
Paid
During
Period
  Interest
Paid
During
Period
 
AMH $10,000,000  30-Sep-18  10% $2,240,452  $2,179,721  $-  $- 
ACC  1,000,000  31-Jul-18  10%  1,318,874   1,277,843   -   - 
MMG  2,000,000  1-Feb-18  10%  1,586,123   1,586,123   -   - 
AKM  5,000,000  30-May-19  10%  146,280   -   146,280   - 
SCHC  5,000,000  21-Jul-19  10%  3,231,880   2,852,510   56,287   - 
Total $23,000,000        $8,523,609  $7,896,197  $202,567  $- 

 

Critical Accounting Policies

 

A critical accounting policy is defined as one that is both material to the presentationSome of our accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and resultsestimates, which inherently contain some degree 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 ouruncertainty. Management bases its estimates on historical experience and on various other assumptions that are believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtainedThe historical experience and as our operating environment changes. These changes have historically been minorassumptions form the basis for making judgments about the reported carrying values of assets and have been included in the consolidated financial statements as soon as they became known. Based on a critical assessment of our accounting policiesliabilities and the underlying judgmentsreported amounts of revenue and uncertainties affecting the application of those policies, management believesexpenses 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 andmay not be readily apparent from other sources. Actual results of operations.

may differ from these estimates under different assumptions or conditions. We believe the following are critical accounting policies reflect our more significantand related judgments and estimates and assumptions used in the preparation of our consolidated financial statements: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 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.

OurCompany’s consolidated financial statements include the accounts of (1) Apollo Medical Holdings, Inc. and its wholly owned subsidiaries AMM, PCCM, and VMM, (2) ourthe Company’s 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; andAPS, (3) physician practice corporations (“PPCs”) managed under long-term management service agreements including AMH, MMG, ACC, LALC (through December 31, 2016), Hendel (through December 31, 2016), AKM, SCHC and BAHA. Some states have laws that prohibit business entities, such as ApolloMed,us, 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 operatethe 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, we providethe Company provides and performperforms 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.

Through the management agreements and ourthe Company’s relationship with the stockholders of the PPCs, we havethe Company has exclusive authority over all non-medical decision making related to the ongoing business operations of the PPCs. Consequently, we consolidatethe Company consolidates the revenue and expenses of each PPC from the date of execution of the applicable management agreement.

 

On January 1, 2017, PCCM amended the management services agreements entered into with LALC and Hendel. Based on the Company’s evaluation of current accounting guidance, it was determined that the Company no longer holds an explicit or implicit variable interest in these entities, and accordingly LALC and Hendel are no longer consolidated and their operations are not included in the March 31, 2017 consolidated financial statements of the Company as of such date. In connection with the amendments, the Company recorded a gain on disposition of $242,411 in the consolidated statement of operations, the reversal of the net assets of the LALC and Hendel entities and related noncontrolling interest of $1,023,183 in the consolidated balance sheet, and a decrease in cash and cash equivalents and in the consolidated statements of cash flows in the amount of $858,670.

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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.

 

Reportable Segments

We operate as one reportable segment, the healthcare delivery segment, and implement and operate innovative health care models to create a patient-centered, physician-centric experience. We report our consolidated financial statements in the aggregate, including all activities in one reportable segment. The Company has determined it has six reporting units, which are comprised of (1) Hospitalist and AMM, (2) IPA, (3) Clinics, (4) Care Connect, (5) ACO, and (6) Palliative Services. While the chief operating decision maker uses financial information related to these reporting units to analyze business performance and allocate resources, the reporting units, as noted above, do not meet the quantitative threshold under U.S. GAAP to be considered a reportable segment. As such, these reporting units are aggregated into a single reportable segment in the consolidated financial statements. 

Concentrations

Our business and operations are concentrated in one state, California. Any material changes by California with respect to strategy, taxation and economics of healthcare delivery, reimbursements, financial requirements or other aspects of regulation of the healthcare industry could have an adverse effect on our operations and cost of doing business.

Revenue Recognition

 

Revenue consists of primarily contracted, fee-for-service,FFS 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.facilities, medical management and care coordination of network physicians and patients. 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-serviceFFS 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-serviceFee-for-Service revenue

 

Fee-for-serviceFFS 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-serviceFFS arrangements, we bill patients for services provided and receive payment from patients or their third-party payors. Fee-for-serviceFFS 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-serviceFFS 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’sour billing center for medical coding and entering into tourour 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.

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”)HMOs 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”)PSA or capitated arrangements directly made with various managed care providers including HMOsHMO’s 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.

 

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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 ourThe Company, through its subsidiary ApolloMed ACO, participates in the MSSP, which is sponsored by CMS. The goal of the CMS.MSSP is to improve the quality of patient care and outcomes through more efficient and coordinated approach among providers. 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’ CMScost savings benchmark. The MSSP is a newly formedrelatively new program with limited historymanaged by CMS that has an evolving payment methodology. Revenues earned by ApolloMed ACO are uncertain, and, if such amounts are payable by the CMS, they will be paid on an annual basis significantly after the time earned, and will be contingent on various factors, including achievement of the minimum savings rate as determined by MSSP for the relevant period. Such payments to ACO participants. We considerare earned and made on an “all or nothing” basis. 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.

Hospitalist Agreements

During the year, we entered into several new hospitalist agreements with hospitals, whereby we earn a stipend fee plus a fee based on an agreed percentage of fee-for-service collections. The fee is recorded at an amount net of the portion owed to the hospitals (we collect all fees on behalf of the hospitals). The fee revenue is further reduced by a portion subject to quality metrics which is only recorded as revenue upon us meeting these metrics. The Company considered the indicators of gross revenue and net revenue reporting and determined that revenue from this arrangement is recorded at net.

Goodwill and OtherIndefinite-Lived Intangible Assets

 

Under FASB ASCFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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, at our fiscal year end, management assesses whether there has been any impairment in the value of goodwill by first comparing the fair value to the net carrying value.value of the reporting unit. If the carrying value exceeds its estimated fair value, a second step is performed to compute the amount of the impairment. We have determined it has six reporting units, which are comprised of (1) Hospitalist and AMM, (2) IPA, (3) Clinics, (4) Care Connect, (5) ACO, and (6) Palliative Services. 

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.

 

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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 analyzeanalyses 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 InstrumentsMedical Liabilities

 

Our accountingWe are responsible for Fair Value Measurementintegrated care that the associated physicians and Disclosures defines fair valuecontracted hospitals provide to our enrollees under risk-pool arrangements. 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 the exchange price that would be received for an asset or paid to transfer a liability (an exit price)cost of services in the principal or most advantageous marketaccompanying consolidated statements of operations. Costs for operating medical clinics, including the asset or liabilitysalaries of medical personnel, are also recorded in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy that requires classification based on observablecost of services, while non-medical personnel and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs)support costs are included in general 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;administrative expense.

 

Level two — InputsAn estimate of amounts due to contracted physicians, hospitals, and 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 reportedprofessional providers is included in medical liabilities in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value becausesheets. Medical liabilities include claims reported as 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.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. We have a $20,000 per member professional stop-loss and $200,000 per member stop-loss for Medi-Cal patients in institutional risk pools. Any adjustments to reserves are reflected in current operations.

 

Non-controllingNoncontrolling Interests

 

The non-controllingnoncontrolling 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-controllingnoncontrolling interests in any period subsequent to initial consolidation would relate to either capital contributions or distributions by the non-controllingnoncontrolling parties as well as income or losses attributable to certain non-controllingnoncontrolling interests. Non-controllingNoncontrolling 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)

  2015  2014
(Unaudited)
  Change  Percentage
change
 
Net revenues $32,989,742  $11,157,876  $21,831,866   195.7%
                 
Costs and expenses:                
Cost of services  22,067,421   9,942,340   12,125,081   122.0%
General and administrative  11,282,221   5,582,360   5,699,861   102.1%
Depreciation and amortization  334,434   32,620   301,814   925.2%
Total costs and expenses  33,684,076   15,557,320   18,126,756   116.5%
                 
Loss from operations $(694,334) $(4,399,444) $3,705,110   (84.2)%
  % of Net Revenues 
  2015  2014
(Unaudited)
 
Net revenues  100.0%  100.0%
         
Costs and expenses:        
Cost of services  66.9%  89.1%
General and administrative  34.2%  50.0%
Depreciation  1.0%  0.3%
Total costs and expenses  102.1%  139.4%
         
Loss from operations  (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  Incremental revenue from the acquisitions of AKM and SCHC
 8,169,015  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.
 1,464,096  Incremental revenue from the acquisitions of BCHC and HCHHA
 5,382,617  ACO shared savings revenue
 5,289  Increase in clinic revenues due to ACC acquisitions
 (30,540) Decrease in hospitalist revenue, primarily driven by the Affordable Care Act which reduced Medicare reimbursement
 628,930  Incremental revenue from consolidating BAHA as a variable interest entity effective February 17, 2015
 392,846  Increase in revenue from LALC and Hendel
 

133,820

  Other

Cost of services are comprised primarily of physician compensation and related expenses. The (increase) decrease was attributable to:

$(4,454,924) Incremental costs of service from the acquisitions of AKM and SCHC
 (5,885,201) Increase in MMG claim costs due to higher patient lives
 (712,667) Incremental costs of service from the acquisitions of BCHC and HCHHA
 (635,409) Increase in ACC clinic costs due to acquisitions in October 2013
 (1,400,000) Participating physician share of ACO savings revenue
 423,027  Decrease in other physician related costs
 697,947  Decrease in physician stock-based compensation
 (446,811) Incremental costs of service from consolidating BAHA as a variable interest entity effective February 17, 2015
 288,957  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  Decrease in stock-based compensation to employees, partially offset by higher valuation of ApolloMed ACO shares to ApolloMed ACO physicians
 (2,269,720) Increase in legal and professional fees related to Lakeside litigation and to support corporate initiatives.
 (402,659) Increase in personnel, services and related expenses related to the ACO initiative.
 (1,031,220) Increase in administrative personnel and facilities costs to support growth in the business
 (1,254,030) Incremental general and administrative expenses from the acquisitions of AKM and SCHC
 (1,063,631) Incremental general and administrative expenses from the acquisitions of BCHC and HCHHA
 (161,181) Incremental general and administrative expenses from consolidating BAHA as a variable interest entity effective February 17, 2015
 197,792  Other
  2015  2014
(Unaudited)
  Change 
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 $1,326,407  $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.

  2015  2014
(Unaudited)
  Change 
Change in fair value of warrant and conversion liability $833,545  $-  $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.

  2015  2014
(Unaudited)
  Change 
Net loss attributable to Apollo Medical Holdings, Inc. $(1,802,601) $(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.

ForDuring the year ended March 31, 2015,2016, we entered an agreement with a shareholder of APS which is one of our majority owned subsidiaries. In connection with the agreement, the former shareholder received approximately $400,000, of which approximately $252,000 was paid by us and the remaining amount of approximately $148,000 was paid by another shareholder of APS, in exchange for his interest in such subsidiary, resulting in an increase in our ownership interest in APS from 51% to 56%.

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New Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). This ASU makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation, and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash usedflows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance on April 1, 2017 and does not expect such adoption to have a material impact on its consolidated financial statements and related disclosures for fiscal 2018.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosures of financial instruments including the requirement to measure certain equity investments at fair value with changes in operating activities was $271,910.fair value recognized in net income. ASU 2016-01 will become effective for the Company beginning interim period April 1, 2018. The Company is currently evaluating the guidance to determine the potential impact on its financial condition, results of operations, cash flows and financial statement disclosures. 

The FASB issued the following accounting standard updates related to Topic 606, Revenue Contracts with Customers:

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) in May 2014. ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08") in March 2016. ASU 2016-08 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations.
ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10") in April 2016. ASU 2016-10 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.
ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update) ("ASU 2016-11") in May 2016. ASU 2016-11 rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 EITF meeting. The SEC Staff is rescinding SEC Staff Observer comments that are codified in Topic 605 and Topic 932, effective upon adoption of Topic 606.

ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients in May 2016. ASU 2016-12 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance.

ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements (" ASU 2 016-20") in December 2016. ASU 2016-20 does not change the core principle of revenue recognition in Topic 606 but summarizes the technical corrections and improvements to ASU 2014-09 and is effective upon adoption of Topic 606.

These ASUs will become effective for the Company beginning interim period April 1, 2018. The Company currently anticipates adopting the standard using the modified retrospective method. The Company has begun the process of implementing this standard, including performing a review of its revenue streams to identify any differences in the timing, measurement, or presentation of revenue recognition. The Company currently believes that the primary impact will be changes to the timing of recognition of revenues related to FFS and Capitation Revenue and enhanced financial statement disclosures. The Company will continue to assess the impact on all areas of its revenue recognition, disclosure requirements and changes that may be necessary to its internal controls over financial reporting.

73

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). This wasASU provides clarification regarding how certain cash receipts and cash payments are presented and classified in the resultstatement of cash flows. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The issues addressed in this ASU that will affect the Company are classifying debt prepayments or debt extinguishment costs and contingent consideration payments made after a business combination. This update is effective for annual and interim periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-15 will have on the Company’s consolidated financial statements.

In December 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) ("ASU 2016-18”). The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-17 will become effective for the Company beginning interim period April 1, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact the adoption of ASU 2016-18 will have on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a net lossBusiness (“ASU 2017-01”). This ASU provides a screen to determine when a set is not a business, which requires that when substantially all of $1,347,957, a decrease in working capital of $168,759 and a $833,545 change in the fair value of the warrantgross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business, which reduces the number of transactions that need to be further evaluated. If the screen is not met, this ASU require that to be considered a business, a set much include, at a minimum, an input and conversion liability, offset by cash provided by non-cash expensesa substantive process that together significantly contribute to the ability to create output and also remove the evaluation of $2,078,351. Non-cash expenses primarily include depreciation expense, issuance stock-based compensation expense, amortizationwhether a market participant could replace missing elements. This update is effective for annual and interim periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently assessing the impact the adoption of financing costs, and accretion of debt discount.

ASU 2017-01 will have on the Company’s consolidated financial statements.

 

Cash provided by working capital was due to:

Increase in accounts payable and accrued liabilities $851,277 
Increase in medical liabilities $249,610 
Increase in due from affiliates $55,358 

Cash used by working capital was due to:

Increase in accounts receivable, net $(912,205)
Increase in other receivables $(188,236)
Increase in other assets $(106,510)
Increase in prepaid expenses and advances $(118,054)

ForIn January 2017, the year ended March 31, 2015, cash used in investing activities was $3,200,375 related toFASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying 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 $438,884Test for Goodwill Impairment (“ASU 2017-04”). This ASU eliminates Step 2 from the salegoodwill impairment test if the carrying amount exceeds the fair value of marketable securities.

Fora reporting unit and also eliminated the year ended March 31, 2015, net cash provided by financing activities was $1,655,049 primarily as the resultrequirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the issuancegoodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of convertible notes payablegoodwill allocated to each reporting unit with a zero or negative carrying amount of $2,000,000, $1,000,000 proceeds fromnet assets. This update is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the NNA lineimpact the adoption of credit, the contributions by a non-controlling interest of $725,278, offset by principal paymentsASU 2017-04 will have 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.Company’s consolidated financial statements.

 

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:

  2014  2013
(Unaudited)
  Change  Percentage
change
 
Net revenues $2,336,522  $1,662,951  $673,571   40.5%
                 
Costs and expenses:                
Cost of services  2,050,913   1,184,786   866,127   73.1%
General and administrative  826,870   531,120   295,750   55.7%
Depreciation  5,765   4,506   1,259   27.9%
Total costs and expenses  2,883,548   1,720,412   1,163,136   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:

  % of Net revenues 
  2014  2013
(Unaudited)
 
       
Net revenues  100.0%  100.0%
         
Costs and expenses:        
Cost of services  87.8%  71.2%
General and administrative  35.4%  31.9%
Depreciation  0.2%  0.3%
Total costs and expenses  123.4%  103.5%
         
Loss from operations  -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  New hospital contracts, increased same-market area growth and expansion of services with existing medical group clients at new hospitals.
$577,010  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) Increase in physician costs attributable to new physicians hired to support new contracts.
$(663,260) 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:

$(92,734) Increase in board, legal and professional fees to support the continuing growth of our operations.
$(191,279) Increase in administrative personnel and facilities costs to support  growth in the business
$(11,737) Increase in stock-based compensation to employees, directors and consultants

  2014  2013
(Unaudited)
  Change 
Interest expense $184,578  $86,114  $77,924 
Other income  (28,816)  (1,476)  (27,340)
Total other expense $155,762  $84,638  $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.

  2014  2013
(Unaudited)
  Change 
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.

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 $(694,334)
Cash used in operating activities $(271,910)

Our accumulated deficit and stockholders’ deficit at March 31, 2015 was as follows: 

Accumulated deficit $(19,340,521)
Stockholders' deficit attributable to Apollo Medical Holdings, Inc. $(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.

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:

       March 31, 
Description of Debt Lender Name Interest Rate  2015 
Term loan due March 28, 2019, net of debt discount of $1,060,401 NNA of  Nevada, Inc.  8.00% $5,467,098 
Line of credit payable due March 28, 2019 NNA of Nevada, Inc.  3 mo. LIBOR + 6%  1,000,000 
8% Senior subordinated convertible promissory notes due March 28, 2019, net of debt discount of $985,255 NNA of Nevada, Inc.  8.00%  1,014,745 
9% Senior subordinated convertible notes due February 15, 2016, net of debt discount of $62,682 Various  9.00%  1,037,818 
Unsecured revolving line of credit due June 5, 2016 Union Bank  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.

Future minimum rental payments required under the operating leases are as follows:

Year ending March 31,   
2016 $771,754 
2017  834,522 
2018  916,395 
2019  920,630 
2020  905,117 
Thereafter  2,482,251 
Total $6,830,669 

Off-BalanceOff Balance Sheet Arrangements

 

WeAs of March 31, 2017, we had no off-balance sheet arrangements as of or for the year ended March 31, 2015.arrangements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company’sOur 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

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.

 

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

ITEM 9A.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

  

As of the end of the period covered by this report, the Company has carried outWe conducted an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officerour chief executive officer and its Chief Financial Officer,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’sour 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 ensuring1934, as amended) as of the end of the period covered by this annual report.

Our disclosure controls and procedures are designed to ensure that the information relating to our Company, including our consolidated subsidiaries, required to be disclosed in theour SEC reports the Company files and submits under the Securities Exchange Act of 1934 areis recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure. Based upon this evaluation, our chief executive officer and when required. For a discussionchief financial officer concluded that, as of the reasons on which this conclusion was based, see “Management’s Report on Internal Control over Financial Reporting” below.evaluation date, our disclosure controls and procedures were effective.

 

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 RuleRules 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'sOur 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'sconsolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). principles.

Our management, conducted an evaluationwith the participation of our CEO and CFO, has assessed the effectiveness of ourthe internal control over financial reporting based onas of March 31, 2017. In making this assessment, our management used the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework issuedset forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (1992) and SEC guidance on conducting such assessments.in Internal Control - Integrated Framework (2013 Framework). Based on this evaluation, our management has concluded that there were material weaknesses in our internal control over financial reporting was effective as of March 31, 2015.2017.

A material weakness is a significantThis Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control deficiency or combination of significant control deficiencies that result in more than a remote likelihood that a material misstatementover financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the annual or interimSEC that permit us to provide only management’s report in this Annual Report on Form 10-K.

Inherent Limitations on Effectiveness of Controls

Our management, including our chief executive officer and chief financial statements willofficer, does not be prevented or detected. Management has identified the following three material weaknesses inexpect that 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 policiesover financial reporting will prevent or detect all errors 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 anyall fraud. A control system, of controls, howeverno matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the control system’s objectives of the system arewill be met. In addition, theThe design of any control system of controls is based in part uponon certain assumptions about the likelihood of certain events. Because of thesefuture events, 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.conditions.

 

Changes in Internal Controls over Financial Reporting

 

There has beenOther than with respect to the material weaknesses discussed below that were previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016 and subsequently remediated as of March 31, 2017, there was no change in our internal controlscontrol over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during our most recently completed fiscalthe quarter (i.e., the three-month period ended March 31, 2015)2017 that has materially affected, or is reasonablyreasonable likely to materially affect, our internal control over financial reporting.

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Material Weakness Related to Internal Control Policies and Procedures

As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016 and our Quarterly Reports on Form 10-Q for the periods ended June 30, 2016, September 30, 2016 and December 31, 2016 (collectively, our “2016 SEC Reports”) our Chief Executive Officer and Chief Financial Officer identified a material weakness related to our 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 and was not properly documented by the Company. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. This control deficiency resulted in the reasonable possibility that a material misstatement in the financial reporting and disclosure process would not be prevented or detected on a timely basis. This material weakness was identified and any resulting errors corrected prior to the completion of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2017.

Remediation of Material Weakness

We initiated a plan to enhance our control procedures over the written documentation of our internal controls over financial reporting in order to be compliant with the COSO 2013 Framework. During the third and fourth quarters of fiscal 2017, we re-evaluated our internal control documentation processes and procedures and formally documented the design and testing of our internal controls to be compliant with the COSO 2013 Framework. Additionally, management remediated this material weakness by:

adding additional resources with technical expertise in designing and testing internal controls; and

re-designing controls and processes to ensure proper written documentation existed in order to be compliant with the COSO 2013 Framework.

Management believes that the actions described above to address the material weaknesses related to the documentation of our internal control policies and procedures, which actions were completed during the fourth quarter of 2017, have remediated such material weaknesses in internal control over financial reporting as of March 31, 2017.

