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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-10-21 · 385 added, 348 removed, 247 unchanged (75% of the section changed)

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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 Annual Report on Form 10-K.

This discussion contains forward-looking statements and involves 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 the “Cautionary Statement Regarding Forward-Looking Statements,” “Item 1A.

Risk Factors” and elsewhere in this Annual Report on Form 10-K.

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.

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 fee-for-service (“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 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 20+ years of experience in population health management, to build our “P3 Care Model.” The key attributes that differentiate P3 include:

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 value-based care 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 value-based care model, all while sharing in the savings from successfully improving the quality of patient care and reducing costs.

We operate in the $830 billion Medicare market, which covers approximately 63 million eligible lives.

Our core focus is the Medicare Advantage market, which makes up approximately 42% of the overall Medicare market, or nearly 26 million Medicare eligible lives.

Medicare beneficiaries may enroll in a Medicare Advantage plan, under which payors contract with the Centers for Medicare & Medicaid Services (“CMS”) to provide a defined range of healthcare services that are comparable to Medicare FFS (which is also referred to as “traditional Medicare”).

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 per member per month fees from payors to provide a defined range of healthcare services for Medicare Advantage health plan members attributed to our primary care physicians (“PCPs”).

These per member per month (“PMPM”) fees comprise our capitated revenue and are determined as a percent of the premium (“POP”) payors receive from CMS for these 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, prescriptions drugs, specialist physician spend and primary care spend.

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.

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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 2,100 physicians, in 15 markets (counties) across 4 states in under four full years of operations as of December 31, 2021.

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, 2021, our PCP network served approximately 67,000 at-risk Medicare Advantage members.

We believe we have significant growth opportunities available to us across existing and new markets, with less than 1% of the 491,060 PCPs in the U.S.

As of December 31, 2022, our PCP network served approximately 100,400 at-risk MA members.

We believe we have significant growth

opportunities available to us across existing and new markets, with less than 1% of the 502,000 PCPs in the U.S.

currently included in our physician network.

Restatement of Previously Issued Financial Statements

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement of the Company’s previously reported consolidated financial statements for the fiscal years ended December 31, 2020 and 2019.

The Company has restated the consolidated financial statements for the years ended December 31, 2020 and 2019.

This restatement related to the Company’s accounting for non-controlling interests related to the variable interest entity medical practices, preferred returns associated with Class A and Class D Units, the equity accounting treatment associated with Class A Units, and capitated revenue.

The effect of these restatements has no impact on the Company’s previously reported cash position or total operating, investing or finance cash flows.

For additional information and a detailed discussion of the restatement, see Note 2 “Restatement of Previously Issued Financial Statements” in the Notes to our consolidated financial statements included in this Annual Report on Form 10-K under “Item 15.

Financial Statements and Supplementary Data.” Restatement adjustments have also been made to the previously reported unaudited condensed consolidated financial statements for the interim periods ended September 30, 2021, June 30, 2021, March 31, 2021, September 30, 2020, June 30, 2020 and March 31, 2020.

For additional information related to the interim period restatements, see Note 30 “Quarterly Financial Information (Unaudited)” in the Notes to our consolidated financial statements included in this Annual Report on Form 10-K under “Item 8.

Financial Statements and Supplementary Data.”

Impact of COVID-19

On March 11, 2020, the World Health Organization designated COVID-19 a global pandemic.

The rapid spread of COVID-19 around the world and throughout the U.S.

has altered the behavior of businesses and people, with significant negative effects on Federal, state, and local economies, the duration of which continues to remain unknown.

Various mandates were implemented by Federal, state, and local governments in response to the pandemic, which caused many people to remain at home, along with forced closure of or limitations on certain businesses.

This included suspension of elective procedures by healthcare facilities.

While some of these restrictions have been eased across the U.S.

and most states have lifted moratoriums on non-emergency procedures, some restrictions remain in place, and many state and local governments are re-imposing certain restrictions due to an increase in reported COVID-19 cases.

COVID-19 disproportionately impacts older adults, especially those with chronic illnesses, which describes many of P3’s patients.

To ensure a coordinated response to the pandemic, we created a COVID-19 Task Force that is supported by team members from across the organization.

Our company owned clinics remained open to those members with urgent needs, and we successfully pivoted to a telemedicine offering for routine care in order to protect and better serve our patients, providers, care teams and community.

We continued to support our affiliate physician network with the tools, team and technology to provide care to the members we serve.

Management did institute multiple safety measures for P3 employees including a work-from-home policy and access to free vaccinations and personal protective equipment.

Deeply committed to our employees, we made a conscious decision not to furlough any of our employees, even if their function was disrupted by COVID-19.

Due to our recurring contracted revenue model, the COVID-19 pandemic did not have a material impact on P3’s revenues during 2020 and 2021.

Nearly 97% the Company’s total revenues are recurring, consisting of fixed monthly PMPM capitation payments received from Medicare Advantage health plans.

P3 estimates that it incurred approximately $67.4 million of direct costs related to COVID-19 claims during the period from March 1, 2020 through December 31, 2021.

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.

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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.

This includes new and emerging information from the impact of new variants of the virus, the actions taken to contain it or treat its impact and the economic impact on our markets.

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 P3’s business, results of operations and liquidity.

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

As a result of the Business Combinations (see Note 7 “Business Combinations” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K), the Company was deemed to be the acquirer for accounting purposes, and P3 Health Group Holdings, LLC, which is the business conducted prior to the closing of the Business Combinations, was deemed to be the acquiree and accounting predecessor (the “Predecessor”).

The Business Combinations were accounted for as a business combination using the acquisition method of accounting, and the Successor’s (as 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, LLC 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, LLC, are presented on different bases for the period December 3, 2021 through December 31, 2021 (the “Successor Period”), and the period January 1, 2021 through December 2, 2021 and the fiscal years ended December 31, 2020 and 2019 (the “Predecessor Periods”).

