P3 HEALTH PARTNERS INC. The following discussion and analysis is intended to provide the reader with an understanding of our business, including an overview of our results of operations and liquidity. It should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements, such as those relating to our plans, objectives, expectations, intentions and beliefs that involve numerous risks and uncertainties. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth under "Cautionary Statement Regarding Forward-Looking Statements," "Item 1A. Risk Factors" and elsewhere in this Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any periods
in
the future.
Overview
P3 is a patient-centered and physician-led population health management company.
We strive to offer superior care to all those in need. We believe that the
misaligned incentives in the FFS healthcare payment model and the fragmentation
between physicians and care teams has led to sub-optimal clinical outcomes,
limited access, high spending and unnecessary variability in the quality of
care. We believe that a platform such as ours, which helps to realign incentives
and focuses on treating the full patient, is uniquely positioned to address
these healthcare challenges.
We have leveraged the expertise of our management team's more than 20 years of
experience in population health management, to build our "P3 Care Model." The
key attributes that differentiate P3 include: 1) patient-focused model, 2)
physician-led model, and 3) our broad delegated model. Our model operates by
entering into arrangements with payors providing for monthly payments to manage
the total healthcare needs of members attributed to our primary care physicians.
In tandem, we enter into arrangements directly with existing physician groups or
independent physicians in the community to join our VBC network. In our model,
physicians are able to retain their independence and entrepreneurial spirit,
while gaining access to the tools, teams and technologies that are key to
success in a VBC model, all while sharing in the savings from successfully
improving the quality of patient care and reducing costs.
We operate in the $829 billion Medicare market, which covers approximately 65
million eligible lives as of 2021. Our core focus is the MA market, which makes
up approximately 48% of the overall Medicare market, or nearly 28 million
Medicare eligible lives in 2022. Medicare beneficiaries may enroll in a Medicare
Advantage plan, under which payors contract with the CMS to provide a defined
range of healthcare services that are comparable to Medicare FFS (which is also
referred to as "traditional Medicare").
We predominantly enter into capitated contracts with the nation's largest health
plans to provide holistic, comprehensive healthcare to Medicare Advantage
members. Under the typical capitation arrangement, we are entitled to PMPM fees
from payors to provide a defined range of healthcare services for Medicare
Advantage health plan members attributed to our PCPs. These PMPM fees comprise
our capitated revenue and are determined as a percent of the premium ("POP")
payors receive from CMS for these members. Our contracted recurring revenue
model offers us highly predictable revenue and rewards us for providing
high-quality care rather than driving a high volume of services. In this
capitated arrangement, our goals are well-aligned with payors and patients
alike-the more we improve health outcomes, the more profitable we will be over
time.
Under this capitated contract structure, we are generally responsible for all
members' medical costs across the care continuum, including, but not limited to
emergency room and hospital visits, post-acute care admissions, prescription
drugs, specialist physician spend, and primary care spend. Keeping members
healthy is our primary objective. When they need medical care, delivery of the
right care in the right setting can greatly impact outcomes. When our members
need care outside of our network of PCPs, we utilize a number of tools including
network management, utilization management and claims processing to ensure that
the appropriate quality care is provided.
Our company was formed in 2017 and our first at-risk contract became effective
on January 1, 2018 . We have demonstrated an ability to rapidly scale, primarily
entering markets with our affiliate physician model, and expanding to a PCP
network of approximately 2,800 physicians, in 15 markets (counties) across five
states in five full years of operations as of December 31, 2022 . Our platform
has enabled us to grow our revenue by an average of 99% annually from December
31, 2018 to December 31, 2022 . As of December 31, 2022 , our PCP network served
approximately 100,400 at-risk MA members. We believe we have significant growth
56
Table of Contents
opportunities available to us across existing and new markets, with less than 1%
of the 502,000 PCPs in the
COVID-19 and Macroeconomic Update
The COVID-19 pandemic continues to evolve, with pockets of resurgence and the
emergence of variant strains contributing to continued uncertainty about its
scope, duration, severity, trajectory, and lasting impact. COVID-19
disproportionately impacts older adults, especially those with chronic
illnesses, which describes many of our patients. Due to our recurring contracted
revenue model, the COVID-19 pandemic did not have a material impact on P3's
revenue during 2021 and 2022. Nearly 99% the Company's total revenue during the
year ended December 31, 2022 is recurring, consisting of fixed monthly PMPM
capitation payments received from MA health plans. We estimate that we have
incurred approximately $95.5 million of direct costs in medical claims expense
related to COVID-19 claims during the period from March 1, 2020 through December
31, 2022 . We expect to incur additional COVID-19 related costs given the volume
of positive cases and "breakthrough" cases (positive cases in vaccinated
patients) present in our markets.
Because of the nature of capitation arrangements, the full impact of the
COVID-19 pandemic may not be fully reflected in our results of operations and
overall financial condition until future periods. The full extent to which
COVID-19 will directly or indirectly impact our future results of operations and
financial condition will depend on multiple factors. In addition, the economy
may continue to be impacted as a result of the COVID-19 pandemic, including any
resurgences to infections, and actions taken in response to it. Such factors
include, but are not limited to, the scope and duration of stay-at-home
practices and business closures and restrictions, government-imposed or
recommended suspensions of elective procedures, and expenses required for
supplies and personal protective equipment. Because of these factors, management
may not be able to fully estimate the length or severity of the impact of the
pandemic on our business. However, management will continue to closely evaluate
and monitor the nature and extent of these potential impacts to our business,
results of operations and liquidity.
Business Combinations
On December 3, 2021 , we consummated the Business Combinations by and among
Foresight and P3 Health Group Holdings and the other parties thereto. As a
result of the Business Combinations (see Note 5 "Business Combinations" to the
consolidated financial statements included elsewhere in this Form 10-K), the
Company was deemed to be the acquirer for accounting purposes, and P3 Health
Group Holdings , which is the business conducted prior to the closing of the
Business Combinations, was deemed to be the acquiree and accounting predecessor.
The Business Combinations were accounted for as a business combination using the
acquisition method of accounting, and the Successor's (defined below) financial
statements reflect a new basis of accounting that is based on the fair value of
net assets acquired. As a result of the application of the acquisition method of
accounting as of the effective time of the Business Combinations, the financial
statements of P3 Health Group Holdings as "Predecessor" for the periods prior to
the Closing Date and of the Company as "Successor" for the periods after the
Closing Date, including the consolidation of P3 Health Group Holdings , are
presented on different bases for the year ended December 31, 2022 , the Successor
Period, and the Predecessor Period. The historical financial information of the
Company (the acquirer) has not been reflected in the Predecessor Period
financial statements.
Recent Acquisitions
OnDecember 27, 2021 andDecember 31, 2021 , respectively, the Company acquired the net assets ofOmni IPA Medical Group, Inc. ("Omni") and 100% of the equity interests ofMedcore Health Plan, Inc. ("Medcore HP") for a total purchase price of$40.0 million , including contingent consideration of$3.5 million (together, the "Medcore Acquisition"). Medcore HP is a health plan licensed under the California Knox-Keene Health Care Service Plan Act of 1975 (the "Knox Keene Act") and Omni is an independent practice association located inCalifornia . Omni serves as Medcore HP's contracted physician network providing medical services to Medcore HP's patients and members. The Knox Keene Act requires entities that participate in downstream risk-sharing arrangements, including global risk and VBC arrangements, to be licensed health plans. Our acquisition of Medcore HP allows our network of providers to participate in global risk and VBC arrangements withCalifornia payors. Through this transaction, we intend to replicate our affiliate model to contract with local physicians and grow our network inCalifornia . 57 Table of Contents Key Factors Affecting our Performance
Growing Medicare Advantage Membership on Our Platform
Membership and revenue are tied to the number of members attributed to our physician network by our payors. We believe we have multiple avenues to serve additional members, including through:
? Growth in membership under our existing contracts and existing markets:
o Patients who are attributed to our physician network who (a) age into Medicare
and elect to enroll in MA or (b) elect to convert from Medicare FFS to MA.