Material Weakness Related to Segregation of Duties

As previously disclosed in our 2016 SEC Reports, our Chief Executive Officer and Chief Financial Officer identified a material weakness in our controls over segregation of duties as it relates to the design of our internal controls over financial reporting. We did not design effective controls to ensure that all controls obtained the proper segregation of duties in the review and approval process within the accounting department. This control deficiency resulted in the reasonable possibility that a material misstatement in the consolidated financial statements would not be prevented or detected on a timely basis.

Remediation of Material Weakness

During the fourth quarter of fiscal 2017, our management remediated this material weakness by supplementing its accounting professionals with additional resources in the accounting department. In addition, the design of the controls were reviewed and updated to ensure that there were was a preparer of the control and a separate reviewer of the control.

Management believes that the actions described above to address the material weaknesses related to segregation of duties within the accounting department, which actions were completed during the fourth quarter of fiscal 2017, have remediated such material weaknesses in internal control over financial reporting as of March 31, 2017.

Material Weakness Related to the Adequate Review and Supervision of the Financial Reporting Process

As previously disclosed in our 2016 SEC Reports, our Chief Executive Officer and Chief Financial Officer identified a material weakness in our controls over the adequate review and supervision function as it relates to the design and testing of our internal controls over financial reporting. We did not design effective controls to ensure that the Company’s accounting department had the adequate amount of resources to properly review and supervise the financial reporting controls within the accounting department. This control deficiency resulted in the reasonable possibility that a material misstatement in the consolidated financial statements would not be prevented or detected on a timely basis.

Remediation of Material Weakness

During the fourth quarter of 2017, our management remediated this material weakness by supplementing its existing accounting professionals with additional resources in the accounting department. In addition, the Company hired outside experts to assist with the preparation and review of the financial statement close process in order to ensure controls are designed and reviewed properly within the financial reporting close process.

Management believes that the actions described above to address the material weaknesses related to review and supervision of the financial reporting process, which actions were completed during the fourth quarter of fiscal 2017, have remediated such material weaknesses in internal control over financial reporting as of March 31, 2017.

ITEM 9B. OTHER INFORMATION

ITEM 9B.OTHER INFORMATION

 

None.

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PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information required by this Item will be contained in the Company’s Proxy Statement for the 2017 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, 2015,2017, which information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 11.EXECUTIVE COMPENSATION

 

Information required by this Item will be contained in the Company’s Proxy Statement for the 2017 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, 2015,2017, which information is incorporated herein by reference

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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 20152017 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, 2015,2017, 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

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 2017 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, 2015,2017, which information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information required by this Item will be contained in the Company’s Proxy Statement for the 2017 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, 2015,2017, which information is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

ITEM 15.(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.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

  

(b)Exhibits Index

(a)Documents filed as part of this report:

1. Financial Statements

The consolidated financial statements contained herein are as listed on the “Index to Consolidated Financial Statements” on page F-1 of this report.

2. Financial Statement Schedule

None

3. Exhibits

See Exhibit Index.

(b)Exhibits:

The following exhibits are attached hereto and incorporated herein by reference.

 

Exhibit No. Description
2.1 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, 2014,2014).
2.2Agreement and incorporated hereinPlan of Merger dated as of December 21, 2016 by reference).and among Apollo Medical Holdings, Inc., Apollo Acquisition Corp., Network Medical Management, Inc., and Kenneth Sim, M.D. in his capacity as the Shareholders’ Representative (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
2.3Amendment to Agreement and Plan of Merger dated as of March 30, 2017 by and among Apollo Medical Holdings, Inc., Apollo Acquisition Corp., a California corporation, Network Medical Management, Inc. and Kenneth Sim, M.D. (filed as an exhibit to a Current Report on Form 8-K on April 5, 2017)
3.1 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)2015).
3.2 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)2015).
3.3 Restated BylawsCertificate of Designation of Series A Convertible Preferred Stock (filed as an exhibit to a Current Report on Form 8-K on January 21, 2015,October 19, 2015)
3.4Amended and incorporated herein by reference)Restated Certificate of Designation of Apollo Medical Holdings, Inc. (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016)
3.5Restated Bylaws (filed as an exhibit to a Quarterly Report on Form 10-Q on November 16, 2015).
4.1Form of Common Stock certificate (filed as an exhibit to a Registration Statement on Form S-8 on May 5, 2017)
4.2 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)2012).
4.24.3 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)2012).
4.34.4 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)2012).
4.44.5 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)2013).
4.54.6 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)2013).
4.64.7 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)2014).
4.74.8 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)2014).
4.84.9 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)2014).

4.978 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).

4.10 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).
4.11Common 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).
4.12Common Stock Purchase Warrant dated October 14, 2015, issued by Apollo Medical Holdings, Inc. to Network Medical Management, Inc. to purchase 1,111,111 shares of common stock (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016).
4.13Common Stock Purchase Warrant dated March 30, 2016, issued by Apollo Medical Holdings, Inc. to Network Medical Management, Inc. to purchase 555,555 shares of common stock (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016).
4.14

Stock Purchase Warrant dated November 4, 2016, issued to Scott Enderby, D.O. (filed as an exhibit to a Current Report on Form 8-K on November 10, 2016)

4.15Voting Agreement dated as of December 21, 2016 by and incorporated hereinbetween Apollo Medical Holdings, Inc., and Thomas Lam, M.D. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
4.16Voting Agreement dated as of December 21, 2016 by reference).and between Apollo Medical Holdings, Inc., and Kenneth Sim, M.D. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
4.17Consent and Waiver Agreement dated as of December 21, 2016 by and between Apollo Medical Holdings, Inc. and Network Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
4.18Warrant dated November 17, 2016 issued to Liviu Chindris, M.D. (filed as an exhibit to a Quarterly Report on Form 10-Q on February 14, 2017)
10.1 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)2008).
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)2010).
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)2012).
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)2014).
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)2014).

10.6 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)2014).
10.7 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)2013).
10.8 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)2013).
10.910.9+ 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)2015).
10.10 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)2013).
10.11 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)2013).
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)2014).
10.13 Investment 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)2014).
10.14 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)2014).
10.15 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)2014).
10.16 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)2014).

79

10.17 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)2014).
10.18 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)2014).
10.1910.19+ 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)2014).
10.2010.20+ 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)2014).
10.2110.21+ 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)2014).
10.2210.22+ 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)2014).
10.2310.23+ 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)2014).
10.2410.24+ 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)2014).
10.25 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)2014).
10.26 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)2014).
10.27 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)2014).
10.28 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)2014).
10.29 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)2014).
10.30 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)2014).
10.31 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)2014).
10.32 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)2014).
10.33 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)2014).
10.3410.34+ 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)2014).
10.3510.35+ 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)2014).
10.3610.36+ 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)2014).
10.3710.37+ 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)2014).

10.3880

10.38+ 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)2014).
10.39 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)2014).
10.40 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)2014).
10.41 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)2014).
10.42 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)2014).
10.43 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)2014).
10.44 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)2014).
10.45 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)2015).
10.4610.46+ 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)2015).
10.47 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)2015).
10.48 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)2015).
16.110.49 Letter re change in certifying accountantWaiver and Consent dated as of August 18, 2015 between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc. (filed as an exhibit to a Quarterly Report on Form 10-Q on August 19, 2015)
10.50Securities Purchase Agreement dated October 14, 2015 between Apollo Medical Holdings, Inc. and Network Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on May 15, 2014, and incorporated by reference herein)October 19, 2015).
21.1+10.51Second Amendment and Conversion Agreement dated as of November 17, 2015 between 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 November 19, 2015).
10.52+Board of Directors Agreement between Apollo Medical Holdings, Inc. and Thomas S. Lam, M.D. dated January 19, 2016 (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016
10.53+First Amendment to Employment Agreement dated as of January 12, 2016 between Apollo Medical Management, Inc. and Warren Hosseinion, M.D. (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016).
10.54+First Amendment to Employment Agreement dated as of January 12, 2016 between Apollo Medical Management, Inc. and Adrian Vazquez, M.D. (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016).
10.55+Consulting Agreement dated January 12, 2016 between Apollo Medical Holdings, Inc. and Flacane Advisors, Inc. (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016).
10.56Indemnification Agreement effective as of September 21, 2015 between Apollo Medical Holdings, Inc. and William Abbott (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016).
10.57+Board of Directors Agreement dated January 12, 2016 between Apollo Medical Holdings, Inc. and Mark Fawcett (filed as an exhibit to a Current Report on Form 8-K/A on February 2, 2016).
10.58Securities Purchase Agreement dated March 30, 2016 between Apollo Medical Holdings, Inc. and Network Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016).

81

10.592015 Equity Incentive Plan (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.60Asset Purchase Agreement dated January 12, 2016 among Apollo Medical Holdings, Inc., Apollo Care Connect, Inc. and Healarium, Inc. (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.61Amendment No.2 to Intercompany Revolving Loan Agr4eement dated March 30, 2016 between  Apollo Medical Management, Inc. and Maverick Medical Group, Inc. (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.62Amended and Restated Subordination Agreement between Apollo Medical Management, Inc. and Maverick Medical Group, Inc. (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.63Stock Purchase Agreement dated as of March 1, 2016 by and among Robert Tracy, D.O., Inc., ApolloMed Care Clinic and Warren Hosseinion, M.D. as nominee for Apollo Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on June 28, 2016)
10.64

Non-Interest Bearing Secured Promissory Note dated March 1, 2016 (filed as an exhibit to a Current Report on Form 8-K on June 28, 2016)

10.65First Amendment to Stock Purchase Agreement and to Non-Interest Bearing Promissory Note dated as of March 1, 2016 by and among Robert Tracy, D.O., Inc., ApolloMed Care Clinic and Warren Hosseinion, M.D. as nominee for Apollo Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on June 28, 2016)
10.66Membership Interest Purchase Agreement and Release dated as of December 9, 2015 between Apollo Medical Holdings, Inc., Apollo Medical Management, Inc., Apollo Palliative Services LLC and Sandeep Kapoor, M.D. (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.67+Amended and Restated Employment Agreement made as of June 29, 2016 by and between Apollo Medical Management, Inc. and Warren Hosseinion, M.D. (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.68+Amended and Restated Employment Agreement made as of June 29, 2016 by and between Apollo Medical Management, Inc. and Adrian Vazquez, M.D. (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.69+Amended and Restated Hospitalist Participation Service Agreement made as of June 29, 2016 by and between ApolloMed Hospitalists, a Medical Corporation, and Warren Hosseinion, M.D. (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.70+Amended and Restated Hospitalist Participation Service Agreement made as of June 29, 2016 by and between ApolloMed Hospitalists, a Medical Corporation, and Adrian Vazquez, M.D. (filed as an exhibit to an annual report on Form 10-K on June 29, 2016)
10.71Third Amendment dated June 28, 2016 between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc. (filed as an exhibit to an Annual Report on Form 10-K on June 29, 2016)
10.72+Employment Agreement by and between Apollo Medical Management, Inc. and Mihir Shah dated July 21, 2016 (filed as an exhibit to a Current Report on Form 8-K on July 26, 2016)
10.73Stock Purchase Agreement dated as of November 4, 2016 by and among BAHA Acquisition, A Medical Corporation, a California professional corporation; Bay Area Hospitalist Associates, A Medical Corporation, a California professional corporation; and Scott Enderby, D.O. (filed as an exhibit to a Current Report on Form 8-K on November 10, 2016)
10.74Employment Agreement dated as of November 4, 2016 by and between Bay Area Hospitalist Associates, Inc., a California professional corporation and Scott Enderby (filed as an exhibit to a Current Report on Form 8-K on November 10, 2016)
10.75Non-Competition Agreement dated as of November 4, 2016 by and between Bay Area Hospitalist Associates, A Medical Corporation, a California professional corporation and Scott Enderby, D.O. (filed as an exhibit to a Current Report on Form 8-K on November 10, 2016)
10.76Intercompany Revolving Loan Agreement dated as of July 22, 2016 by and between Apollo Medical Management, Inc. and Bay Area Hospitalist Associates, a Medical Corporation (filed as an exhibit to a Quarterly Report on Form 10-Q on November 14, 2016)
10.77Intercompany Revolving Loan Agreement dated as of November 22, 2016 by and between Apollo Medical Management, Inc. and Maverick Medical Group, Inc. (filed as an exhibit to the Current Report on Form 8-K on November 29, 2016)
10.78Subordination Agreement dated as of November 22, 2016 by and between Apollo Medical Management, Inc. and Maverick Medical Group, Inc. (filed as an exhibit to the Current Report on Form 8-K on November 29, 2016)
10.79+Employment Agreement dated December 20, 2016 between Apollo Medical Management, Inc. and Warren Hosseinion, M.D. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
10.80+Employment Agreement dated December 20, 2016 between Apollo Medical Management, Inc. and Gary Augusta (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
10.81+Employment Agreement dated December 20, 2016 between Apollo Medical Management, Inc. and Mihir Shah (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
10.82+Employment Agreement dated December 20, 2016 between Apollo Medical Management, Inc. and Adrian Vazquez, M.D. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
10.83Next Generation ACO Model Participation Agreement (filed as an exhibit to a Current Report on Form 8-K on January 20, 2017)
10.84Promissory Note dated as of January 3, 2017 between Apollo Medical Holdings, Inc. and Network Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on February 13, 2017)
82

10.85Promissory Note (Term Loan) issued November 17, 2016 to Liviu Chindris, M.D. in the principal amount of $400,000.00 (filed as an exhibit to a Quarterly Report on Form 10-Q on February 14, 2017)
10.86Securities Purchase Agreement dated as of March 30, 2017 between Apollo Medical Holdings, Inc. and Alliance Apex, LLC (filed as an exhibit to a Current Report on Form 8-K on April 5, 2017)
10.87Convertible Promissory Note dated March 30, 2017 issued to Alliance Apex, LLC in the principal amount of $4,990,000 (filed as an exhibit to a Current Report on Form 8-K on April 5, 2017)
10.88Fourth Amendment to Registration Rights Agreement between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated as of April 26, 2017 (filed as an exhibit to a Current Report on Form 8-K on April 28, 2017)
10.89Management Services Agreement dated as of July 1, 2011 between Pulmonary Critical Care Management, Inc. and Los Angeles Lung Center, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.90Amendment No.1 dated as of January 1, 2017 to Management Services Agreement between Pulmonary Critical Care Management, Inc. and Los Angeles Lung Center, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.91Amendment No.2 dated as of March 24, 2017 to Management Services Agreement between Pulmonary Critical Care Management, Inc. and Los Angeles Lung Center, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.92Management Services Agreement dated as of August 1, 2012 between Verdugo Medical Management, Inc. and Eli E. Hendel, M.D., a Medical Corporation, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.93Amendment No.1 dated as of January 1, 2017 to Management Services Agreement between Verdugo Medical Management, Inc. and Eli E. Hendel, M.D., a Medical Corporation, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.94Amendment No.2 dated as of March 24, 2017 to Management Services Agreement  between Verdugo Medical Management, Inc. and Eli E. Hendel, M.D., a Medical Corporation, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
21.1* Subsidiaries of Apollo Medical Holdings, Inc.

23.1+

23.1*
 

Consent of BDO USA, LLP

23.2+Consent of Kabani & Company, Inc.
31.1+31.1* Certification by Chief Executive Officer
31.2+Certification by Chief Financial Officer
32.1+Certification bythe Chief Executive Officer pursuant to 18 U.S.C. section 1350.Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
32.2+31.2* Certification by the Chief Financial Officer pursuant to 18 U.S.C. section 1350Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
101*32* The following materials formatted in XBRL (eXtensible Business Reporting Language):  (1) ConsolidatedCertification of Periodic Financial Statements (Unaudited) asReport by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of :
+Filed herewith.the Sarbanes-Oxley Act of 2002

   

101.INS* +XBRL Instance Document
101.SCH* +XBRL Taxonomy Extension Schema Document
101.CAL* +XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* +XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* +XBRL Taxonomy Extension Label Linkbase Document
101.PRE*+XBRL Taxonomy Extension Presentation Linkbase Document
*Filed herewith
Management contract or compensatory plan, contract or arrangement

(c)Financial Statement Schedules:

Not applicable.

83

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 APOLLO MEDICAL HOLDINGS, INC.
   
Date: July 14, 2015June 29, 2017By:/s/ WARREN HOSSEINION, M.D
  Warren Hosseinion, M.D., 
  Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Warren Hosseinion and Gary Augusta, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

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 Companyregistrant and in the capacities indicatedand on July 14, 2015.the dates indicated.

  

SIGNATURE TITLE
   
/S/ WARREN HOSSEINION, M.D. President, Chief Executive Officer (Principal Executive Officer), and Director
Warren Hosseinion, M.D., 
   
/S/ MIHIR SHAHChief Financial Officer (Principal Financial and Accounting Officer)
Mihir Shah
   
/S/ GARY AUGUSTA Executive Chairman of the Board and Director
Gary Augusta  
   
/S/ MARK FAWCETTDirector
Mark Fawcett  
  Chief Financial Officer (Principal
/S/ THOMAS LAM, M.D.Director 
Thomas Lam, M.D.
 
/S/ MITCH CREEMSURESH NIHALANI Financial and Accounting Officer) and Director
Mitch CreemSuresh Nihalani  
 
/S/ DAVID SCHMIDTDirector
David Schmidt
   
/S/ TED SCHRECK Director
Ted Schreck  

 
/S/ SURESH NIHALANIDirector
Suresh Nihalani
/S/ DAVID SCHMIDTDirector
David Schmidt84 

CONSOLIDATED FINANCIAL STATEMENTS - TABLE OF CONTENTS:

 

 Page
  
Report of independent registered public accounting firmF-2
Report of independent registered public accounting firmF-3
Consolidated financial statements: 
Consolidated balance sheetsF-4F-3
Consolidated statements of operationsF-5F-4
Consolidated statements of changes in stockholders’ deficitequity (deficit)F-6F-5
Consolidated statements of cash flowsF-7F-6
Notes to consolidated financial statementsF-8

F- 1

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. (“Company”) as of March 31, 20152017 and 20142016 and the related consolidated statements of operations, stockholders’ deficit,equity (deficit), and cash flows for the year ended March 31, 2015 and the period from February 1, 2014 through March 31, 2014.years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits 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, 20152017 and 2014,2016, and the results of its operations and its cash flows for the yearyears then 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.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has generated negative cash flows from operations since inception, resulting in an accumulated deficit of $37.7 million as of March 31, 2017. These factors among others raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ BDO USA, LLP

 

Los Angeles, California

July 14, 2015

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, 2015June 29, 2017

 

F-3
F- 2 

  

APOLLO MEDICAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

 

 March 31, March 31,  January 31,  March 31, 
 2015 2014 2014  2017  2016 
ASSETS                    
            
Cash and cash equivalents $5,014,242  $6,831,478  $1,451,407  $8,664,211  $9,270,010 
Accounts receivable, net  3,801,584   1,508,461   1,509,589 
Accounts receivable, net of allowance for doubtful accounts of $475,080 and $601,000 at March 31, 2017 and 2016, respectively  5,506,472   3,392,941 
Other receivables  208,288   -   -   464,085   581,213 
Due from Affiliates  36,397   24,041   1,599   18,314   20,505 
Prepaid expenses  278,922   42,200   53,543 
Deferred financing costs, net, current  513,646   -   97,806 
Prepaid expenses and other current assets  269,168   293,828 
Total current assets  9,853,079   8,406,180   3,113,944   14,922,250   13,558,497 
Deferred financing costs, net, non-current  264,708   366,286   144,345 
        
Deferred financing costs, net  -   37,926 
Property and equipment, net  582,470   94,948   85,685   1,205,139   1,247,973 
Restricted cash  530,000   20,000   20,000   765,058   530,000 
Intangible assets, net  1,377,257   59,627   62,427   1,904,269   2,353,212 
Goodwill  2,168,833   494,700   494,700   1,622,483   1,622,483 
Other assets  218,716   41,636   38,681   225,358   216,442 
TOTAL ASSETS $14,995,063  $9,483,377  $3,959,782  $20,644,557  $19,566,533 
                    
LIABILITIES AND STOCKHOLDERS' DEFICIT            
            
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY        
Accounts payable and accrued liabilities $3,352,204  $1,442,086  $1,087,660  $7,883,373  $4,572,307 
Medical liabilities  1,260,549   552,561   285,625   1,768,231   2,670,709 
Notes and lines of credit payable, net of discount, current portion  327,141   322,230   3,178,693 
Convertible notes payable, net of discount, current portion  1,037,818   -   - 
Convertible note payable, net of debt issuance cost of $161,000  4,829,000   - 
Lines of credit  62,500   188,764 
Total current liabilities  5,977,712   2,316,877   4,551,978   14,543,104   7,431,780 
Notes and lines of credit payable, net of discount, non-current portion  6,234,721   5,467,099   - 
Convertible notes payable, net of discount, non-current portion  1,457,103   962,978   1,100,522 
        
Note payable – related party  5,000,000   - 
Warrant liability  2,144,496   2,354,624   -   -   2,811,111 
Deferred rent liability  747,418   728,877 
Deferred tax liability  171,215   4,954   -   83,667   43,479 
Total liabilities  15,985,247   11,106,532   5,652,500  20,374,189  11,015,247 
                    
COMMITMENTS, CONTINGENCIES and SUBSEQUENT EVENTS (Notes 10 and 11 )            
COMMITMENTS AND CONTINGENCIES (Note 10)        
MEZZANINE EQUITY        
Series A Preferred stock, par value $0.001; 5,000,000 shares authorized (inclusive of Series B Preferred stock); 1,111,111 issued and outstanding as of March 31, 2016, Liquidation preference of $9,999,999 at March 31, 2016 -  7,077,778 
                    