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

On December 27, 2021 and December 31, 2021, respectively, the Company acquired the net assets of Omni IPA Medical Group, Inc.

(“Omni”) and 100% of the equity interests of Medcore 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 in California.

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 with California payors.

Through this transaction, we intend to replicate our affiliate model to contract with local physicians and grow our network in California.

Key Factors Affecting our Performance

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● 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 Medicare Advantage or (b) elect to convert from Medicare FFS to Medicare Advantage.

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.

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The strength of our affiliate physician model and its multiple avenues of growth is evident by our growth from 2018 to December 31, 2022.

At December 31, 2021, the number of Medicare Advantage at-risk members on our platform was approximately 67,000 compared to approximately 19,700 members at December 31, 2019, representing a compound annual growth rate (“CAGR”) of 84% over this period.

At December 31, 2022, the number of MA at-risk members on our platform was approximately 100,400 compared to approximately 67,000 at December 31, 2021, representing a compound annual growth rate (“CAGR”) of 41% over this period.

The table below illustrates membership growth from 2021 to 2022:

At-risk Medicare Advantage Members

MA at-risk members

Year-over-year % change

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According to CMS, the Medicare market covers approximately 65 million eligible lives as of 2021.

Over the last decade, Medicare Advantage penetration of the Medicare beneficiary population has increased from 26% to 42% of the overall Medicare beneficiary market and makes up nearly 26 million Medicare eligible lives today.

Recent data suggests that the number of Medicare-eligible patients will continue to increase as the US population ages and becomes eligible for the program.

Additionally, recent data from the Kaiser Family Foundation suggests the Medicare Advantage penetration rates will continue to increase in the upcoming years.

As these new patients age-in to Medicare and enroll in Medicare Advantage through our payors, they become attributed to our network of physicians with little incremental cost to us.

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 P3 offers with our value-based care model, including greater access to their physicians and customized care plans catered to their needs.

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.

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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 value-based care space and our proactive assessment of expansion markets.

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 across the United States.

We look at various factors including:

We look at various

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’re able to leverage the investments we previously made to have a faster impact on our expanded footprint.

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 of December 31, 2021, we operate in 15 markets, markets being counties, across four states.

As of December 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 key uses of the proceeds from the consummation of the Business Combinations and PIPE Investment on December 3, 2021, after accounting for distributions to existing shareholders, is to fund the investment required to enter these new markets and to take on additional new contracts.

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

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Because of the benefits, we have also historically experienced high retention with our affiliate providers.

From 2018 through 2021, P3 experienced a 99% physician retention rate in our affiliate provider network.

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.

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Payors with higher acuity members receive a higher payment and those with lower acuity members receive a lower payment.

Moreover, some of our capitated revenues also include adjustments for performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors.

Given the prevalence of fee-for-service arrangements, our patients often have historically not participated in a value-based care model, and therefore their health conditions are poorly documented.

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.

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Effectively Managing Member Medical Expense

Our medical claims expense is our largest expense category, representing 80% of our total operating expenses for the combined Successor and Predecessor periods in the year ended December 31, 2021.

Our medical claims expense is our largest expense category, representing 82% of our total operating expenses (excluding goodwill impairment) for the year ended December 31, 2022.

We manage our medical costs by improving our members access to healthcare.

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The power of our model is reflected in the relative performance of our network when compared to local FFS benchmarks.

For example, in 2019 our Arizona members’ emergency department (“ED”) utilization was 36% lower than the local FFS benchmark and inpatient hospital admission rate was 35% lower than the local FFS benchmark.

Achieving Operating Efficiencies

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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 our absolute investment in our enterprise resources to increase over time, we expect it 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 the exchange on which we list our securities, and increased legal and audit fees.

While we expect

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 the Nasdaq Stock Market, and increased legal and audit fees.

Impact of Seasonality

Our operational and financial results will experience some variability depending upon the time of year in which they are measured.

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:

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Contracts with new payors typically begin on January 1, at which time new members become attributed to our network of physicians.

Additionally, new members are attributed to our network on January 1, when plan enrollment selections made during the prior Annual Enrollment Period from October 15th through December 7th of the prior year take effect.

Additionally, new members are attributed to our network on January 1, when plan enrollment selections made during the prior Annual Enrollment Period from October 15 through December 7 of the prior year take effect.

Revenue Per Member .

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Non-GAAP Financial Measures and Key Performance Metrics

We use certain non-GAAP financial measures to supplement our consolidated financial statements, which are presented in accordance with U.S.

Generally Accepted Accounting Principles (“GAAP”).

These non-GAAP financial measures include Adjusted EBITDA.

A non-GAAP financial measure is a numerical measure that departs from GAAP because it includes or excludes amounts that are required under GAAP.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by P3 may not be comparable to similarly titled measures used by other companies.

The presentation of non-GAAP financial measures provides additional information to investors regarding P3’s results of operations that P3’s management believes is useful for trending, analyzing and benchmarking the performance of P3’s business.

See “Supplemental Unaudited Presentation of Consolidated Adjusted EBITDA,” below, for a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP measure.

In addition to our GAAP and non-GAAP financial information, we monitor the following operating metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.

We believe the following key metrics are useful in evaluating our business:

At-risk members

We use certain financial measures, which are not calculated in accordance with accounting principles generally accepted in the U.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

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):

December 3, 2021

January 1, 2021

through December

Interest expense, net

Depreciation and amortization expense

Provision for income taxes

Mark-to-market of stock warrants

Premium deficiency reserve

Equity-based compensation

Transaction and other related costs (1)

Goodwill impairment

Adjusted EBITDA loss

(1) Transaction and other related costs consist of accounting, legal, and advisory fees and bonus incurred related to the Business Combinations, the Medcore Acquisition, and other transactions that were completed, pending, or abandoned.