? Adding new contracts (either payor contracts or physician contracts) in
existing markets.
? Adding new contracts (either payor contracts or physician contracts) in
adjacent and new markets.
The strength of our affiliate physician model and its multiple avenues of growth
is evident by our growth from 2018 to
AtDecember 31, 2022 , the number of MA at-risk members on our platform was approximately 100,400 compared to approximately 67,000 atDecember 31, 2021 , representing a compound annual growth rate ("CAGR") of 41% over this period. The table below illustrates membership growth from 2021 to 2022: December 31, 2022 2021 CAGR
MA at-risk members 100,400 67,000 41 % Year-over-year % change 50 % 32 %
Growing Existing Contract Membership
According to CMS, the Medicare market covers approximately 65 million eligible lives as of 2021. MA penetration of the Medicare beneficiary population has increased from 26% in 2011 to 48% in 2022 of the overall Medicare beneficiary market making up nearly 28 million Medicare eligible lives. As new patients age-in to Medicare and enroll in MA through our payors, they become attributed to our network of physicians with little incremental cost to us. In addition to age-ins, Medicare eligible patients can change their enrollment selections during select periods throughout the year. Our sales and marketing teams actively work with local community partners to connect with Medicare eligible patients and make them aware of their healthcare choices and the services that we offer with our VBC model, including greater access to their physicians and customized care plans catered to their needs. The ultimate effect of our marketing efforts is increased awareness of P3 and additional patients choosing us as their primary care provider. We believe that our marketing efforts also help to grow our payor partners' membership base as we grow our own patient base and help educate patients about their choices on Medicare, further aligning our model with that of healthcare payors.
Growing Membership in Adjacent and New Markets
Our affiliate model allows us to quickly and efficiently enter into new and adjacent markets in two ways: 1) partnering with payors and 2) partnering with providers. Because our model honors the existing patient-provider relationship, we are able to deploy our care model around existing physicians in a given a market. By utilizing the local healthcare infrastructure, we can quickly build a network of PCPs to serve the healthcare needs of contracted members. Our business development and managed care teams maintain an active pipeline of new partnership opportunities for both providers and payors. These potential opportunities are developed through significant inbound interest and the deep relationships our team has developed with their more than 20 years of experience in the VBC space and our proactive assessment of expansion markets. When choosing a market to enter, we make our decision on a county-by-county basis acrossthe United States . We look at various 58
Table of Contents
factors including: (i) population size, (ii) payor participants and concentration, (iii) health system participants and concentration, and (iv) competitive landscape.
When entering a new market, we supplement the existing physician network with local market leadership teams and support infrastructure to drive the improvement in medical cost and quality. When entering an adjacent market, we are able to leverage the investments we previously made to have a faster impact on our expanded footprint. We have historically demonstrated success in effectively growing into new and adjacent markets. As ofDecember 31, 2022 , we operate in 15 markets, markets being counties, across five states. P3 is actively pursuing opportunities to expand operations to additional states in the Southwest and Midwest. One of the primary uses of the net proceeds we obtained from the consummation of the Business Combinations and the concurrent private placement of 20,370,307 shares (the "PIPE Shares") of our Class A common stock, for an aggregate purchase price of$203.7 million (the "PIPE Investment ") is to fund the investment required to enter these new markets and to take on additional new contracts.
Growing Membership in Existing Markets
Once established in a market, we have an opportunity to efficiently expand both our provider and payor contracts. Given the benefits PCPs experience from joining our P3 Care Model, which offers providers the teams, tools and technologies to better support their patient base, we often experience growth in our affiliate network after entering a market. Because of the benefits, we have also historically experienced high retention with our affiliate providers. From 2018 through 2022, we experienced a 98% physician retention rate in our affiliate provider network. By expanding our affiliate provider network and adding new physicians to the P3 network, we can quickly increase the number of contracted at-risk members under our existing health plan arrangements. Additionally, by expanding the number of contracted payors, we can leverage our existing infrastructure to quickly increase our share of patients within our physician network. We have a proven ability to manage medical costs and improve clinical outcomes of our lives under management on behalf of our payor partners. This is evidenced by the receipt of inbound partnership requests from payors to improve growth, quality and profitability in their markets.
Growing Capitated Revenue Per Member
Medicare pays capitation using a risk adjusted model, which compensates payors based on the health status, or acuity, of each individual member. Payors with higher acuity members receive a higher payment and those with lower acuity members receive a lower payment. Moreover, some of our capitated revenue also includes adjustments for performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors. Given the prevalence of FFS arrangements, our patients often have historically not participated in a VBC model, and therefore their health conditions are poorly documented. Through the P3 Care Model, we determine and assess the health needs of our patients and create an individualized care plan consistent with those needs. We capture and document health conditions as a part of this process. We expect that our PMPM revenue will continue to improve the longer members participate in our care model as we better understand and assess their health status (acuity) and coordinate their medical care.
Effectively Managing Member Medical Expense
Our medical claims expense is our largest expense category, representing 82% of our total operating expenses (excluding goodwill impairment) for the year endedDecember 31, 2022 . We manage our medical costs by improving our members access to healthcare. Our care model focuses on maintaining health and leveraging the primary care setting as a means of avoiding costly downstream healthcare costs, such as emergency department visits and acute hospital inpatient admissions. The power of our model is reflected in the relative performance of our network when compared to local FFS benchmarks.
Achieving Operating Efficiencies
As a result of our affiliate model and ability to leverage our existing local and national infrastructure, we generate operating efficiencies at both the market and enterprise level. Our local corporate, general and administrative expense, which includes our local leadership, care management teams and other operating costs to support our markets, are expected to decrease over time as a percentage of revenue as we add members to our existing contracts, grow membership with new payor and physician contracts, and our revenue subsequently increases. Our corporate general and administrative expenses at the enterprise level include resources and technology to support payor contracting, quality, data management, delegated services, finance and legal functions. While we
expect
59
Table of Contents
our absolute investment in our enterprise resources to increase over time, we expect our investment will decrease as a percentage of revenue when we are able to leverage our infrastructure across a broader group of at-risk members. We expect our corporate, general and administrative expenses to increase in absolute dollars in the future as we continue to invest to support growth of our business, as well as due to the costs required to operate as a public company, including insurance coverage, investments in internal audit, investor relations and financial reporting functions, fees paid to theNasdaq Stock Market , and increased legal and audit fees.