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  4,863   4,913   4,695 
Additional paid-in-capital  16,517,985   15,127,587   14,147,634 
STOCKHOLDERS’ EQUITY        
Series A Preferred stock, par value $0.001; 5,000,000 shares authorized (inclusive of Series B Preferred stock); 1,111,111 issued and outstanding as of March 31, 2017, Liquidation preference of $9,999,999 at March 31, 2017 7,077,778  - 
Series B Preferred stock, par value $0.001; 5,000,000 shares authorized (inclusive of Series A Preferred stock) 555,555 issued and outstanding as of March 31, 2017 and 2016, Liquidation preference of $4,999,995 at March 31, 2017 and 2016  3,884,745   3,884,745 
Common stock, par value $0.001; 100,000,000 shares authorized, 6,033,518 and 5,876,852 shares issued and outstanding at March 31, 2017 and 2016, respectively  6,033   5,876 
Additional paid-in capital  26,331,948   23,524,517 
Accumulated deficit  (19,340,521)  (17,537,920)  (16,771,478)  (37,654,381)  (28,684,565)
Stockholders' deficit attributable to Apollo Medical Holdings, Inc.  (2,817,673)  (2,405,420)  (2,619,149)
Non-controlling interests  1,827,489   782,265   926,431 
Total stockholders' deficit  (990,184)  (1,623,155)  (1,692,718)
            
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $14,995,063  $9,483,377  $3,959,782 
Stockholders’ deficit attributable to Apollo Medical Holdings, Inc.  (353,877)  (1,269,427)
Noncontrolling interest  624,245   2,742,935 
Total stockholders’ equity  270,368   1,473,508 
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY $20,644,557  $19,566,533 

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-4
F- 3 

  

APOLLO MEDICAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

  Year Ended
March 31,
  Two Months
Ended March 31,
  Year Ended
January 31,
 
   2015   2014   2014 
Net revenues $32,989,742  $2,336,522  $10,484,305 
             
Costs and expenses            
Cost of services  22,067,421   2,050,913   9,076,213 
General and administrative  11,282,221   826,870   5,286,610 
Depreciation and amortization  334,434   5,765   31,361 
Total costs and expenses  33,684,076   2,883,548   14,394,184 
             
Loss from operations  (694,334)  (547,026)  (3,909,879)
             
Other (expense) income            
Interest expense  (1,326,407)  (184,578)  (679,184)
Gain on change in fair value of warrant and conversion feature liabilities  833,545   -   - 
Other  3,031   28,816   49,702 
Total other expense  (489,831)  (155,762)  (629,482)
             
Loss before provision for income taxes  (1,184,165)  (702,788)  (4,539,361)
             
Provision for income taxes  163,792   7,820   19,513 
             
Net loss  (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 

  For The Years Ended March 31, 
  2017  2016 
       
Net revenues $57,427,701  $44,048,740 
Costs and expenses:        
Cost of services  48,735,537   34,000,786 
General and administrative  18,583,372   16,962,687 
Depreciation and amortization  645,742   351,396 
Total costs and expenses  67,964,651   51,314,869 
         
Loss from operations  (10,536,950)  (7,266,129)
         
Other income (expense) :        
Interest expense  (82,905)  (542,296)
Gain (loss) on change in fair value of warrant and conversion feature liabilities  1,633,333   (408,692)
Gain on deconsolidation of variable interest entity  242,411   - 
Loss on debt extinguishment  -   (266,366)
Other income  14,701   239,057 
Total other income (expense), net  1,807,540   (978,297)
         
Loss before benefit from income taxes  (8,729,410)  (8,244,426)
         
Benefit from income taxes  (47,495)  (71,037)
         
Net loss  (8,681,915)  (8,173,389)
         
Net income attributable to noncontrolling interests  287,901   1,170,655 
         
Net loss attributable to Apollo Medical Holdings, Inc. $(8,969,816) $(9,344,044)
         
Net loss per share:        
Basic and diluted $(1.49) $(1.79)
         
Weighted average shares of common stock outstanding:        
Basic and diluted  6,001,680   5,212,927 

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-5F- 4

  

APOLLO MEDICAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICITSTOCKHOLDERS’ EQUITY (DEFICIT)

For the Years Ended March 31, 2017 and 2016

 

  Common
Stock
  Additional       
  Shares  Amount   Paid-In
Capital
  Accumulated
Deficit
  Non-controlling
Interests
  Stockholders'
Deficit
 
Balance at January 31, 2013  3,484,344  $3,484  $10,663,912  $(11,751,180) $692,405  $(391,379)
Issuance of warrants  -   -   50,936   -   -   50,936 
Issuance of common stock for loan fees  10,000   10   44,990   -   -   45,000 
Issuance of stock for stock-based compensation  137,167   137   718,236   -   12,602   730,975 
Unvested stock-based compensation  -   -   333,838   -   -   333,838 
Issuance of stock options for stock-based compensation  -   -   1,252,378   -   -   1,252,378 
Shares issued in connection with private placement offering  182,500   183   729,817   -   -   730,000 
Shares issued in connection with convertible notes redemption  881,236   881   863,417   -   -   864,298 
Fair value of embedded conversion feature reacquired in connection with convertible notes redemption  -   -   (509,890)  -   -   (509,890)
Distributions to non-controlling interest shareholder  -   -   -   -   (240,000)  (240,000)
Net loss  -   -   -   (5,020,298)  461,424   (4,558,874)
Balance at January 31, 2014  4,695,247   4,695   14,147,634   (16,771,478)  926,431   (1,692,718)
Net income (loss)  -   -   -   (766,442)  55,834   (710,608)
Stock-based compensation expense  -   -   60,187   -   -   60,187 
Shares issued in NNA financing  200,000   200   868,036   -   -   868,236 
8% notes share conversion  18,208   18   51,730   -   -   51,748 
Distributions to non-controlling interest  -   -   -   -   (200,000)  (200,000)
Balance at March 31, 2014  4,913,455   4,913   15,127,587   (17,537,920)  782,265   (1,623,155)
Net income (loss)  -   -   -   (1,802,601)  454,644   (1,347,957)
Issuance of warrants  -   -   132,000   -   -   132,000 
Contribution by non-controlling interest  -   -    -   -   725,278   725,278 
Distributions to non-controlling interest  -   -    -   -   (600,000)  (600,000)
Issuance of membership interest in subsidiary  -   -    -   -   274,148   274,148 
Stock-based compensation expense  -   -   1,258,848   -   -   1,258,848 
Pre-acquisition net equity ofnon-controlling interest in variable interest entity  -   -    -   -   191,154   191,154 
Repurchase of common stock  (50,050)  (50)  (450)  -   -   (500)
Partial shares paid out in connection with 1 for 10 reverse stock split  (16)  -   -   -   -   - 
Balance at March 31, 2015  4,863,389  $4,863  $16,517,985  $(19,340,521) $1,827,489  $(990,184)
             Additional        Stockholders’ 
  Preferred Stock – Series A  Preferred Stock – Series B  Common Stock  Paid-in  Accumulated  Noncontrolling  (Deficit) 
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interests  Equity 
Balance April 1, 2015  -  $-   -  $-   4,863,389  $4,863  $16,517,985  $(19,340,521) $1,827,489  $(990,184)
Net income (loss)  -   -   -   -   -   -   -   (9,344,044)  1,170,655   (8,173,389)
Stock-based compensation expense  -   -   -   -   -   -   1,103,976   -   -   1,103,976 
Issuance of common stock in acquisition  -   -   -   -   275,000   275   1,512,225   -   -   1,512,500 
Distributions to noncontrolling interest  -   -   -   -   -   -   -   -   (702,642)  (702,642)
Reclassification of noncontrolling interest to notes receivable  -   -   -   -   -   -   -   -   414,716   414,716 
Net adjustment from change in APS ownership interest  -   -   -   -   -   -   (338,032)  -   32,717   (305,315)
Conversion of 9% notes to common stock  -   -   -   -   138,463   138   553,713   -   -   553,851 
Conversion of 8% notes and warrants to common stock  -   -   -   -   600,000   600   3,059,400   -   -   3,060,000 
Issuance of preferred stock and equity warrant  -   -   555,555   3,884,745   -   -   1,115,250   -   -   4,999,995 
Balance at March 31, 2016  -  -   555,555  3,884,745   5,876,852  5,876  23,524,517  (28,684,565) 2,742,935  1,473,508 
Net income (loss)          -   -   -   -   -   (8,969,816)  287,901   (8,681,915)
Stock-based compensation expense  -   -   -   -   -   -   1,106,454   -   -   1,106,454 
Issuance of common stock for exercise of warrants  -   -   -   -   150,000   150   171,850   -   -   172,000 
Issuance of common stock for vested restricted stock  -   -   -   -   6,666   7   61   -   -   68 
Relative fair value of warrants issued with debt  -   -   -   -   -   -   6,880   -   -   6,880 
Reclassification of Noncontrolling interest due to acquisition of VIE  -   -   -   -   -   -   183,408   -   (183,408)  - 
Distributions to noncontrolling interest  -   -   -   -   -   -   -   -   (1,200,000)  (1,200,000)
Deconsolidation of VIEs,  -   -   -   -   -   -   -   -   (1,023,183)  (1,023,183)
Warrants issuable for debt guarantee  -   -   -   -   -   -   161,000   -   -   161,000 
Reclassification of mezzanine equity to permanent equity  1,111,111   7,077,778   -   -   -   -   -   -   -   7,077,778 
Reclassification of derivative liability to equity  -   -   -   -   -   -   1,177,778   -   -   1,177,778 
                                         
Balance at March 31, 2017  1,111,111  $7,077,778   555,555  $3,884,745   6,033,518  $6,033  $26,331,948  $(37,654,381) $624,245  $270,368 

 

The accompanying notes are an integral part of these consolidated financial statements.statements

F- 5

APOLLO MEDICAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

  Year Ended
March 31,
  Two Months
Ended March 31,
  Year Ended
January 31,
 
  2015  2014  2014 
          
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss $(1,347,957) $(710,608) $(4,558,874)
Adjustments to reconcile net loss to net cash used in operating activities:            
Provision for doubtful accounts  64,811   -   - 
Depreciation and amortization expense  334,434   5,765   31,361 
Gain on extinguishment of debt  -   (23,000)  (24,783)
Gain on sale of marketable securities  (49,791)  -   - 
Deferred income taxes  (51,922)  4,954   - 
Stock-based compensation expense  1,258,848   60,187   2,157,857 
Amortization of financing costs  121,578   25,965   255,396 
Amortization of debt discount  400,394   19,406   136,751 
Change in fair value of warrant and conversion feature liability  (833,545)  -   - 
Changes in assets and liabilities:            
Accounts receivable  (912,205) 1,128   72,916 
Other receivable  (188,236)  -   - 
Due from affiliates  55,358   (22,442)  4,049 
Prepaid expenses and advances  (118,054)  11,342   19,084 
Other assets  (106,510)  (2,952)  (27,700)
Accounts payable and accrued liabilities  851,277  621,360   455,738 
Medical liabilities  249,610  -   - 
Net cash used in operating activities  (271,910)  (8,895)  (1,478,205)
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Acquisitions, net of $660,893 of cash and cash equivalents acquired during the year ended March 31, 2015  (3,356,145)  -   (250,000)
Increase in cash on consolidation of variable interest entity  271,395   -   - 
Proceeds from sale of marketable securities  438,884   -   - 
Property and equipment acquired  (44,509)  (12,228)  (22,931)
Increase in restricted cash  (510,000)  -   - 
Net cash used in investing activities  (3,200,375)  (12,228)  (272,931)
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Proceeds from issuance of convertible note payable  2,000,000   -   220,000 
Proceeds from line of credit  1,000,000   7,000,000   2,811,878 
Proceeds from issuance of common stock  -   2,000,000   730,000 
Principal payments on notes payable  (936,083)   .   (530,000)
Payment of line of credit payable  -   (2,811,878)  - 
Payment of medical clinic acquisition notes payable  -   (256,000)  - 
Payments in connection with convertible note redemption  -   (98,252)  (707,911)
Contributions by non-controlling interest  725,278   -   - 
Distributions to non-controlling interest shareholder  (600,000)  (200,000)  (240,000)
Debt issuance costs  (533,646)  (232,676)  (258,151)
Repurchase of common stock  (500)  -   - 
Net cash provided by financing activities  1,655,049   5,401,194   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 
Income taxes paid $32,197  $3,824  $19,513 
             
Non-Cash Financing Activities:            
Convertible note warrant $487,620  $-  $50,936 
Convertible note conversion feature 578,155  -  - 
Acquisition related warrant consideration 132,000  -  - 
Acquisition related consideration fair value of units issued by consolidated subsidiary 274,148  -  - 
Acquisition related deferred tax liability 218,183  -  - 
Pre-acquisition net equity of non-controlling interest in variable interest entity  191,154   -   - 
NNA term loan discount -  1,254,363  - 
Shares issued in connection with convertible notes redemption -  51,748  864,298 
Fair value of warrant liabilities -  2,354,624  - 
NNA shares issuance discount  -   1,100,261   - 
Shares issuable and issued for deferred financing costs  -   -   45,000 
Notes payable issued in connection with medical clinic acquisitions  -   -   299,900 
Settlement of stock issuable liability with issuance of shares  -   -   159,334 
Fair value of embedded conversion feature reacquired in connection with convertible notes redemption -  -  509,890 
  For The Years Ended March 31, 
  2017  2016 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(8,681,915) $(8,173,389)
Adjustments to reconcile net loss to net cash used in operating activities:        
Provision for doubtful accounts  385,597   435,838 
Depreciation and amortization  645,742   351,396 
Loss on disposal of assets  6,938   476,745 
Deferred income taxes  40,188   (127,736)
Stock-based compensation expense  1,106,454   1,103,976 
Gain on deconsolidation of variable interest entity  (242,411)  - 
Loss on debt extinguishment  -   266,366 
Amortization of deferred financing costs  44,806   94,912 
Write-off of capitalized offering costs  -   513,646 
Amortization adjustment to debt discount  -   (29,984)
Change in fair value of warrant and conversion feature liability  (1,633,333)  408,692 
Impairment of goodwill and intangible assets  68,311   207,285 
Changes in assets and liabilities:        
Accounts receivable  (2,780,122)  (27,195)
Other receivables  113,303   283,704 
Due from affiliates  2,191   15,892 
Prepaid expenses and other current assets  (10,158)  (92,182)
Deferred financing costs  -   (43,330)
Other assets  (8,916)  3,181 
Accounts payable and accrued liabilities  3,653,211   1,024,991 
Deferred rent liability  53,514   57,907 
Medical liabilities  (902,478)  1,410,160 
         
Net cash used in operating activities  (8,139,078)  (1,839,125)
         
Cash flows from investing activities:        
Change in restricted cash  (235,058)  - 
Proceeds from sale of ACC assets  -   15,000 
Decrease in cash and cash equivalents resulting from deconsolidation of variable interest entities  (858,670)  - 
Property and equipment acquired  (297,561)  (262,108)
         
Net cash used in investing activities  (1,391,289)  (247,108)
         
Cash flows from financing activities:        
Proceeds from the issuance of Series A preferred stock and warrants  -   10,000,000 
Proceeds from the issuance of Series B preferred stock and warrants  -   4,999,995 
Proceeds from issuance of convertible note payable  4,990,000   - 
Proceeds from issuance of note payable – related party  5,000,000   - 
Repayments on convertible notes  -   (470,000)
Proceeds from notes payable  400,000   100,000 
Principal payments on notes payable  (400,000)  (6,527,500)
Proceeds from line of credit  112,500   - 
Repayments on lines of credit  (150,000)  (1,006,000)
Distributions to noncontrolling interest  (1,200,000)  (702,642)
Proceeds from exercise of warrants and vested restricted stock  172,068   - 
Proceeds from issuance of common stock  -   200,000 
Payment to noncontrolling interest for equity interest  -   (251,852)
         
Net cash provided by financing activities  8,924,568   6,342,001 

F- 6

APOLLO MEDICAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

   For The Years Ended March 31, 
  2017  2016 
Net change in cash and cash equivalents  (605,799)  4,255,768 
         
Cash and cash equivalents, beginning of year  9,270,010   5,014,242 
         
Cash and cash equivalents, end of year $8,664,211  $9,270,010 
         
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:        
Interest paid $23,532  $521,341 
Income taxes paid  30,902   176,587 
         
NON-CASH FINANCING ACTIVITIES:        
Issuance of common stock on conversion of 8% warrants and notes $-  $3,060,000 
Issuance of common stock in connection with conversion of 9% notes payable and accrued interest  -   553,851 
Change in noncontrolling interest ownership  -   338,032 
Tenant improvement allowance  -   659,360 
Note receivable related to sale of ACC asset  -   51,000 
Convertible debt reclassified to accounts payable  -   100,000 
Common stock issued for acquisition of intangible assets  -   1,312,500 
Reclassification of derivative liability to equity  1,177,778   - 
Relative fair value of warrant included in debt discount  6,880   - 
Reclassification of mezzanine equity to permanent equity  7,077,778   - 
Reclassification of noncontrolling interest to due to acquisition of BAHA noncontrolling interest  183,408   - 
Warrants issuable for debt guarantee  161,000   - 

 

The accompanying notes are an integral part of these consolidated financial statements. statements

 

F- 7

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 deliverypopulation health management company working to provide coordinated, outcomes-based medical care in a cost-effective manner. Led by a management team with over a decade of experience, ApolloMed has built a company and culture that is focused on physicians providing high qualityhigh-quality medical care, population health management and care coordination for patients, particularly for senior patients and patients with multiple chronic conditions. ApolloMed believes that the Company is well-positioned to take advantage of changes in the rapidly evolving 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 serves Medicare, Medicaid and HMOhealth maintenance organization (“HMO”) patients, and uninsured patients, in California. The Company primarily in California, as well as in Mississippi and Ohio (where our ACO has recently begun operations). We primarily provideprovides services to patients thatwho are covered predominately by private or public insurance, although we do derivethe Company derives a small portion of ourits revenue from non-insured patients. We provideThe Company provides 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”), and Apollo Care Connect, Inc. (“ApolloCare”).

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)(“BAHA”) and APA ACO, Inc. (“APAACO”). Through its wholly-owned subsidiary PCCM, ApolloMed manages Los Angeles Lung Center (“LALC”) (see below for deconsolidation), and through its wholly-owned subsidiary VMM, ApolloMed manages Eli Hendel, M.D., Inc. (“Hendel”) (see below for deconsolidation). ApolloMed also has a controlling interest in ApolloMed Palliative Services, LLC (“ApolloMed Palliative”APS”), 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. Revenues earned by ApolloMed ACO participatesare uncertain, and, if such amounts are payable by the Centers for Medicare & Medicaid Services (“CMS”), they will be paid on an annual basis significantly after the time earned, and are contingent on various factors, including achievement of the minimum savings rate as determined by MSSP for the relevant period. Such payments are earned and made on an “all or nothing” basis. CMS determined that the Company did not meet the minimum savings threshold in performance year 2015 and therefore did not receive the MSSP, the goal of which“all or nothing” annual shared savings payment in fiscal 2017. The Company is eligible to improve the quality of patient care and outcomes through more efficient and coordinated approach among providers. be considered for an “all or nothing” payment under this program for performance year 2016 (which, if it is paid, would be paid to us in fiscal 2018).

 

In January 2016, the Company formed ApolloCare, which acquired certain technology and other assets of Healarium, Inc., which provides the Company with a cloud and mobile-based population health management platform that includes digital care plans, a case management module, connectivity with multiple healthcare tracking devices and the ability to integrate with multiple electronic health records to capture clinical data.

During fiscal 2016, the Company combined the operations of AKM into those of MMG.

On March 1, 2016, the Company sold substantially all the assets of ACC to an unrelated third party. As the Company still operates various clinics, the sale was not deemed to represent a strategic shift in the Company’s operations and therefore not considered a discontinued operation.

In November 2016, BAHA Acquisition Corp., an affiliated entity owned by the Company’s CEO and consolidated as a variable interest entity, acquired the noncontrolling interest in BAHA which was previously consolidated as a variable interest entity, and continues to have its financial results consolidated with those of the Company as a variable interest entity. As part of the transaction, the Company acquired the noncontrolling interest of BAHA and was reflected as an equity transaction as there was no change in control.

On December 21, 2016, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Apollo Acquisition Corp., a California corporation and wholly-owned subsidiary of the Company (“Merger Subsidiary”), Network Medical Management (“NMM”), and Kenneth Sim, M.D., not individually but in his capacity as the representative of the shareholders of NMM (the “Shareholders’ Representative”) (see Note 10).

F- 8

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 1, 2017, PCCM and VMM amended the management services agreements entered into with LALC and Hendel. Based on the Company’s evaluation of current accounting guidance, it was determined that the Company no longer holds an explicit or implicit variable interest in these entities, and accordingly LALC and Hendel are no longer consolidated and their operations are not included in the March 31, 2017 consolidated financial statements of the Company as of such date. In connection with the amendments, the Company recorded a gain on deconsolidation of $242,411 in the consolidated statement of operations, the deconsolidation of the net assets of the LALC and Hendel entities and related noncontrolling interest of $1,023,183 in the consolidated balance sheet, and a decrease in cash and cash equivalents and in the consolidated statements of cash flows in the amount of $858,670.

On January 18, 2017, CMS announced that APAACO, which is owned 50% by ApolloMed and 50% by Network Medical Management, Inc. has been approved to participate in the Next Generation ACO Model “NGACO Model”. Through this new model, CMS will partner with APAACO and other ACOs experienced in coordinating care for populations of patients and whose provider groups are willing to assume higher levels of financial risk and reward under the NGACO Model. The NGACO program began on January 1, 2017.