(2) During the year ended December 31, 2022, other consists of (i) income related 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 December 31, 2020, 2019, and 2018 and the condensed consolidated financial statements for the quarterly periods ended March 31, 2021, June 30, 2021, September 30, 2021, March 31, 2020, June 30, 2020, and September 30, 2020, (iv) expenses for 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 December 31, 2021, other consists of interest income offset by 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 .

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):

December 3, 2021

January 1, 2021

through December

Capitated revenue

medical claims expenses

Medical margin

The following table sets forth a reconciliation of our operating loss, the most directly comparable GAAP metric, to medical margin (in thousands):

December 3, 2021

January 1, 2021

through December

Operating loss

Other patient service revenue

Other medical expenses

Premium deficiency reserve

Corporate, general and administrative expenses

Sales and marketing expenses

Depreciation and amortization

Goodwill impairment

Medical margin

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.

The following table presents our network contribution (dollars in thousands):

December 3, 2021

January 1, 2021

through December

Total operating revenue

medical claims expenses

other medical expenses

Network contribution

The following table sets forth a reconciliation of our operating loss, the most directly comparable GAAP metric, to network contribution (in thousands):

December 3, 2021

January 1, 2021

through December

Operating loss

Premium deficiency reserve

Corporate, general and administrative expenses

Sales and marketing expenses

Depreciation and amortization

Goodwill impairment

Network contribution

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):

As of and For the Year Ended

As of and from December 3, 2021

January 1, 2021

through December

MA at-risk members

Affiliate PCPs

At-Risk Membership

At-risk membership represents the approximate number of Medicare Advantage members for whom we receive a fixed per member per month fee under capitation arrangements as of the end of a particular period.

Contracted Primary Care Physicians

Contracted 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 a particular period.

The key metric we utilize to measure our profitability and performance is Adjusted EBITDA.

Platform support costs

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

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):

December 3, 2021

January 1, 2021

through December

Platform support costs

% of Total operating revenue

Key Components of Results of Operations

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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 revenues are 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.

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.

See “ —Critical Accounting Policies and Estimates—Capitated Revenue ” for more information.

Other patient service revenue.

Other patient service revenue is comprised primarily of encounter-related fees to treat patients outside of P3’s at-risk arrangements at company owned clinics.

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.

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This also includes an estimate of the cost of services that have been incurred, but not yet reported (“IBNR”).

IBNR is recorded as “Claims Payable” in the accompanying consolidated balance sheets.

Estimates for incurred claims are based on historical enrollment and cost trends while also taking into consideration operational changes.

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IBNR estimates are made on an accrual basis and adjusted in future periods as required.

To the extent we revise our estimates of incurred but not reported claims for prior periods up or down, there would be a correspondingly unfavorable or favorable effect on our current period results that may or may not reflect changes in long term trends in our performance.

To the extent we revise our estimates of IBNR claims for prior periods up or down, there would be a

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 stock-based compensation for our executive, technology infrastructure, operations, clinical and quality support, finance, legal, and human resources departments.

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.

2 unchanged sentences

These expenses capture all costs for both our local and enterprise sales and marketing efforts.

Amortization expense.

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.

Depreciation expense.

Depreciation expense is associated with our property and equipment.

Depreciation includes expenses associated with leasehold improvements, computer equipment and software, furniture and fixtures and internally developed software.

Premium deficiency reserve.

PDR represents the advance recognition of a probable future loss in the current period’s financial statements.

If a PDR exists, the amount is recognized by recording an additional liability for the probable future deficiency on the current period’s consolidated balance sheet with a corresponding non-cash charge to the consolidated statement of operations.

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 consists of gains and losses resulting from other transactions.

P3 LLC is treated as a partnership for U.S.

federal and most applicable state and local income tax jurisdictions.

As a partnership, P3 LLC is generally not subject to U.S.

federal, state and local income taxes.

Any taxable income or loss generated by P3 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 to U.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 by P3 LLC.

Non-controlling Interests

We consolidate the financial results of P3 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 to P3 Health Partners Inc.

and the non-controlling interest.

Results of Operations

The Business Combinations resulted in the presentation of the Company’s financial statements on different bases for the period December 3, 2021 through December 31, 2021 (the “Successor Period”);

and the period January 1, 2021 through December 2, 2021 and the fiscal years ended December 31, 2020 and 2019 (the “Predecessor Periods”).

The Business Combinations resulted in the presentation of the Company’s consolidated financial statements on different bases for the year ended December 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 ended December 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 a user of the financial statements.

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.

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When we refer to the year ended December 31, 2021 herein, we are referring to the combined Successor and Predecessor periods contained in the year ended December 31, 2021.

The following discussion and analysis of the Company’s results of operations and liquidity compares the combined results of the Successor and Predecessor periods of 2021 with the Predecessor Period of 2020, and the Predecessor Period of 2020 with the Predecessor Period of 2019.

The following discussion and analysis of our results of operations and liquidity compares the year ended December 31, 2022 with the combined results of the Successor and Predecessor periods of 2021.

The following table sets forth our consolidated statements of operations data for the periods indicated (dollars in thousands):

1 unchanged sentence

January 1, 2021

($s in thousands)

December 31, 2021

December 2, 2021

Operating revenue:

Capitated revenue

Other patient service revenue

Total revenue

Operating expenses:

Total operating revenue

Operating expense:

Medical expense

Premium deficiency reserve

Corporate, general & administrative expenses

Corporate, general & administrative expense

Sales and marketing expense

Amortization of intangible assets

Depreciation expense

Total operating expenses

Depreciation and amortization

Goodwill impairment

Total operating expense

Operating loss

3 unchanged sentences

Total other income (expense)

Net loss before income taxes

Loss before income taxes

Provision for income taxes

Net loss attributable to non-controlling interests

Net loss attributable to redeemable non-controlling interests

Net loss attributable to controlling interests

Capitated revenue was $57.2 million in the Successor Period of 2021.