Impact of Seasonality
Our operational and financial results reflect some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas: At-Risk Member Growth. While new members are attributed to our platform throughout the year, we experience the largest portion of our at-risk member growth during the first quarter. Contracts with new payors typically begin onJanuary 1 , at which time new members become attributed to our network of physicians. Additionally, new members are attributed to our network onJanuary 1 , when plan enrollment selections made during the prior Annual Enrollment Period fromOctober 15 through December 7 of the prior year take effect. Revenue Per Member. Our revenue is based on percentage of premium we have negotiated with our payors as well as our ability to accurately and appropriately document the acuity of a member's health status. We experience some seasonality with respect to our per member revenue as it will generally decline over the course of the year. In January of each year, CMS revises the risk adjustment factor for each patient based upon health conditions documented in the prior year, leading to an overall increase in per-patient revenue. As the year progresses, our per-patient revenue declines as new patients join us typically with less complete or accurate documentation (and therefore lower risk-adjustment scores) and patients with more severe acuity profiles (and, therefore, higher per member revenue rates) expire. Medical Costs. Medical expense is driven by utilization of healthcare services by our attributed membership. Medical expense will vary seasonally depending on a number of factors, including the weather and the number of business days. Certain illnesses, such as the influenza virus, are far more prevalent during colder months of the year, which will result in an increase in medical expenses during these time periods. We would therefore expect to see higher levels of per-member medical expense in the first and fourth quarters. Business days can also create year-over-year comparability issues if one year has a different number of business days compared to another. Non-GAAP Financial Measures and Key Performance Metrics We use certain financial measures, which are not calculated in accordance with accounting principles generally accepted in theU.S. ("GAAP"), as well as certain key performance metrics, to supplement our consolidated financial statements. The measures set forth below should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures and key performance metrics as used by us may not be comparable to similarly titled measures used by other companies. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. The presentation of non-GAAP financial measures and key performance metrics provides additional information to investors regarding our results of operations that our management believes is useful for identifying trends, analyzing and benchmarking the performance of our business.
Non-GAAP Financial Measures
Adjusted EBITDA
The key non-GAAP metric we utilize to measure our profitability and performance is Adjusted EBITDA. We present Adjusted EBITDA because we believe it helps investors understand underlying trends in our business and facilitates an understanding of our operating performance from period to period because it facilitates a comparison of our recurring core business operating results.
By definition, EBITDA consists of net income (loss) before interest, income
taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA,
further adjusted to exclude the effect of certain supplemental adjustments, such
as mark-to-market warrant gain/loss, premium deficiency reserves, equity-based
compensation expense, and certain other items that we believe are not
60
Table of Contents
indicative of our core operating performance. Our definition of Adjusted EBITDA may not be the same as the definitions used in any of our debt agreements.
Adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP. It is unaudited and should not be considered an alternative to, or more meaningful than, net income (loss) as an indicator of our operating performance. Uses of cash flows that are not reflected in Adjusted EBITDA include capital expenditures, interest payments, debt principal repayments, and other expenses defined above, which can be significant. As a result, Adjusted EBITDA should not be considered as a measure of our liquidity. Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to Adjusted EBITDA set forth below and not rely on any single financial measure to evaluate our business.
The following table sets forth a reconciliation of our net loss, the most directly comparable GAAP metric, to Adjusted EBITDA (in thousands):
Successor Predecessor
Year Ended December 3, 2021 January 1, 2021
December 31, through December through December
2022 31, 2021 2, 2021
Net loss $ (1,561,557) $ (57,938) $ (146,400) Interest expense, net 11,404 893 9,824 Depreciation and amortization expense 87,289 7,150 1,574 Provision for income taxes 1,862 - - Mark-to-market of stock warrants (9,865) (2,272) 7,665 Premium deficiency reserve (11,461) 26,277 11,559 Equity-based compensation 19,404 4,635 3,701 Transaction and other related costs(1) 14,050
- 37,563
Goodwill impairment 1,314,952 - -
Other(2) 6,008 429 (147)
Adjusted EBITDA loss $ (127,914) $ (20,826) $ (74,661) Transaction and other related costs consist of accounting, legal, and (1) advisory fees and bonus incurred related to the Business Combinations, the
Medcore Acquisition, and other transactions that were completed, pending, or
abandoned.
During the year ended
to the release of indemnity funds previously escrowed as part of the Medcore
Acquisition and (ii) interest income, offset by (iii) accounting, legal, and
professional services expenses incurred related to the restatement of our
consolidated financial statements for the years ended
2019, and 2018 and the condensed consolidated financial statements for the
(2) quarterly periods ended
third-party consultants to assist us with the development, implementation,
and documentation of new and enhanced internal controls and processes for
compliance with Sarbanes-Oxley Section 404(b), and (v) severance expense.
During the combined Successor and Predecessor periods included in the year
ended
valuation allowance on our notes receivable.
Medical Margin
Medical margin is a non-GAAP financial metric. We present medical margin because
we believe it helps investors understand underlying trends in our business and
facilitates an understanding of our operating performance from period to period
because it facilitates a comparison of our recurring core business operating
results.
Medical margin represents the amount earned from capitation revenue after
medical claims expenses are deducted. Medical claims expenses represent costs
incurred for medical services provided to our members. As our platform grows and
matures over time, we expect medical margin to increase in absolute dollars;
however, medical margin PMPM may vary as the percentage of new members brought
onto our platform fluctuates. New membership added to the platform is typically
dilutive to medical margin PMPM. Furthermore, in light of COVID-19, we continue
to evaluate the ultimate impact of the pandemic on medical margin.
61
Table of Contents
Medical margin should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using medical margin on a supplemental basis. You should review the reconciliation of operating loss to medical margin set forth below and not rely on any single financial measure to evaluate our business.
The following table presents our medical margin (dollars in thousands):
Successor Predecessor
Year Ended December 3, 2021 January 1, 2021
December 31, through December through December
2022 31, 2021 2, 2021
Capitated revenue $ 1,034,800 $ 57,224 $ 567,735Less: medical claims expenses (972,725) (62,344)
(550,869)
Medical margin $ 62,075 $ (5,120) $ 16,866
The following table sets forth a reconciliation of our operating loss, the most directly comparable GAAP metric, to medical margin (in thousands):
Successor Predecessor
Year Ended December 31 , through
December through December
2022 31, 2021 2, 2021
Operating loss $ (1,560,913) $ (58,888) $ (129,058)
Other patient service revenue (14,671) (1,538) (10,867)
Other medical expenses 84,499 4,533 41,596
Premium deficiency reserve (11,461) 26,277 11,559
Corporate, general and administrative expenses 157,284 16,983 100,243
Sales and marketing expenses 5,096 364 1,818
Depreciation and amortization 87,289
7,149 1,575
Goodwill impairment 1,314,952 - -
Medical margin $ 62,075 $ (5,120) $ 16,866
Network Contribution
Network contribution is a non-GAAP financial metric. We present network
contribution because we believe it helps investors understand underlying trends
in our business and facilitates a broader understanding of our operating
performance from period to period because it facilitates a comparison of our
recurring core business operating results.
We define network contribution as total operating revenue less the sum of: (i)
medical claims expenses and (ii) other medical expenses including physician
compensation expense related to surplus sharing and bonuses and other direct
medical expenses incurred to improve care for our members. We believe this
metric provides insight into the economics of the P3 Care Model, as it includes
all medical claims expense associated with our members' care as well as partner
compensation and additional medical costs we incur as part of our aligned
partnership model. Other medical expenses are largely variable and proportionate
to the level of surplus in each respective market, among other cost factors.
Network contribution should not be considered in isolation or as a substitute
for performance measures calculated in accordance with GAAP. We compensate for
these limitations by relying primarily on our GAAP results and using network
contribution on a supplemental basis. You should review the reconciliation of
operating loss to network contribution set forth below and not rely on any
single financial measure to evaluate our business.