In connection with the approval by CMS for APAACO to participate in the NGACO Model, CMS and APAACO have entered into the Participation Agreement. The term of the Participation Agreement is two performance years, through December 31, 2018. CMS may offer to renew the Participation Agreement for an additional two performance years. Additionally, the Participation Agreement may be terminated sooner by CMS as specified therein.

Going Concern, Liquidity and Capital Resources

 

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business.

As shown in the accompanying consolidated financial statements, the Company has a history of operating losseslosses. The Company had a net loss of approximately $8.7 million and asapproximately $8.2 million for the years ended March 31, 2017 and 2016, respectively. The Company had negative cash flow from operations of approximately $8.1 million and approximately $1.8 million for the years ended March 31, 2017 and 2016, respectively.

As of March 31, 2015 has2017, the Company had an accumulated deficit of $19,340,521, and during the year endedapproximately $37.7 million. At March 31, 2015 net2017, the Company had cash used in operating activities was $271,910.

The primary sourcesequivalents of liquidity asapproximately $8.7 million compared to cash and cash equivalents of approximately $9.3 million at March 31, 2015 include cash on hand2016. At March 31, 2017, the Company had net borrowings from notes and lines of $5,014,242credit totaling approximately $9.9 million compared to net borrowings at March 31, 2016 of approximately $0.2 million and availability under lines of credit of approximately $380,000. Management has established$0.2 million.  

These factors among others raise substantial doubt about the Company’s ability to continue as a business plan, which they believe will resultgoing concern. The Company’s long-term ability to continue as a going concern is dependent upon the Company’s ability to increase revenue, reduce costs, achieve a satisfactory level of profitable operations, and obtain additional sources of suitable and adequate financing. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in future profitability. However,the event that the Company cannot continue as a going concern. The Company’s ability to continue as a going concern is also dependent on management’s ability to further develop business operations. The Company may requirealso have to reduce certain overhead costs through the reduction of salaries and other means, and settle liabilities through negotiation. There can be no assurance that management’s attempts at any or all of these endeavors will be successful.

To date, the Company has funded the Company’s operations from a combination of internally generated cash flow and external sources, including the proceeds from the issuance of equity and/or debt securities. The Company expects to continue to fund the Company’s working capital requirements, capital expenditures and payments of principal and interest on outstanding indebtedness, with cash on hand, cash flows from operations, available borrowings under the Company’s lines of credit and, if available, additional fundingfinancings of equity and/or debt. Management does not believe that the Company has sufficient liquidity to meet certainthe Company’s 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. Ifmonths without some additional funds, such as funds available funds are not adequate, the Company may need to obtain additional sources of funds or reduce operations; however, there isfrom raising capital. However, no assurance can be given that the Companyany such funds will be successfulavailable at all or available on favorable terms. The Company is substantially dependent upon the consummation of the Merger to meet the Company’s liquidity requirements. See “NMM Transaction” in doing so.Note 10.

 

F- 9

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.APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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; andAPS, (3) physician practice corporations (“PPCs”) managed under long-term management service agreements including AMH, MMG, ACC, LALC (through December 31, 2016), Hendel (through December 31, 2016), 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.

 

Effective January 1, 2017, as a result of an amendment to their respective MSA’s, LALC and Hendel are no longer controlled by the Company and are therefore not consolidated by the Company as of such date. 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. The Company has determined it has six reporting units, which are comprised of (1) Hospitalist and AMM, (2) IPA, (3) Clinics, (4) Care Connect, (5) ACO, and (6) Palliative Services. While the chief operating decision maker uses financial information related to these reporting units to analyze business performance and allocate resources, the reporting units, as noted above, do not meet the quantitative threshold under U.S. GAAP to be considered a reportable segment. As such, these reporting units are aggregated into a single reportable segment in the consolidated financial statements.

 

Revenue Recognition

 

Revenue consists of contracted, fee-for-service (“FFS”) 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.

F- 10

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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-serviceFFS 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, 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

Fee-for-service revenue

 

Fee-for-serviceFFS 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-serviceFFS arrangements, the Company bills patients for services provided and receivesreceive payment from patients or their third-party payors. Fee-for-serviceFFS 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-serviceFFS 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, 2015,2017 and March 31, 2014 and January 31, 20142016 (see "Medical Liabilities" in this Note 2, below).

 

F-10
F- 11 

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Medicare Shared Savings Program Revenue

 

The Company, through its subsidiary ApolloMed ACO, participates in the MSSP, which is sponsored by CMS. The goal of the Centers for Medicare & Medicaid Services (“CMS”).MSSP is to improve the quality of patient care and outcomes through more efficient and coordinated approach among providers. 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’ CMScost savings benchmark. The MSSP is a newly formedrelatively new program with limited historymanaged by CMS that has an evolving payment methodology. Revenues earned by ApolloMed ACO are uncertain, and, if such amounts are payable by the CMS, they will be paid on an annual basis significantly after the time earned, and will be contingent on various factors, including achievement of the minimum savings rate as determined by MSSP for the relevant period. Such payments to ACO participants.are earned and made on an “all or nothing” basis. 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.

 

Hospitalist Agreements

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,year, the Company earnedentered into several new hospitalist agreements with hospitals, whereby the Company earns a stipend fee plus a fee based on an agreed percentage of fee-for-service collections. The fee is recorded at an amount net of the portion owed to the hospitals (the Company collects all fees on behalf of the hospitals). The fee revenue is further reduced by a portion subject to quality metrics which is only recorded as revenue upon the Company meeting these metrics. The Company considered the indicators of gross revenue and received $5.38 million which has been reportednet revenue reporting under ASC 605-45-45, “Revenue Recognition: Principal Agent Considerations” and determined that revenue from this arrangement is recorded at net.

NGACO Model Revenue

No revenues were generated from the NGACO Model in “Net revenue”fiscal 2017 and management is in the consolidated financial statements forprocess of evaluating 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.appropriate revenue recognition.

 

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 ranging from 0.05% to 0.10%.

Long-Lived Assets

The Company reviews its long-lived assets including definite lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of 0.15%.the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value.

 

Goodwill and Indefinite-Lived Intangible Assets

 

Under FASB ASCFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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, at the Company’s fiscal year end, management assesses whether there has been any impairment in the value of goodwill by first comparing the fair value to the net carrying value.value of the reporting unit. If the carrying value exceeds its estimated fair value, a second step is performed to compute the amount of the impairment. The Company has determined it has six reporting units, which are comprised of (1) Hospitalist and AMM, (2) IPA, (3) Clinics, (4) Care Connect, (5) ACO, and (6) Palliative Services.

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
F- 12 

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Concentrations

 

The Company had major payors that contributed the following percentage of net revenue:

 

  Year Ended
March 31,
2015
  Two Months
Ended
March 31,
2014
  Year
Ended
January
31, 2014
 
Medicare/Medi-Cal  34.8%  14.3%  17.8%
L.A Care  13.2%  12.1%  *
Healthnet  12.3%  *  *
Hollywood Presbyterian  *   11.8%  15.9%
California Hospital  *   11.6%  13.9%

   For The Years Ended March 31, 
  2017  2016 
       
Governmental - Medicare/Medi-Cal  18.8%  29.8%
L.A. Care  13.1%  15.7%
Allied Physicians  8.5%  0.0%
Health Net  6.8%  9.9%

 

Receivables from one of these payors amounted to the following percentage of total accounts receivable:receivable before the allowance for doubtful accounts:

 

  March 31,
2015
  March 31,
2014
  January 31,
2014
 
Medicare/Medi-Cal  22.1%  21.7%  31.5%

  As of March 31, 
  2017  2016 
       
Governmental - Medicare/Medi-Cal  20.5%  39.3%
Allied Physicians  12.8%  15.8%

 

*   Represents less than 10%The Company maintains its cash and cash equivalents and restricted cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts; however, amounts in excess of the federally insured limit may be at risk if the bank experiences financial difficulties. As of March 31, 2017, approximately $8.5 million was in excess of the Federal Deposit Insurance Corporation limits of $250,000 per depositor.

The Company’s business and operations are concentrated in one state, California. Any material changes by California with respect to strategy, taxation and economics of healthcare delivery, reimbursements, financial requirements or other aspects of regulation of the healthcare industry could have an adverse effect on the Company’s operations and cost of doing business.

 

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. Leasehold improvements are amortized on a straight-line basis over the shorter of the terms of the respective leases or the expected useful lives of the improvements ranging from 5 to 10 years.

Property and equipment consisted of the following:

 

 As of March 31, 
 2017  2016 
 March 31, 2015 March 31, 2014 January 31,
2014
      
Website $4,568  $4,568  $4,568  $4,568  $4,568 
Computers  125,478   40,397   31,010   287,570   166,043 
Software  165,439   165,439   165,439   70,971   215,439 
Machinery and equipment  355,988   143,920   143,920   141,977   351,090 
Furniture and fixtures  88,939   37,394   43,366   183,130   114,127 
Leasehold improvements  402,035   56,144   49,780   1,075,760   1,094,665 
  1,142,447   447,862   438,083   1,763,976   1,945,932 
        
Less accumulated depreciation and amortization  (559,977)  (352,914)  (352,398)  (558,837)  (697,959)
 $582,470  $94,948  $85,685         
 $1,205,139  $1,247,973 

 

Depreciation and amortization expense was $207,063, $516,$265,110 and $25,388$165,620 for the yearyears ended March 31, 2015, the two months ended March 31, 2014,2017 and the year ended January 31, 2014,2016, respectively.

F- 13

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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 onand $200,000 per member stop-loss for Medi-Cal patients in institutional risk pools. Any adjustments to reserves are reflected in current operations.

 

The Company’s medical liabilities waswere as follows:

 

 Year Ended
March 31, 2015
 Two
Months
Ended
March 31, 2014
 Year Ended
January 31,
2014
  For The Years Ended March 31, 
        2017  2016 
Balance, beginning of period $552,561  $285,625  $- 
            
Balance, beginning of year $2,670,709  $1,260,549 
Incurred health care costs:                    
Current year  4,211,231   167,000   288,601   10,365,502   7,844,329 
            
Acquired medical liabilities (see Note 4 )  458,378   -   - 
            
Claims paid:                    
Current year  (3,245,283)  -   (2,976)  (8,524,215)  (6,019,186)
Prior years  (90,367)  -   -   (1,881,869)  (1,159,909)
Total claims paid  (3,335,650)  -   (2,976)  (10,406,084)  (7,179,095)
Risk pool settlement  814,733   - 
Adjustment related to full risk capitation contracts  (1,676,629)  803,981 
Adjustments  -   (59,055)
                    
Risk pool settlement  (384,869)  -   - 
Accrual for net deficit from full risk capitation contracts  544,041   99,936   - 
            
Adjustments  (785,143)  -   - 
Balance, end of period $1,260,549  $552,561  $285,625 
Balance, end of year $1,768,231  $2,670,709 

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).method.

 

AtDuring the year ended March 31, 2015, there is approximately $514,000 of2016, the Company wrote-off deferred financing costs of approximately $175,000 related to the Company’s upcoming public offering which is anticipated to close duringconversion of NNA of Nevada, Inc. (“NNA”) indebtedness as part of 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.loss on debt extinguishment expense (see Note 7).

 

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.

 

F- 14

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED 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 505-50Equity-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 ..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 Loannotes payable and the Convertible Notesconvertible note payable 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

 

In October 2015, the Company issued a warrant in connection with the 2015 NMM financing that initially required liability classification (see Note 9). The fair value of the warrant liability of $2,144,496approximately $1.2 million at March 31, 2015 issued in connection withDecember 21, 2016, the 2014 NNA financingdate on which the Series A Warrant was reclassified from liability to equity, see Note 9, was estimated using the Monte Carlo valuation model which used the following inputs: term of 6.03.81 years, risk free rate of 1.53%1.74%, no dividends, volatility of 57.4%62.6%, share price of $5.00$9.00 per share based on the trading price of the Company’s common stock adjusted for a marketability discount. The fair value of the warrant liability of approximately $2.8 million at March 31, 2016 was estimated using the Monte Carlo valuation model, using the following inputs: term of 4.5 years, risk free rate of 1.13%, no dividends, volatility of 65.7%, share price of $5.93 per share based on the trading price of the Company’s common stock adjusted for marketability discount, and a 0% probability of redemption of the warrant shares issued along with the shares of the Company’s convertible preferred stock issued in the NMM financing. The fair value of the warrant liability of approximately $2.9 million in October 2015 was estimated at issuance using the Monte Carlo valuation model, using the following inputs: term of 5 years; risk free rate of 1.3%, no dividends, volatility of 63.3%, share price of $6.00 per share based on the trading price of the Company’s common stock adjusted for a marketability discount, and a 100%0% probability of down-roundredemption of the warrant shares issued along with the shares of the Company’s convertible preferred stock issued in the NMM financing.

Conversion feature liability

The 8% NNA Convertible Note was converted into common shares in October 2015 and the related liability was marked to fair value with changes in fair value recorded in the consolidated statement of operations and reclassified to additional paid-in capital on such date. The fair value of the warrantconversion feature liability on the date of $2,354,624 at March 31, 2014conversion was estimated using the Monte Carlo simulation valuation model, which usedusing the following inputs:input terms: term of 7 years,3.45 years; risk free rate of 2.31%0.95%, no dividends, volatility of 71.4%50.7%, share price of $4.50$6.00 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.future financing event related to the anti-dilution provision of the convertible feature.

F- 15

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Conversion feature liability

TheThere were no financial instruments measured at fair value on a recurring basis as 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.

2017. The carrying amounts and fair values of the Company's financial instruments measured at fair value on a recurring basis are presented below as of:of March 31, 2016:

 

March 31, 2015

  Fair Value Measurements    
  Level 1  Level 2  Level 3  Total 
Liabilities:                
Warrant liability $-  $-  $2,144,496  $2,144,496 
Conversion feature liability  -   -   442,358   442,358 
  $-  $-  $2,586,854  $2,586,854 

March 31, 2014

 Fair Value Measurements    
 Fair Value Measurements    Level 1  Level 2  Level 3  Total 
 Level 1 Level 2 Level 3 Total          
Liabilities:                                
Warrant liability $-  $-  $2,354,624  $2,354,624  $-  $-  $2,811,111  $2,811,111 

 

The following summarizes the activity of Level 3 inputs measured on a recurring basis for the yearyears ended March 31, 20152017 and for the two months ended March 31, 2014:2016:

 

             
   Warrant Liability   Conversion Feature
Liability
   Total 
Balance at February 1, 2014 $-  $-  $- 
Liability incurred (Note 7)  2,354,624   -   2,354,624 
Balance at March 31, 2014 $2,354,624   -   2,354,624 
Liability incurred (Note 7)  487,620   578,155   1,065,775 
Gain on change in fair value of warrant and conversion feature liability  (697,748)  (135,797)  (833,545)
Balance at March 31, 2015 $2,144,496  $442,358  $2,586,854 
  Warrant
Liability
  Conversion
Feature
Liability
  Total 
Balance at April 1, 2015 $2,144,496  $442,358  $2,586,854 
Warrant adjustments  (999,724)  -   (999,724)
Conversion of warrants and convertible note to common stock – NNA  (1,624,029)  (482,904)  (2,106,933)
Fair value of warrant issued – NMM  2,922,222   -   2,922,222 
Change in fair value of warrant and conversion feature liability  368,146   40,546   408,692 
             
Balance at March 31, 2016  2,811,111   -   2,811,111 
             
Fair value of warrant reclassified to equity  (1,177,778)  -   (1,177,778)
Change in fair value of warrant liability  (1,633,333)  -   (1,633,333)
Balance at March 31, 2017 $-  $-  $- 

 

The gain on change in fair value of the warrant and conversion feature liability of $833,545$1,633,333 for the year ended March 31, 2015 is2017 and loss on change in fair value of the warrant liability and conversion feature liability of $408,692 for the year ended March 31, 2016, are included in the accompanying consolidated statements of operations. The change in fair value during the year ended March 31, 2016 relates to a warrant liability and embedded conversion feature resulting from a 2014 financing transaction with NNA which was settled in October 2015. Upon settlement, the Company reclassified the fair value of warrants of $1,177,778 from warrant liability to additional paid in capital – see Note 9.

 

Non-controllingNoncontrolling Interests

 

The non-controllingnoncontrolling 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-controllingnoncontrolling interests in any period subsequent to initial consolidation would relate to either capital contributions or distributions by the non-controllingnoncontrolling parties as well as income or losses attributable to certain non-controllingnoncontrolling interests. Non-controllingNoncontrolling interests also represent third-party minority equity ownership interests which are majority owned by the Company.

During the year ended March 31, 2016, the Company entered into a settlement agreement with a shareholder of one of the Company’s majority owned subsidiaries. In connection with the settlement agreement, the former shareholder received approximately $400,000, of which approximately $252,000 was paid by the Company and the remaining amount of approximately $148,000 was paid by another shareholder of APS, in exchange for the shareholder’s interest in such subsidiary, resulting in an increase in the Company’s ownership interest in APS from 51% to 56%. The net effect of this settlement was a decrease in additional paid-in capital of approximately $338,000, an adjustment to increase noncontrolling interest by approximately $32,000 and an increase in noncontrolling interest resulting from a reclassification from noncontrolling interest to other receivables of approximately $415,000.

See “Principles of Consolidation” above regarding deconsolidation of LALC and Hendel and related adjustments to noncontrolling interest.

See Note 3 related to the reclassification of noncontrolling interest to additional paid-in capital due to the acquisition of the variable interest entity, BAHA.

Basic and Diluted Earnings (Loss) 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.

 

F- 16

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

 

 Year Ended March 31,
2015
 Two Months Ended
March 31, 2014
 Year Ended
January 31, 2014
  As of March 31, 
 2017  2016 
     
Preferred stock  1,666,666   1,666,666 
Options  412,387   434,430   514,651   902,950   1,064,150 
Warrants  119,430   143,550   156,202   138,500   2,091,166 
Convertible Notes  50,431   -   - 
Convertible notes  499,000   - 
  582,248   577,980   670,853         
  3,207,116   4,821,982 

 

New Accounting Pronouncements

 

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,February 2016, the FASB issued ASU No. 2014-17,Business Combinations: Pushdown Accounting2016-02, Leases (“ASU 2016-02”). This ASU provides companiesnew standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the option to apply pushdown accounting in its separate financial statements upon occurrencepattern of an event in which an acquirer obtains control of the acquired entity. The election to apply pushdown accounting can be made eitherexpense recognition 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 issuedincome statement. 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 update2016-02 is effective for fiscal years beginning after December 15, 2015; however, earlier2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the adoption of this standard update is not expected to have a significant impactASU 2016-02 on ourthe consolidated financial statements.

In February 2015,March 2016, the FASB issued ASU No. 2015-02,Amendments2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). This ASU makes several modifications to Topic 718 related to the Consolidation Analysis, whichaccounting for forfeitures, employer tax withholding on share-based compensation, and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard 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 after December 15, 2016, with early adoption permitted. The Company adopted this guidance on April 1, 2016. The standard allows2017 and does not expect such adoption to have a material impact on its consolidated financial statements and related disclosures for fiscal 2018.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosures of financial instruments including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. ASU 2016-01 will become effective for the Company beginning interim period April 1, 2018. The Company is currently evaluating the guidance to transitiondetermine the potential impact on its financial condition, results of operations, cash flows and financial statement disclosures.

F- 17

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The FASB issued the following accounting standard updates related to Topic 606, Revenue Contracts with Customers:

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) in May 2014. ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08") in March 2016. ASU 2016-08 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations.
ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10") in April 2016. ASU 2016-10 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.
ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update) ("ASU 2016-11") in May 2016. ASU 2016-11 rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 EITF meeting. The SEC Staff is rescinding SEC Staff Observer comments that are codified in Topic 605 and Topic 932, effective upon adoption of Topic 606.
ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients in May 2016. ASU 2016-12 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance.
ASUNo. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements (" ASU 2016-20") in December 2016. ASU 2016-20 does not change the core principle of revenue recognition in Topic 606 but summarizes the technical corrections and improvements to ASU 2014-09 and is effective upon adoption of Topic 606.

These ASUs will become effective for the Company beginning interim period April 1, 2018. The Company currently anticipates adopting the standard using the modified retrospective method. The Company has begun the process of implementing this standard, including performing a review of its revenue streams to identify any differences in the timing, measurement, or presentation of revenue recognition. The Company currently believes that the primary impact will be changes to the new model using eithertiming of recognition of revenues related to FFS and Capitation Revenue and enhanced financial statement disclosures. The Company will continue to assess the impact on all areas of its revenue recognition, disclosure requirements and changes that may be necessary to its internal controls over financial reporting. 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). This ASU provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The issues addressed in this ASU that will affect the Company are classifying debt prepayments or debt extinguishment costs and contingent consideration payments made after a full or modified retrospective approach,business combination. This update is effective for annual and earlyinterim periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluatingassessing the impact this standardthe adoption of ASU 2016-15 will have on its business practices,the Company’s consolidated financial condition, results of operations, and disclosures.statements.

 

In April 2015,December 2016, the FASB)FASB issued ASU 2015-03,Interest – ImputationNo. 2016-18, Statement of Interest (Subtopic 835-30)Cash Flows (Topic 230) ("ASU 2016-18”). The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-17 will become effective for the Company beginning interim period April 1, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact the adoption of ASU 2016-18 will have on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). This ASU provides a screen to determine when a set is not a business, which requires that debt issuance costs relatedwhen substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business, which reduces the number of transactions that need to a recognized debt liability be presented infurther evaluated. If 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 arescreen is not affected by this ASU.  The amendments inmet, this ASU arerequire that to be considered a business, a set much include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and also remove the evaluation of whether a market participant could replace missing elements. This update is effective for financial statements issued for fiscal yearsannual and interim periods beginning after December 15, 2015, and2017, including interim periods within those years.periods. The Company is currently assessing the impact the adoption of ASU 2017-01 will have on the Company’s consolidated financial statements.