Capitated revenue was $567.8 million in the Predecessor Period of 2021.

Capitated revenue was $625.0 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase of $144.2 million, or 30%, compared to $480.7 million for the year ended December 31, 2020.

This increase was driven primarily by a 32% increase in the total number of at-risk members from 50,600 at December 31, 2020 to 67,000 at December 31, 2021, as we increased the number of health plan contracts from twelve to seventeen and a 5% increase in capitation revenue rates, due to increased premiums from patients with a higher average level of acuity.

Capitated revenue was approximately 98% of total revenue for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

Capitated revenue was $480.7 million for the year ended December 31, 2020, an increase of $341.4 million, or 245%, compared to $139.3 million for the year ended December 31, 2019.

This increase was driven primarily by a 157% increase in the total number of at-risk members from 19,700 at December 31, 2019 to 50,600 at December 31, 2020, as we increased the number of health plan contracts from seven to twelve and an 8% increase in capitation revenue rates, due to increased premiums from patients with a higher average level of acuity.

Capitated revenue was approximately 98% of total revenue for the year ended December 31, 2020.

Other patient service revenue was $1.5 million in the Successor Period of 2021.

Other patient service revenue of $10.9 million in the Predecessor Period of 2021.

Other patient service revenue was $12.4 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase of $2.1 million, or 20%, compared to $10.3 million for the year ended December 31, 2020.

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 2% of total revenue for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

Other patient service revenue was $10.3 million for the year ended December 31, 2020, an increase of $4.2 million, or 69%, compared to $6.1 million for the year ended December 31, 2019.

Amounts may not sum due to rounding.

Capitated revenue was $1,034.8 million for the year ended December 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 ended December 31, 2021.

This increase was driven primarily by a 50% increase in the total number of at-risk members from 67,000 at December 31, 2021 to 100,400 at December 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 ended December 31, 2022 and 2021, respectively.

Other patient service revenue was $14.7 million for the year ended December 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 ended December 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 2% of total revenue for the year ended December 31, 2020.

Operating expenses

Other patient service revenue was approximately 1% and 2% of total operating revenue for the years ended December 31, 2022 and 2021, respectively.

Operating Expense

Medical Expense

Medical expense was $66.9 million in the Successor Period of 2021.

Medical expense was $592.5 million in the Predecessor Period of 2021.

Medical expense was $659.4 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase of $174.9 million, or 36%, compared to $484.5 million for the year ended December 31, 2020.

The increase was primarily driven by a 32% increase in the total number of at-risk members year-over-year and a 7% increase in the cost per patient.

Medical expense was $484.5 million for the year ended December 31, 2020, an increase of $343.5 million, or 244%, compared to $141.0 million for the year ended December 31, 2019.

The increase was consistent with our revenue growth and primarily due to a 157% increase in the total number of at-risk members year-over-year and a 9% increase in the cost per patient.

Medical expense was $1,057.2 million for the year ended December 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 ended December 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 ended December 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 ended December 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 expenses was $ 17.0 million in the Successor Period of 2021.

Corporate, general and administrative expenses of $100.2 million in the Predecessor Period of 2021.

Corporate, general and administrative expense was $117.2 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase of $63.8 million, or 119%, compared to $53.4 million for the year ended December 31, 2020.

The increase was primarily driven by $29.6 million of certain transaction expenses incurred in connection with the Business Combinations, an $7.9 million increase in stock-based compensation, primarily related to the vesting of certain awards in connection with the Business Combinations, $7.9 million incurred related to transaction related litigation fees, and increases in salaries and benefits of $17.9 million, as headcount increased 57% from December 31, 2020 to December 31, 2021.

Corporate, general and administrative expense was $53.4 million for the year ended December 31, 2020, an increase of $17.0 million, or 47%, compared to $36.4 million for the year ended December 31, 2019.

The increase was primarily driven by increases in salaries and benefits of $10.2 million, as headcount increased 75% from December 31, 2019 to December 31, 2020 and professional fees of $6.0 million.

Corporate, general and administrative expense was $157.3 million for the year ended December 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 ended December 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% from December 31, 2021 to December 31, 2022.

Sales and Marketing Expense

Sales and marketing expenses was $0.4 million in the Successor Period of 2021.

Sales and marketing expenses was $1.8 million in the Predecessor Period of 2021.

Sales and marketing expense was $2.2 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase of $0.7 million, or 47%, compared to $1.5 million for the year ended December 31, 2020.

The increase was driven by increases in community outreach spend and higher spending related to patient and provider marketing initiatives.

Sales and marketing expense was $1.5 million for the year ended December 31, 2020, an increase of $0.7 million, or 88%, compared to $0.8 million for the year ended December 31, 2019.

Sales and marketing expense was $5.1 million for the year ended December 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 ended December 31, 2021.

The increase was driven by increases in community outreach spend and higher spending related to patient and provider marketing initiatives.

Amortization Expense

Amortization of intangible assets was $7.0 million in the Successor Period of 2021 and was associated with definite lived intangible assets acquired in the Business Combinations, including trademarks and tradenames, customer contracts, provider network agreements and payor contracts.

Depreciation Expense

Depreciation expense was $0.2 million in the Successor Period of 2021.

Depreciation expense was $1.5 million in the Predecessor Period of 2021.