62
Table of Contents
The following table presents our network contribution (dollars in thousands):
Successor Predecessor
Year Ended December 3, 2021 January 1, 2021
December 31, through December through December
2022 31, 2021 2, 2021
Total operating revenue $ 1,049,471 $ 58,762 $ 578,602Less: medical claims expenses (972,725) (62,345)
(550,869)
Less: other medical expenses (84,499) (4,532)
(41,596)
Network contribution $ (7,753) $ (8,115) $ (13,863) The following table sets forth a reconciliation of our operating loss, the most directly comparable GAAP metric, to network contribution (in thousands):
Successor Predecessor
Year Ended December 31 , through
December through December
2022 31, 2021 2, 2021
Operating loss $ (1,560,913) $ (58,888) $ (129,058)
Premium deficiency reserve (11,461) 26,277 11,559
Corporate, general and administrative expenses 157,284 16,983 100,243
Sales and marketing expenses 5,096 364 1,818
Depreciation and amortization 87,289
7,149 1,575
Goodwill impairment 1,314,952 - -
Network contribution $ (7,753) $ (8,115) $ (13,863) Key Performance Metrics
We monitor the following financial and performance metrics to help us evaluate
our business, identify trends affecting our business, formulate business plans
and make strategic decisions (dollars in thousands):
Successor Predecessor
As of and For the Year Ended As of and from December 3, 2021 January 1, 2021
December 31, through December through December
2022 31, 2021 2, 2021
MA at-risk members 100,400 67,000 N/A
Affiliate PCPs 2,800 2,100 N/A
Platform support costs $ 119,167 $ 14,292 $ 78,293
MA At-Risk Members
MA at-risk members represent the approximate number of MA members for whom we receive a fixed PMPM fee under capitation arrangements as of the end of the period.
Affiliate Primary Care Physicians
Affiliate primary care physicians represent the approximate number of primary care physicians included in our affiliate network, with whom members may be attributed under our capitation arrangements, as of the end of the period.
Platform Support Costs
Our platform support costs, which include regionally-based support personnel and
other operating costs to support our markets, are expected to decrease over time
as a percentage of revenue as our physician partners add members and our revenue
grows. Our operating expenses at the enterprise level include resources and
technology to support payor contracting, clinical program
63
Table of Contents
development, quality, data management, finance, and legal functions. We exclude costs related to the operations of our owned medical clinics and wellness centers.
The table below represents costs to support our markets and enterprise
functions, which are included in corporate, general and administrative expenses
(dollars in thousands):
Successor Predecessor
Year Ended December 3, 2021 January 1, 2021
December 31, through December through December
2022 31, 2021 2, 2021
Platform support costs $ 119,167 $ 14,292 $ 78,293
% of Total operating revenue 11.4 % 24.3 % 13.5 %
Key Components of Results of Operations
Revenue
Capitated revenue. We contract with health plans using an at-risk model. Under
the at-risk model, we are responsible for the cost of all covered health care
services provided to members assigned by the health plans to the Company in
exchange for a fixed payment, which generally is a POP based on health plans'
premiums received from CMS. Through this capitation arrangement, we stand ready
to provide assigned Medicare Advantage members all their medical care via our
directly employed and affiliated physician/specialist network.
The premiums health plans receive are determined via a competitive bidding
process with CMS and are based on the costs of care in local markets and the
average utilization of services by patients enrolled. Medicare pays capitation
using a "risk adjustment model," which compensates providers based on the health
status (acuity) of each individual patient. Medicare Advantage plans with higher
acuity patients receive higher premiums. Conversely, Medicare Advantage plans
with lower acuity patients receive lesser premiums. Under the risk adjustment
model, capitation is paid on an interim basis based on enrollee data submitted
for the preceding year and is adjusted in subsequent periods after final data is
compiled. As premiums are adjusted via this risk adjustment model (via a Risk
Adjustment Factor, "RAF"), our PMPM payments will change commensurately with how
our contracted Medicare Advantage plans' premiums change with CMS.
Management determined the transaction price for these contracts is variable as
it primarily includes PMPM fees, which can fluctuate throughout the course of
the year based on the acuity of each individual enrollee. In certain contracts,
PMPM fees also include adjustments for items such as performance incentives or
penalties based on the achievement of certain clinical quality metrics as
contracted with payors. Capitated revenue is recognized based on an estimated
PMPM transaction price to transfer the service for a distinct increment of the
series (e.g., month) and is recognized net of projected acuity adjustments and
performance incentives or penalties as management can reasonably estimate the
ultimate PMPM payment of those contracts. We recognize revenue in the month in
which attributed members are entitled to receive healthcare benefits during the
contract term. The capitation amount is subject to possible retroactive premium
risk adjustments based on the member's individual acuity.
Other patient service revenue. Other patient service revenue is comprised
primarily of encounter-related fees to treat patients outside of our at-risk
arrangements at company owned clinics. Other patient service revenue also
includes ancillary fees earned under contracts with certain payors for the
provision of certain care coordination and other care management services. These
services are provided to patients covered by these payors regardless of whether
those patients receive their care from our directly employed or affiliated
medical groups.
Operating Expenses
Medical expense. Medical expense primarily includes costs of all covered
services provided to members by non-P3 employed providers. This also includes an
estimate of the cost of services that have been incurred, but not yet reported
("IBNR"). Estimates for incurred claims are based on historical enrollment and
cost trends while also taking into consideration operational changes. Future and
actual results typically differ from estimates. Differences could result from an
overall change in medical expenses per member, changes in member mix or simply
due to the addition of new members. IBNR estimates are made on an accrual basis
and adjusted in future periods as required. To the extent we revise our
estimates of IBNR claims for prior periods up or down, there would be a
64
Table of Contents
correspondingly unfavorable or favorable effect on our current period results that may or may not reflect changes in long term trends in our performance.
Premium deficiency reserve. Premium deficiency reserves ("PDR") are recognized
when it is probable that expected future health care costs and maintenance costs
under a group of existing contracts will exceed anticipated future premiums and
stop-loss insurance recoveries on those contracts. PDR represents the advance
recognition of a probable future loss in the current period's financial
statements.
Corporate, general and administrative expense. Corporate, general and
administrative expenses include employee-related expenses, including salaries
and related costs and equity-based compensation for our executive, technology
infrastructure, operations, clinical and quality support, finance, legal, and
human resources departments. In addition, general and administrative expenses
include all corporate technology and occupancy costs.
Sales and marketing expense. Sales and marketing expenses consist of costs related to patient and provider marketing and community outreach. These expenses capture all costs for both our local and enterprise sales and marketing efforts.
Depreciation and amortization expense. Depreciation expense is associated with our property and equipment, including leasehold improvements, computer equipment and software, furniture and fixtures, and internally developed software. Amortization expense is associated with definite lived intangible assets, including trademarks and tradenames, customer contracts, provider network agreements, and payor contracts.
Other (Income)/Expense
Interest expense, net. Interest expense primarily consists of interest on our Term Loan Facility (as defined herein).
Mark-to-market of stock warrants. Mark-to-market of stock warrants consists of the change in the fair value on the revaluation of warrant liabilities associated with our public, private placement, and forward purchase warrants.
Other. Other consists of gains and losses resulting from other transactions.