F- 18

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This ASU eliminates Step 2 from the goodwill impairment test if the carrying amount exceeds the fair value of a reporting unit and also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. This update is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for financial statements that have not been previously issued and retrospective applicationinterim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is required for each balance sheet presented.  Thecurrently assessing the impact the adoption of this standard update is not expected toASU 2017-04 will 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

 

Acquired Technology

In January 2016, Apollo Palliative Services LLCCare Connect acquired certain assets from Healarium Inc., a third party entity, and Affiliates Acquisitionswas determined to be a purchase of assets. According to the asset purchase agreement, as amended, the Company agreed to issue 275,000 shares of its common stock with a fair value of $1,512,500 in exchange for the technology with a fair value of approximately $1.3 million, plus $200,000 in cash. The technology provides a cloud and mobile-based population health management platform, with an emphasis on chronic care management and high-risk patient management in addition to a comprehensive platform for total patient engagement. The acquired technology was placed into service in April 2016 and will be amortized over its estimated useful life of five years. Management evaluated the acquired technology for impairment and no impairment occurred during fiscal 2017 (see Note 4).

BAHA Acquisition

 

On October 27, 2014, AMM madeNovember 10, 2016, BAHA Acquisition, a Medical Corporation, a California professional corporation (“Acquisition”), an initial capital contributionaffiliate 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.

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 $900,000 
Fair value of equity consideration  230,862 
Working capital adjustment  (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:

Cash and cash equivalents $77,020 
Accounts receivable  253,193 
Prepaid expenses and other current assets  467 
Property and equipment  7,130 
Identifiable intangible assets  532,000 
Goodwill  398,467 
Total assets acquired  1,268,277 
     
Accounts payable and accrued liabilities  243,937 
Total liabilities assumed  243,937 
Net assets acquired $1,024,340 

 The intangible assets acquired consisted of the following:

  Life
(yrs.)
  Additions 
Medicare license  Indefinite  $462,000 
Trade name  5   51,000 
Non-compete agreements  5   19,000 
      532,000 

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 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“BAHA Stock Purchase Agreement”) dated as of November 4, 2016 with BAHA and Scott Enderby, D.O. (“Enderby”), dated October 27, 2014, bypursuant to which Enderby sold to Acquisition, and among ApolloMed Palliative,Acquisition purchased from Enderby, 100% of the issued and outstanding stock of BAHA (the “BAHA Stock”), of which Enderby was the sole shareholderholder beneficially and of HCHHA,record (the “Transaction”). Warren Hosseinion, M.D., the Company’s Chief Executive Officer, is the sole stockholder of Acquisition, as nominee for AMM. BAHA Acquisition is a consolidated variable interest entity of the Company.

As provided for in the BAHA Stock Purchase Agreement, the purchase price for the BAHA Stock consists of (i) a payment of $25,000 (the “Initial Payment”) at the closing (the “Closing”) of the Transaction, which also took place on November 4, 2016 (the “Closing Date”); (ii) a contingent payment in the aggregate amount of $100,000 to be paid over a period of 18 months following the Closing (the “Contingent Payment”); and HCHHA, ApolloMed Palliative agreed(iii) a warrant to purchase all24,000 shares of the remaining sharesCompany’s common stock (the “Enderby Warrant”) issued to Enderby. The Company has informally agreed with Enderby to defer the Initial Payment from the Closing until after the delivery of HCHHA for $300,000the closing statement calculating Actual Net Working Capital, as described in cashthe following paragraph.

No later than 30 days following the Closing Date, Acquisition shall prepare and $43,286deliver to Enderby a written statement of equity consideration in APS, subject to reduction if HCHHA’sthe net working capital was less than $50,000of BAHA as of the closingClosing Date. If the Actual Net Working Capital (as defined in the BAHA Stock Purchase Agreement) as of the transaction. ApolloMed Palliative agreedClosing Date is less than $300,000 (the “Target Amount”), then Enderby shall, within five business days of the date of final determination of the Actual Net Working Capital as of the Closing Date, pay to pay a contingent paymentAcquisition the amount equal to the absolute value of the difference between the Target Amount and the Actual Net Working Capital as of the Closing Date, together with interest on the amount of such difference calculated at the rate of four percent (4%) per annum from the Closing Date to the date of payment. The Company provided the statement of the net working capital to Enderby, who is reviewing such statement.

The Contingent Payment of up to a further $150,000 (the “HCHHA Contingent Payment”). The HCHHA Contingent Paymentan aggregate $100,000 will be paidmade to Enderby in two installments of $75,000connection with personal services to be performed by him pursuant to an employment agreement entered into in connection with the seller within sixty days of eachClosing of the first and second anniversariesTransaction (the “Enderby Employment Agreement”) as follows: (i) $25,000 on the six-month anniversary of the transaction,Closing, an additional $50,000 on the first-year anniversary of the Closing and is contingent upon,a final $25,000 on the 18-month anniversary of the Closing, if as of each applicablesuch date, BAHA’s revenue is greater than $6,000,000. The Contingent Payment is in connection with the seller’scontinued personal services provided under the Enderby Employment Agreement and is deemed to be post combination compensation.

As further inducement for Acquisition to enter into the BAHA Stock Purchase Agreement, BAHA and Enderby entered into a non-competition agreement dated as of November 4, 2016, pursuant to which Enderby has agreed, without the written permission of BAHA, within a radius of 50 miles from BAHA’s offices in San Francisco and for a period of three years from the Closing Date, not to compete with BAHA; hire or induce another person to hire any BAHA employee or independent contractor; or solicit any business, customers, clients or contractors of BAHA.

F- 19

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As part of the Transaction, BAHA and Enderby entered into the Enderby Employment Agreement, pursuant to which Enderby has been hired to serve as Chief Executive Officer of BAHA. Enderby will serve in that capacity for an initial term of two years, automatically extended for additional one-year terms, unless not less than 60 days prior to each such renewal date, either party shall have given written notice to the other that the Enderby Employment Agreement will not be renewed. Enderby shall be paid a base salary of $400,000 per year and shall be entitled to participate in any incentive compensation plans and/or equity compensation plans as are now available or may become available to other similarly positioned employees.

The Enderby Employment Agreement shall be terminated upon Enderby’s death and may be terminated on Enderby’s Disability (as that term is defined in the Enderby Employment Agreement), by BAHA with or without Cause (as that term is defined in the Enderby Employment Agreement) or by Enderby with or without Good Reason (as that term is defined in the Enderby Employment Agreement).

If Enderby’s employment continuing or having beenis terminated without cause and the seller meeting certain productivity targets. The contingent payments were accounted for as compensation consideration and will be accrued ratably overany reason during the term of the agreement. AsEnderby Employment Agreement, or if the Enderby Employment Agreement is not renewed, Enderby shall be entitled to be paid any earned but unpaid base salary through the date of March 31, 2015, $41,245 has been expensed and is included in accounts payabletermination, unpaid expense reimbursements and accrued liabilities.

The Company accountedbut unused paid time off. Additionally, in the event of termination by BAHA without Cause or termination by Enderby for Good Reason, and if, but only if, Enderby signs a general release of claims in a form and manner satisfactory to BAHA, Enderby shall also be entitled to receive a severance payment in an amount equal to (i) four weeks of his most recent base salary for every full year of his active employment, but such amount shall be no less than one month’s worth nor more than six months’ worth of his most recent base salary; plus (ii) the acquisition aspremium amounts paid for coverage under BAHA’s group medical, dental and vision programs for a business combination usingperiod of twelve months, to be paid directly to Enderby at the acquisition methodsame times such payments would be paid on behalf of accounting which requires, among other things,a current employee for such coverage, provided 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 APSEnderby timely elects continued coverage under such plan(s) pursuant to the aggregated amount. The acquisition-date fair valueConsolidated Omnibus Budget Reconciliation Act of the consideration transferred was1985 as follows:

Cash consideration $300,000 
Fair value of equity consideration  43,286 
Working capital adjustment  (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 $(37,087)
Accounts receivable  149,599 
Property and equipment  3,035 
Identifiable intangible assets  284,000 
Goodwill  268,989 
Total assets acquired  668,536 
Accounts payable and accrued liabilities  232,570 
Deferred tax liability  114,652 
Total liabilities assumed  347,222 
Net assets acquired 321,314 

The intangible assets acquired consisted of the following:

  Life
(yrs.)
  Additions 
Medicare license  Indefinite  $242,000 
Trade name  5   38,000 
Non-compete agreements  5   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.

SCHCamended.

 

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 ofNovember 4, 2016, the Company issued 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) $428,391Enderby Warrant to pay off and discharge certain indebtedness of SCHC (iii) warrantsEnderby to purchase up to 100,00024,000 shares of the Company’s common stock, at an exercise price of $10.00$4.50 per share, and (iv) a contingent amount of up to $1,000,000 payable, if at all, in cash. The acquisitionwhich was funded by an intercompany loan from AMM, which also provided an indemnity in favor of onethe closing price of the Sellers relating to certain indebtednesscommon stock on the trading day immediately preceding the Closing Date. The Enderby Warrant may be exercised in equal monthly installments of SCHC that remained outstanding following the closing1,000 shares over a 24-month period commencing on December 4, 2016 and terminating on November 4, 2018. The fair value of the acquisition. Followingwarrants at the acquisition of SCHC, the Affiliatetransaction date 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.deemed to be de minimus.

  

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. PursuantPrior 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, andTransaction, the financial statementsresults of SCHC will beBAHA were consolidated by the Company as a variable interest entity with those ofas 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 $2,428,391 
Fair value of warrant consideration  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%.

A contingent payment obligation of $1,000,000 was considered a post-combination transaction and therefore it willto 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 $264,601 
Accounts receivable  750,433 
Receivable from affiliate  67,714 
Prepaid expenses and other current assets  82,430 
Property and equipment  607,315 
Identifiable intangible assets  416,000 
Goodwill  922,734 
Other assets  66,762 
Total assets acquired  3,177,989 
     
Accounts payable and accrued liabilities  134,426 
Note payable to financial institution  463,582 
Deferred tax liability  19,590 
Total liabilities assumed  617,598 
     
Net assets acquired $2,560,391 

The intangible assets acquired consisted of the following:

  Life
(yrs.)
  Additions 
       
Network relationships  5  $220,000 
Trade name  5   102,000 
Non-compete agreements  3   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.

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 $140,000 
Holdback consideration paid to seller  140,000 
Working capital adjustment paid to seller  236,236 
Total purchase consideration $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       $140,000 
Holdback consideration        376,236 
Total consideration       $516,236 
     
Cash and cash equivalents       $356,359 
Marketable securities        389,094 
Accounts receivable        31,193 
Prepaid expenses and other assets        26,311 
Intangibles        213,000 
Goodwill    83,943 
Accounts payable and accrued liabilities    (40,439)
Deferred tax liability  (84,847)
Medical payables  (458,378)
Net assets acquired $516,236 

The intangible assets acquired consisted of the following:

  Life
(yrs.)
  Additions 
       
Payor relationships  5  $107,000 
Trade name  4   66,000 
Non-compete agreements  3   40,000 
      $213,000 

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:

  Year Ended
March 31, 2015
 
  (unaudited) 
Net revenue $37,036,240 
Net loss $(2,244,224)
Basic and diluted loss per share $(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 $100,000 
Fair value of promissory note due to seller  145,000 
Total purchase consideration $245,000 
     
Property and equipment $10,000 
Exclusivity Agreement  40,000 
Noncompete Agreement  20,000 
Goodwill  175,000 
Total fair value of assets acquired $245,000 

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:

     Weighted-average
  Assets  Amortization
  Acquired  Period (years)
      
Exclusivity Agreement $40,000  4
Noncompete Agreement  20,000  5
Total identifiable intangible assets $60,000   

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 asbeneficiary. As part of the acquisition includes benefitsTransaction, Acquisition acquired the noncontrolling interest of BAHA.

Based on the Actual Net Working Capital, the Company did not pay the Initial Payment. While it is probable that the Company believescontingent payment will result from gaining additional expertise and intellectual property inbe earned, it is probable that the clinical care area and expandcontingent payment will be offset against Actual Net Working adjustment. In addition, the reach ofreceivable created by 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 acquisitionActual Net Working Capital 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”).deemed collectible and was not recorded. The Company accounted forrecorded the acquisition as a business combination using the acquisition methodreclassification of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values asnoncontrolling interest 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:$183,408 to additional paid-in capital pursuant to this transaction.

 

Cash consideration $75,000 
Fair value of promissory note due to seller  73,400 
Total purchase consideration $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:

Estimated
Fair
Value
Property and equipment10,000
Noncompete Agreement6,000
Goodwill132,400
Total fair value of assets acquired148,400

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:

     Weighted-average
  Assets  Amortization
  Acquired  Period (years)
      
Noncompete Agreement  6,000  3
Total identifiable intangible assets $6,000   

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 $75,000 
Fair value of promissory note due to seller  81,500 
Total purchase consideration $156,500 

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:

  Estimated 
  Fair Value 
Noncompete Agreement $2,400 
Goodwill  154,100 
Total fair value of assets acquired $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:

     Weighted-average
  Assets  Amortization
  Acquired  Period (years)
      
Noncompete Agreement  2,400  3
Total identifiable intangible assets $2,400   

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.

4. Goodwill and Intangible Assets

 

Goodwill

 

The following is a summary of goodwill activity:

 

Balance at January 31, 2014 $494,700 
     
Balance at March 31, 2014 $494,700 
     
Acquisition of AKM  83,943 
Acquisition of SCHC  922,734 
Acquisition of BCHC  398,467 
Acquisition of HCHHA  268,989 
     
Balance at March 31, 2015 $2,168,833 
Balance at April 1, 2015 $2,168,833 
Decrease from disposal of ACC assets  (461,500)
Impairment loss in AKM  (83,943)
Other  (907)
Balance at March 31, 2016  1,622,483 
     
Balance at March 31, 2017  1,622,483 

 

Intangible Assets, Net

 

Intangible assets, net consisted of the following:

 

  Weighted  Gross        Gross     Net 
  Average  March 31,     Impairment/  March 31,  Accumulated  March 31, 
  Life (Yrs)  2016  Additions  Disposal  2017  Amortization  2017 
Indefinite Lived Assets:                            
Medicare License     $704,000  $-  $-  $704,000  $-  $704,000 
Amortized intangible assets:                            
Acquired Technology  5   1,312,500   -   -   1,312,500   (262,500)  1,050,000 
Non-compete  4   117,000   -   (22,328)  94,672   (94,672)  - 
Network relationships  5   220,000   -   -   220,000   (117,331)  102,669 
Trade name  5   191,000   -   (45,983)  145,017   (97,417)  47,600 
      $2,544,500  $-  $(68,311) $2,476,189  $(571,920) $1,904,269 

  Weighted-
average life
(Yrs.)
  Balance at
January
31, 2014
  Additions  Balance at
March 31,
2014
  Additions  Balance at
March 31,
2015
Indefinite -lived assets:                       
Medicare license     $-  $-  $-  $704,000  $704,000
                        
Amortized intangible assets:                       
Exclusivity  4   40,000   -   40,000   -   40,000
Non-compete  4   28,400   -   28,400   157,000   185,400
Payor relationships  5   -   -   -   107,000   107,000
Network relationships  5   -   -   -   220,000   220,000
Trade name  5   -   -   -   257,000   257,000
Totals      68,400   -   68,400   1,445,000   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
F- 20

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Weighted  Gross        Gross     Net 
  Average  March 31,     Impairment/  March 31,  Accumulated  March 31, 
  Life (Yrs)  2015  Additions  Disposal  2016  Amortization  2016 
Indefinite Lived Assets:                            
Medicare License     $704,000  $-  $-  $704,000  $-  $704,000 
Amortized intangible assets:                            
Acquired Technology  5   -   1,312,500   -   1,312,500   -   1,312,500 
Exclusivity  4   40,000   -   (40,000)  -   -   - 
Non-compete  4   185,400   -   (68,400)  117,000   (58,738)  58,262 
Payor relationships  5   107,000   -   (107,000)  -   -   - 
Network relationships  5   220,000   -   -   220,000   (73,333)  146,667 
Trade name  5   257,000   -   (66,000)  191,000   (59,217)  131,783 
      $1,513,400  $1,312,500  $(281,400) $2,544,500  $(191,288) $2,353,212 

The acquired technology of $1,312,500 was placed into service in April 2016 and the related amortization has been included in the table above from that date. 

 

Included in depreciation and amortization on the consolidated statements of operations is amortization expense of $127,371, $2,800$380,632 and $5,973$185,776 for the years ended March 31, 2017 and 2016, respectively.

During the year ended March 31, 2017, the Company recorded an impairment charge on intangible assets of $68,311 in general and administrative expenses as the carrying amount was determined not to be recoverable.

On March 1, 2016, the Company sold substantially all the assets of ACC to an unrelated third party. In connection with the sale, the Company received cash of $10,000 and issued a note receivable in the amount of $51,000, of which $5,000 was repaid prior to year-end. The Company recognized a loss on disposal of $476,745 related to this transaction, which included the write-off of the remaining goodwill and intangible assets of ACC in the amount of $461,500 and $27,427, respectively. In addition, management determined that the remaining goodwill and intangible assets of AKM in the amount of $83,943 and $123,342, respectively, was not recoverable. Accordingly, the Company recorded an impairment charge in the aggregate amount of $207,285 in general and administrative expenses for the year ended March 31, 2015, two months ended March 31, 2014 and year ended January 31, 2014, respectively.2016.

 

Future amortization expense is estimated to be approximately as follows for each for the five years ending March 31 thereafter:

 

2016 $186,167 
2017 185,001 
2018 146,537  $327,000 
2019 114,658   327,000 
2020 40,894   284,000 
Total $673,257 
2021  262,269 
    
 $1,200,269 

5. Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consisted of the following:

 

 March 31, March 31, January 31,  

As of

March 31,

 
 2015 2014 2014  2017  2016 
Accounts payable $1,377,817  $819,380  $467,636  $3,569,011  $2,036,615 
Physician share of MSSP  62,000   -   -   -   62,000 
Accrued compensation  1,469,132   546,078   452,562   2,860,340   2,156,339 
Income taxes payable  185,051   4,149   287   20,827   110,653 
Accrued interest  55,529   19,780   47,722   54,158   4,500 
Accrued professional fees  202,675   52,699   119,453   1,379,037   202,200 
 $3,352,204  $1,442,086  $1,087,660         
 $7,883,373  $4,572,307 

F- 21

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6. Notes Payable and Lines of Credit Payable

 

Notes and linesLines of credit payable consist of the following:

 

  March 31,  March 31,  January 31, 
  2015  2014  2014 
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) $5,467,098  $5,694,565  $- 
Line of credit payable to NNA due March 28, 2019  1,000,000   -   - 
Unsecured revolving line of credit due to financial institution due June 5, 2016  94,764   94,764   94,764 
Medical Clinic Acquisition Promissory Notes  -   -   272,051 
Secured Revolving Credit Facility  -   -   2,811,878 
  $6,561,862  $5,789,329  $3,178,693 
  As of March 31, 
  2017  2016 
Hendel $100,000 revolving line of credit due to financial institution, bore interest at prime plus 4.5% (8.5% and 8.00%, respectively, interest only payable monthly and matured on March 31, 2017 (Deconsolidated - see Note 1). $-  $88,764 
         
BAHA $150,000 line of credit due to a financial institution, bears interest at prime rate plus 3% (7.0% and 6.50%, respectively), interest only payable monthly and matured in March 2017, currently due on demand.  62,500   100,000 
         
  $62,500  $188,764 

Note Payable – Related Party (Chindris)

 

On November 17, 2016, AMM entered into a promissory note agreement with Liviu Chindris, M.D. (“Chindris Note”), a minority shareholder in APS, pursuant to which the Company borrowed the principal amount of $400,000 at an interest rate of 12% per annum. The Chindris Note required repayment of the outstanding principal and accrued interest, in full, on or before February 18, 2017. In connection with the issuance of the Chindris Note, the Company also issued a two-year stock purchase warrant Dr. Chindris (the “Chindris Warrant”) to purchase up to 5,000 shares of the Company’s common stock at an exercise price of $9.00 per share. The relative fair value of the Chindris Warrant was $6,880 and was recorded as debt discount to be amortized over the term of the Chindris Note using the straight-line method, which approximates the effective interest method. The Company amortized $6,880 of debt discount to interest expense for the year ended March 31, 2017. The Chindris Note was fully repaid prior to March 31, 2017.

Note Payable – Related Party (NMM)

In connection with the Merger Agreement (see Note 10), on January 3, 2017, the Company issued a promissory note to NMM in the amount of $5,000,000. Interest is due quarterly at the rate of Prime plus 1%, or 5% at March 31, 2017, with the entire principal balance being due on January 3, 2019. In the event of default, as defined, all unpaid principal and interest will become due and payable.

NNA Credit Agreements

 

On October 15,In 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.Holdings, Inc.  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 AgreementThis facility was refinanced on March 28, 2014repaid in connection with 2014 NNA financing.October 2015, as explained in more detail below.

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, 2014.2014 (see Note 7).

  For The Years Ended March 31, 
  2017  2016 
Interest expense $82,905  $323,708 
Amortization of loan fees and discount, net of out of period adjustment (Note 12)  -   (141,066)
         
  $82,905  $182,642 

F- 22

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.  Convertible Notes Payable

6% Alliance Apex Convertible Note

On March 30, 3017, the Company issued a Convertible Promissory Note to Alliance Apex, LLC (“Alliance Note”) for $4,990,000. The Term LoanAlliance Note is due and Revolving Loan maturepayable to Alliance on March 28, 2019, subject to NNA’s right to accelerate payment(i) December 31, 2017, or (ii) the date on which the occurrenceChange of certain events. The Term Loan mayControl Transaction (see Note 10 – NMM transaction) is terminated, whichever occurs first (“Maturity Date”). Upon the closing, on or before the Maturity Date, of the Merger, the Alliance Note together with the accrued and unpaid interest, shall automatically be prepaid at any time without penalty or premium. The loans extended under the Credit Agreement are secured by substantially allconverted (a “Mandatory Conversion”) into shares of the Company’s assets,common stock, at a conversion price of $10.00 per share, subject to adjustment for stock splits, stock dividends, reclassifications and are guaranteedother similar recapitalization transactions that occur after the date of the Alliance Note. As part of an amendment to the Merger Agreement on March 30, 2017, the merger consideration to be paid by the Company’s subsidiariesCompany to NMM was amended to include warrants to purchase 850,000 shares of common stock in the Company at an exercise price of $11 per share, that will only be granted in the event that the proposed merger between the Company and consolidated medical corporations.NMM is consummated (such warrant will not vest and will expire if the contemplated merger transaction does not occur) in exchange for both NMM providing a guarantee for the Alliance Note and as compensation to NMM for giving up their right to additional shares in the Company based on the agreed upon exchange ratio with NMM in the event that the Alliance Note is converted to common stock. As the guarantee was provided in conjunction with the warrants, the guarantee is considered a debt issuance cost. The guaranteesCompany estimated the debt issuance cost and related warrants issuable for the debt guarantee of these subsidiaries$161,000 based on the incremental fair value to a market participant of a similar but unsecured debt instrument without such guarantee using a market rate for an unsecured high yield note of 12.4% and consolidated entities are in turn secured by substantially alla 25% probability of the assetsnote not being converted. As of March 31, 2017, the subsidiariesdebt issuance cost associated with the guarantee of $161,000 has been offset against the related Alliance convertible note resulting in a net balance of $4,829,000 and consolidated entities providing the guaranty.related warrants issuable for the debt guarantee is recorded in additional paid-in capital.

8% NNA Convertible Note

 

Concurrently with the Credit Agreement entered into with NNA, the Company also 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 itthe Company 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).2014. The Convertible Note matureswould have matured on March 28, 2019, subject to NNA’s right to accelerate payment on the occurrence of certain events. The Company maycould redeem amounts outstanding under the Convertible Note on 60 days’ prior notice to NNA. Amounts outstanding under the Convertible Note arewere 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 arewere guaranteed by its subsidiaries and consolidated medical corporations.

 

On February 6,October 14, 2015, the Company entered into a First Amendment and Acknowledgement (the “Acknowledgement”)the Agreement 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 betweenNMM pursuant to which the Company sold NMM 1,111,111 units, each Unit consisting of one share of Preferred Stock 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 deadlineone Warrant, for a resale registration statement for the benefit of NNA.

Under the Investment Agreement, the Company issued to NNA warrants tototal 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$10,000,000, the proceeds of $9.0 million in part based onwhich were used by 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 $1,100,261Company primarily 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.

The Revolving Loan bears interest at the rate of three month LIBOR plus 6.0% per annum. The Company had borrowed $1,000,000 underrepay 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 securedowed 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 paymentNNA and the balance the Company used for working capital purposes (see Note 9). The Company repaid approximately $7.5 million of the scheduled principal payments duethen outstanding NNA debt obligations and recorded a loss on September 15 and October 15, 2012, and amended the Note effective October 15, 2012 in which SpaGus agreeddebt extinguishment of approximately $266,000 related 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

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
 
Interest expense $595,067  $38,260  $68,634 
Amortization of loan fees and discount  288,054   13,880   161,091 
  $883,121  $52,140  $229,725 

7.  Convertible Notes Payable

Convertible notes payable consist of the following:

  March 31,  March 31,  January 31, 
  2015  2014  2014 
             
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) $1,037,818  $962,978  $950,522 
8% Convertible Note Payable to NNA due March 28, 2019, net of debt discount of $985,255 (March 31, 2015)  1,014,745   -   - 
Conversion feature liability  442,358   -   - 
Other convertible note  -   -   150,000 
  $2,494,921  $962,978  $1,100,522 

transaction.

 

9% Senior Subordinated Convertible Notes due February 15, 2016

 

The 9% Notes, issued January 31, 2013, bearbore interest at a rate of 9% per annum, were payable semi-annuallysemiannually on August 15 and February 15, and maturematured February 15, 2016, and arewere subordinated. The principal of the 9% Notes, plus any accrued yet unpaid interest, iswas 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%splits, into shares 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.Company’s common stock.

 

In connection with the issuance of the 9% Notes in 2013, the holders of the 9% Notes received warrants to purchase 66,00082,500 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 warrants are exercisable at any date prior to January 31, 2018, and were classified in equity. The $186,897 fair valueCertain holders of the 9% Notes warrants was based on the Company’s closing stock price at the transaction dateconverted an aggregate of approximately $554,000 of outstanding principal 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 bearaccrued interest at the rate of 8.0 % per annum payable semi-annually, are due March 28, 2019, and are convertible into 138,463 shares of the Company’s common stock initially at $10.00 per share. Theprior to their maturity on February 15, 2016. Prior to conversion, price will be subject to adjustment in the eventCompany amortized approximately $14,000 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 marketabilityrelated debt 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 issuabledeferred financing costs 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.fiscal 2016.

 

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:

 

 For The Years Ended March 31, 
 Year Ended March
31, 2015
 Two Months Ended
March 31, 2014
 Year Ended January
31, 2014
  2017  2016 
Interest expense $209,369  $18,518  $218,403  $-  $171,027 
Amortization of loan fees and discount  229,156   24,452   231,055   -   188,627 
 $438,525  $42,970  $449,458         
 $-  $359,654 

F- 23

  

APOLLO MEDICAL HOLDINGS, INC.

Aggregate maturities of long term debt at March 31, 2015, gross of discount and net of conversion feature liability, are as follows:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2016 $1,684,765 
2017  490,000 
2018  700,000 
2019  7,847,500 
  $10,722,265 

8. Income Taxes

 

Income tax(Benefit from) provision (benefit)of income taxes consists of the following:

 

 Year Ended
March 31,
2015
 Two Months
Ended
March 31,
2014
 Year Ended
January 31,
2014
  For The Years Ended March 31, 
Current      
Federal $147,945  $-  $- 
State  67,769   2,866   19,513 
  215,714   2,866  19,513 2017  2016 
Deferred            
Current:        
Federal  (36,390) 3,855   -  $(81,614)    $(9,979)
State  (15,532)  1,099   -   (6,069)  66,678 
 (51,922) 4,954  -   (87,683)  56,699 
                    
Provision for income taxes $163,792  $7,820  $19,513 
Deferred:        
Federal  25,598   (81,277)
State  14,590   (46,459)
  40,188   (127,736)
        
Benefit from income taxes $(47,495) $(71,037)

 

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, 2015,2017, the Company had federal and California tax net operating loss carryforwards of approximately $6.6$19.1 million and $6.6$21.3 million, respectively. The federal and California net operating loss carryforwards will expire at various dates from 2026 through 2035.2037. 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, 2015,2017 and March 31, 2014 and January 31, 20142016 are shown below. A valuation allowance of $4,447,029, $3,963,239$11,557,356 and $4,163,638$8,369,878 as of March 31, 2015,2017 and March 31, 2014 and January 31, 2014,2016, 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:

 

  March 31,
2015
  March 31,
2014
  January 31,
2014
 
          
Current deferred tax assets:            
State taxes - current  17,062   589   3,808 
Stock options  2,177,276   1,675,822   1,649,986 
Accrued payroll and related costs  1,529   1,529   1,529 
Accrued hospital pool deficit  -   28,649   28,649 
Other  65,920   -   - 
Net current deferred tax assets before valuation allowance  2,261,787   1,706,589   1,683,972 
Valuation Allowance  (2,234,631)  (1,706,589)  (1,683,972)
Net current deferred tax assets  27,156   -   -
           - 
Noncurrent deferred tax (liabilities) assets:            
Net operating loss carryforward  2,208,522   2,248,422   1,990,962 
Property and equipment  (3,170)  -   - 
Acquired intangible assets  (194,883)  (4,954)  - 
Other  3,558   8,228   488,704 
Net noncurrent deferred tax liabilities before valuation allowance  2,014,027   2,251,696   2,479,666 
Valuation Allowance  (2,212,398)  (2,256,650)  (2,479,666)
Net noncurrent deferred tax liabilities  (198,371)  (4,954)  - 
Net deferred tax liabilities $(171,215) $(4,954) $- 

  For The Years Ended March 31, 
  2017  2016 
Deferred tax assets (liabilities):        
State taxes $5,718      $15,114 
Stock options  3,127,225   2,617,037 
Accrued payroll and related costs  -   16,222 
Accrued hospital pool deficit  25,747   329,430 
Net operating loss carryforward  7,640,802   4,754,165 
Property and equipment  42.623   1,588 
Acquired intangible assets  113,171   65,748 
Other  518,403   527,095 
         
Net deferred tax assets before valuation allowance  11,473,689   8,326,399 
Valuation allowance  (11,557,356)  (8,369,878)
         
Net deferred tax liabilities $(83,667) $(43,479)

 

The provision for income taxes differs from the amount computed by applying the federal income tax rate as follows:

 

  Year Ended
March 31, 2015
  Two Months Ended
March 31, 2014
  Year Ended
January 31, 2014
 
Tax provision at U.S. Federal statutory rates  34.0%  34.0%  34.0%
State income taxes net of federal benefit  (3.2)%  (0.4)%  (0.3)%
Non-deductible permanent items  (5.9)%  (0.1)%  (0.1)%
Non-taxable entities  (4.3)%  0.3%  -
Other  0.5%  (0.1)%  3.2%
Change in valuation allowance  (34.9)%  (34.8)%  (37.2)%
Effective income tax rate  (13.8)%  (1.1)%  (0.4)%

  For The Years Ended March 31, 
  2017  2016 
Tax provision at U.S. Federal statutory rates  34.0%  34.0%
State income taxes net of federal benefit  (0.1)%  (0.3)%
Nondeductible permanent items  0.7%  (0.7)%
Nontaxable entities  0.3%  5.4%
Other  (3.4)%  1.9%
Change in valuation allowance  (31.0)%  (39.4)%
         
Effective income tax rate  0.5%  0.9%

 

As of March 31, 2015,2017 and March 31, 2014, and January 31, 2014,2016, 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.

 

F- 24

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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’ federal income tax returns are open to audit under the statute of limitations for the years ended March 31, 2014 onwards and state income tax returns are open to audit under the statute of limitations for the years ended January 31, 2011 through 2015.2013 onward. The Company does not anticipate material unrecognized tax benefits within the next 12 months.

 

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.

 

CommonPreferred Stock Placement– Series A

 

On March 28, 2014, theOctober 14, 2015, Company entered into an equity and debt investment for up to $12.0 millionagreement (the “Agreement”) with NNA. As part of the investment, the Company entered into the Investment Agreement with NNA,NMM pursuant to which the Company sold NNA 200,000 sharesto NMM, and NMM purchased from the Company, in a private offering of securities, 1,111,111 units, each unit consisting of one share of the Company’s Preferred Stock (the “Series A”) and a stock purchase warrant to purchase one share of the Company’s common stock (the “Purchased Shares”at an exercise price of $9.00 per share. NMM paid the Company an aggregate $10,000,000 for the units, the proceeds of which were used by the Company primarily to repay certain outstanding indebtedness owed by the Company to NNA and the balance for working capital.

The Series A has a liquidation preference in the amount of $9.00 per share plus any declared and unpaid dividends. The Preferred Stock can be voted for the number of shares of Common Stock into which the Series A could then be converted, which initially is one-for-one. The Series A is convertible into Common Stock, at the option of NMM, at any time after issuance at an initial conversion rate of one-for-one, subject to adjustment in the event of stock dividends, stock splits and certain other similar transactions.

At any time prior to conversion and through the Redemption Expiration Date (as described below), the Series A was able to be redeemed at the option of NMM, on one occasion, in the event that the Company’s net revenues for the four quarters ending September 30, 2016, as reported in its periodic filings under the Securities Exchange Act of 1934, as amended, were less than $60,000,000. In such event, the Company had up to one year from the date of the notice of redemption by NMM to redeem the Series A Preferred Stock, the NMM Warrant and any shares of common stock issued in connection with the exercise of any portion of the NMM Warrant theretofore (collectively the “Redeemed Securities”), for the aggregate price paid therefore by NMM, together with interest at a rate of 10% per annum from the date of the notice of redemption until the closing of the redemption. Any mandatory conversion described previously would not take place until such time as it was determined that that conditions for the redemption of the Redeemed Securities have not been satisfied or, if such conditions exist, NMM decided not to have such securities redeemed. As the redemption feature was not within the control of the Company, the Series A Preferred Stock did not qualify as permanent equity and was classified as mezzanine or temporary equity. The Company did not attain the $60,000,000 net revenues milestone noted above by September 30, 2016. Accordingly, the Series A were subject to redemption for $10,000,000. However, as part of the proposed Merger between NMM and the Company (see Note 10), NMM entered into a Consent and Waiver Agreement dated December 21, 2016 (the “NMM Waiver”), pursuant to which NMM has relinquished its right of redemption of the Series A Preferred Stock and the related common stock warrants. As a result of the NMM Waiver on December 21, 2016, the mezzanine equity was reclassified to permanent equity at its carrying amount of $7,077,778.

The common stock warrants may be exercised at any time after issuance and through October 14, 2020, for $9.00 per share, subject to adjustment in the event of stock dividends and stock splits. The warrants are not separately transferable from the Preferred Stock. The warrants were also subject to redemption in the event the Preferred Stock was redeemed by NMM, as described above. Accordingly, the Company previously accounted for such warrants as liabilities and has marked such liability to its fair value at March 31, 2016. The Company determined the fair value of the warrant liability to be $2,922,222 at inception which was estimated using the Monte Carlo valuation model (see Note 2) with the value of the Series A being the residual value of $7,077,778. As a result of the NMM Waiver, the fair value of the warrant at December 21, 2016 of $1,177,778 (see Note 2) was reclassified from liability to equity.

Without the written consent of NMM, between the Closing Date and the nine-month anniversary of the Closing Date, the Company shall not acquire, sell all or substantially all of its assets to, effect a change of control, or merge, combine or consolidate with, any other Person engaged in the business of being a MSO, ACO or IPA, or enter into any agreement with respect to any of the foregoing.

Preferred Stock – Series B

On March 30, 2016, Company entered into an agreement with NMM pursuant to which the Company sold to NMM, and NMM purchased from the Company, in a private offering of securities, 555,555 units, each Unit consisting of one share of the Company’s Series B Preferred Stock (“Series B”) and a warrant to purchase one share of the Company’s common stock at an exercise price of $10.00 per share. In addition with the issuance of common shares,NMM paid the Company issuedan aggregate $4,999,995 for the units. The proceeds were allocated to NNA 100,000each Series B units and Series B warrants to purchasebased upon their relative fair values in the Company’s common stockamount of $3,884,745 and $1,115,250, respectively, as each class of securities met the requirements for $10.00 per share.permanent equity classification. 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 theestimated fair value of the shares issuedunits was approximately $900,000, or $868,236 after the relative fair value adjustment, which approximates $4.50 per share.estimated using a Black-Scholes equity allocation option pricing method. The Company also enteredused a comparable company lookback volatility rate of 65.8%, and a risk-free rate of 1.2% - commensurate with the expected term of 5-years. In valuing the Series B warrants, the Company used a comparable company lookback volatility rate of 65.8%, and a risk-free rate of 1.2% - commensurate with the expected term of 5-years.

The Preferred Stock has a liquidation preference in the amount of $9.00 per share plus any declared and unpaid dividends. The Series B can be voted for the number of shares of Common Stock into a registration rights agreement (“RRA”) with NNA, which the CompanyPreferred Stock could then be converted, which initially is one-for-one. The Preferred Stock is convertible into Common Stock, at the option of NMM or mandatorily at any time prior to and NNA amended on February 6, 2015, which requiresincluding March 30, 2021, if the Company receives aggregate gross proceeds of not less than $5,000,000 in one or more transactions (other than transactions with NMM), at an initial conversion rate of one-for-one, subject to file a registration statement to register its shares withadjustment in 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 commonevent of stock based upon its then fair market value, as liquidated damages equal to 1.50% of the aggregate purchase price paid by NNA.dividends, stock splits and certain other similar transactions.

F- 25

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DuringThe warrants may be exercised at any time after issuance and through March 30, 2021, for $10.00 per share, subject to adjustment in the year ended January 31, 2014, the Company issued 18,250 sharesevent of common stock for proceeds of $730,000.dividends and stock splits.

 

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 1,200,000500,000 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, 2015,2017, 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, 20152017 there were approximately 48,600no shares available for future grants under the 2013 Plan.

  

On December 15, 2015, the Company’s Board of Directors approved the Company’s 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which 1,500,000 shares of the Company’s common stock were reserved for issuance thereunder. In addition, shares that are subject to outstanding grants under the Company’s 2010 Plan and 2013 Plan but that ordinarily would have been restored to such plans reserve due to award forfeitures and terminations will roll into and become available for awards under the 2015 Plan. The 2015 Plan provides for awards, including incentive stock options, non-qualified options, restricted common stock, and stock appreciation rights. The 2015 Plan was subject to approval by the Company’s stockholders, which approval was obtained at the 2016 Annual Meeting of Stockholders that was held on September 14, 2016. As of March 31, 2017, there were approximately 1,023,600 shares available for future grants under the 2015 Plan.

Share Issuances

On November 17, 2015, the Company entered into the Conversion Agreement with NNA, Dr. Warren Hosseinion and Dr. Adrian Vazquez. Pursuant to the Conversion Agreement, the Company agreed to issue 275,000 shares of common stock and to pay accrued and unpaid interest of $47,112, to NNA in full satisfaction of NNA’s conversion and other rights under the 8% Convertible Note dated March 28, 2014, issued by NNA, in the principal amount of $2,000,000. Pursuant to the Conversion Agreement, the Company also agreed to issue a total of 325,000 shares of the Company’s Common Stock to NNA in exchange for all Warrants held by NNA, under which NNA had the right to purchase 300,000 shares of the Company’s Common Stock at an exercise price of $10 per share and 200,000 shares at an exercise price of $20 per share, in each case subject to anti-dilution adjustments. On the date of conversion, the fair value of the 600,000 shares of common stock was based on the market price of the stock of $6.00 per share, less a 15% discount for marketability or $3,060,000 at $5.10 per share. The fair value of all the existing warrants held by NNA and of the conversion feature liability, converted in exchange for the 600,000 shares of common stock, was $1,624,029 and $482,904, respectively. These amounts together with the carrying amount of the 8% convertible note and accrued interest of approximately $1,124,000 resulted in a gain of approximately $171,000 which is included as an off-set in the net loss on debt extinguishment of approximately $266,000 in the consolidated statement of operations (see Note 7).

In January 2016, the Company formed Apollo Care Connect, Inc. which acquired certain technology and other assets of Healarium, Inc., which provides us with a population health management platform that includes digital care plans, a case management module, connectivity with multiple healthcare tracking devices and the ability to integrate with multiple electronic health records to capture clinical data. The Company issued 275,000 shares of its common stock with a fair value of $1,512,500 in exchange for the acquired assets and the seller paid the Company $200,000.

On February 15, 2016, the Company issued an aggregate 138,463 shares of Common Stock upon the conversion by certain holders of the principal and accrued interest of the 9% Notes prior to their maturity on February 15, 2016 in the amount $553,851.

During the year ended March 31, 2017, the Company issued 150,000 shares of common stock and received approximately $172,000 from the exercise of certain warrants at an exercise price of $1.1485 per share.

 

A summary of the Company’s restricted stock soldissued to employees, directors and consultants with a right of repurchase of unlapsed or unvested shares is as follows:

     Weighted
Average
Remaining
Vesting
  Weighted
Average
Per Share
  Weighted-
average
Per Share
 
     Life  Intrinsic  Grant Date 
   Shares   (In years)   Value   Fair Value 
Unvested or unlapsed shares at January 31, 2014  101,296   1.5   -  $4.10 
Granted  -   -   -   - 
Vested/lapsed  (10,555)  -   -   - 
Forfeited  -   -   -   - 
Unvested or unlapsed shares, beginning of period at March 31, 2014  90,741   1.3  $-  $4.10 
Granted  -   -   -   - 
Vested / lapsed  (78,519)  -   -   - 
Forfeited  -   -   -   - 
Unvested or unlapsed shares at March 31, 2015  12,222   0.3  $ 0. 50  $4.10 

  Weighted-Average Remaining
Vesting Life
  Weighted-Average Per Share 
  Shares  (In Years)  Intrinsic Value  Grant Date
Fair Value
 
             
Unvested or unlapsed shares at April 1, 2015  12,222   0.3  $0.50  $4.10 
Granted  -   -   -   - 
Vested/lapsed  (12,222)  -   -   - 
Forfeited  -   -   -   - 
                 
Unvested or unlapsed shares at March 31, 2016 and 2017  -   -   -   - 

F- 26

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Options

 

In July 2014,During January and February 2016, the Company issued 56,500 options to acquirepurchase an aggregate of 374,150 shares of the Company’s common stock to certain employees and consultants. The Company determined thatoptions have exercise prices ranging from $5.79 - $6.37 and vesting terms between immediate through three years. See below for assumptions used to determine the weighted averagegrant date fair value of the stock 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.Option Pricing Model.

 

In October 2014, in connection with services provided toDuring the year ended March 31, 2017, the Company the Company issued to various employees and consultants options to purchase an aggregate of 7,500149,200 shares of the Company’s common stock of the Company, whichto certain employees, directors and consultants. The options have an exercise price of $10.00prices ranging from $4.50 - $6.00 and vest evenly and monthly over avesting terms between six months through three year period. The Company determined thatyears. See below for assumptions used to determine the weighted averagegrant date fair value of the stock 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.Option Pricing Model.

 

On various dates in October, November and December 2014, in connection with services providedThe following table presents details of the assumptions used to calculate the Company, the Company issued to a certain consultant options to purchase an aggregate of 1,500 sharesweighted-average grant date fair value of common stock ofoptions granted by 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.Company:

 

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.

  Years Ended 
  March 31,  March 31, 
  2017  2016 
Expected term (in years)    4.6 – 6.0   6.0 
Expected volatility    126.42 -136.04%  133%
Risk-free interest rate    0.75 – 1.06%    1.31 – 1.94%
Expected dividends $-  $- 
Weighted-average grant date fair value per share $3.92  $4.75 

 

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 of 1.48%, no dividends, weighted average volatility factor of 62.1%, share price of $3.40 per share.

Stock option activity is summarized below:

 

  Shares  Weighted
Average
Per Share
Exercise
Price
  Weighted
Average
Remaining
Life
(Years)
  Weighted
Average
Per Share
Intrinsic
Value
 
Balance, January 31, 2014  735,800  $1.70   9.0  $1.60 
Granted  -   -   -   - 
Cancelled  (88,767)  2.30   7.9   - 
Exercised  -   -   -   - 
Expired  -   -   -   - 
Forfeited  (18,333)  2.10   8.5   - 
Balance, March 31, 2014  628,700  $2.00   8.7  $1.10 
Granted  162,000   10.00   -   - 
Cancelled  (14,200)  -   -   - 
Exercised  -   -   -   - 
Expired  -   -   -   - 
Forfeited  -   -   -   - 
Balance, March 31, 2015  776,500  $4.69   7.4  $1.50 
Vested and exercisable, March 31, 2015  658,306  $2.20   5.1  $2.40 
  Option Shares  Weighted-Average
Per Share
Exercise Price
  Weighted-Average
Remaining Life
(Years)
  Weighted-Average
Per Share
Intrinsic Value
 
             
Balance, April 1, 2015  776,500  $4.69   7.40  $1.50 
Granted  374,150   5.97   -   - 
Cancelled/expired  (86,500)  2.63   -   - 
Exercised  -   -   -   - 
                 
Balance, March 31, 2016  1,064,150  $4.27   7.94  $2.27 
Granted  149,200   4.78   -   - 
Cancelled/expired  (48,000)  6.75   -   - 
Exercised  -   -   -   - 
                 
Balance, March 31, 2017  1,165,350  $4.24   6.64  $4.86 
                 
Vested and exercisable, March 31, 2017  1,028,043  $4.07   6.36  $5.25 

 

ApolloMed ACO 2012 Equity Incentive Plan

 

On October 18, 2012 ApolloMed ACO’s Board of Directors adopted the ApolloMed Accountable Care Organization, Inc. 2012 Equity Incentive Plan (the “ACO Plan”) and reserved 9,000,000 shares of ApolloMed ACO’s common stock for issuance thereunder. The 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.

 

F- 27

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the restricted stock award in the ACO Plan:

 

 Shares Weighted
Average
Remaining
Vesting
Life
(Years)
 Weighted
Average
Per Share
Intrinsic
Value
 Weighted
Average
Per Share
Fair Value
  Shares Weighted-Average
Remaining
Vesting Life
(Years)
 Weighted-Average
Per Share Fair
Value
 
Balance, January 31, 2014  3,752,000   1.0  $0.02  $0.03 
       
Balance, April 1, 2015  3,752,000   0.8  $0.03 
Granted  -   -   -   -   184,000   -   0.77 
Released  -   -   -   -   (183,996)  -   0.03 
Balance, March 31, 2014  3,752,000   0.8  $0.02  $0.03 
            
Balance, March 31, 2016  3,752,004   -   0.07 
Granted  184,000   -   -   0.77   -   -   - 
Released  (183,996)  -   -   -   (32,000)  -   - 
Balance, March 31, 2015  3,752,004   0.1  $0.70  $0.07 
Vested and exercisable, March 31, 2015  3,651,675             
            
Balance, March 31, 2017  3,720,004   -  $0.07 
            
Vested and exercisable, end of year  3,720,004   -  $0.07 

  

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, 2015,2017, total unrecognized compensation costs related to non-vested stock-based compensation arrangements granted under the Company’s 2010, 2013 and 20132015 Equity Plans, and the ACO Plan’s are as follows:

 

Common stock options $246,834 
Restricted stock $72,440 
ACO Plan restricted stock $27,720 
Common stock options$435,739

 

The weighted-average period of years expected to recognize these compensation costs is 1.71.53 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:

  Year Ended
March 31, 2015
  Two Months Ended
March 31, 2014
  Year Ended
January 31, 2014
 
Stock-based compensation expense:            
Cost of services $13,376  $15,703  $616,902 
General and administrative  1,245,472   44,484   1,540,955 
  $1,258,848  $60,187  $2,157,857 

  

For The Years Ended

March 31,

 
  2017  2016 
       
Stock-based compensation expense:        
Cost of services $4,906  $4,959 
General and administrative  1,101,548   1,099,017 
         
  $1,106,454  $1,103,976 

 

Warrants

 

Warrants consisted of the following:

 

 Weighted
Average
Per Share
    Weighted-Average
Per Share
Intrinsic Value
  Number of
Warrants
 
 Intrinsic Number of      
 Value Warrants 
Outstanding at January 31, 2014 $0.40   314,500 
Outstanding at April 1, 2015 $0.46   914,500 
Granted  -   400,000   -   1,676,666 
Exercised  -   -   -   (500,000)
Cancelled  -   -   -   - 
Outstanding at March 31, 2014  0.20   714,500 
        
Outstanding at March 31, 2016  3.12   2,091,166 
Granted  -   200,000   -   29,000 
Exercised  -   -   4.87   (150,000)
Cancelled  -   -   -   - 
Outstanding at March 31, 2015 $0.46   914,500 
        
Outstanding at March 31, 2017 $4.68   1,970,166 

 

      Weighted     Weighted 
      average     average 
Exercise Price Per  Warrants  remaining  Warrants  exercise price per 
Share  outstanding  contractual life  exercisable  share 
$1.15   125,000   1.3   125,000  $1.15 
                   
$1.15   25,000   1.3   25,000  $1.15 
                   
$4.50   50,000   1.3   50,000  $4.50 
                   
$5.00   10,000   2.6   10,000  $5.00 
                   
$4.50   82,500   2.8   82,500  $4.50 
                   
$4.00   22,000   2.8   22,000  $4.00 
                   
$10.00   200,000   6.0   -  $10.00 
                   
$20.00   200,000   6.0   -  $20.00 
                   
$10.00   100,000   6.0   -  $10.00 
                   
$10.00   100,000   3.3   100,000  $10.00 
     914,500   4.3   414,500  $4.60 
F- 28

  

InAPOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Weighted     Weighted 
      Average     Average 
Exercise Price Per  Warrants  Remaining  Warrants  Exercise Price Per 
Share  Outstanding  Contractual Life  Exercisable  Share 
                   
$4.00-$5.00   188,500   0.85   169,500  $4.47 
$9.00-$10.00   1,781,666   3.54   1,781,666   9.37 
                   
$1.15-$10.00   1,970,166   3.28   1,951,166  $8.90 

On October 15, 2015, in connection with the 2014 NNANMM financing NNA received warrantsthe Company issued a 5 year stock warrant to purchase up to 200,0001,111,111 shares of common stock at an exercise price of $9.00 per share.

On March 30, 2016, in connection with the Company’sNMM financing the Company issued a 5 year stock warrant to purchase up to 555,555 shares of 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 $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.

 

Authorized stockStock

 

At March 31, 20152017 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,preferred stock, 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.stock option plans. The amount of shares of common stock reserved for these purposes is as follows at March 31, 2015: 2017:

 

Common stock issued and outstanding  4,863,389
Conversion of 9% Notes275,000
Conversion of 8% Notes200,0006,033,518 
Warrants outstanding  914,5001,970,166 
Stock options outstanding  776,5001,165,350 
Remaining sharesShares issuable under 2013 Equity  Incentive Planupon conversion of convertible note  90,000499,000
Preferred stock1,666,666 
   7,119,389
11,334,700 

 

10. Commitments and Contingencies

 

Lease commitments

  

The Company’s headquarters are located at 700 North Brand Boulevard, Suite 1400, Glendale, California 91203.  Under the original lease of the premises, the Company occupied space in Suite 220. On October 14, 2014, the Company's lease was amended by a Second Amendment (the “Second Lease Amendment”), pursuant to which the Company relocated its corporate headquarters to a larger suite in the same office building in October 2015. The Second Lease Amendment relocates the leased premises from Suite No. 220 to Suite Nos. 1400, 1425 and 1450, which collectively include 16,484 rentable square feet (the “New Premises”). The New Premises were improved with an allowance of $659,360, provided by the landlord, for construction and installation of equipment for the New Premises. The Second Lease Amendment also extends the term of the lease for approximately six years after the Company occupies the New Premises and increases the Company’s security deposit. The Second Lease Amendment sets the New Premises 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. However, the base rent will be abated by up to $228,049 subject to other terms of the lease. At March 31, 2017 and 2016, deferred rent liability associated with the Company’s leases its office facilities under non-cancelable operating leases, certain of which contain renewal options. was $747,418 and $728,877, respectively.

Future minimum rental payments required under the operating leases are as follows:

 

Year ending March 31,

 

2016 $771,754 
2017  834,522 
2018  916,395  $982,000 
2019  920,630   977,000 
2020  905,117   994,000 
2021  1,012,000 
2022  716,000 
Thereafter  2,482,251   910,000 
Total $6,830,669 
    
 $5,591,000 

F- 29

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Rent expense recorded was as follows:

 

  Year Ended  Two Months
Ended
  Year Ended 
  March 31,
2015
  March 31,
2014
  January 31,
2014
 
             
Rent expense $685,579  $39,735  $210,302 
  For The Years Ended March 31, 
  2017  2016 
         
Rent expense $951,244  $888,278 

Letters of Credit 

In January 2013, in response to request by Prospect Medical Group, Inc., MMG arranged for City National Bank (“CNB”) to provide an irrevocable standby letter of credit in an amount up to $10,000, and entered into a security agreement in favor of CNB, as required by the Management Service Agreement effective February 1, 2013. In November, 2014 the irrevocable standby letter of credit and the security agreement amounts were increased to $ 500,000. The letter of credit is collateralized by a certificate of deposit which is included in restricted cash in the amount of $500,000 at March 31, 2017.

In December 2016, in response to a request by Humana Insurance Company and Humana Health Plan, Inc. (collectively “Humana”), MMG arranged for CNB to provide an irrevocable standby letter of credit in an amount up to $235,000 through December 31, 2017, and entered into a security agreement in favor of CNB, as required by the Independent Practice Association Participation Agreement effective January 1, 2015, including the addenda and attachments thereto, and as amended. The letter of credit is collateralized by a certificate of deposit which is included in restricted cash in the amount of $235,000 at March 31, 2017.

Other letters of credit consist of approximately $30,000. The cash deposit as part of the securities agreements are listed as restricted cash on the consolidated balance sheets at both March 31, 2017 and 2016.

 

Regulatory Matters

 

Laws and regulations governing the Medicare program and Medicaid programshealthcare generally are complex and subject to interpretation. ComplianceThe Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, 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 Medi-Cal programs.

As a risk-bearing organization, the Company is required to follow regulations of the California Department of Managed Health Care (“DMHC”). The Company must comply with a minimum working capital requirement, Tangible Net Equity (“TNE”) requirement, cash-to-claims ratio and claims payment requirements prescribed by the DMHC. TNE is defined as net assets less intangibles, less non-allowable assets (which include amounts due from affiliates), plus subordinated obligations. The DMHC determined that, as of February 28, 2016, MMG, was not in compliance with the DMHC’s positive TNE requirement for a Risk Bearing Organization (“RBO”). As a result, the DMHC required MMG to develop and implement a corrective action plan (“CAP”) for such deficiency. MMG submitted a CAP to the DMHC, which the DMHC approved. MMG has up to one year to cure the deficiency. MMG achieved positive TNE as of the third quarter of fiscal 2017 and has maintained positive TNE to date. Since DMHC requirements are that an RBO should have positive TNE for one full quarter to be taken off a CAP, the Company believes that MMG is currently in compliance with DMHC requirements. The DMHC is currently reviewing filings the Company has made to confirm this compliance.

Many of the Company's payer and provider contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of medical services. Such differing interpretations may not come to light until a substantial period of time has passed following contract implementation. Liabilities for claims disputes are recorded when the loss is probable and can be estimated. Any adjustments to reserves are reflected in current operations.

In connection with DMHC’s approval of the CAP for MMG, on November 22, 2016, AMM, a wholly-owned subsidiary of the Company, entered into an Intercompany Revolving Loan Agreement (the “Loan Agreement”) with MMG, another affiliate of the Company, pursuant to which AMM has agreed to lend MMG up to $2,000,000 (the “Commitment Amount”) in one or more advances (collectively, “Advances”) that MMG may request from time to time during the term of the Loan Agreement. Interest on outstanding Advances shall accrue interest at a rate equal to the greater of 10% per annum or the LIBOR rate then in effect, and is payable monthly on the first business day of each month.

In an Event of Default (as defined in the Loan Agreement), interest on Advances shall accrue interest at a default rate equal to 3% per annum above the interest rate then in effect. Additionally, in an Event of Default, MMG may, among other things, accelerate all payments due under the Loan Agreement.

The Loan Agreement also contains other provisions typical of an agreement of this nature, including without limitation, representation and warranties, a right of set-off and governing law.

The Loan Agreement replaces substantially similar loan agreements between the parties (other than with respect to the Commitment Amount), including without limitation that certain Intercompany Revolving Loan Agreement dated as of February 1, 2013, that certain Amendment No. l to Intercompany Revolving Loan Agreement dated as of March 28, 2014, that certain Intercompany Revolving Loan Agreement dated as of June 27, 2014, and that certain Amendment No. 2 to Intercompany Revolving Loan Agreement dated as of March 30, 2016, all of which were terminated.

The Loan Agreement was entered into in response to a request of the California Department of Managed Health Care (“DMHC”), in order to comply with DMHC requirements in connection with its review of a pending Corrective Action Plan (“CAP”) for MMG (See Regulatory Matters).

F- 30

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Also on November 22, 2016, and also at the request of the DMHC in connection with its review of the pending CAP for MMG, AMM and MMG entered into a Subordination Agreement (the “Subordination Agreement”), pursuant to which AMM has agreed to irrevocably and fully subordinate its right to repayment of Advances, together with interest thereon, under the Loan Agreement, to all other present and future creditors of MMG.

AMM also agreed that the payment by MMG of principal and interest of Advances under the Loan Agreement will be suspended and will not mature when, excluding the liability of MMG to pay AMM principal and interest under the Loan Agreement, if after giving effect to the payment, MMG would not be in compliance with the financial solvency requirements, as defined in and calculated under the Knox-Keene Health Care Service Plan Act of 1975, as amended (the “Knox-Keene Act”), and the rules promulgated thereunder.

AMM further agreed that, in the event of the liquidation or dissolution of MMG, the payment by MMG of principal and interest to AMM under the Loan Agreement shall be fully subordinated and subject to the prior payment or provision for payment in full of all claims of all other present and future creditors of MMG.

Upon the written consent of the director of the DMHC, all previous subordination agreements between AMM and MMG, including without limitation that certain Subordination Agreement dated June 27, 2014 between AMM and MMG and that certain Amended and Restated Subordination Agreement between AMM and MMG dated as of March, 30, 2016, shall be terminated. Once consented to by the director of the DMHC and executed by the parties, the Subordination Agreement may not be cancelled, terminated, rescinded or amended by mutual consent or otherwise, without the prior written consent of the director of the DMHC.

Legislation and HIPAA

The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid programs. fraud and abuse. Government activity has continued with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed.

The Company believes that it is in compliance with allfraud and abuse regulations as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time.

The Health Insurance Portability and Accountability Act (“HIPAA”) assures health insurance portability, reduces healthcare fraud and abuse, guarantees security and privacy of health information, and enforces standards for health information. The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) expanded upon HIPAA in a number of ways, including establishing notification requirements for certain breaches of protected health information. In addition to these federal rules, California has also developed strict standards for the privacy and security of health information as well as for reporting certain violations and breaches. The Company may be subject to significant fines and penalties if found not to be compliant with these state or federal provisions.

Affordable Care Act

The Patient Protection and Affordable Care Act (“ACA”) will substantially reform the United States health care system. The legislation impacts multiple aspects of the health care system, including many provisions that change payments from Medicare, Medicaid and insurance companies. Starting in 2014, the legislation required the establishment of health insurance exchanges, which will provide individuals without employer-provided health care coverage the opportunity to purchase insurance. It is anticipated that some employers currently offering insurance to employees will opt to have employees seek insurance coverage through the insurance exchanges. It is possible that the reimbursement rates paid by insurers participating in the insurance exchanges may be substantially different than rates paid under current health insurance products. Another significant component of the ACA is the expansion of the Medicaid program to a wide range of newly eligible individuals. In anticipation of this expansion, payments under certain existing programs, such as Medicare disproportionate share, will be substantially decreased. Each state’s participation in an expanded Medicaid program is optional. However, the ACA may be amended, or repealed and replaced by the Congress. The potential outcome of the repeal and replacement is unknown at this time but could have a material impact on the Company.

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 that are provided by the Company’sour affiliated hospitalists. The CompanyWe 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.

F- 31

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 withOn December 20, 2016, AMM, a wholly-owned subsidiary of the 2014 NNA Financing, AMMCompany, entered into Employment Agreementsnew 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”, Gary Augusta and together withMihir Shah. The new employment agreements were approved by the Hosseinion Employment Agreement,Compensation Committee of the “Employment Agreements”), pursuant to which Dr. HosseinionBoard of Directors of the Company 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 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 duringreplace the fiscal year and $29,824 as payout of unused vacation time.

Also on March 28, 2014, AMHemployment agreements previously 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(i) 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 ofas amended on January 12, 2016 and as amended and restated on June 29, 2016, and (ii) Mr. Shah on July 21, 2016. The new employment agreements provide that 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 optionMr. Shah will continue to purchase (at fair market value) all equity interestsbe paid their current base salary in the Company held by Dr. Hosseinion or Dr. Vazquez,aggregate amount of $1,160,000, and that Mr. Augusta will be paid a base salary of $300,000 and revise certain term, bonus and severance arrangements 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 contractorsprovided therein. Mr. Augusta’s consulting agreement through Flacane Advisers, Inc. (“Flacane”) has been terminated.

Each of the Company or anynew employment agreements has an initial term of its affiliates for competitive purposes or (iv) Dr. Hosseinion or Dr. Vazquez, as applicable, directly or indirectly Competesthree years with automatic annual renewals and entitles the executive to 20 business days of paid time off per calendar year. Accrued and unused paid time off shall be paid in cash at the end of each calendar year. Under the new employment agreements, each executive is eligible to receive an annual bonus and is granted certain vesting rights and Accrued Benefits (as such term is defined in the Stock Option Agreements)respective employment agreement) if the executive’s employment is terminated without “Cause” (as such term is defined in the respective employment agreement) or if the executive resigns with “Good Reason” (as such term is defined in the respective employment agreement) during the employment term. 

NMM Transaction

On December 21, 2016, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Apollo Acquisition Corp., a California corporation and wholly-owned subsidiary of the Company (“Merger Subsidiary”), NMM, and Kenneth Sim, M.D., not individually but in his capacity as the representative of the shareholders of NMM (the “Shareholders’ Representative”).

Thomas Lam, M.D. and Kenneth Sim, M.D. entered into Voting Agreements with the Company or anyCompany. Under the Voting Agreements, Dr. Sim and Dr. Lam have agreed, among other things, to vote in favor of its affiliates.the approval and adoption of the Merger and the Merger Agreement.

 

Under the terms of the Merger Agreement, Merger Subsidiary will merge with and into NMM, with NMM becoming a wholly owned subsidiary of Apollo Medical Holdings, as the Merger. The Merger is intended to qualify for federal income tax purposes as a tax deferred reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986. In the transaction NMM will receive such number of shares of ApolloMed common stock such that NMM shareholders will own 82% and the Company shareholders will own 18% of issued and outstanding shares at closing. Additionally, NMM has agreed to relinquish its redemption rights relating to preferred stock it owns in the Company pursuant to the terms of a Consent and Waiver Agreement dated as of December 21, 2016 by and between the Company and NMM. The transaction was approved unanimously by the Board of Directors of both companies. Consummation of the Merger is subject to various closing conditions, including, among other things, approval by the stockholders of the Company and the stockholders of NMM. As part of the Merger Agreement, the Company and NMM have made various mutual representations and warranties.

Within five business days following the execution of the Merger Agreement, NMM was required to provide a working capital loan to the Company in the principal amount of $5,000,000, which loan the Company received on January 3, 2017. The loan is evidenced by a promissory note, which was issued on January 3, 2017. The promissory note has a term of two years, with the Company’s payment obligations commencing on February 1, 2017 and continuing on a quarterly basis thereafter until January 3, 2019. Under the terms of the promissory note, the Company must pay NMM interest on the principal balance outstanding at the prime rate plus one percent (1%). The Company may voluntarily prepay the outstanding principal and interest in whole or in part without penalty or premium. Upon the occurrence of any Event of Default (as such term is defined in the promissory note), the unpaid principal amount of, and all accrued but unpaid interest on, the promissory note will become due and payable immediately at the option of NMM. In such event, NMM may, at its option, declare the entire unpaid balance of the promissory note, together with all accrued interest, applicable fees, and costs and charges, including costs of collection, if any, to be immediately due and payable in cash.

The Merger Agreement grants each party the ability to update disclosure schedules through January 20, 2017. If any updated disclosure schedules are found to be unacceptable to the receiving party, as determined in such receiving party’s sole discretion, then such receiving party may terminate the Merger Agreement no later than February 3, 2017 (see below for amendment to the Merger Agreement).

F- 32

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Merger Agreement provides that Thomas Lam, M.D., the Chief Executive Officer of NMM, and Warren Hosseinion, M.D., will be Co-Chief Executive Officers of the combined company upon closing of the transaction. Kenneth Sim, M.D., who currently serves as Chairman of NMM, will be Executive Chairman of the Company. Gary Augusta, current Executive Chairman of the Company, will be President, Mihir Shah will continue as Chief Financial Officer, and Hing Ang, current Chief Financial Officer of NMM will be the Chief Operating Officer. Adrian Vazquez, M.D. and Albert Young, M.D. will be Co-Chief Medical Officers. The Board of Directors will consist of nine directors, five of whom will be recommended for nomination to the Company’s Nomination and Corporate Governance Committee from NMM and four of whom will be recommended for nomination of the Company’s Nomination and Corporate Governance Committee from the Company.

Consummation of the Merger is subject to various closing conditions, including, among other things, approval under Hart-Scott-Rodino Act from Department of Justice and Federal Trade Commission, approval by The Company’s stockholders and the stockholders of NMM.

On March 30, 2017, NMM and ApolloMed entered into the Amendment to Agreement and Plan of Merger (“Amended Merger Agreement”) to exclude from the exchange ratio the 499,000 ApolloMed shares issued or issuable pursuant to a securities purchase agreement dated as of March 30, 2017, between ApolloMed and Appliance Apex, LLC. As part of an amendment to the Merger Agreement on March 30, 2017, the merger consideration to be paid by the Company to NMM was amended to include warrants to purchase 850,000 shares of common stock in the Company at an exercise price of $11 per share.

As of the date of this filing, the Merger has not been completed.

Registration Rights Agreement

On June 28, 2016, NNA and the Company entered into the Third Amendment (the “Third Amendment”) to the Registration Rights Agreement dated May 28, 2014, as amended by the First Amendment and Acknowledgement dated as of February 6, 2015, the Second Amendment and Conversion Agreement dated as of November 17, 2015, and the amendments thereto (collectively, the “Registration Agreement”). Pursuant to the Third Amendment, the Company had until April 28, 2017 to register NNA’s registrable securities on a registration statement filed with the SEC and the Company had until the earlier of (i) October 27, 2017 or (ii) the 5th trading day after the date the Company is notified by the SEC that such registration statement will not be reviewed or will not be subject to further review to have such registration statement declared effective by the SEC. All other provisions of the Registration Agreement remain in full force and effect, including paying NNA liquidated damages of 1.5% of the total purchase price of the registrable securities owned by NNA, payable in shares of the Company’s common stock, if the Company does not comply with these deadlines.

On April 26, 2017, the Company entered into a consulting arrangementFourth Amendment (the “Amendment”) with Bridgewater Healthcare, LLC, in which Mr. Mitchell R. Creem will provide CFO services toNNA. The Amendment amended the Registration Rights Agreement, dated as of March 28, 2014, between the Company in returnand NNA (as amended by the First Amendment and Acknowledgement, dated as of February 6, 2015, the Amendment to First Amendment and Acknowledgement, dated as of July 7, 2015, the Second Amendment and Conversion Agreement, dated as of November 17, 2015, the Third Amendment, dated as of June 28, 2016, and as further amended by the amendments thereto, the “Registration Rights Agreement”).

The Amendment amended the Registration Rights Agreement to extend the deadline for cash compensation of $10,000 per monththe Company to file a resale registration statement covering NNA’s registrable securities to December 31, 2017, and 500 vested options per month with an exercise price of $10.00 per sharealso to extend the date by which the Company is required to use its commercially reasonable best efforts to cause such registration statement to be declared effective May 20, 2014.to June 30, 2018 (or, if earlier, the fifth (5th) trading day after the date on which the Securities and Exchange Commission notifies the Company that such registration statement will not be “reviewed” or will not be subject to further review).

11. Related Party Transactions

On January 15, 2015, AMM12, 2016, the Company 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. Gary Augusta, following the terminationPresident of Flacane Advisors, Inc. and the Company’s Executive Chairman of the current agreement.Board of Directors (the “2016 Augusta Consulting Agreement”) to replace the substantially similar 2015 Augusta Consulting Agreement that expired by its terms on December 31, 2015. Under the 2016 Augusta Consulting Agreement, the Augusta Consultant is paid $25,000 per month to provide business and strategic services to the Company; and Augusta Consultant is also eligible to receive options to purchase shares of the Company’s common stock as determined by ourthe Company’s 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.In addition, Mr. Augusta is subject to a Directors Agreement with the Company dated March 7, 2012. During the years ended March 31, 2017 and 2016, the Company incurred approximately $280,000 and $770,000, respectively, of an aggregate of consulting expense and reimbursement of out of pocket expenses in connection with the 2015 Augusta Consulting Agreement and 2016 Augusta Consulting Agreement. The Company owed the Augusta Consultant approximately $11,300 and $9,500, at March 31, 2017 and 2016, respectively. The 2016 Augusta Consulting Agreement was terminated on December 20, 2016 and replaced by an employment agreement with Mr. Augusta (see Note 10).

 

11. Subsequent EventsDuring the year ended March 31, 2016, the Company raised approximately $15 million in connection with the sale of shares of Series A and Series B preferred stock and warrants from NMM in which Dr. Thomas Lam, one of the Company’s directors is a significant shareholder (see Note 9). On January 3, 2017, pursuant to a promissory note agreement, NMM provided a loan to ApolloMed in the principal amount of $5,000,000 (see Note 6).

 

On JuneAs part of an amendment to the Merger Agreement on March 30, 2015, ACC entered into a Settlement Agreement and Release (the Agreement) with2017, the prior ownersmerger consideration to be paid by the Company to NMM was amended to include warrants to purchase 850,000 shares 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 outcommon stock in the Asset Purchase AgreementCompany at an exercise price of $11 per share, that will only be granted in the event that the proposed merger between the Company and various other agreements entered into byNMM is consummated (such warrant will not vest and will expire if the contemplated merger transaction does not occur) in exchange for both partiesNMM providing a guarantee for the Alliance Note and as compensation to NMM for giving up their right to additional shares in the Company based on or about September 1, 2013. the agreed upon exchange ratio with NM in the event that the Alliance Note is converted to common stock.

F- 33

APOLLO MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2 2016, accounts payable in the consolidated balance sheets includes $104,500 for principal and accrued interest owed to a result9% note holder who is also a shareholder of the Agreement,Company and such amount was paid during 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.year ended March 31, 2017.

 

On July 7,In September 2015, the Company entered into an Amendment to First Amendmenta note receivable with Rob Mikitarian, a minority owner in APS, in the amount of approximately $150,000. The note accrues interest at 3% per annum and Acknowledgement (the “New Amendment”) with NNAis due on or before September 2017. At both March 31, 2017 and 2016, the balance of Neveda, Inc., an affiliate of Fresenius Medical Care North America. The New Amendment amended the First Amendmentnote was approximately $150,000 and Acknowledgement, dated as of February 6,is included in other receivables in the accompanying consolidated balance sheets.

In September 2015, (as amended by the Amendment “Acknowledgement”), among the Company NNA, Warren Hosseinion, M.D.,entered into a note receivable with Dr. Liviu Chindris, a minority owner in APS, in the amount of approximately $105,000. The note accrues interest at 3% per annum and Adrian Vazquez, M.D.is due on or before September 2017. At both March 31, 2017 and 2016, the balance of the note was approximately $105,000 and is included an extension until October 24, 2015 of a deadline previously contemplated byin other receivables in the Acknowledgment, foraccompanying consolidated balance sheets.

In November, 2016 the Company issued the Chindris Note to fileDr, Liviu Chindris, a registration statement coveringminority owner in APS, in the saleprincipal amount of NNA’s registrable securities.$400,000 that bore interest at the rate of 12% annually. The note was due February 17, 2017 and was repaid. (see Note 6).

 

12. Restatement asIn December 2016, the Company billed NMM, current merger candidate, $930,169 for its 50% share of startup costs related to Next Generation ACO (NGACO) model. See more detail about this model in the “Our Operations and forIndustry” section of the Year Ended January 31, 2014Form 10-K.

F- 34

EXHIBIT INDEX 

 

The consolidated financial statements as offollowing exhibits are attached hereto 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. 

13. Valuation and Qualifying Accountsincorporated herein by reference.

 

Exhibit No.Description
2.1Stock 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).

2.2

Agreement and Plan of Merger dated as of December 21, 2016 by and among Apollo Medical Holdings, Inc., Apollo Acquisition Corp., Network Medical Management, Inc., and Kenneth Sim, M.D. in his capacity as the Shareholders’ Representative (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)

2.3

Amendment to Agreement and Plan of Merger dated as of March 30, 2017 by and among Apollo Medical Holdings, Inc., Apollo Acquisition Corp., a California corporation, Network Medical Management, Inc. and Kenneth Sim, M.D. (filed as an exhibit to a Current Report on Form 8-K on April 5, 2017)

3.1Restated Certificate of Incorporation (filed as an exhibit to a Current Report on Form 8-K on January 21, 2015).
3.2Certificate of Amendment to Restated Certificate of Incorporation (filed as an exhibit to a Current Report on Form 8-K on April 27, 2015).
3.3Certificate of Designation of Series A Convertible Preferred Stock (filed as an exhibit to a Current Report on Form 8-K on October 19, 2015)
3.4Amended and Restated Certificate of Designation of Apollo Medical Holdings, Inc. (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016)
3.5Restated Bylaws (filed as an exhibit to a Quarterly Report on Form 10-Q on November 16, 2015).
4.1Form 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).
4.2Form 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).
4.3Form 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).
4.4Form 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).
4.5Form 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).
4.6Convertible 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).
4.7Common 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).
4.8Common 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).

Allowance for doubtful accounts: 

4.9Common 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).
4.10Common 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).
4.11Common Stock Purchase Warrant dated October 14, 2015, issued by Apollo Medical Holdings, Inc. to Network Medical Management, Inc. to purchase 1,111,111 shares of common stock (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016).
4.12Common Stock Purchase Warrant dated March 30, 2016, issued by Apollo Medical Holdings, Inc. to Network Medical Management, Inc. to purchase 555,555 shares of common stock (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016).
4.13Common Stock Purchase Warrant dated March 30, 2016, issued by Apollo Medical Holdings, Inc. to Network Medical Management, Inc. to purchase 555,555 shares of common stock (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016).
4.14Stock Purchase Warrant dated November 4, 2016, issued to Scott Enderby, D.O. (filed as an exhibit to a Current Report on Form 8-K on November 10, 2016)
4.15Voting Agreement dated as of December 21, 2016 by and between Apollo Medical Holdings, Inc., and Thomas Lam, M.D. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
4.16Voting Agreement dated as of December 21, 2016 by and between Apollo Medical Holdings, Inc., and Kenneth Sim, M.D. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
4.17Consent and Waiver Agreement dated as of December 21, 2016 by and between Apollo Medical Holdings, Inc. and Network Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
4.18Warrant dated November 17, 2016 issued to Liviu Chindris, M.D. (filed as an exhibit to a Quarterly Report on Form 10-Q on February 14, 2017)
10.1Agreement 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).
10.22010 Equity Incentive Plan (filed as Appendix A to Schedule 14C Information Statement filed on August 17, 2010).
10.3Board 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).
10.42013 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).
10.5Board 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).
10.6Board 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).
10.7Intercompany 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).
10.8Intercompany 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).
10.9+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).
10.10Intercompany 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).
10.11Form 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).
10.12Credit 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).
10.13Investment 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).
10.14Collateral 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).
10.15Collateral 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).
10.16Collateral 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).

10.17Shareholders 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).
10.18Registration 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).
10.19+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).
10.20+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).
10.21+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).
10.22+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).
10.23+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).
10.24+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).
10.25Amended 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).
10.26Amended 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).
10.27Amended 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).
10.28Physician 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).
10.29Physician 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).
10.30Physician 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).
10.31Amendment 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).
10.32Amendment 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).
10.33Amendment 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).
10.34+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).
10.35+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).
10.36+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).
10.37+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)

10.38+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)
10.39Contribution 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).
10.40Contribution 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).
10.41Membership 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).
10.42Stock 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).
10.43Second 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).
10.44Lease 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).
10.45First 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).
10.46+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).
10.47Amendment 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).
10.48Amendment 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). 
10.49Waiver and Consent dated as of August 18, 2015 between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc. (filed as an exhibit to a Quarterly Report on Form 10-Q on August 19, 2015)
10.50Securities Purchase Agreement dated October 14, 2015 between Apollo Medical Holdings, Inc. and Network Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on October 19, 2015)
10.51Second Amendment and Conversion Agreement dated as of November 17, 2015 between 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 November 19, 2015)
10.52+Board of Directors Agreement between Apollo Medical Holdings, Inc. and Thomas S. Lam, M.D. dated January 19, 2016 (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016
10.53+First Amendment to Employment Agreement dated as of January 12, 2016 between Apollo Medical Management, Inc. and Warren Hosseinion, M.D. (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016)
10.54+First Amendment to Employment Agreement dated as of January 12, 2016 between Apollo Medical Management, Inc. and Adrian Vazquez, M.D. (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016)
10.55+Consulting Agreement dated January 12, 2016 between Apollo Medical Holdings, Inc. and Flacane Advisors, Inc. (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016)
10.56Indemnification Agreement effective as of September 21, 2015 between Apollo Medical Holdings, Inc. and William Abbott (filed as an exhibit to a Current Report on Form 8-K on January 19, 2016)
10.57+Board of Directors Agreement dated January 12, 2016 between Apollo Medical Holdings, Inc. and Mark Fawcett (filed as an exhibit to a Current Report on Form 8-K/A on February 2, 2016)
10.58Securities Purchase Agreement dated March 30, 2016 between Apollo Medical Holdings, Inc. and Network Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on April 4, 2016)

10.592015 Equity Incentive Plan
10.60Asset Purchase Agreement dated January 12, 2016 among Apollo Medical Holdings, Inc., Apollo Care Connect, Inc. and Healarium, Inc.
10.61Amendment No.2 to Intercompany Revolving Loan Agr4eement dated March 30, 2016 between  Apollo Medical Management, Inc. and Maverick Medical Group, Inc.
10.62Amended and Restated Subordination Agreement between Apollo Medical Management, Inc. and Maverick Medical Group, Inc.
10.63Stock Purchase Agreement dated as of March 1, 2016 by and among Robert Tracy, D.O., Inc., ApolloMed Care Clinic and Warren Hosseinion, M.D. as nominee for Apollo Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on June 28, 2016)
10.64

Non-Interest Bearing Secured Promissory Note dated March 1, 2016 (filed as an exhibit to a Current Report on Form 8-K on June 28, 2016)

10.65First Amendment to Stock Purchase Agreement and to Non-Interest Bearing Promissory Note dated as of March 1, 2016 by and among Robert Tracy, D.O., Inc., ApolloMed Care Clinic and Warren Hosseinion, M.D. as nominee for Apollo Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on June 28, 2016)
10.66Membership Interest Purchase Agreement and Release dated as of December 9, 2015 between Apollo Medical Holdings, Inc., Apollo Medical Management, Inc., Apollo Palliative Services LLC and Sandeep Kapoor, M.D.
10.67+Amended and Restated Employment Agreement made as of June 29, 2016 by and between Apollo Medical Management, Inc. and Warren Hosseinion, M.D.
10.68+Amended and Restated Employment Agreement made as of June 29, 2016 by and between Apollo Medical Management, Inc. and Adrian Vazquez, M.D.
10.69+Amended and Restated Hospitalist Participation Service Agreement made as of June 29, 2016 by and between ApolloMed Hospitalists, a Medical Corporation, and Warren Hosseinion, M.D.
10.70+Amended and Restated Hospitalist Participation Service Agreement made as of June 29, 2016 by and between ApolloMed Hospitalists, a Medical Corporation, and Adrian Vazquez, M.D.
10.71Third Amendment dated June 28, 2016 between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc.
10.72+Employment Agreement by and between Apollo Medical Management, Inc. and Mihir Shah dated July 21, 2016 (filed as an exhibit to a Current Report on Form 8-K on July 26, 2016)
10.73Stock Purchase Agreement dated as of November 4, 2016 by and among BAHA Acquisition, A Medical Corporation, a California professional corporation; Bay Area Hospitalist Associates, A Medical Corporation, a California professional corporation; and Scott Enderby, D.O. (filed as an exhibit to a Current Report on Form 8-K on November 10, 2016)
10.74Employment Agreement dated as of November 4, 2016 by and between Bay Area Hospitalist Associates, Inc., a California professional corporation and Scott Enderby (filed as an exhibit to a Current Report on Form 8-K on November 10, 2016)
10.75Non-Competition Agreement dated as of November 4, 2016 by and between Bay Area Hospitalist Associates, A Medical Corporation, a California professional corporation and Scott Enderby, D.O. (filed as an exhibit to a Current Report on Form 8-K on November 10, 2016)
10.76Intercompany Revolving Loan Agreement dated as of July 22, 2016 by and between Apollo Medical Management, Inc. and Bay Area Hospitalist Associates, a Medical Corporation (filed as an exhibit to a Quarterly Report on Form 10-Q on November 14, 2016)
10.77Intercompany Revolving Loan Agreement dated as of November 22, 2016 by and between Apollo Medical Management, Inc. and Maverick Medical Group, Inc. (filed as an exhibit to the Current Report on Form 8-K on November 29, 2016)
10.78Subordination Agreement dated as of November 22, 2016 by and between Apollo Medical Management, Inc. and Maverick Medical Group, Inc. (filed as an exhibit to the Current Report on Form 8-K on November 29, 2016)
10.79+Employment Agreement dated December 20, 2016 between Apollo Medical Management, Inc. and Warren Hosseinion, M.D. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
10.80+Employment Agreement dated December 20, 2016 between Apollo Medical Management, Inc. and Gary Augusta (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
10.81+Employment Agreement dated December 20, 2016 between Apollo Medical Management, Inc. and Mihir Shah (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
10.82+Employment Agreement dated December 20, 2016 between Apollo Medical Management, Inc. and Adrian Vazquez, M.D. (filed as an exhibit to a Current Report on Form 8-K on December 22, 2016)
10.83Next Generation ACO Model Participation Agreement (filed as an exhibit to a Current Report on Form 8-K on January 20, 2017)
10.84Promissory Note dated as of January 3, 2017 between Apollo Medical Holdings, Inc. and Network Medical Management, Inc. (filed as an exhibit to a Current Report on Form 8-K on February 13, 2017)
10.85Promissory Note (Term Loan) issued November 17, 2016 to Liviu Chindris, M.D. in the principal amount of $400,000.00 (filed as an exhibit to a Quarterly Report on Form 10-Q on February 14, 2017) 
10.86Securities Purchase Agreement dated as of March 30, 2017 between Apollo Medical Holdings, Inc. and Alliance Apex, LLC (filed as an exhibit to a Current Report on Form 8-K on April 5, 2017)
10.87Convertible Promissory Note dated March 30, 2017 issued to Alliance Apex, LLC in the principal amount of $4,990,000 (filed as an exhibit to a Current Report on Form 8-K on April 5, 2017)

 

  Year Ended
March 31, 2015
  Two Months Ended
March 31, 2014
  Year Ended
January 31, 2014
 
Balance at beginning of period $30,670  $50,474  $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 

10.88Fourth Amendment to Registration Rights Agreement between Apollo Medical Holdings, Inc. and NNA of Nevada, Inc., dated as of April 26, 2017 (filed as an exhibit to a Current Report on Form 8-K on April 28, 2017)
10.89Management Services Agreement dated as of July 1, 2011 between Pulmonary Critical Care Management, Inc. and Los Angeles Lung Center, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.90Amendment No.1 dated as of January 1, 2017 to Management Services Agreement between Pulmonary Critical Care Management, Inc. and Los Angeles Lung Center, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.91Amendment No.2 dated as of March 24, 2017 to Management Services Agreement between Pulmonary Critical Care Management, Inc. and Los Angeles Lung Center, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.92Management Services Agreement dated as of August 1, 2012 between Verdugo Medical Management, Inc. and Eli E. Hendel, M.D., a Medical Corporation, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.93Amendment No.1 dated as of January 1, 2017 to Management Services Agreement between Verdugo Medical Management, Inc. and Eli E. Hendel, M.D., a Medical Corporation, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
10.94Amendment No.2 dated as of March 24, 2017 to Management Services Agreement between Verdugo Medical Management, Inc. and Eli E. Hendel, M.D., a Medical Corporation, a California Medical Corporation (filed As an exhibit to a Current Report on Form 8-K on May 23, 2017)
21.1*Subsidiaries of Apollo Medical Holdings, Inc.
23.1*Consent of BDO USA, LLP
31.1*Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
31.2*Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
32*Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*XBRL Instance Document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
*Filed herewith
+Management contract or compensatory plan, contract or arrangement

 

F-40