Depreciation expense was $1.7 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase of $0.9 million, or 113%, compared to $0.8 million for the year ended December 31, 2020.

The increase was primarily driven by increased amortization of internally developed software.

Depreciation expense was $0.8 million for the year ended December 31, 2020, an increase of $0.4 million, or 100%, compared to $0.4 million for the year ended December 31, 2019.

The increase was driven by increased amortization of internally developed software and an increase in plant, property and equipment associated with opening clinics.

Premium Deficiency Reserve

Premium deficiency reserve was $26.2 million in the Successor Period of 2021.

Premium deficiency reserve was $11.6 million in the Predecessor Period of 2021.

Premium deficiency reserve was $37.8 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase of $58.4 million compared to a credit of $20.5 million for the year ended December 31, 2020.

The increased expense was driven by the lack of a premium deficiency reserve liability at December 31, 2020, which resulted in a credit of $20.5 million of premium deficiency reserve for the year ended December 31, 2020.

The premium deficiency reserve liability recorded on the accompanying consolidated balance sheets was $37.8 million and $0 million at December 31, 2021 and December 31, 2020, respectively.

Management included a premium deficiency reserve liability of $37.8 million at December 31, 2021, based on its estimate of probable capitated contract losses during the year ending December 31, 2022.

Premium deficiency reserve was a credit of $20.5 million for the year ended December 31, 2020, a decrease of $26.9 million compared to an expense of $6.4 million for the year ended December 31, 2019.

The decreased expense was driven by the lack of a premium deficiency reserve liability at December 31, 2020 and maturation of P3’s overall contractual arrangements.

The premium deficiency reserve liability was $20.5 million and $0 at December 31, 2019 and December 31, 2020, respectively.

Management included a premium deficiency reserve liability of $20.5 million at December 31, 2019, based on its estimate of probable capitated contract losses during the year ended December 31, 2020, primarily related to the Company’s newly contracted health plans.

From December 31, 2019 to December 31, 2020, the number of health plan contracts expanded from 7 to 12.

During this period, the number of at-risk members in the P3 network increased significantly from 19,700 to 50,600, with new members reflecting greater than 60% of total members.

No premium deficiency reserves were recorded as of December 31, 2020 given the maturation of P3’s overall contractual arrangements and the associated members.

Other (Income)/Expense

Interest expense, net, was $1.3 million in the Successor Period of 2021.

Interest expense, net, was $9.7 million in the Predecessor Period of 2021.

Interest expense, net, was $11.0 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase of $8.5 million compared to $2.5 million for the year ended December 31, 2020.

The increase was primarily due to interest associated with the Company’s Term Loan Facility.

Interest expense, net, was $2.5 million for the year ended December 31, 2020, compared to $2.5 million for the year ended December 31, 2019, and was primarily due to interest associated with the Company’s Term Loan Facility.

A mark-to-market of stock warrants gain of $2.3 million and loss of $7.7 million were recorded in the Successor and Predecessor Periods of 2021, respectively, for the change in the fair value on the revaluation of warrant liabilities associated with our public, private placement and forward purchase warrants.

Other expense was $0.3 million for the year ended December 31, 2020, an increase of $0.4 million compared to other income of $0.1 million for the year ended December 31, 2019.

The increase was primarily due to increased non-income related taxes.

Provision for Income Taxes

The provision for income taxes was zero in the Successor Period of 2021 and the Predecessor Periods of 2021, 2020 and 2019.

As a result of the Business Combinations, substantially all of the Company’s assets and operations are held and conducted by P3 LLC and its subsidiaries, and the Company’s only assets are equity interest in P3 LLC.

P3 LLC is treated as a partnership for U.S.

federal and most applicable state and local income tax jurisdictions.

As a partnership, P3 LLC is generally not subject to U.S.

federal, state and local income taxes.

Any taxable income or loss generated by P3 LLC is passed through to and included within the taxable income or loss of its members.

Prior to the Business Combinations, the income and losses of P3 LLC was passed through to its members and nontaxable to P3 LLC.

Net loss was $57.9 million in the Successor Period of 2021.

Net loss was $146.4 million in the Predecessor Period of 2021.

Net loss was $204.3 million in the combined Successor and Predecessor periods of 2021 compared with $31.4 million in the Predecessor Period of 2020.

The $172.9 million increase primarily reflects a $305.7 million increase in total operating expenses, a $8.5 million increase in interest expense, net, a $5.4 million increase in mark-to-market of stock warrants, partially offset by a $146.3 million increase in total operating revenue.

Net loss was $31.4 million in the Predecessor Period of 2020 compared with $42.0 million in the Predecessor Period of 2019.

The $10.6 million decrease in net loss primarily reflects a $345.6 million increase in total operating revenue, largely offset by a $334.7 million increase in total operating expenses.

Supplemental Unaudited Presentation of Consolidated Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure.

Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP.

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.

Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.

The definition of Adjusted EBITDA may not be the same as the definitions used in any of our debt agreements.

By definition, EBITDA consists of net income (loss) before interest, income taxes, depreciation and amortization.

We define Adjusted EBITDA as EBITDA, further adjusted to add back the effect of certain expenses, such as mark-to-market warrant expense, premium deficiency reserves, stock-based compensation expense and transaction expenses.

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 above and not rely on any single financial measure to evaluate our business.

The following table sets forth a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP measure, using data derived from our unaudited consolidated financial statements for the periods indicated (dollars in thousands):

December 3, 2021

January 1, 2021

through December

($s in thousands)

2020 (As Restated)

Interest expense, net

Certain non-income related taxes

Amortization expense

Depreciation expense

Mark-to-market of stock warrants

Premium deficiency reserve

Transaction expense, Business Combinations

Transaction related litigation expense

Stock-based compensation

Adjusted EBITDA (loss)

Depreciation and Amortization Expense

Depreciation and amortization expense was $87.3 million for the year ended December 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 year December 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 ended December 31, 2022.