Income Taxes
P3 LLC is treated as a partnership forU.S. federal and most applicable state and local income tax jurisdictions. As a partnership,P3 LLC is generally not subject toU.S. federal, state and local income taxes. Any taxable income or loss generated byP3 LLC is passed through to and included within the taxable income or loss of its members, including us, on a pro rata basis. We are subject toU.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss generated byP3 LLC . Non-controlling Interests
We consolidate the financial results ofP3 LLC and report a non-controlling interest on our consolidated statements of operations, representing the portion of net income or loss attributable to the non-controlling interest. The weighted average ownership percentages during the period are used to calculate the net income or loss attributable toP3 Health Partners Inc. and the non-controlling interest. Results of Operations The Business Combinations resulted in the presentation of the Company's consolidated financial statements on different bases for the year endedDecember 31, 2022 , the Successor Period, and the Predecessor Period. The Company has not provided pro forma statements of operations and cash flows for the years endedDecember 31, 2022 and 2021. Accordingly, references to certain financial results in 2022 and 2021 may not be comparable. The historical financial information of Foresight (a special purpose acquisition company or a "SPAC") prior to the Business Combinations has not been included in the Predecessor financial statements as this information has been determined not to be useful to 65 Table of Contents a user of the financial statements. SPACs deposit the proceeds from their initial public offerings into segregated trust accounts until a business combination occurs, at which point they are utilized to fund the business combination. The operations of a SPAC until the closing of a business combination, other than income from the trust account investments and transaction expenses, are nominal. Accordingly, the only activity reported in the Predecessor Period was the operations ofP3 LLC . Foresight's historical financial information is excluded from the Predecessor financial information. Thus, the financial results of the Successor and Predecessor entities are expected to be largely consistent with the exception of certain financial statement line items impacted by the Business Combinations. Management believes reviewing our operating results for the twelve-month period endedDecember 31, 2021 by combining the results of the Predecessor and Successor periods is more useful in discussing our overall operating performance when compared to the same period in the prior year. When we refer to the year endedDecember 31, 2021 herein, we are referring to the combined Successor and Predecessor periods contained in the year endedDecember 31, 2021 .
The following discussion and analysis of our results of operations and liquidity
compares the year ended
The following table sets forth our consolidated statements of operations data for the periods indicated (dollars in thousands):
Successor Predecessor
Year Ended December 3, 2021 January 1, 2021
December 31, % of through % of through % of
2022 Revenue(1) December 31, 2021 Revenue(1) December 2, 2021 Revenue(1)
Operating revenue:
Capitated revenue $ 1,034,800 99 % $ 57,225 97 % $ 567,735 98 %Other patient service revenue 14,671 1
1,538 3 10,867 2
Total operating revenue 1,049,471 100 58,763 100 578,602 100
Operating expense:
Medical expense 1,057,224 101 66,877 114 592,465 102
Premium deficiency reserve (11,461) (1) 26,277 45 11,559 2
Corporate, general &
administrative expense 157,284 15 16,983 29 100,243 17
Sales and marketing expense 5,096 0 364 1 1,818 -Depreciation and amortization 87,289 8
7,149 12 1,575 -
Goodwill impairment 1,314,952 125 - - - -
Total operating expense 2,610,384 248 117,650 201 707,660 121
Operating loss (1,560,913) (149) (58,887) (101) (129,058) (21)
Other income (expense):
Interest expense, net (11,404) (1) (851) (2) (9,824) (2)
Mark-to-market of stock
warrants 9,865 1 2,272 4 (7,665) (1)
Other 2,757 0 (471) - 147 -Total other income (expense) 1,218 0 950 2 (17,342) (3) Loss before income taxes (1,559,695) (149) (57,937) (99) (146,400) (24) Provision for income taxes (1,862) 0 - - - - Net loss (1,561,557) (149) (57,937) (99) (146,400) (24) Net loss attributable to redeemable non-controlling interests (1,291,430) (123) (47,857) (81) - - Net loss attributable to controlling interests$ (270,127) (26) % $
(10,080) (18) %
(1) Amounts may not sum due to rounding.
Revenue
Capitated revenue was$1,034.8 million for the year endedDecember 31, 2022 , an increase of$409.8 million , or 66%, compared to$625.0 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 . This increase was driven primarily by a 50% increase in the total number of at-risk members from 67,000 atDecember 31, 2021 to 100,400 atDecember 31, 2022 , as we increased the number of health plan contracts from 17 to 24, and a 10% increase in capitation revenue rates, due to increased premiums from patients with a higher average level of acuity. Capitated revenue was approximately 99% and 98% of total operating revenue for the years endedDecember 31, 2022 and 2021, respectively. 66
Table of Contents
Other patient service revenue was$14.7 million for the year endedDecember 31, 2022 , an increase of$2.3 million , or 18%, compared to$12.4 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 . This increase was primarily driven by increased fees associated with care coordination services and additional fees earned at owned clinics. Other patient service revenue was approximately 1% and 2% of total operating revenue for the years endedDecember 31, 2022 and 2021, respectively.
Operating Expense
Medical Expense
Medical expense was$1,057.2 million for the year endedDecember 31, 2022 , an increase of$397.9 million , or 61%, compared to$659.3 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 . The increase was primarily due to a 50% increase in the total number of at-risk members year-over-year. Premium Deficiency Reserve Premium deficiency reserve was a benefit of$11.5 million for the year endedDecember 31, 2022 , a decrease of$49.3 million , or 130%, compared to expense of$37.8 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 . The change was due to management's assessment of the profitability of contracts, wherein increased membership and the maturation of our overall contractual arrangements are expected to reduce our future losses.
Corporate, General and Administrative Expense
Corporate, general and administrative expense was$157.3 million for the year endedDecember 31, 2022 , an increase of$40.1 million , or 34.2%, compared to$117.2 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 . The increase was primarily driven by increases in professional fees of$19.5 million supporting our operations as a public company and restatement-related costs, and salaries and benefits of$19.2 million , as headcount increased 33% fromDecember 31, 2021 toDecember 31, 2022 .
Sales and Marketing Expense
Sales and marketing expense was$5.1 million for the year endedDecember 31, 2022 , an increase of$2.9 million , or 133%, compared to$2.2 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 . The increase was driven by increases in community outreach spend and higher spending related to patient and provider marketing initiatives.
Depreciation and Amortization Expense
Depreciation and amortization expense was$87.3 million for the year endedDecember 31, 2022 , an increase of$78.6 million , or 900.6%, compared to$8.7 million for the combined Successor and Predecessor periods included in the yearDecember 31, 2021 . The increase was primarily due to there being a full year of amortization expense recorded on acquired definite lived intangible assets, including trademarks and tradenames, customer contracts, provider network agreements, and payor contracts, during the year endedDecember 31, 2022 .
Goodwill Impairment
During the year endedDecember 31, 2022 , we recorded a$1,315.0 million goodwill impairment charge due to the presence of certain macroeconomic and financial market conditions, industry-specific considerations, our performance, and the sustained decrease in the price of our Class A common stock.
Other
Other income was$2.8 million for the year endedDecember 31, 2022 , compared to other expense of$0.3 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 . During the year endedDecember 31 , 67 Table of Contents
2022, we recorded income of
Income Taxes
Provision for income taxes was
Liquidity and Capital Resources
P3 Health Partners Inc. is a holding company and has no material assets other
than its ownership of equity interests in P3 LLC . As such, we have no
independent means of generating revenue or cash flow, and our ability to pay
taxes, make payments under the Tax Receivable Agreement ("TRA"), and to pay
dividends will depend on the financial results and cash flows of P3 LLC and the
distributions received from P3 LLC . Deterioration in the financial condition,
earnings or cash flow of P3 LLC for any reason could limit or impair P3 LLC's
ability to pay such distributions. Additionally, to the extent that we need
funds and P3 LLC is restricted from making such distributions under applicable
law or regulation or under the terms of any financing arrangements, or P3 LLC is
otherwise unable to provide such funds, it could materially adversely affect our
liquidity and financial condition. It is anticipated that the distributions we
will receive from P3 LLC may, in certain periods, exceed the actual tax
liabilities and obligations to make payments under the TRA.
Cash Sources
To date, we have financed our operations principally through the cash we obtained as a result of the Business Combinations, private placements of our equity securities, payments from our payors, issuances of promissory notes, and borrowings under the Term Loan Facility (as defined below). We generate cash from our operations, generally from our contracts with payors. As ofDecember 31, 2022 , we had cash and restricted cash of$18.5 million . We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the strong growth we have experienced over the last five years and the investments we intend to make in expanding our business, which will require up-front expenses. Our future capital requirements will depend on many factors, including the pace of our growth, ability to manage medical costs, the maturity of our members, and our ability to raise capital. We may need to raise additional capital through a combination of debt financing, other non-dilutive financing and/or equity financing and to the extent we are unsuccessful at doing so, we may need to adjust our growth trajectory to accommodate our capital needs and look for additional ways to generate cost efficiencies.
Term Loan
InNovember 2020 , the Company entered a Term Loan and Security Agreement withCRG Servicing, LLC (as amended, the "Term Loan Agreement") providing for funding of up to$100 million (the "Term Loan Facility"). The Term Loan Facility's maturity date isDecember 31, 2025 . As ofDecember 31, 2022 , we had$65.0 million of borrowings outstanding under the Term Loan Facility, and remaining availability under the Term Loan Facility ended upon termination of the commitment period onFebruary 28, 2022 . Interest is payable at 12.0% per annum on a quarterly cycle (in arrears), which began onMarch 31, 2021 . InMarch 2021 , we elected to pay interest at 8.0% with the remaining interest at 4.0% being added to principal as paid in-kind ("PIK") for a period of three years (or 12 payments). We are required to remain in compliance with financial covenants such as minimum liquidity of$5.0 million and annual minimum revenue levels. In addition, the Term Loan Agreement restricts our ability and the ability of our subsidiaries to, among other things, incur indebtedness and liens. On an annual basis, we must post a minimum amount of annual revenue equal to or greater than$460.0 million in 2022;$525.0 million in 2023;$585.0 million in 2024 and$650.0 million in 2025. The maturity date may be accelerated as a remedy under the certain default provisions in the Term Loan Agreement, or in the event a mandatory prepayment event occurs. 68
Table of Contents
In connection with the issuance of the VGS Promissory Note and entry into the Subordination Agreement (as described below), onDecember 13, 2022 , we entered into an amendment to the Term Loan Agreement to permit the issuance of the VGS Promissory Note and the entry into the Subordination Agreement.
VGS Promissory Note
OnDecember 13, 2022 , we entered into a financing transaction with VGS which included the issuance of the VGS Promissory Note and the entry into the VGS Warrant Agreement and the Subordination Agreement. The VGS Promissory Note provides for funding of up to$40.0 million , available for us to draw in three tranches as follows: (i) a first tranche of$15.0 million available onDecember 13, 2022 , (ii) a second tranche of up to$15.0 million in a single draw at our option afterJanuary 5, 2023 , and (iii) a third tranche of up to$10.0 million available at our option in a single draw afterJanuary 5, 2023 and on or prior toFebruary 3, 2023 . We will pay VGS an up-front fee of 1.5% at the time of each draw and a back-end fee at the time the VGS Promissory Note is paid as follows: (i) if paid fromMarch 1, 2023 throughJune 30, 2023 , 4.5%; (ii) if paid fromJuly 1, 2023 throughDecember 31, 2023 , 6.75% and (iii) if paid onJanuary 1, 2024 or later, 9.0%. The maturity date of the Promissory Note isMay 19, 2026 . Interest is payable at 14.0% per annum on a quarterly cycle (in arrears) beginningMarch 31, 2023 . We may elect to pay interest of 6.0% in kind and 8.0% in cash, subject to certain limitations. The VGS Promissory Note may be prepaid, at our option, either in whole or in part, without penalty or premium, at any time and from time to time, subject to the payment of the back-end fee; provided that prepayments must be in increments of at least$2.0 million . The VGS Promissory Note provides for mandatory prepayments with the proceeds of certain asset sales, and the Lender has the right to demand payment in full upon (i) a change of control of the Company and (ii) certain qualified financings (as defined in the VGS Promissory Note).
The VGS Promissory Note restricts our ability to, among other things, incur indebtedness and liens, and make investments and restricted payments. The maturity date may be accelerated as a remedy under the certain default provisions in the agreement, or in the event a mandatory prepayment event occurs.
In connection with the issuance of the VGS Promissory Note, we also entered into the VGS Warrant Agreement pursuant to which we issued VGS warrants to purchase 429,180 shares of Class A common stock at an exercise price of$4.26 per share. The number of shares of common stock for which the VGS Warrant is exercisable and the exercise price may be adjusted upon any event involving subdivisions, combinations, distributions, recapitalizations, and similar transactions. Pursuant to the VGS Warrant Agreement, the warrants and the right to purchase securities upon the exercise of the warrants will terminate upon the earliest to occur of the following: (a)December 13, 2027 ; and (b) the consummation of (i) a sale, conveyance, consolidation with any other corporation (other than a wholly owned subsidiary corporation) or (ii) any other transaction or series of related transactions in which more than 50% of the voting power of which the Company orP3 LLC is disposed. In connection with the issuance of the VGS Promissory Note, we also entered into a subordination agreement, dated as ofDecember 13, 2022 (the "Subordination Agreement") with VGS which subordinates VGS's right of payment under the VGS Promissory Note to the right of payment and security interests of the lenders under the Term Loan Facility. Under the terms of the Subordination Agreement, we will be required to pay all interest under the VGS Promissory Note in-kind. The VGS Promissory Note may be prepaid, at our option, either in whole or in part, without penalty or premium subject to certain conditions. As ofDecember 31, 2022 ,$15.0 million had been drawn on the VGS Promissory Note. Between January andMarch 2023 , we borrowed a total of$12.9 million on the VGS Promissory Note and have$12.1 million in remaining borrowing capacity. As ofDecember 31, 2022 , we were not in compliance with its Term Loan Facility and VGS Promissory Note covenants related to issuance of the 2022 financial statements with an audit opinion free of a "going concern" qualification. The Term Loan Facility and VGS Promissory Note lenders have granted us a waiver of the covenant under the Term Loan Facility related to the existence of a "going concern" qualification in the audit opinion for our audited financial statements for the fiscal year endedDecember 31, 2022 . We were in compliance with all other covenants under the Term Loan Facility and VGS Promissory Note as ofDecember 31, 2022 ; however, there can be no assurance that we will be able to maintain compliance with these covenants in the future or that the lenders under the Term Loan Facility VGS Promissory Note or the lenders of any future indebtedness we may incur will grant any such waiver or forbearance in the
future.
69
Table of Contents
Repurchase Promissory Note
InJune 2019 , we issued a share repurchase promissory note (the "Repurchase Promissory Note") to a former equity investor for$15.0 million , which was subsequently amended inNovember 2020 . The amended agreement stipulated that the Repurchase Promissory Note would automatically mature and be due and payable on the earlier ofJune 30, 2026 , a change in control transaction, or an underwritten primary public offering, each as defined in the agreement. The note accrues PIK interest of 11.0% per year. The principal balance, accrued interest, and an exit fee of$0.6 million are due at maturity. Accrued interest was$9.0 million and$6.5 million atDecember 31, 2022 and 2021, respectively.
For additional discussion of our long-term debt, see Note 12 "Debt" in our consolidated financial statements included elsewhere in this Form 10-K.
OnMarch 30, 2023 , we entered into a Securities Purchase Agreement pursuant to which we agreed to sell certain of our securities for gross proceeds of approximately$89.5 million . See Note 25 "Subsequent Events" to the consolidated financial statements contained elsewhere in this Form 10-K.
Cash Uses
Our primary uses of cash include payments for medical expenses, administrative expenses, cost associated with our care model, debt service, and capital expenditures. Final reconciliation and receipts of amounts due from payors are typically settled in arrears. Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets ofP3 LLC when its units are redeemed or exchanged. We intend to treat any redemptions and exchanges ofP3 LLC units as direct purchases of the units forU.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent the tax basis is allocated to those capital assets. In connection with the Business Combinations, we entered into a TRA that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets ofP3 LLC resulting from any redemptions or exchanges ofP3 LLC , (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the "TRA Payments"). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The estimation of a liability under the TRA is, by its nature, imprecise and subject to significant assumptions regarding a number of factors, including (but not limited to) the amount and timing of taxable income generated by the Company each year as well as the tax rate then applicable. As a result of the Business Combinations, we may recognize an estimated liability under the TRA of approximately$530.0 million if all P3 Equityholders redeem or exchange their Common Units for Class A common stock or cash at the earliest possible date permitted under the P3 LLC A&R LLC Agreement and assuming (a) the generation of sufficient future taxable income, (b) a trading price of$10 per share of Class A common stock at the time of the redemption or exchange, (c) a constant corporate combinedU.S. federal and state income tax rate of 23.89% and (d) no material changes in tax law. The TRA liability is estimated to be$4.6 million as ofDecember 31, 2022 . Due to the Company's history of losses, the Company has not recorded tax benefits associated with the increase in tax basis as a result of the Business Combinations. As a result, the Company determined that payments to TRA holders are not probable and no TRA liability has been recorded as ofDecember 31, 2022 . As non-controlling interest holders exercise their right to exchange their units inP3 LLC , a TRA liability may be recorded based on 85% of the estimated future tax benefits that the Company may realize as a result of increases in the tax basis ofP3 LLC . The amount of the increase in the tax basis, the related estimated tax benefits, and the related TRA liability to be recorded will depend on the price of the Company's Class A common stock at the time of the relevant redemption or exchange. 70 Table of Contents
The following table summarizes current and long-term material cash requirements
as of
Material Cash Requirements
Less than 1-3 3-5 More than
Total 1 year years years 5 years
Unpaid claims(1) $ 151,207 $ 151,207 $ - $ - $ -
Long-term debt, principal(2) 95,000 - 65,000 30,000 -
Long-term debt, interest(3) 78,216 13,429 42,001 22,786 -
Operating lease liabilities(4) 12,790 704 4,292 3,538 4,256 Total$ 337,213 $ 165,340 $ 111,293 $ 56,324 $ 4,256
Represents unpaid claims due to third parties for health care services
provided to members, including estimates for incurred but not reported
claims. Estimates for incurred claims are based on historical enrollment and (1) cost trends while also taking into consideration operational changes. Future
and actual results typically differ from estimates. Differences could result
from an overall change in medical expenses per members, changes in member mix
or simply due to addition of new members.
Represents principal payments only. We will pay interest on outstanding (2) indebtedness based on the rates and terms summarized in Note 12 "Debt" in our
consolidated financial statements.
Represents interest expected to be incurred on our long-term debt based on
(3) amounts outstanding as of
in our consolidated financial statements.
(4) Represents minimum operating lease payments, excluding potential lease
renewals. See Note 17 "Leases" in our consolidated financial statements.
Liquidity and Going Concern As of the date of this Form 10-K, management believes that our existing cash resources are not sufficient to support planned operations for at least the next year from the issuance of this Form 10-K. As a result, management has concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date the consolidated financial statements contained elsewhere in this Form 10-K are issued. In evaluating the Company's ability to continue as a going concern, management considered the Company's current projections of future cash flows, current financial condition, sources of liquidity, including funds available under the VGS Promissory Note, and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations. This evaluation of our cash resources available over the next year from the date of issuance of this Form 10-K does not take into consideration the potential mitigating effect of our ongoing efforts to raise capital or management's plans that have not been fully implemented or the many factors that determine the Company's capital requirements, including the pace of our growth, ability to manage medical costs and the maturity of our members. Management continues to explore raising additional capital through a combination of debt financing and equity issuances. If we raise funds by issuing debt securities or preferred stock, or by incurring loans, these forms of financing would have rights, preferences, and privileges senior to those of holders of our common stock. If we raise capital through the issuance of additional equity, such sales and issuance would dilute the ownership interests of the existing holders of our Class A common stock. The availability and the terms under which we may be able to raise additional capital could be disadvantageous, and the terms of debt financing or other non-dilutive financing may involve restrictive covenants and dilutive financing instruments, which could place significant restrictions on our operations. Macroeconomic conditions and credit markets could also impact the availability and cost of potential future debt financing. There can be no assurances that any additional debt, other non-dilutive and/or equity financing would be available to us on favorable terms, or potentially at all. We expect to continue to incur net losses, comprehensive losses, and negative cash flows from operating activities in accordance with our operating plan. If we are unable to obtain additional funding when needed, we will need to curtail planned activities in order to reduce costs, which will likely have an unfavorable effect on our ability to execute on our business plan, and have an adverse effect on our business, results of operations, and future prospects. The audited consolidated financial statements included elsewhere in this Form 10-K have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result from the outcome of these uncertainties.
Our independent registered public accounting firm, in its report on the
Company's consolidated financial statements for the year ended
71
Table of Contents
Cash Flows
The following table summarizes our cash flows (in thousands):
Successor Predecessor
Year Ended December 3, 2021 January 1, 2021
December 31, through December through December
2022 31, 2021 2, 2021Net cash used in operating activities$ (126,019) $ (15,342)$ (51,129) Net cash used in investing activities (7,733) (47,856) (8,209) Net cash provided by financing activities 11,375
198,677 24,790
Net change in cash $ (122,377) $ 135,479 $ (34,548)
Operating Activities
Net cash used in operating activities was$126.0 million for the year endedDecember 31, 2022 , compared to net cash used in operating activities of$66.5 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 . Significant changes impacting net cash used in operating activities during the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 were primarily due to the timing of cash sweeps received in 2022, but recognized in 2021 in accordance with our revenue recognition policy resulting from the extended reporting period related to the 2021 audit, and payments of professional fees supporting our operations as a public company and restatement-related costs.
Investing Activities
Net cash used in investing activities was$7.7 million for the year endedDecember 31, 2022 , primarily consisting of the acquisition of two medical practices for a total purchase price of$5.5 million , net of cash acquired. Net cash used in investing activities was$56.1 million for the combined Successor and Predecessor periods included in the year endedDecember 31, 2021 , primarily consisting of the cash paid for the Business Combinations and Medcore Acquisition.
Financing Activities
Net cash provided from financing activities was$11.4 million for the year endedDecember 31, 2022 , consisting of proceeds from the issuance of the VGS Promissory Note, offset by repayments of debt. Net cash provided from financing activities was$223.5 million for the combined Successor and Predecessor periods included in the yearDecember 31, 2021 , primarily consisting of$195.3 million of proceeds from the issuance of PIPE Shares. JOBS Act We qualify as an "emerging growth company" pursuant to the provisions of the JOBS Act. For as long as we are an "emerging growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory "say-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation. In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods permitted under the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act. 72 Table of Contents Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management use judgment in the application of accounting policies, including making estimates and assumptions that could affect assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. Management bases its estimates on the best information available at the time, its experiences and various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. For a more detailed discussion of our significant accounting policies, see Note 3 "Significant Accounting Policies" in our consolidated financial statements included elsewhere in this Form 10-K. Below is a discussion of accounting policies that are particularly important to the portrayal of our financial condition and results of operations and require the application of significant judgment by our management.
Capitated Revenue
The transaction price for our capitated payor contracts is variable as it primarily includes PMPM fees associated with unspecified membership. Medicare pays capitation using a "risk adjustment model", which compensates providers based on the health status (acuity) of each individual patient. Medicare Advantage plans with higher acuity patients receive higher premiums. Conversely, Medicare Advantage plans with lower acuity patients receive lesser premiums. Under the risk adjustment model, capitation is paid on an interim basis based on enrollee data submitted for the preceding year and is adjusted in subsequent periods after final data is compiled. As premiums are adjusted via this risk adjustment model (via a RAF), the Company's PMPM payments will change commensurately with how our contracted Medicare Advantage plans' premiums change with CMS. In certain contracts, PMPM fees also include adjustments for items such as performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors. Capitated revenue is recognized based on an estimated PMPM transaction price to transfer the service for a distinct increment of the series (e.g., month), net of projected acuity adjustments and performance incentives or penalties as management can reasonably estimate the ultimate PMPM payment of those contracts. The Company recognizes revenue in the month in which eligible members are entitled to receive healthcare benefits during the contract term. The capitation amount is subject to possible retroactive premium risk adjustments based on the member's individual acuity.
Medical Expense and Claims Payable
The cost of healthcare services is recognized in the period services are
provided. Medical expense includes costs of all covered services provided to
members assigned by the health plans under P3's at-risk model. Medical expense
includes the cost for third-party healthcare service providers, the cost for
overseeing the quality of care and programs, and from time to time, remediation
of certain claims that might result from periodic reviews conducted by various
regulatory agencies. This also includes an estimate of the cost of services that
have been incurred, but not yet reported ("IBNR").
Management estimates the Company's IBNR by applying standard actuarial
methodologies, which utilize historical data, including the period between the
date services are rendered and the date claims received (and paid), denied
claims activity, expected medical cost inflation, seasonality patterns, and
changes in membership mix. Such estimates are subject to impact from changes in
both the regulatory and economic environments. The Company's claims payable
represents management's best estimate of its liability for unpaid medical costs.
We have included incurred but not reported claims of $151.2 million and $102.0
million on our consolidated balance sheets as of December 31, 2022 and 2021,
respectively.
Our consolidated financial statements could be materially impacted if actual
claims expense is different from our estimates. If our liability for incurred
and not reported claims at December 31, 2022 were to differ by plus or minus 5%,
the impact on medical claims expense would be approximately $7.6 million .
73
Table of Contents
Warrant Liability
We have Public and Private Placement Warrants that are classified as liabilities
at their fair value at inception and adjusted to fair value at each reporting
period. This liability is subject to re-measurement at each balance sheet date
until exercised and any change in fair value is recognized in our statement of
operations.
The Public Warrants are publicly traded and are recorded at fair value using the
closing price as of the measurement date. The Private Placement Warrants have no
observable traded price and are valued using an option pricing model
(Black-Scholes-Merton). The assumptions used in preparing these models include
estimates such as volatility, contractual terms, discount rates, dividend yield,
expiration dates and risk-free rates. We have historically been a private
company and lacked sufficient company-specific historical and implied volatility
information. Therefore, we estimated our expected stock volatility based on the
historical volatility of a publicly traded set of peer companies. The risk-free
interest rate assumption is determined by using the U.S. Treasury rates of the
same period as the expected term of the private placement warrants at each
reporting period. Changes in these assumptions can materially affect the
estimate of the fair value of these instruments and could cause a material
increase or decrease to expense realized from the change in fair value of
warrants, and to the underlying warrant liability.
Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired in a business combination.Goodwill is not amortized and instead is tested for impairment on an annual basis or more frequently if we believe indicators of impairment exist. We have determined that there is only one reporting unit for the purpose of testing goodwill impairment. In circumstances where we conclude that it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of the reporting unit is less than its carrying amount, a quantitative fair value test is performed. Factors we consider when performing the qualitative assessment primarily include general economic conditions and changes in forecasted operating results. In a quantitative impairment test, we assess goodwill by comparing the carrying amount of each reporting unit to its fair value. We estimate the fair value of our reporting unit using a weighted combination of the income approach and market-based approach. The income approach discounts the reporting unit's estimated future cash flows using an estimated discount rate, both of which are considered Level 3 inputs. The market approach is based on comparable companies' market multiples of revenue and EBITDA. Publicly traded companies in the same industry and target companies with transactions that are similar in nature are selected as guideline companies for the market-based approach. The resulting fair value is then compared to the carrying amount. Our annual impairment review measurement date is in the fourth quarter of each year. For 2022, we completed the required annual assessment of goodwill for impairment for our reporting unit using a qualitative assessment and determined that a quantitative assessment of goodwill impairment was required (i.e., it is more likely than not that the fair value of goodwill exceeds the carrying amount). Based on the results of our quantitative assessment, we recorded a$1,315.0 million goodwill impairment charge during the year endedDecember 31, 2022 . We review identified intangible assets with defined useful lives and subject to amortization for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires comparing the carrying amount of the asset to the sum of undiscounted cash flows expected to be generated by the asset. Intangible assets with indefinite lives are tested for impairment annually.
Income Taxes
We account for income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the consolidated financial statement carrying amounts and tax bases of
assets and liabilities and operating loss and tax credit carryforwards and are
measured using the enacted tax rates that are expected to be in effect when the
differences reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in our consolidated
74
Table of Contents
statements of operations in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized.
We account for uncertain tax positions by reporting a liability for unrecognizable tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.
Premium Deficiency Reserves
A PDR is recorded when there is a probable future loss on unearned capitated premiums after estimated expected claim costs and claim adjustment expenses. Losses under prepaid health care services contracts shall be recognized when it is probable that expected future health care costs and maintenance costs under a group of existing contracts will exceed anticipated future premiums and stop-loss insurance recoveries on those contracts. To determine the need to recognize a loss, contracts shall be grouped in a manner consistent with the provider's method of establishing premium rates, for example, by community rating practices, geographical area, or statutory requirements, to determine whether a loss has been incurred. In our at-risk arrangements, the more we improve health outcomes and lower the overall cost of care, the more profitable we will be over time. We assess the profitability of our at-risk arrangements to identify contracts where current operating results or forecasts indicate probable future losses. Management estimates the Company's PDR by utilizing estimates of membership growth rates, changes in membership mix, estimated PMPM payments under contracts, historical claims data, seasonality patterns, our ability to lower the overall cost of care and incremental medical costs, such as those related to COVID-19 admissions. Such estimates are subject to impact from changes in both the regulatory and economic environments. The Company's PDR represents management's best estimate of its probable future losses. We have included premium deficiency reserve liabilities of$26.4 million and$37.8 million on our accompanying consolidated balance sheets as ofDecember 31, 2022 and 2021, respectively.
Equity-based Compensation
We measure the cost of the employee services received in exchange for an award of equity instruments based on the grant-date fair value or, in certain circumstances, the calculated value of the award. Under our unit-based incentive plan, the Company may reward grantees with various types of awards, including but not limited to profits interests on a service-based or performance-based schedule. These awards may also contain market conditions. For performance-vesting units, P3 recognizes unit-based compensation expense when it is probable that the underlying performance condition will be achieved. The Company will analyze if a performance condition is probable for each reporting period through the settlement date for awards subject to performance vesting. For service-vesting units, P3 recognizes unit-based compensation expense over the requisite service period for each separately vesting portion of the profits interest as if the award was, in substance, multiple awards.
Recent Accounting Pronouncements
See Note 4 "Recent Accounting Pronouncements" in our consolidated financial statements included elsewhere in this Form 10-K for a description of recent accounting standards issued and the anticipated effects on our consolidated financial statements.
© Edgar Online, source