Goodwill Impairment

During the year ended December 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 income was $2.8 million for the year ended December 31, 2022, compared to other expense of $0.3 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

During the year ended December 31,

2022, we recorded income of $2.5 million related to the release of indemnity funds previously escrowed as part of the Medcore Acquisition.

Provision for income taxes was $1.9 million for the year ended December 31, 2022 which primarily consisted of Oregon corporate activity tax, a quasi-gross receipts tax that is levied on our Oregon sourced revenue.

Liquidity and Capital Resources

To date, we have financed our operations principally through the Business Combinations, private placements of our equity securities, payments from our payors and borrowings under the Term Loan and Security Agreement, as amended (the “Term Loan Facility”).

We generate cash primarily from our contracts with payors.

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.

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 of December 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 four years and the investments we intend to make in expanding our business, which will require up-front expenses.

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 the Company’s growth trajectory to accommodate its capital needs and look for additional ways to generate cost efficiencies.

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.

In November 2020, the Company entered a Term Loan and Security Agreement with CRG 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 is December 31, 2025.

As of December 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 on February 28, 2022.

Interest is payable at 12.0% per annum on a quarterly cycle (in arrears), which began on March 31, 2021.

In March 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.

In connection with the issuance of the VGS Promissory Note and entry into the Subordination Agreement (as described below), on December 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

On December 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 on December 13, 2022, (ii) a second tranche of up to $15.0 million in a single draw at our option after January 5, 2023, and (iii) a third tranche of up to $10.0 million available at our option in a single draw after January 5, 2023 and on or prior to February 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 from March 1, 2023 through June 30, 2023, 4.5%;

(ii) if paid from July 1, 2023 through December 31, 2023, 6.75% and (iii) if paid on January 1, 2024 or later, 9.0%.

The maturity date of the Promissory Note is May 19, 2026.

Interest is payable at 14.0% per annum on a quarterly cycle (in arrears) beginning March 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 or P3 LLC is disposed.

In connection with the issuance of the VGS Promissory Note, we also entered into a subordination agreement, dated as of December 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 of December 31, 2022, $15.0 million had been drawn on the VGS Promissory Note.

Between January and March 2023, we borrowed a total of $12.9 million on the VGS Promissory Note and have $12.1 million in remaining borrowing capacity.

As of December 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 ended December 31, 2022.

We were in compliance with all other covenants under the Term Loan Facility and VGS Promissory Note as of December 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.

Repurchase Promissory Note

In June 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 in November 2020.

The amended agreement stipulated that the Repurchase Promissory Note would automatically mature and be due and payable on the earlier of June 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 at December 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.

On March 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.

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.

Following the completion of the Business Combinations (the “Closing”) on December 3, 2021, substantially all of P3’s assets and operations are held and conducted by P3 LLC, the surviving company post-combination.

The ability of P3 Health Partners Inc.

to pay taxes, make payments under the Tax Receivable Agreement 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 P3 needs 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 the liquidity and financial condition of P3.

It is anticipated that the distributions P3 will receive from P3 LLC may, in certain periods, exceed the actual tax liabilities and obligations to make payments under the Tax Receivable Agreement.

Tax Receivable Agreement

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 of P3 LLC when its units are redeemed or exchanged.

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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 million if all P3 Equityholders redeem or exchange their P3 LLC 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 combined U.S.

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 combined U.S.

federal and state income tax rate of 23.89% and (d) no material changes in tax law.

The potential future tax benefits are currently estimated to be $5.4 million, of which $4.6 million is estimated to be the associated TRA liability.

The TRA liability is estimated to be $4.6 million as of December 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.

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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.

As of the date of this report, we believe that our existing cash resources are not sufficient to support planned operations for at least the next year from the issuance of this Annual Report on Form 10-K.

This evaluation of our cash resources available over the next twelve months from the date of this filing does not take into consideration the potential mitigating effect of 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, the maturity of our members, and our ability to raise capital.

The following table summarizes current and long-term material cash requirements as of December 31, 2022 (in thousands):

Material Cash Requirements

Unpaid claims (1)

Long-term debt, principal (2)

Long-term debt, interest (3)

Operating lease liabilities (4)

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 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 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 amounts outstanding as of December 31, 2022 as summarized in Note 12 “Debt” in our consolidated financial statements.

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 the Company’s 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 We expect to continue to incur net losses, comprehensive losses, and negative cash flows from operating activities in accordance with our operating plan.

As of the date of this report, we believe that our existing cash resources are not sufficient to support planned operations.

The matters discussed above raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.

The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

The following discussion of our cash flows is based on the consolidated statements of cash flows.

The following table sets forth summarized cash flows for the periods indicated (dollars in thousands):

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 December 31, 2022, has also expressed substantial doubt about our ability to continue as a going concern.

The following table summarizes our cash flows (in thousands):

December 3, 2021

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through December

($s in thousands)

Net cash used in operating activities

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Net change in cash

Cash at beginning of year/period

Cash at end of year/period

Operating Activities

Net cash used in operating activities of $15.3 million in the Successor Period of 2021.

Net cash used in operating activities was $51.1 million in the Predecessor Period of 2021.

Net cash used in operating activities was $66.5 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, an increase in net cash used of $41.9 million compared to net cash used in operating activities of $24.6 million for the year ended December 31, 2020.

Significant changes impacting net cash used in operating activities during the year ended December 31, 2021 as compared to the year ended December 31, 2020 were as follows:

● a $172.9 million increase in our net loss from $31.4 million in 2020 to $204.3 million for the combined Successor and Predecessor periods of 2021, driven in part by a $62.1 million increase in certain non-cash expenses including depreciation, amortization, mark-to-market adjustments for warrants, stock-based compensation and premium deficiency reserves, $29.6 million of transaction expenses incurred in connection with the Business Combinations and $7.9 million of expenses for transaction related litigation fees;

the net loss also reflects the performance in our capitated contracts, as the total number of at-risk members increased 32% from 50,600 at December 31, 2020 to 67,000 at December 31, 2021, as described above;

● an increase in our claims payable for the year ended December 31, 2021 of $18.1 million compared to an increase in our claims payable for the year ended December 31, 2020 of $37.1 million;

● a decrease in our net health plan receivables for the year ended December 31, 2021 of $0.5 million compared to an increase in our net health plan receivables for the year ended December 31, 2020 of $27.5 million

Net cash used in operating activities was $24.6 million for the year ended December 31, 2020, a decrease of $3.7 million compared to net cash used in operating activities of $28.3 million for the year ended December 31, 2019.

Significant changes impacting net cash used in operating activities for the year ended December 31, 2020 as compared to the year ended December 31, 2019 were as follows:

● increases in claims payable for the year ended December 31, 2020 of $37.1 million compared to increases in claims payable for the year ended December 31, 2019 of $12.1 million, primarily driven by growth in at-risk members;

● increases in accounts payable, accrued payroll and accrued interest for the year ended December 31, 2020 of $12.3 million compared to increases for the year ended December 31, 2019 of $3.5 million, primarily driven by growth in the Company’s operations;

● increases in health plan payable for the year ended December 31, 2020 of $8.8 million compared to increases in health plan payable for the year ended December 31, 2019 of $1.9 million, primarily driven by growth in at-risk members;

● offset by increases in health plan receivables for the year ended December 31, 2020 of $27.5 million compared to increases in health plan receivables for the year ended December 31, 2019 of $9.7 million, primarily driven by growth in at-risk members;

● offset by increases in other current assets for the year ended December 31, 2020 of $4.2 million compared to increase in other currents assets for the year ended December 31, 2019 of $0.1 million.

Net cash used in operating activities was $126.0 million for the year ended December 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 ended December 31, 2021.

Significant changes impacting net cash used in operating activities during the year ended December 31, 2022 as compared to the year ended December 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 $47.9 million in the Successor Period of 2021.

Net cash used in investing activities was $8.2 million in the Predecessor Period of 2021.

Net cash used in investing activities was $56.1 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021 compared to $3.2 million for the year ended December 31, 2020.

The $52.9 million increase was primarily driven by the acquisitions of P3 LLC, Medcore HP and Omni for a total cash payment of $47.9 million, net of cash acquired, and the acquisition of three medical practices in 2021 for a total purchase price of $5.0 million.

Net cash used in investing activities was $3.2 million for the year ended December 31, 2020 compared to $3.9 million for the year ended December 31, 2019.

The decrease in net cash used in investing activities was primarily a result of decreased note receivables issued offset by increased capital investments in property and equipment.

Net cash used in investing activities was $7.7 million for the year ended December 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 ended December 31, 2021, primarily consisting of the cash paid for the Business Combinations and Medcore Acquisition.

Financing Activities

Net cash provided by financing activities was $198.7 million in the Successor Period of 2021.

Net cash provided by financing activities was $24.8 million in the Predecessor Period of 2021.

Net cash provided by financing activities was $223.5 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021 compared to net cash provided by financing activities of $34.8 million for the year ended December 31, 2020.

The $188.7 million increase primarily related to proceeds from the Business Combinations.

Net cash provided from financing activities was $34.8 million for the year ended December 31, 2020 compared to $63.6 million for the year ended December 31, 2019, a decrease of $28.8 million.

The decline in financing activities was primarily a result of the decrease in units issued, partially offset by an increase in proceeds from long-term debt and a decrease in repayment of long-term debt.

Contractual Obligations and Commitments

Our principal commitments consist of repayments of unpaid claims, long-term debt on term loans, unsecured debt and operating leases for our facilities.

The following table summarizes our contractual obligations as of December 31, 2021:

Payments due by Period

Unpaid claims

Short-term debt

Unsecured debt

Operating lease obligations

Current portion of long-term debt

Unpaid claims

As of December 31, 2021, we estimated a balance of unpaid claims due to third parties for health care services provided to members, including estimates for incurred but not reported claims, of $ 102.0 million.

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 members, changes in member mix or simply due to addition of new members.

As of December 31, 2021, our Term Loan Facility provide for funding of up to $100.0 million.

The Term Loan Facility’s maturity date is December 31, 2025.

As of December 31, 2021, 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 on February 28, 2022.

Interest is payable at 12.0% per annum on a quarterly cycle (in arrears) beginning March 31, 2021.

Commencing in March 2021, we have elected to pay 8.0% with the remaining 4.0% being added to principal as “paid in kind” (“PIK”) for a period of three years (or twelve payments), in lieu of the full 12.0% in cash.

We were required to meet a borrowing base milestone by demonstrating to the lenders that revenue for any three consecutive month period (ending after the Term Loan Facility’s closing date, but on or prior to December 31, 2021) was greater than or equal to $125.0 million.

Additionally, we must remain in compliance with financial covenants such as minimum liquidity of $5.0 million and annual minimum revenue levels.

In addition, the Term Loan Facility restricts our ability and the ability of our subsidiaries to, among other things, incur indebtedness and liens.

Beginning in 2021, and on an annual basis thereafter, the Company must post a minimum amount of annual revenue equal to or greater than $395.0 million;

increasing to $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 agreement, or in the event a mandatory prepayment event occurs.

As of December 31, 2021, the Company was not in compliance with its Term Loan covenants related to issuance of the 2021 financial statements with an audit opinion free of a “going concern” qualification or timely filing of the 2021 financial statements.

The Term Loan lenders granted (i) a waiver of the covenant under the Facility related to the existence of a “going concern” qualification in the audit opinion for our audited financial statements for the fiscal year ended December 31, 2021 and (ii) a consent to extend the deadline to provide audited financial statements for the year ended December 31, 2021 to October 21, 2022.

We were in compliance with all other covenants under the Facility as of December 31, 2021.

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 Facility or the lenders of any future indebtedness we may incur will grant us any such waiver or forbearance in the future.

Unsecured Debt

As of December 31, 2021, we have a $15.0 million unsecured note with a former equity investor.

The note carries interest of 11.0% per year.

The principal balance plus accrued interest is due at maturity, which is the earlier of June 30, 2026 or a change in control transaction.

The Transaction pertaining to P3’s business combination with Foresight does not constitute a change in control.

As of December 31, 2021, accrued interest totaled $6.5 million on this note.

For additional discussion of our unpaid claims, term loan, unsecured debt and, operating and finance leases, see Note 15 “Claims Payable”, Note 16 “Debt”, and Note 22 “Leases” in our consolidated financial statements as of and for the period ended December 31, 2021 included elsewhere in this Annual Report on Form 10-K.

Net cash provided from financing activities was $11.4 million for the year ended December 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 year December 31, 2021, primarily consisting of $195.3 million of proceeds from the issuance of PIPE Shares.

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act.

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Actual results could differ from those estimates.

For a more detailed discussion of our significant accounting policies, see Note 4 “Significant Accounting Policies” in our consolidated financial statements included elsewhere in the Annual Report on Form 10-K.

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.

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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”), the Company’s PMPM payments will change commensurately with how our contracted Medicare Advantage plans’ premiums change with CMS.

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 revenues are 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.

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.

Healthcare Services Expense and Claims Payable (collectively, “Medical Expense”)

Medical Expense and Claims Payable

The cost of healthcare services is recognized in the period services are provided.

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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 $102.0 million and $56.9 million on our balance sheet as of December 31, 2021 and December 31, 2020, respectively.

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, 2021 were to differ by plus or minus 5%, the impact on medical claims expense would be approximately $5.1 million for the combined Predecessor and Successor periods.

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.

Warrant Liability

The Company has public and private placement warrants, and we account for the warrants in accordance with the guidance contained in ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities.

Accordingly, we classify the warrants as liabilities at their fair value and adjust the warrants to fair value at each reporting period.

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 placement warrants are publicly traded and are recorded at fair value using the closing price as of the measurement date.

The fair value of the private placement warrants have no observable traded price and are valued using an option pricing model (Black-Scholes-Merton).

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.

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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, which is 5 years from the closing of the Business Combinations.

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.

See Note 4 “Significant Accounting Policies” of the accompanying consolidated financial statements for additional information.

Goodwill and Other Identified Intangible Assets

Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired in a business combination and is measured in accordance with the provisions of ASC Topic 350 , Intangibles—Goodwill and Other.

Under ASC Topic 350, goodwill is not amortized and instead is tested for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist.

The Company has determined that there is only one reporting unit for purpose of testing goodwill impairment.

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, and we estimate the fair value of our reporting unit using a weighted combination of income approach and market-based approach.

The income approach estimates the fair value by discounting each reporting unit’s estimated future cash flows using the company estimate of the discount rate, or expected return, that a market participant would have required as of the valuation date.

Significant assumptions in the income approach, all of which are considered Level 3 inputs, include the estimated future net annual cash flows for each reporting unit and the discount rate.

Under the market approach, we estimated a fair value based on comparable companies’ market multiples of revenues and EBITDA.

Publicly traded companies in the same industry and target companies of transactions with similar nature were selected as guideline companies for the market-based method.

Finally, management compared the weighted estimates to the carrying amount.

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 2021, we completed the required annual assessment of goodwill for impairment for our reporting unit using a qualitative assessment and determined that quantitative assessment of goodwill impairment was not required (i.e., it is more likely than not that the fair value of goodwill exceeds the carrying amount), and no goodwill impairment was recognized for the year ended December 31, 2021.

The Company reviews 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.

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 ended December 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.

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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 Statements of Operations in the period that includes the enactment date.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our consolidated

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.

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Premium Deficiency Reserves

Accounting Standards Codification (“ASC”) ASC 954-450-30-4 requires a premium deficiency reserve (“PDR”) when there is a probable future loss on unearned capitated premiums after estimated expected claim costs and claim adjustment expenses.

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 P3’s at-risk arrangements, the more we improve health outcomes and lower the overall cost of care, the more profitable we will be over time.

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.

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The Company’s PDR represents management’s best estimate of its probable future losses.

We have included premium deficiency reserve liabilities of $37.8 million and $0 million on our accompanying consolidated balance sheet as of December 31, 2021 and December 31, 2020, respectively.

Unit-based Compensation

ASC 718, Compensation—Stock Compensation (“ASC 718”) requires the measurement of 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 P3’s 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.

We have included premium deficiency reserve liabilities of $26.4 million and $37.8 million on our accompanying consolidated balance sheets as of December 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.

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Recent Accounting Pronouncements

See Item 8, Note 5 “Recent Accounting Pronouncements Adopted” in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of recent accounting standards issued and the anticipated effects on our consolidated financial statements.

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.

Quantitative and Qualitative Disclosures About Market Risk.

Not required for Smaller Reporting Companies.

Financial Statements and Supplementary Data.

The financial statements required to be filed pursuant to this Item 8 are appended to this report.

An index of those financial statements is found in Item 15 of Part IV of this Form 10-K.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis