Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief
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Executive Officer and Chief Financial Officer concluded that, due to the material weaknesses described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2021.
Material Weaknesses
In connection with the audit of our financial statements for the year ended December 31, 2021, and as previously reported, the restatement of the Company’s financial statements for the years ended December 31, 2020 and 2019 as more fully described in Note 2 “Restatement of Previously Issued Financial Statements” to our consolidated financial statements in “Item 15. Exhibits and Financial Statement Schedules” of this Annual Report on Form 10-K, we concluded that there were material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that the Company had the following material weaknesses in its internal control over financial reporting:
Control Environment, Risk Assessment and Monitoring Activities
We did not maintain appropriately designed entity-level controls impacting the control environment, risk assessment procedures, and effective monitoring activities to prevent or detect material misstatements to the consolidated financial statements. These material weaknesses are specifically attributed to the following:
● We did not have adequate policies and procedure or sufficient qualified resources with sufficient technical knowledge to maintain effective controls over the accounting related to significant accounts and related financial statement disclosures.
● We did not design and implement a sufficient risk assessment process to identify and assess risks impacting control over financial reporting.
● We had ineffective evaluation and determination as to whether the components of internal control were present and functioning.
Control Activities and Information and Communication
As a consequence of these entity-level material weaknesses, we did not design, implement, and maintain effective control activities within certain business processes and the information technology environment to mitigate the risk of material misstatement in financial reporting. Specifically:
● We did not maintain effective controls over our information systems to ensure that relevant and reliable information was communicated on a timely basis across the organization to support the financial reporting process. Particularly:
o We did not design and implement effective information technology general controls in the areas of user access related to certain information technology systems that support our financial reporting process.
o We did not maintain sufficient segregation of duties over the performance of control activities for financial close and reporting, including over the review of account reconciliations and journal entries.
● We did not design and maintain effective management review controls at a sufficient level of precision over the accounting for transactions related to the risk adjustment factor receivable and related revenue,
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capitated revenue classification, premium deficiency reserves, business combinations, goodwill and intangibles, income taxes, warrant valuation, and equity awards. This material weakness resulted in certain material corrections to the financial statements.
● We did not design and maintain effective controls at a sufficient level of precision over the estimation of claims expense and payable including controls over the review of historical claims data, including the completeness and accuracy of data used to determine the financial statement amounts.
● We did not design and maintain effective controls over accounting for complex transactions, including the inaccurate attribution of net income or loss to the controlling and non-controlling interest pursuant to ASC 810 for subsidiaries that are variable interest entities, the improper classification of the Class A Units as permanent equity instead of temporary equity, and the improper accounting of preferred returns in equity and interest expense, as no recognition is necessary until legally declared. This material weakness resulted in the restatement discussed in Note 2 to the financial statements included herein.
Remediation Activities
We have taken and are taking steps to remediate these material weaknesses through (i) hiring qualified accounting, financial reporting, IT, and other key management personnel with public company experience, (ii) engaging an external advisor to assist with documenting internal controls, including enhancing controls to ensure proper communication of critical information, review and approvals; evaluating effectiveness of internal controls and assist with the remediation of deficiencies and training of personnel, as necessary, and establishment of a formal internal audit function and (iii) enhancing policies, procedures, and documentation for significant areas of accounting, including each area where a material weakness was identified. We are still in the process of implementing these steps and cannot assure investors that these measures will significantly improve or remediate the material weaknesses described above.
Management’s annual report on internal control over financial reporting
As disclosed elsewhere in this Annual Report on Form 10-K, we completed the Business Combinations on December 3, 2021. Prior to the Business Combinations, our predecessor, Foresight, was a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, recapitalization, reorganization, or similar business combination with one or more businesses. As a result, previously existing internal controls were no longer applicable or comprehensive enough as of the assessment date, as Foresight’s operations prior to the Business Combinations were insignificant compared to those of the consolidated entity post-Business Combinations. Therefore, management was unable, without incurring unreasonable effort or expense, to complete an assessment of our internal control over financial reporting as of December 31, 2021. Accordingly, we are excluding management’s report on internal control over financial reporting pursuant to Section 215.02 of the SEC Division of Corporation Finance’s Regulation S-K Compliance & Disclosure Interpretations.
Changes in internal control over financial reporting
On December 31, 2021, we completed the acquisition of Medcore HP and Omni IPA Medical Group, Inc. Together, those acquired businesses represent 3.0% of total assets and 0.0% of total revenues as of and for the year ended December 31, 2021. We have not completed an assessment of internal control over financial reporting for these businesses, and we are in the process of design and implementation of our internal control over financial reporting for the acquired entities in a manner commensurate with our operations subsequent to the acquisition.
Other than the design and implementation of internal controls related to this acquisition and the actions to remediate the material weaknesses in our internal control over financial reporting as described above, both of which were ongoing as of the date of issuance of this Annual Report on Form 10-K, and the material weaknesses noted above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table provides information regarding our executive officers and members of our board of directors (ages as of the date of this Annual Report on Form 10-K):
Name
Age
Position
Executive Officers
Sherif Abdou, M.D.
62
Chief Executive Officer, Director and Co-Founder
Amir Bacchus, M.D.
58
Chief Medical Officer, Director and Co-Founder
Eric Atkins
37
Chief Financial Officer
Non-Employee Directors
Mark Thierer
62
Chairman of the Board
Greg Wasson
63
Director
Lawrence B. Leisure
72
Director
Mary Tolan
62
Director
Greg Kazarian
60
Director
Thomas E. Price, M.D.
68
Director
Jeffrey G. Park
50
Director
Sherif Abdou, M.D. is a Co-founder of P3 and has served as P3’s Chief Executive Officer and on the Legacy P3 Board of Managers since 2017 and as a Director of the Company since December 2021. Dr. Abdou served as Chief Executive Officer of P3 Health Group from 2015 to 2017. Dr. Abdou received a Bachelor of Medicine and Surgery degree from Mansoura University and a Master of Medical Management degree from the University of Southern California. Dr. Abdou was selected to serve on our board of directors for his experience in the healthcare industry, his role as one of P3’s founders and his service as P3’s Chief Executive Officer.
Amir Bacchus, M.D. is a Co-founder of P3 and has served as P3’s Chief Medical Officer and on the Legacy P3 Board of Managers since 2017 and as a Director of the Company since December 2021. Dr. Bacchus served as Chief Medical Officer of P3 Health Group from 2015 to 2017. Dr. Bacchus served as a director of the University of Nevada, Las Vegas—School of Medicine Advisory Board, a position he held from 2014 to 2020. Dr. Bacchus received a Bachelor of Arts degree from California State University, Northridge, a Doctor of Medicine from Wayne State University School of Medicine and an MBA from the University of Nevada, Las Vegas. Dr. Bacchus was selected to serve on our board of directors for his experience in the healthcare industry, his role as one of P3’s founders and his service as P3’s Chief Medical Officer.
Eric Atkins has served as P3’s Chief Financial Officer since January 2021. Prior to joining P3, Mr. Atkins served as Chief Financial Officer of Sprout Pharmaceuticals, Inc., a virtual pharmaceutical manufacturer, from December 2017 to August 2020. From September 2015 to August 2017, Mr. Atkins served as Vice President Finance, Front Line Care, of Hill-Rom Holdings, Inc., a medical device manufacturer. Mr. Atkins received a Bachelor of Science in Accounting and a Bachelor of Science in Finance from the University of Illinois, Urbana-Champaign and an MBA from Northwestern University. Mr. Atkins is a registered certified public accountant in the state of Illinois.
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Mark Thierer has served as a Director of the Company since December 2021 and an advisor to Foresight since October 2020. Mr. Thierer currently serves as the managing partner of the investment firm he formed, AssetBlue Investment Group, a position he has held since June 2017. From October 2017 through February 2018, Mr. Thierer also served as the interim Chief Executive Officer of Dentsply Sirona Inc. (Nasdaq: XRAY), a manufacturer of dental implants. Mr. Thierer was Chief Executive Officer of OptumRx, a pharmacy care services company, from July 2015 until September 2017. He previously served as chairman and Chief Executive Officer of Catamaran Corporation (Nasdaq: CTRX), one of the nation’s largest pharmacy benefit management companies, from March 2011 until it combined with OptumRx in 2015. Mr. Thierer has experience as a Chief Executive Officer leading a national pharmacy benefit and healthcare information technology solutions company. His skills include strategy and business development, technology, finance and marketing. He brings valuable leadership experience and knowledge of operations and the day-to-day management of a national corporation. Mr. Thierer also has experience in the structuring and execution of strategic corporate transactions, including mergers and acquisitions. Mr. Thierer is a member of the board of directors of Discover Financial Services (NYSE: DFS) since 2014 and Senior Connect Acquisition Corp. (Nasdaq: SNRH). Mr. Thierer received a BS in Finance from the University of Minnesota and an MBA from Nova Southeastern University. Mr. Thierer also holds the designation of CEBS (Certified Employee Benefits Specialist) from The Wharton School of the University of Pennsylvania. Mr. Thierer was selected to serve on our board of directors for his extensive experience in both the financial and healthcare sectors.
Greg Wasson has served continually as a director of P3 Health Partners Inc. and it’s predecessor, Foresight Acquisition Corp, since November 2020. Mr. Wasson currently serves as President and Founder of his own family office, Wasson Enterprise. Wasson Enterprise’s focus is to partner with entrepreneurs and operators to build sustainable, high-growth businesses that do well by doing good. As the former President and CEO of Walgreens Boots Alliance, Inc., Mr. Wasson has extensive global operational and management experience, as well as extensive knowledge of the retail and healthcare industries. Mr. Wasson attended Purdue University’s School of Pharmacy, receiving his pharmacy degree in 1981. Before his senior year, he was invited to become one of the first pharmacy services interns in Walgreens’ corporate offices—an opportunity that led to his being hired by Walgreens upon graduation and that changed the course of his future career. Mentored by many company leaders through the years, together with his outstanding performance in positions of increasing responsibility, Mr. Wasson served Walgreens for 34 years. As Walgreens CEO, Mr. Wasson led the Fortune 35 company to record fiscal 2014 sales of $76.4 billion. He is credited with creating significant financial and shareholder value, initiating and completing transformative mergers and investments, leading complex organizational and structural change, assembling a diverse and high- performance senior leadership team, and establishing Walgreens’ position as an industry leader. Before retiring from Walgreens, Mr. Wasson had transformed an iconic 114-year-old domestic company into the first global pharmacy-led, health, well-being and beauty enterprise via the successful merger with European-based Alliance Boots to create Walgreens Boots Alliance, Inc. Mr. Wasson currently serves on the Board of Directors of OptimizeRx Corp. (Nasdaq: OPRX), a position he has held since August 2020. Mr. Wasson also served on the Board of Directors of PNC Financial Services Group, Inc. (NYSE: PNC) from July 2015 to October 2018 and Verizon Communications Inc. (NYSE: VZ) from February 2013 to October 2018. Mr. Wasson was selected to serve on our board of directors for his deep experience as an executive in the healthcare services industry and broad industry relationships.
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Lawrence B. Leisure has served as a Director of the Company since December 2021 and on the Legacy P3 Board of Managers since April 2017. Mr. Leisure co-founded and has served as a Managing Partner of Chicago Pacific Founders, a private equity fund focused exclusively on healthcare services and senior living, since 2014. Mr. Leisure currently serves as a director of BioIntelliSense, a position he has held since January 2019, a director of Xsell Technology, a position he has held since December 2015. Mr. Leisure also served as a director of MyGrove, from January 2012 to June 2021. Mr. Leisure currently serves as a manager of Recovery Ways Holdings, a position he has held since July 2014, a manager of Sage Veterinary Partners, LLC, a position he has held since July 2018, a manager of Chicago Pacific Capital, L.P., a position he has held since July 2014, a manager of Chicago Pacific Founders UGP I, a position he has held since July 2014, a manager of Chicago Pacific Founders UPP II, a position he has held since June 2019, a manager of Wellbe Senior Medical, LLC, a position he has held since March 2019, a manager of Impact Advisors Holdings, LLC, a position he has held since December 2019, and a manager of Allymar Health Solutions, LLC, a position he has held since March 2021. Mr. Leisure also served as a manager of FEMG Holdings, LLC, from August 2018 to July 2021. He also serves on the board of IrsVision, and Cahrus Technologies, both early-stage startup companies. From a not-for-profit perspective, he is a Senior Advisor to the Byers Center for BIODESIGN at Stanford University, a member of the Board of Advisors of the UCLA Anderson School of Management, and Chair of the Advisory Board of the UCSF Rosenman Institute. Mr. Leisure received a Bachelor of Arts degree from Stanford University and an MBA degree from the University of California, Los Angeles. Mr. Leisure was selected to serve on our board of directors for his deep experience in value-based healthcare delivery models and broad industry relationships.
Mary Tolan has served as a Director of the Company since December 2021 and on the Legacy P3 Board of Managers since April 2017. Ms. Tolan co-founded and has served as a Managing Partner of Chicago Pacific Founders, a private equity fund focused exclusively on healthcare services, technology and healthcare real estate, since 2014. Previously, Ms. Tolan was the founder of R1 RCM, Inc. (Nasdaq: RCM), a provider of comprehensive end-to-end healthcare revenue-cycle management services and population health management services infrastructure. Prior to R1 RCM, Ms. Tolan was a Group Chief Executive at Accenture, the global management consulting, technology services, and outsourcing company. Ms. Tolan currently serves as a director of Tredence, Inc., Atrio, WellBe, Duo, Peeq, Novum Health, SightMD, and Ascend. Ms. Tolan serves on the Board of Trustees for the University of Chicago. Ms. Tolan received a Bachelor of Business Administration degree from Loyola University and an MBA from the University of Chicago. Ms. Tolan was selected to serve on our board of directors for her extensive experience in value-based care as an executive in the healthcare services industry and her investing experience.
Greg Kazarian has served as a Director of the Company since December 2021 and on the Legacy P3 Board of Managers since May 2017. Mr. Kazarian has served as an Operating Partner of Chicago Pacific Founders since 2014. Mr. Kazarian currently serves as a director of Recovery Ways Holdings, LLC, a position he has held since July 2014, and a director of CPF Outpatient Holdings, LLC, a position he has held since October 2020. Mr. Kazarian was one of the four Executive Officers of Accretive Health (now R1 RCM, Inc. (Nasdaq: RCM)) a provider of comprehensive end-to-end healthcare revenue-cycle management services and population health management services infrastructure. Mr. Kazarian served in a variety of roles during his tenure at Accretive Health including General Counsel, Head of the Physician Advisory Services Business and Senior Vice President of Operations with P&L responsibility for one third of the Company’s revenue cycle business. Prior to joining Accretive Health, Mr. Kazarian was a partner at Pedersen and Houpt in Chicago, where he spent 16 years representing mid-sized growth companies. Mr. Kazarian received his law degree and his Bachelor of Science degree in Biophysics from the University of Illinois. Mr. Kazarian was selected to serve on our board of directors for his experience as an executive in the healthcare services industry and his investing experience.
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Thomas E. Price, M.D. has served as a Director of the Company since December 2021 and on the Legacy P3 Board of Managers since January 2018. Dr. Price currently serves as a director of Triumph Orthopedics, LLC, a position he has held since 2021, a sole director of HealthWiseFirst, LLC, a position he has held since 2018, a director of Association Health Plans of America, LLC, a position he has held since 2018, a director of Transformation Care Network, LLC, a position he has held since 2020, a director of Botanicals Sciences, LLC, a position he has held since 2020, a director of Capital Ministries (non-profit), a position he has held since 2018. Dr. Price entered private medical practice in 1984, returned to Emory University as an assistant professor of orthopedic surgery in 2002 and subsequently serviced as director of the orthopedic clinic at Atlanta’s Grady Memorial Hospital. Dr. Price served in the US House of Representatives from Georgia’s 6th district from 2005 to 2017, during which time he served as Chair of the House Budget Committee from 2015 to 2017. In February 2017, he was confirmed by the Senate as the United States Secretary of Health and Human Services (HHS) and remained in that position until September 2017. Currently, Dr. Price serves on the boards of several privately held health care companies and non-profits as well as consulting and advising companies. Dr. Price holds Bachelor’s and Doctor of Medicine degrees from the University of Michigan. He completed his residency at Emory University and was in private orthopedic practice from 1984 to 2004. Dr. Price was selected to serve on our board of directors for his extensive experience in public service and medical practice that bring a deep perspective on P3’s business.
Jeffrey G. Park , has served as a Director of the Company since December 2021. Mr. Park was the Chairman and Chief Executive Officer of WellDyneRx, an independent pharmacy benefits manager, from April 2019 until April 2022 and since October 2019 as a director of Progyny (Nasdaq: PGNY). From January 2018 until May 2018, he was the Interim Chief Executive Officer of Diplomat Pharmacy, Inc., or Diplomat (NYSE: DPLO), a provider of specialty pharmacy services. Additionally, from June 2017 to February 2019, he served on the board of directors of Diplomat. Prior to that, from July 2015 until July 2016, he was the Chief Operating Officer of OptumRX, the entity resulting from the merger of Catamaran Corporation, or Catamaran, and OptumRX, UnitedHealthcare Group’s free-standing pharmacy care services business. Before the merger, from March 2014 until July 2015, he was Catamaran’s Executive Vice President, Operations, and previously served as Catamaran’s Chief Financial Officer, beginning in 2006. Mr. Park holds a B.S. in Accounting from Brock University. Mr. Park was selected to serve on our board of directors for his extensive leadership experience in the pharmaceutical industry.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our code of business conduct and ethics is available under the Corporate Governance section of our website at ir.p3hp.org. In addition, we intend to post on our website all disclosures that are required by law or the Nasdaq rules concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this Annual Report on Form 10-K.
Audit Committee and Audit Committee Financial Expert
We have a separately-designated standing audit committee (“Audit Committee”) that consists of Jeffrey G. Park, Greg Wasson and Thomas E. Price, with Jeffrey G. Park serving as the chair of the Audit Committee. Our board of directors has determined that all members of the Audit Committee (Jeffrey G. Park, Greg Wasson and Thomas E. Price) are independent directors under the Nasdaq rules and the additional independence standards applicable to audit committee members established pursuant to Rule 10A-3 under the Exchange Act. Our board of directors has also determined that each of Jeffrey G. Park, Greg Wasson and Thomas E. Price meets the “financial literacy” requirement for audit committee members under the Nasdaq Stock Market rules and Jeffrey G. Park is an “audit committee financial expert” within the meaning of the SEC rules.
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Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our officers and directors, and persons who beneficially own more than 10% of our common stock to file with the SEC reports of their ownership and changes in their ownership of our common stock. To our knowledge, based solely on review of the copies of such reports and amendments to such reports with respect to the year ended December 31, 2021 filed with the SEC and on written representations by our directors and executive officers, all required Section 16 reports under the Exchange Act for our directors, officers and beneficial owners of greater than 10% of our common stock were filed on a timely basis during the year ended December 31, 2021 other than one Form 3 filed jointly by Hudson Vegas Investment SPV, LLC, Hudson Vegas Investment Manager, LLC and Daniel Straus, which was filed late.
Item 11. Executive Compensation
This section discusses the material components of the executive compensation program for P3 executive officers who are named in the “ Summary Compensation Table ” below. In 2021, the “named executive officers” and their positions with P3 were as follows:
● Sherif Abdou, M.D., Chief Executive Officer;
● Amir Bacchus, M.D., Chief Medical Officer; and
● Eric Atkins, Chief Financial Officer.
Summary Compensation Table
The following table sets forth information concerning the compensation of the named executive officers for the year ended December 31, 2020 and December 31, 2021:
All Other
Salary
Bonus
Stock Awards
Compensation
Total
Name and Principal Position
Year
($)
($)(1)
($)(2)
($)(3)
($)
Sherif Abdou
2021
750,000
750,000
81,081
(4)
2,824
1,583,905
Chief Executive Officer
2020
743,075
750,000
3,160
1,496,235
Amir Bacchus
2021
500,000
500,000
56,474
(4)
1,927
1,058,401
Chief Medical Officer
2020
514,615
500,000
1,615
1,016,230
Eric Atkins
2021
350,000
175,000
1,019,315
538
1,544,853
Chief Financial Officer
(1) Amounts reflect annual discretionary bonuses paid to the named executive officers for services performed in 2021, paid in 2022.
(2) Amounts reflect the aggregate grant date fair value of Incentive Units in P3 Health Group Holdings, LLC granted under the 2017 Management Incentive Plan to the named executive officers during the applicable year computed in accordance with FASB ASC Topic 718. For additional information regarding the awards granted to our named executive officers, please see Note 18 “Capitalization and Management Incentive Units” and Note 19 “Share-Based Compensation” in our consolidated statements included elsewhere in this Annual Report on Form 10-K for a discussion of the relevant assumptions used in calculating this amount.
(3) Amounts reflect Company-paid term life insurance premiums.
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(4) Amounts reflect the incremental fair value associated with the time-vesting Incentive Units held by Drs. Abdou and Bacchus that vested and were converted into the right to receive a portion of the P3 Merger consideration upon the closing of the P3 Merger, as computed in accordance with FASB ASC Topic 718.
Narrative to Summary Compensation Table
2021 Salaries
In 2021, the named executive officers received an annual base salary to compensate them for services rendered to our company. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities. The 2021 annual base salaries for our named executive officers were $750,000 for Dr. Abdou, $500,000 for Dr. Bacchus, and $350,000 for Mr. Atkins. The actual base salaries earned by our named executive officers for services in 2021 are set forth above in the Summary Compensation Table in the column entitled “ Salary ”.
2021 Bonuses
Our named executive officers were eligible to earn cash bonuses for work performed in calendar year 2021, as determined by our board of directors (or a subcommittee thereof). For 2021, Drs. Abdou and Bacchus and Mr. Atkins were eligible to receive annual target bonuses of 100%, 100% and 50%, respectively, of their respective base salaries. Based on a review of Company performance for 2021 and each named executive officer’s individual performance and contributions to the Company’s success, the board of directors approved bonuses equal to 100% of each named executive officer’s respective 2021 target bonus opportunity.
The actual cash bonus amounts awarded to our named executive officers for 2021 performance are set forth above in the Summary Compensation Table in the column entitled “ Bonus .”
Equity-Based Compensation
2017 Management Incentive Plan
Prior to the P3 Merger, we maintained the P3 Health Group Holdings, LLC Amended and Restated 2017 Management Incentive Plan (the “2017 Plan”) which provided our service providers the opportunity to acquire a proprietary interest in our success. Awards that were granted under the 2017 Plan were intended to qualify as profits interests within the meaning of Internal Revenue Service Revenue Procedures 93-27 and 2001-43 (“Incentive Units”). Following the P3 Merger and the effectiveness of the P3 Health Partners Inc. 2021 Incentive Award Plan (the “2021 Plan”), the 2017 Plan terminated and no further awards will be made under the plan. In connection with the P3 Merger, each Incentive Unit that was outstanding immediately prior to the effective time of the P3 Merger and that was vested (after taking into account any accelerated vesting that occurred in connection with the P3 Merger) was canceled and converted into the right to receive a portion of the Merger consideration, which consisted of P3 LLC Units and, in certain cases, cash. Each outstanding Incentive Unit that was subject to time-based vesting but had not vested immediately prior to the effective time of the P3 Merger was converted into the right to receive a portion of the Merger consideration, which Merger consideration remained subject to the original vesting conditions. Each outstanding Incentive Unit that was subject to performance-vesting requirements that were not achieved in connection with the P3 Merger was forfeited without consideration. For each P3 LLC Unit held by the named executive officer (whether vested or unvested), the officer was also entitled to a share of Class V Common Stock on a one-for-one basis.
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In 2021, we awarded time-vesting Incentive Units to Mr. Atkins under the 2017 Plan. Mr. Atkins’ 2021 grant (215,000 Incentive Units) is subject to vesting 20% annually on each anniversary of January 20, 2021, provided that Mr. Atkins remains employed through such vesting date, such that all time-vested units will be vested as of January 20, 2026. In addition, under the terms of Mr. Atkins’ grant agreement, if his employment is terminated at any time other than for “cause,” then the Incentive Units that would have vested on the next vesting date (had he remained employed) will vest on a pro-rated basis (based on the number of months he was employed between vesting dates). Upon the occurrence of a Sale of the Company (as defined in Mr. Atkins’ award agreement), if Mr. Atkins remains employed by the Company as of the date of the sale, 50% of his unvested Incentive Units would become vested.
Upon the closing of the P3 Merger and pursuant to action taken by the Board of Directors, all of the time-vesting Incentive Units held by Drs. Abdou and Bacchus vested and were converted into the right to receive a portion of the P3 Merger consideration. In addition, in connection with the P3 Merger, 50% of Mr. Atkins’ unvested Incentive Units (107,500) vested and converted into 203,160 P3 LLC Units and shares of Class V Common Stock. The remaining 50% of Mr. Atkins’ Incentive Units (107,500) converted into 203,160 unvested P3 LLC Units and Class V Common Stock, of which 81,264 vested on January 20, 2022, 81,264 shares will vest on January 20, 2023 and the remaining 40,632 will vest on January 20, 2024, subject, in each case, to Mr. Atkins’ continued employment through such date.
Drs. Abdou and Bacchus did not receive any incentive equity awards in 2021. All of the incentive equity awards held by our named executive officers as of December 31, 2021 are further described below in the section entitled, “— Outstanding Equity Awards at Fiscal Year-End .”
2021 Incentive Award Plan
In connection with the Business Combinations, the Company’s board of directors adopted, and its stockholders approved, the 2021 Plan, in order to facilitate the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants of our company and certain of our affiliates and to enable us to obtain and retain services of these individuals, which is essential to our long-term success. The 2021 Plan became effective on December 3, 2021.
Benefits and Perquisites
Health and Welfare Plans
In 2021, the named executive officers participated in a 401(k) retirement savings plan maintained by P3. The Internal Revenue Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) plan. In 2021, the Company did not make matching contributions under the 401(k) plan.
In 2021, the named executive officers participated in standard health and welfare plans maintained by P3.
We believe the benefits described above are necessary and appropriate to provide a competitive compensation package to our named executive officers.
No Tax Gross-Ups
We do not make gross-up payments to cover our named executive officers’ personal income taxes that may pertain to any of the compensation or perquisites paid or provided by our company.
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Outstanding Equity Awards at Fiscal Year-End
The following table summarizes information regarding the outstanding equity awards held by each named executive officer as of December 31, 2021.
Number of
Market Value of
Shares or Units of Stock
Shares or Units of Stock
That Have Not
That Have Not
Name
Vested (#)
Vested ($)(1)
Sherif Abdou
—
—
Amir Bacchus
—
—
Eric Atkins
203,160
(2)
1,430,246
(1) There is no public market for the P3 LLC Units, which are exchangeable for shares of Class A common stock of the Company on a one-for-one basis. For purposes of this disclosure, we have valued the P3 LLC Units based on the closing price of our Class A common stock of $7.04 per share on December 31, 2021.
(2) Represents P3 LLC Units that were converted in connection with the P3 Merger from the unvested Incentive Units that had been awarded to the executive on March 1, 2021, and that remained unvested as of December 31, 2021. In connection with the P3 Merger, 50% of Mr. Atkins’ unvested Incentive Units (107,500) vested and converted into 203,160 P3 LLC Units and shares of Class V Common Stock. The remaining 50% of Mr. Atkins’ unvested Incentive Units (107,500) converted into 203,160 unvested P3 LLC Units and shares of Class V Common Stock, of which 81,264 P3 LLC Units and Class V Units vested on January 20, 2022, 81,264 shares will vest on January 20, 2023 and the remaining 40,632 will vest on January 20, 2024, in each case subject to Mr. Atkins’ continued employment through such date.
Executive Compensation Arrangements
We have entered into offers of employment letters or employment agreements with each of our named executive officers. The material terms of these agreements are described below.
Sherif Abdou and Amir Bacchus 2017 Employment Agreements
Each of our founders, Sherif Abdou and Amir Bacchus, was party to an employment agreement that was entered into in April 2017 (collectively, the “2017 Employment Agreements”), which were in effect through 2021. We entered into new employment agreements with Drs. Abdou and Bacchus in May 2022. The following describes the 2017 Employment Agreements as they were in effect in 2021.
Pursuant to their respective agreements, Dr. Abdou served as our Chief Executive Officer and President and Dr. Bacchus served as our Chief Medical Officer. The 2017 Employment Agreements provided for a base salary ($600,000 in the case of Dr. Abdou and $400,000 in the case of Dr. Bacchus) and eligibility to earn an annual bonus (100% of base salary). Each of Drs. Abdou and Bacchus was entitled to participate in any employee benefit plan adopted by the Company or its affiliates, and we agreed to maintain short-term and long-term disability insurance coverage for Drs. Abdou and Bacchus during the term of their respective employment.
The 2017 Employment Agreements included customary restrictive covenants, including confidentiality, non-disparagement, non-competition (36 months post-employment), and employee non-solicitation and noninterference covenants (each 36 months post-employment). The term of the noncompetition covenant would have been reduced from 36 months to zero months post-employment if the executive’s employment would have been terminated without cause (as defined in the applicable agreement).
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Under the terms of the 2017 Employment Agreements, if the employment of Dr. Abdou or Dr. Bacchus was terminated by us without cause, then, in addition to the accrued benefits through the date of termination, the executive would have been entitled to receive continued base salary payments for a period of 12 months (to be paid according to the Company’s normal payroll cycle). In the event Drs. Abdou or Bacchus terminate his own employment with “cause” (as defined in the Employment Agreements), then, in addition to the accrued benefits through the date of termination of employment, the executive would have been entitled to receive continued base salary payments for a period of 18 months.
Sherif Abdou and Amir Bacchus 2022 Employment Agreements
We entered into new employment agreements with each of Sherif Abdou and Amir Bacchus in May 2022, which superseded the 2017 Employment Agreements (collectively, the “2022 Employment Agreements”). The initial term of the 2022 Employment Agreements will end on January 1, 2025, and the term automatically will renew for successive one-year terms unless advance written notice of non-renewal is given by either party (such term, the “employment term”). In addition, during the employment term, for so long as Dr. Abdou or Dr. Bacchus serve as Chief Executive Office or Chief Medical Officer, respectively, the Company will nominate the executive for re-election as a member of the board of directors. The 2022 Employment Agreements provide for a base salary ($800,000 in the case of Dr. Abdou and $600,000 in the case of Dr. Bacchus) and eligibility to earn an annual bonus (100% of base salary in the case of each of Drs. Abdou and Bacchus). Each of Drs. Abdou and Bacchus are entitled to participate in any employee benefit plan that the Company and its affiliates adopts, and the Company has agreed to maintain short-term and long-term disability insurance coverage for Drs. Abdou and Bacchus during the term of their respective employment.
The 2022 Employment Agreements include customary confidentiality and mutual non-disparagement provisions, as well as a standard non-compete restriction effective during employment and for 18 months thereafter and service provider/customer non-solicitation restrictions effective during employment and for 24 months thereafter.
Under the terms of the 2022 Employment Agreements, if the employment of Dr. Abou or Dr. Bacchus is terminated by the Company without “cause” or by the executive for “cause” (each, as defined in the 2022 Employment Agreements), then, in addition to any accrued benefits through the date of termination, the executive will be entitled to receive the following severance payments and benefits, subject to the executive’s and the Company’s timely execution (and non-revocation) of a mutual release of claims: (i) cash severance in an aggregate amount equal to one-and-one-half times the sum of the executive’s (a) annual base salary then in effect and (b) target annual bonus amount, payable in equal monthly installments over an 18-month period following the date of termination; and (ii) Company-subsidized COBRA premiums for up to 18 months. If the executive’s employment is terminated without “cause” by the executive, then, in addition to any accrued benefits through the date of termination, the executive will be entitled to receive cash severance in an aggregate amount equal to one-and-one-half times the sum of the executive’s (i) annual base salary then in effect and (ii) target annual bonus amount, payable in equal monthly installments over an 18-month period following the date of termination. In addition, if the executive’s employment is terminated due to his death, then, in addition to any accrued benefits through the date of termination, the executive will be entitled to receive a pro-rated portion of his target bonus for the year of termination.
Sherif Abdou and Amir Bacchus Transaction Bonus Agreements
In connection with the consummation of the Business Combination, the board of directors of the Company approved Transaction Bonus Agreements with each of Sherif Abdou and Amir Bacchus in May 2022. The Transaction Bonus Agreements provide for the payment of bonuses in an aggregate amount equal to $6,300,000 (Dr. Abdou) and $3,700,000 (Dr. Bacchus)(each, a “Transaction Bonus”).
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Pursuant to the Transaction Bonus Agreements, the first installment of the Transaction Bonus ($3,300,000 for Dr. Abdou and $1,700,000 for Dr. Bacchus) was paid within five days following the execution of the Transaction Bonus Agreement. The second installment of the Transaction Bonus ($3,000,000 for Dr. Abdou and $2,000,000 for Dr. Bacchus) will be paid on December 15, 2022. The second installment will not be paid if the executive’s employment is terminated for “cause” by the Company or without “cause” by the executive prior to the payment date. If the executive fails to comply with the Transaction Bonus Terms (as described below), the executive will be required to repay the Transaction Bonus (or forfeit any portion of the Transaction Bonus that has not yet been paid).
The Transaction Bonus Terms include: (i) a restriction on the executive’s ability to offer, sell, or announce an intention to dispose of any shares of the Company’s Class A common stock until the closing of the Company’s first underwritten offering and sale of common stock (the “First Secondary Sale”); (ii) a requirement that, following the First Secondary Sale, the executive will only sell shares of the Company’s Class A common stock pursuant to a customary 10b5-1 plan; and (iii) a limitation on the number of shares of Class A common stock the executive may sell under such 10b5-1 plan. These restrictions apply to Class A common stock held directly by the executive or in a trust established by the executive.
Eric Atkins Offer Letter Agreement
We entered into an offer letter agreement with Eric Atkins on January 13, 2021 (the “Atkins Offer Letter”). Pursuant to the terms of his agreement, Mr. Atkins serves as our Chief Financial Officer and reports to the Chief Executive Officer. The Atkins Offer Letter provides for a starting annual salary of $350,000 and a target bonus of 50% if target bonus goals are met. In addition, the Atkins Offer Letter provides for the grant of time-vesting Incentive Units, as described in the section entitled, “— Equity-Based Compensation .”
Mr. Atkins is entitled to participate in any employee benefit plan that the Company adopts. The Atkins Offer Letter provides for an employee non-solicitation covenant that continues for a 24 month period following the termination of Mr. Atkins’ employment, as well as a confidentiality covenant. The Atkins Offer Letter also provides that if Mr. Atkins’ employment is terminated by the Company for any reason other than for “cause,” a portion of the unvested Incentive Units will become vested in connection with such termination, as discussed in more detail in the section entitled, “— Equity-Based Compensation .” As described above, in connection with the P3 Merger, a portion of the unvested Incentive Units was converted to unvested P3 LLC Units (and paired with shares of Class V Common Stock) that will vest and be paid in accordance with the vesting schedule described above.
Non-Employee Director Compensation
None of our non-employee directors received compensation from the Company for their services on our board in 2021. Effective as of March 24, 2022, our Board adopted a non-employee director compensation program (the “Director Compensation Program”). The Director Compensation Program provides for annual cash retainer fees and long-term equity awards for each of our non-employee directors (each, an “Eligible Director”). The Director Compensation Program consists of the following components:
Cash Compensation
● Annual Retainer: $65,000
● Annual Committee Chair Retainer:
o Audit: $25,000
o Compensation and Nominating: $25,000
● Annual Committee Member (Non-Chair) Retainer:
o Audit: $12,500
o Compensation and Nominating: $12,500
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● Chairperson: $95,000
The annual cash retainers will be paid in quarterly installments in arrears, but effective as of January 1 of each calendar year (including 2022). Annual cash retainers will be pro-rated for any partial calendar quarter of service.
Equity Compensation
An Eligible Director who is serving on our Board as of the date of an annual meeting of stockholders (beginning with calendar year 2022) automatically will be granted, on the date of such annual meeting, an option to purchase shares of the Company’s Class A Common Stock with an aggregate fair market value of $170,000 and, in the case of the Chairperson of the Board, an aggregate fair market value of $340,000 (an “Annual Grant”).
Each Annual Grant will vest in full on the earlier to occur of the first anniversary of the grant date and the date of the next annual meeting following the grant date, subject to continued service.
However, for calendar years 2022 and 2023, each of, Mr. Kazarian, Mr. Leisure, Mr. Price, Mr. Park, Ms. Tolan, and Mr. Wasson received a stock option grant on March 24, 2022 with an aggregate fair market value of $340,000 or, in the case of Mr. Thierer, an aggregate fair market value of $680,000 (the “2022/2023 Grant”). The 2022/2023 Grant will vest as to 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date, subject to continued service. Each of these directors will not be eligible to receive the Annual Grant for calendar years 2022 and 2023.
The Annual Grant and the 2022/2023 Grant will vest and become exercisable in full immediately prior to the occurrence of a Change in Control (as defined in the 2021 Plan).
Compensation under the Director Compensation Program is subject to the annual limits on non-employee director compensation set forth in the 2021 Plan.
Compensation Committee Interlocks and Insider Participation
During 2021, the members of our Compensation and Nominating Committee were Lawrence B. Leisure, Thomas E. Price, Mary Tolan and Greg Wasson, none of whom was an officer or employee of the Company during fiscal year 2021 or was formerly an officer of the Company. Related person transactions pursuant to Item 404(a) of Regulation S-K involving those who served on the Compensation and Nominating Committee during 2021 are described in Item 13. “Certain Relationships and Related Party Transactions.” During 2021, none of our executive officers served as a member of the board of directors or compensation committee (or other committee performing equivalent functions) of any entity that had one or more executive officers serving on our board of directors or Compensation and Nominating Committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information with respect to holdings of our Class A Common Stock and Class V Common Stock by:
● stockholders who beneficially owned more than 5% of the outstanding shares of our Class A Common Stock and Class V Common Stock;
● each of our named executive officers and directors; and
● all directors and executive officers as a group.
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The number of shares beneficially owned by each stockholder is determined under rules issued by the SEC and includes voting or investment power with respect to securities. These rules generally provide that a person is the beneficial owner of securities if such person has or shares the power to vote or direct the voting thereof, or to dispose or direct the disposition thereof or has the right to acquire such powers within 60 days.
As described in Item 13. “Certain Relationships and Related Party Transactions,” each P3 LLC Unit (other than P3 LLC Units held by us) is redeemable from time to time at each holder’s option (subject in certain circumstances to time-based vesting requirements) for, at our election (determined solely by a majority of our directors who are disinterested), shares of our Class A Common Stock on a one-for-one basis, or to the extent there is cash available from a secondary offering, a cash payment equal to a volume weighted average market price of one share of Class A Common Stock for each P3 LLC Unit so redeemed, in each case, in accordance with the terms of the P3 LLC A&R LLC Agreement; provided that, at our election (determined by a majority or our directors who are disinterested), we may effect a direct exchange of such Class A Common Stock or such cash, as applicable, for such P3 LLC Units.
The P3 LLC Unitholders may, subject to certain exceptions, exercise such redemption right for as long as their P3 LLC Units remain outstanding. See Item 13. “Certain Relationships and Related Party Transactions— Amended and Restated Limited Liability Company Agreement of P3 LLC.” In connection with the Business Combinations, we issued to each P3 Equityholder, for nominal consideration, one share of Class V Common Stock for each P3 LLC Unit such P3 Equityholder owned. As a result, the number of shares of Class V Common Stock listed in the table below correlates to the number of P3 LLC Units the P3 Equityholders own as of October 14, 2022.
The number of shares beneficially owned by the holders in the table below assume the maximum number of P3 LLC Units and shares of Class V Common Stock or shares of Class A Common Stock, as applicable, are released from escrow to each holder. See the disclosure in the section entitled Item 13. “Certain Relationships and Related Party Transactions — Related Party Transactions in connection with the Business Combinations—Escrow Agreement.”
Unless otherwise noted, the business address of each of those listed in the table below is 2370 Corporate Circle, Suite 300, Henderson, NV 89074. We have based our calculation of the percentage of beneficial ownership on 243,603,813 shares of common stock outstanding as of October 14, 2022 consisting of 41,578,890 shares of our Class A common stock and 202,024,923 shares of our Class V Common Stock.
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Unless otherwise indicated, we believe, based on information provided to us, that each of the stockholders listed below has sole voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.
Class A
Class V
Total Voting
Common Stock
% of Class
Common Stock (1)
% of Class
Power (2)
Directors and Named Executive Officers:
Mark Thierer
—
—
—
—
—
Sherif Abdou (3)
—
—
28,185,982
14.0
%
11.6
%
Amir Bacchus (4)
—
—
18,790,658
9.3
%
7.7
%
Greg Wasson (5)
7,753,525
18.6
%
—
—
3.2
%
Lawrence Leisure
—
—
—
—
—
Mary Tolan
—
—
—
—
—
Greg Kazarian (6)
—
—
1,177,659
*
*
Thomas Price (7)
—
—
1,177,659
*
*
Jeffrey Park
—
—
—
—
—
Eric Atkins (8)
—
—
450,517
*
*
All Directors and Executive Officers of post-combination Company as a group (9 individuals) (9)
7,753,525
18.6
%
49,782,475
24.6
%
23.6
%
Five Percent Holders:
Chicago Pacific Founders (10)
8,732,517
21.0
%
91,269,317
45.2
%
41.1
%
Hudson Vegas Investment SPV, LLC (11)
—
—
43,974,331
21.8
%
18.1
%
FMR LLC (12)
10,120,307
24.3
%
—
—
4.2
%
Foresight Sponsor Group, LLC (13)
7,753,525
18.6
%
—
—
3.2
%
Leavitt Equity Partners II, L.P. (14)
—
—
7,505,383
3.7
%
3.1
%
Ameriprise Financial, Inc. (15)
4,200,863
10.1
%
—
—
1.7
%
LMR Partners LLP (16)
2,463,719
5.9
%
—
—
1.0
%
The Vanguard Group (17)
2,140,558
5.1
%
—
—
0.9
%
* Less than 1%.
(1) Class V Common Stock entitles the holder thereof to one vote per share.
(2) Represents the percentage of voting power of the holders of Class A Common Stock and Class V Common Stock of the Company voting together as a single class.
(3) Includes 7,907,484 shares held by the NA 2021 GRAT, a grantor retained annuity trust of which Dr. Abdou and his spouse serve as trustees, 3,058,479 shares held by the NA 2021 Trust, a trust for the benefit of Dr. Abdou and his children, of which Dr. Abdou and his spouse serve as trustees, 1,408,437 shares held by the NA Charitable Trust, a charitable remainder trust of which Dr. Abdou, his spouse and his children serve as trustees, 7,907,484 shares held by the SA 2021 GRAT, a grantor retained annuity trust of which Dr. Abdou and his spouse serve as trustees, 3,058,479 shares held by the SA 2021 Trust, a trust for the benefit of Dr. Abdou and his children, of which Dr. Abdou and his spouse serve as trustees, 1,408,437 shares held by the SA Charitable Trust, a charitable remainder trust of which Dr. Abdou, his spouse and his children serve as trustees, and 3,437,182 shares held by the Abdou Family Trust, a revocable trust of which Dr. Abdou and his spouse serve as trustees, and of which Dr. Abdou and his spouse are beneficiaries. Includes an aggregate of 2,653,044 shares of Class V Common Stock and 2,653,044 P3 LLC Units being held in escrow until the resolution of the Class D Dispute and the Cash Preference Dispute.
(4) Includes 15,032,528 shares held by Dr. Bacchus and 3,758,130 shares held by Charlee Co LLC, of which Dr. Bacchus serves as managing member. Includes 1,768,698 shares of Class V Common Stock and 1,768,698 P3 LLC Units being held in escrow until the resolution of the Class D Dispute and the Cash Preference Dispute.
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(5) Consists of the securities held by Foresight Sponsor Group, LLC (“FSG”) identified in footnote (11) below. FSG is governed by a board of managers consisting of Greg Wasson and Michael Balkin. Accordingly, each of Mr. Wasson and Mr. Balkin may be deemed to beneficially own the securities held by FSG. The principal business office of Mr. Wasson is 2045 W. Grand Avenue, Ste. B, PMB 8512, Chicago, Illinois 60612.
(6) Includes 102,785 shares of Class V Common Stock and 102,785 P3 LLC Units being held in escrow until the resolution of the Class D Dispute. Includes 706,595 shares that Mr. Kazarian owns directly and 471,064 shares owned through the Kazarian 2020 Irrevocable Trust, for which Mr. Kazarian serves as Trustee.
(7) Includes 102,785 shares of Class V Common Stock and 102,785 P3 LLC Units being held in escrow until the resolution of the Class D Dispute.
(8) Includes 44,197 shares of Class V Common Stock and 44,197 P3 LLC Units being held in escrow until the resolution of the Class D Dispute. Also includes 203,160 shares of restricted Class V common stock and 203,160 restricted Common Units that vest in five equal annual installments beginning on January 20, 2022.
(9) Includes 4,671,509 shares of Class V Common Stock and 4,671,509 P3 LLC Units being held in escrow until the resolution of the Class D Dispute and the Cash Preference Dispute.
(10) Based solely on the Schedule 13D filed with the SEC on December 13, 2021 by (i) Chicago Pacific Founders UGP, LLC, (ii) Chicago Pacific Founder GP, L.P., (iii) Chicago Pacific Founders Fund, L.P., and (iv) Chicago Pacific Founders Fund B, L,P. Includes 89,183,894 shares of Class V Common Stock held by Chicago Pacific Founders Fund, L.P., 2,085,333 shares of Class V Common Stock held by Chicago Pacific Founders GP, L.P., 2,778,931 shares of Class A Common Stock held by Chicago Pacific Founders Fund-A, L.P. and 5,953,586 shares of Class A Common Stock held by Chicago Pacific Founders Fund-B, L.P. The General Partner of each of Chicago Pacific Founders Fund, L.P., Chicago Pacific Founders Fund-A, L.P. and Chicago Pacific Founders Fund-B, L.P. is Chicago Pacific Founders GP, L.P. The General Partner of Chicago Pacific Founders GP, L.P. is Chicago Pacific Founders UGP, LLC, which is managed by Mary Tolan, Lawrence Leisure and Vance Vanier. Included in the number of shares of Class V Common Stock and Class A Common Stock are 8,224,897 shares of Class V Common Stock and 723,291 shares of Class A Common Stock, respectively, that are being held in escrow until the resolution of the Class D Dispute and the Cash Preference Dispute, as applicable, described above and will be voted in accordance with the proportional vote totals that a matter receives by all voting securities other than those being held in escrow. The business address for the reporting persons is 980 North Michigan Avenue, Suite 1998, Chicago, IL 60611.
(11) Based solely on the Schedule 13D filed by Hudson Vegas Investment SPV, LLC, Hudson Vegas Investment Manager, LLC and Daniel Straus with the SEC on December 17, 2021. Hudson Vegas Investment Manager, LLC and Daniel Straus each may be deemed to share voting and dispositive power over the shares of Class V Common Stock which are held by Hudson Vegas Investment SPV, LLC. Each of Hudson Vegas Investment Manager, LLC and Daniel Straus disclaims beneficial ownership of any shares other than to the extent they may have a pecuniary interest therein. Included in the number of shares of Class V Common Stock are 1,126,765 shares of Class V Common Stock that are being held in escrow until the resolution of the Cash Preference Dispute and 3,315,859 shares of Class V Common Stock that are being held in escrow until the resolution of the Class D Dispute, and will be voted in accordance with the proportional vote totals that a matter receives by all voting securities other than those being held in escrow. The principal business address of each of the reporting persons is 173 Bridge Plaza North, Fort Lee, New Jersey 07024.
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(12) Based solely on the Schedule 13G filed by FMR LLC, Fidelity Contrafund and Abigail P. Johnson with the SEC on January 7, 2022. FMR LLC and Abigail P. Johnson may be deemed to have beneficial ownership over 10,120,307 shares. Fidelity Contrafund may be deemed to have beneficial ownership over 2,735,364 shares. FMR LLC has sole voting power with respect to 3,473,042 shares and sole dispositive power with respect to 10,120,307 shares. Abigail P. Johnson has sole voting power with respect to no shares and sole dispositive power with respect to 10,120,307 shares. Fidelity Contrafund has sole voting power with respect to 2,735,364 shares and sole dispositive power with respect to no shares. Abigail P. Johnson is a Director, the Chairman, and the Chief Executive Officer of FMR LLC. Members of the Johnson family, including Abigail P. Johnson, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders’ voting agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders’ voting agreement, members of the Johnson family may be deemed, under the Investment Company Act, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Abigail P. Johnson has the sole power to vote or direct the voting of the shares owned directly by the various investment companies registered under the Investment Company Act (the “Fidelity Funds”) advised by Fidelity Management & Research Company LLC (“FMR Co. LLC”), a wholly owned subsidiary of FMR LLC, which power resides with the Fidelity Funds’ Boards of Trustees. FMR Co. LLC carries out the voting of the shares under written guidelines established by the Fidelity Funds’ Boards of Trustees. The principal business address of FMR LLC is 245 Summer Street, Boston, MA 02210.
(13) Based solely on the Schedule 13G filed with the SEC on January 18, 2022 by FSG, Michael P. Balkin and Gregory D. Wasson. Each of the reporting persons may be deemed to have beneficial ownership of 7,753,525 shares of Class A Common Stock consisting of (1) 7,526,025 shares of Class A Common Stock held by FSG and (2) 227,500 shares of Class A Common Stock issuable upon exercise of a warrant held by FSG (the “FSG Warrant”). Each of the reporting persons has shared voting and dispositive power with respect to 7,753,525 shares. The principal business office of Mr. Wasson and FSG is 2045 W. Grand Avenue, Ste. B, PMB 82152, Chicago, Illinois 60612. The principal business office of Mr. Balkin is 3201 South Ocean Boulevard, Unit 404, Highland Beach, Florida 33487.
(14) Based solely on the Schedule 13D filed with the SEC on September 12, 2022 by Leavitt Equity Partners II, L.P. (“LEP LP”), Leavitt Equity Partners II, LLC (“LEP LLC”), LEP Management, LLC (“LEP Management”), Leavitt Legacy LLC (“Legacy”), and Taylor Leavitt (collectively, the “Leavitt Reporting Persons”). LEP LLC is the general partner of LEP LP, which is an investment limited partnership. LEP Management is the investment advisor of LEP LP. Legacy is the manager of LEP LLC. Mr. Leavitt is the sole owner of Legacy. In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, the Leavitt Reporting Persons would be deemed to beneficially own more than five percent of Class A Common Stock as result of the Reporting Persons’ ownership of P3 LLC Units. Each of the Levitt Reporting Persons is deemed to have shared voting and shared dispositive power with respect to 7,505,383 shares. Includes 676,360 shares of Class V Common Stock and 676,360 P3 LLC Units being held in escrow until the resolution of the Class D Dispute. The business address of the Leavitt Reporting Persons is 299 South Main Street, Suite 2300, Salt Lake City, UT 84111.
(15) Based solely on the Schedule 13G filed with the SEC on April 11, 2022 by Ameriprise Financial, Inc. (“AFI”), Columbia Management Investment Advisers, LLC (“CMIA”), Columbia Wanger Asset Management, LLC (“CWAM”), and Columbia Acord Fund (the “Fund”). CMIA, CWAM and AFI do not directly own any shares. As the investment adviser to the Fund and various other unregistered and registered investment companies and other managed accounts, CMIA and CWAM may be deemed to beneficially own the Fund’s shares. AFI, as the parent company of CMIA and CWAM, may be deemed to beneficially own CMIA and CWAM’s shares. AFI and CMIA reported shared voting and dispositive power over 4,200,863 shares and sole voting and dispositive power over no shares. CWAM reported shared voting and dispositive power with respect to 4,197,373 shares and sole voting power and dispositive power over no shares. The Fund reported sole voting power and dispositive power over 2,500,000 shares and shared voting and dispositive power over no shares. The principal business address of AFI is 45 Ameriprise Financial Center, Minneapolis, MN 55474. The principal business address of CMIA is 290 Congress Street, Boston, MA 02210. The principal business address of CWAM and the Fund is 71 S Wacker Drive, Suite 2500, Chicago, IL 60606.
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(16) Based solely on the Schedule 13G filed with the SEC on April 12, 2022 by LMR Master Fund Ltd (“LMR Master Fund”), LMR CCSA Master Fund Ltd. (“CCSA Master Fund”), LMR Partners LLP, LMR Partners Limited, LMR Partners LLC, LMR Partners AG, Ben Levine and Stefan Renold (collectively, the “LMR Reporting Persons”). Represents 2,463,719 shares of Class A common stock issuable upon the exercise of Public Warrants held by LMR Master Fund and CCSA Master Fund. Ben Levine and Stefan Renold are ultimately in control of the investment and voting decisions of the LMR Investment Managers with respect to the securities held by LMR Master Fund and CCSA Master Fund. The business address of each of the LMR Reporting Persons is c/o LMR Partners LLP, 9 th Floor, Devonshire House, 1 Mayfair Place, London, W1J 8AJ, United Kingdom.
(17) Based solely on the Schedule 13G filed by The Vanguard Group with the SEC on February 9, 2022. The 13G reports that The Vanguard Group has sole dispositive power with respect to 2,140,558 shares, shares dispositive power with respect to no shares, and sole voting and dispositive power with respect to no shares. The Vanguard Group, Inc.’s clients, including investment companies registered under the Investment Company Act of 1940 and other managed accounts, have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the securities reported. The business address of The Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355.
Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2021)
Number of Securities
Available for Future
Number of Securities to
Weighted-Average
Issuance Under Equity
be Issued Upon Exercise
Exercise Price of
Compensation Plans
of Outstanding Options,
Outstanding Options,
(excludes securities
Plan category:
Warrants, and Rights
Warrants, and Rights
Reflected in first column)
Equity compensation plans approved by security holders (1)
—
$
—
14,616,229
(2)
Equity compensation plans not approved by security holders
—
$
—
—
Total
—
14,616,229
(1) Consists of the P3 Health Partners Inc. 2021 Incentive Award Plan (the “2021 Plan”).
(2) Consists of 14,616,229 shares of Class A common stock of the Company available for issuance under the 2021 Plan, as of December 31, 2021. The number of shares of common stock reserved for issuance under the 2021 Plan will increase on the first day of each calendar year beginning on January 1, 2022 and ending on and including January 1, 2031, by a number equal to the lesser of (i) 1% of the aggregate number of shares of Class A Common Stock and Class V Common Stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of Shares (as defined in the 2021 Plan) as is determined by the board of directors.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
Policies and Procedures for Approval of Related Person Transactions
Our Board of Directors has adopted a written Related Person Transaction Policy, setting forth the policies and procedures for the review and approval or ratification of related person transactions. Under the policy, our legal team is primarily responsible for developing and implementing processes and procedures to obtain information regarding related persons with respect to potential related person transactions and then determining, based on the facts and circumstances, whether such potential related person transactions do, in fact, constitute related person transactions requiring compliance with the policy. If our legal team determines that a transaction or relationship is a related person transaction requiring compliance with the policy, our General Counsel is required to present to the Audit Committee all relevant facts and circumstances relating to the related person transaction. Our Audit Committee must review the relevant facts and circumstances of each related person transaction, including if the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party and the extent of the related person’s interest in the transaction, take into account the conflicts of interest and corporate opportunity provisions of our Code of Business Conduct and Ethics, and either approve or disapprove the related person transaction. If advance Audit Committee approval of a related person transaction requiring the Audit Committee’s approval is not feasible, then the transaction may be preliminarily entered into by management upon prior approval of the transaction by the chair of the Audit Committee subject to ratification of the transaction by the Audit Committee at the Audit Committee’s next regularly scheduled meeting; provided, that if ratification is not forthcoming, management will make all reasonable efforts to cancel or annul the transaction. If a transaction was not initially recognized as a related person, then upon such recognition the transaction will be presented to the Audit Committee for ratification at the Audit Committee’s next regularly scheduled meeting; provided, that if ratification is not forthcoming, management will make all reasonable efforts to cancel or annul the transaction. Our management will update the Audit Committee as to any material changes to any approved or ratified related person transaction and will provide a status report at least annually of all then current related person transactions. No director may participate in approval of a related person transaction for which he or she is a related person.
Relationships and Transactions with Directors, Executive Officers and Significant Stockholders
The following are certain transactions, arrangements and relationships with our directors, executive officers and stockholders owning 5% or more of our outstanding common stock, or any member of the immediate family of any of the foregoing persons, since January 1, 2021, other than equity and other compensation, termination, change in control and other arrangements, which are described under Item 11. “Executive Compensation.”
Transactions in connection with the Business Combinations
Subscription Agreements
Contemporaneously with the execution of the Merger Agreement and the Transaction and Combination Agreement, we entered into the Subscription Agreements with the various Subscribers party thereto. Under the Subscription Agreements, the investors agreed to purchase and subscribe for, and we agreed to sell and issue to such investors, an aggregate of 20,870,307 PIPE Shares (as defined above) for a purchase price of $10.00 per share, in a private placement. The primary purpose of the sale of the PIPE Shares was to raise additional capital for use in connection with the Business Combinations and to meet the minimum available cash requirement provided in the Merger Agreement.
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Pursuant to the Subscription Agreements, we agreed that, within 30 calendar days after the consummation of the Business Combinations (the “Filing Deadline”), we would file with the SEC a registration statement registering the resale of the PIPE Shares, and use our commercially reasonable efforts to have that registration statement declared effective as soon as practicable after the filing thereof, but no later than the earlier of (i) the 75th calendar day following the earlier of the Filing Deadline and the initial filing date of the registration statement if the SEC notifies us that it will “review” the registration statement and (ii) the 5th business day after the date we are notified (orally or in writing, whichever is earlier) by the SEC that the registration statement will not be “reviewed” or will not be subject to further review. Our obligations to include the PIPE Shares held by a Subscriber in the registration statement is contingent upon the relevant Subscriber furnishing in writing, to us such information regarding the Subscriber, the PIPE Shares held by such Subscriber and the intended method of disposition of the PIPE Shares, as is reasonably requested by us to effect the registration of such PIPE Shares, and must execute such documents in connection with such registration as we may reasonably request, which will be what is customary of a selling stockholder in similar situations.
Support Agreement
Contemporaneously with the execution of the Merger Agreement and the Transaction and Combination Agreement, the Sponsors, Foresight and Legacy P3 entered into the Sponsor Support Agreement (the “Support Agreement”). Pursuant to the Support Agreement, the Sponsors agreed, among other things: (i) not to sell, pledge or otherwise dispose of (or agree to dispose of) any of their securities in Foresight; (ii) to vote or cause to be voted at any meeting in favor of each proposal in favor of the Business Combinations and against any merger or other similar business combination transaction with any party other than Legacy P3 or other proposal that would prevent the Business Combinations; (iii) to vote or cause to be voted at any meeting in favor of any amendment to warrants issued by Foresight, and any amendment thereto proposed in the Warrant Exchange Offer/Solicitation contemplated by the Merger Agreement (which did not occur); (iv) to comply with their obligations under that certain letter agreement, dated as of February 9, 2021, by and among Foresight, the Sponsors, Greg Wasson, Michael Balkin, Gerald Muizelaar, Brian Gamache, Robert Zimmerman and John Svoboda; and (v) comply with Foresight’s non-solicitation covenants under the Merger Agreement (with respect to the provisions thereof applicable to representatives of Foresight).
Pursuant to the Support Agreement, our Sponsor (but not FA Co-Investment LLC) agreed to tender or cause to be tendered any and all Foresight Warrants that our Sponsor owns of record or beneficially (as defined in the Securities Act) pursuant to and in accordance with the terms of the Warrant Exchange Offer/Solicitation. Our Sponsor also agreed that once its Foresight Warrants are tendered, it will not withdraw or cause or permit to be withdrawn any of such Foresight Warrants from the Warrant Exchange Offer/Solicitation, unless and until the Support Agreement has been terminated.
Amended and Restated Limited Liability Company Agreement of P3 LLC
We operate our business through P3 LLC (as the successor of P3) and its subsidiaries. At the closing of the Business Combinations, the limited liability company agreement of P3 LLC was amended and restated into the P3 LLC A&R LLC Agreement, which sets forth, among other things, the rights and obligations of the members of P3 LLC after the Closing.
Sole Manager . Pursuant to the P3 LLC A&R LLC Agreement, P3 is the sole manager of P3 LLC. As the sole manager, P3 is generally able to control all of the day-to-day business affairs and decision-making of P3 LLC without the approval of any member of P3 LLC, unless otherwise stated in the P3 LLC A&R LLC Agreement. As the sole manager of P3 LLC, P3, through its officers and directors, is responsible for all operational and administrative decisions of P3 LLC and the day-to-day management of P3 LLC’s business. Pursuant to the terms of the P3 LLC A&R LLC Agreement, P3 cannot be removed or replaced as the sole manager of P3 LLC except by its resignation, which may be given at any time by written notice to the other members of P3 LLC.
Compensation, Expenses . P3 is not entitled to compensation for its services as the manager of P3 LLC except as expressly provided for in the P3 LLC A&R LLC Agreement. P3 is entitled to reimbursement by P3 LLC for reasonable out-of-pocket expenses incurred on behalf of P3 LLC, including all expenses associated with P3 being a public company and maintaining its corporate existence.
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Distributions . The P3 LLC A&R LLC Agreement requires tax distributions to be made by P3 LLC to its members on a pro rata basis, except to the extent such distributions would render P3 LLC insolvent or are otherwise prohibited by law. Tax distributions are made on a quarterly basis, to each member of P3 LLC, including P3, based on such member’s allocable share of the taxable income of P3 LLC and an assumed tax rate that will be determined by P3, as described below. The assumed tax rate for purposes of determining tax distributions from P3 LLC to its members will be the highest combined federal, state, and local tax rate that may potentially apply to a corporate or individual taxpayer (whichever is higher) resident in New York City, New York, taking into account certain assumptions and without regard to the actual final tax liability of any such member. The P3 LLC A&R LLC Agreement also allows for cash distributions to be made by P3 LLC (subject to P3’s discretion as the sole manager of P3 LLC) to its members on a pro rata basis out of cash available for distribution in accordance with the P3 LLC A&R LLC Agreement. We expect P3 LLC may make distributions out of distributable cash periodically and as necessary to enable us to cover P3’s operating expenses and other obligations, including tax liability and other obligations under the Tax Receivable Agreement, except to the extent such distributions would render P3 LLC insolvent or are otherwise prohibited by law.
Transfer Restrictions . The P3 LLC A&R LLC Agreement generally does not permit transfers of P3 LLC Units by members, except for transfers to permitted transferees, transfers pursuant to the participation right described below and other limited exceptions. The P3 LLC A&R LLC Agreement imposes additional restrictions on transfers (including on exchanges of P3 LLC Units and Class V Common Stock for Class A - Common Stock) that are necessary or advisable so that P3 LLC is not treated as a “publicly traded partnership” for U.S. federal income tax purposes. In the event of a permitted transfer under the P3 LLC A&R LLC Agreement, the transferring member will be required to simultaneously transfer shares of Class V Common Stock held by such transferring member to such transferee equal to the number of P3 LLC Units that were transferred to such transferee in such permitted transfer.
The P3 LLC A&R LLC Agreement permits holders of P3 LLC Units to participate in a tender offer, share exchange offer, issuer bid, take-over bid, recapitalization or similar transaction with respect to Class A Common Stock that is approved by our board of directors by delivering a participation redemption notice, which shall be effective immediately prior to, and contingent upon, the consummation of such transaction.
Permitted transferees of P3 LLC Units will be required to assume all of the obligations of a transferring member with respect to the transferred P3 LLC Units by executing a joinder to the P3 LLC A&R LLC Agreement, and such transferee shall be bound by any limitations and obligations under the P3 LLC A&R LLC Agreement.
Maintenance of One-to-One Ratios . The P3 LLC A&R LLC Agreement includes provisions intended to ensure that P3 at all times maintains (i) a one-to-one ratio between the number of P3 LLC Units owned, directly or indirectly, by P3 and the aggregate number of shares of Class A Common Stock issued and outstanding, and (ii) a one-to-one ratio between the aggregate number of P3 LLC Units owned, directly or indirectly, by the members of P3 LLC (other than P3 and its subsidiaries) and the number of shares of Class V Common Stock issued and outstanding. These ratio requirements disregard (1) shares of Class A Common Stock issuable under unvested equity incentive awards granted by P3, (2) treasury stock, and (3) preferred stock or other debt or equity securities (including warrants, options or rights) issued by P3 that are convertible into or exercisable or exchangeable for shares of Class A Common Stock, except to the extent P3 has contributed the net proceeds from such other securities, including any exercise or purchase price payable upon conversion, exercise or exchange thereof, to the equity capital of P3 LLC.
Excluding certain warrants, options or similar instruments granted pursuant to any equity plan or stock option plan in effect on, or adopted after, the date of the P3 LLC A&R LLC Agreement by P3 LLC or P3, in the event any holder of P3 Warrants exercises a P3 Warrant, then P3 will cause a corresponding exercise of a warrant to purchase P3 LLC Units with similar terms held by P3, such that the number of shares of Class A Common Stock issued in connection with the exercise of such P3 Warrants will be matched with a corresponding number of P3 LLC Units issued by P3 LLC to P3. In the event that a P3 Warrant is redeemed, P3 LLC will redeem a warrant to purchase P3 LLC Units with similar terms held by P3.
Issuance of P3 LLC Units upon Exercise of Options or Issuance of Other Equity Compensation . The P3 LLC A&R LLC Agreement contemplates the manner in which various types of equity incentive awards will be treated by P3 and P3 LLC.
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Dissolution . The P3 LLC A&R LLC Agreement provides that the consent of P3, as the manager of P3 LLC, and members holding a majority of the P3 LLC Units then outstanding (excluding P3 LLC Units held directly or indirectly by P3) will be required to voluntarily dissolve P3 LLC. In addition to a voluntary dissolution, P3 LLC will be dissolved upon the entry of a decree of judicial dissolution or other circumstances in accordance with Delaware law. Upon a dissolution event, the proceeds of a liquidation will be distributed in the following order: (1) first, to pay the expenses of winding up P3 LLC; (2) second, to pay debts, liabilities and obligations owed to creditors of P3 LLC other than members; (3) third, to pay debts, liabilities and obligations owed to the members (other than payments or distributions owed to the members in their capacity as such pursuant to the P3 LLC A&R LLC Agreement); and (4) fourth, to the members pro-rata in accordance with their respective percentage ownership interests in P3 LLC (as determined based on the number of P3 LLC Units held by a member relative to the aggregate number of all outstanding P3 LLC Units).
Confidentiality . Each member of P3 LLC (other than P3) agrees to maintain the confidentiality of P3 LLC’s confidential information. This obligation excludes information (i) that is independently developed by the members without use of or reference to such confidential information, (ii) that is or becomes generally available to the public other than as a direct or indirect result of a disclosure by a member or its affiliates or representatives, (iii) that is or becomes available to a member from a source other than P3, P3 LLC, any of its subsidiaries or their respective representatives, provided that such source is not, and was not, known by such member to be bound by a confidentiality agreement with, or any other confidentiality obligation owed to P3, P3 LLC or any of their respective affiliates or representatives, or (iv) approved for release by written authorization of the Chief Executive Officer, the Chief Financial Officer or the General Counsel of either P3 LLC or P3.
Fiduciary Duties; Indemnification . The P3 LLC A&R LLC Agreement provides (i) that the manager of P3 LLC owes P3 LLC and its members the same fiduciary duties as the manager would owe to a Delaware corporation and its stockholders if such manager were a member of the board of directors of such corporation, and (ii) that the officers of P3 LLC owe P3 LLC and its members duties of the type owed by the officers of a Delaware corporation to such corporation and its stockholders. The P3 LLC A&R LLC Agreement also provides for indemnification to the fullest extent permitted by law of (1) the manager (and its directors, officers, employees and agents), (2) officers, employees and agents of P3 LLC and (3) persons serving at P3 LLC’s request as a manager, officer, director, employee or agent of another entity, in each case, subject to certain exceptions, including in the case of fraud, willful misconduct, knowing violations of law and breaches of representations, warranties or covenants under the P3 LLC A&R LLC Agreement.
P3 LLC Unit Exchange Right . The P3 LLC A&R LLC Agreement provides a redemption right to the members of P3 LLC (other than P3 and its subsidiaries) which entitles them to have their P3 LLC Units redeemed for, at P3’s election, newly-issued shares of Class A Common Stock on a one-for-one basis, or a cash payment equal to the volume weighted average market price of one share of Class A Common Stock for each P3 LLC Unit so redeemed. As holders of P3 LLC Units exercise their redemption rights, P3’s economic interest in P3 LLC will be correspondingly increased and the number of shares of Class V Common Stock outstanding will be correspondingly reduced.
Each member’s (other than P3 and its subsidiaries) redemption rights are subject to certain customary limitations, including the expiration of any contractual lock-up period relating to the shares of Class A Common Stock that may be applicable to such member, and may be conditioned on the closing of an underwritten distribution of the shares of Class A Common Stock that may be issued in connection with such proposed redemption.
Whether by redemption or exchange, P3 is obligated to ensure that at all times the number of P3 LLC Units that P3 owns equals the number of outstanding shares of Class A - Common Stock (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).
Amendments . In addition to certain other requirements, P3’s prior written consent, as manager, and the prior written consent of members holding a majority of the P3 LLC Units then outstanding and entitled to vote (excluding P3 LLC Units held directly or indirectly by P3) will generally be required to amend or modify the P3 LLC A&R LLC Agreement.
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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. We intend to treat any redemptions and exchanges of P3 LLC units as direct purchases of the units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent the tax basis is allocated to those capital assets.
In connection with the Business Combinations, we entered into a TRA that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of P3 LLC resulting from any redemptions or exchanges of P3 LLC, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the “TRA Payments”). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize.
The estimation of a liability under the TRA is, by its nature, imprecise and subject to significant assumptions regarding a number of factors, including (but not limited to) the amount and timing of taxable income generated by the Company each year as well as the tax rate then applicable. As a result of the Business Combinations, the potential future tax benefits are estimated to be $5.4 million, of which $4.6 million is estimated to be the associated TRA liability.
As noted above, the Company has no recorded tax benefits associated with the increase in tax basis as a result of the Business Combinations. As a result, the Company determined that payments to TRA holders are not probable and no TRA liability has been recorded as of December 31, 2021.
As non-controlling interest holders exercise their right to exchange their units in P3 LLC, a TRA liability may be recorded based on 85% of the estimated future tax benefits that the Company may realize as a result of increases in the tax basis of P3 LLC. The amount of the increase in the tax basis, the related estimated tax benefits, and the related TRA liability to be recorded will depend on the price of the Company’s Class A Common Stock at the time of the relevant redemption or exchange.
We expect to obtain an increase in our proportionate share of the tax basis of the assets of P3 LLC (1) as a result of the purchase of P3 Existing Units from the P3 Equityholders in connection with the Business Combinations, (2) if and when (as described above under “— Amended and Restated Limited Liability Company Agreement of P3 LLC ”) the P3 Equityholders receive shares of Class A Common Stock or cash in connection with any future redemption or exchange of P3 LLC Units pursuant to the P3 LLC A&R LLC Agreement and (3) in connection with certain distributions (or deemed distributions) by P3 LLC (any such basis increase, the “Basis Adjustments”). The parties intend to treat the purchase of P3 Existing Units described in clause (1) and any such redemption or exchange of P3 LLC Units described in clause (2) above as a direct purchase by us of P3 Existing Units and P3 LLC Units, as applicable, from the P3 Equityholders for U.S. federal income and other applicable tax purposes, regardless of whether such P3 Existing Units or P3 LLC Units are surrendered by the P3 Equityholders to P3 LLC or sold to us upon the exercise of our election to acquire P3 LLC Units directly. A Basis Adjustment may have the effect of increasing (for income tax purposes) depreciation and amortization deductions allocable to us and thereby reducing the amounts that we would otherwise pay in the future to various tax authorities. The Basis Adjustments may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets.
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In connection with the Business Combinations, we entered into the Tax Receivable Agreement with certain of the P3 Equityholders and P3 LLC. The Tax Receivable Agreement provides for the payment by us to the P3 Equityholders of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of the transactions described above, including tax benefits attributable to payments made under the Tax Receivable Agreement (such as deductions attributable to imputed interest deemed paid pursuant to the Tax Receivable Agreement). P3 LLC has in effect an election under Section 754 of the Code effective for each taxable year in which a redemption or exchange of P3 LLC Units for shares of Class A Common Stock or cash occurs. These Tax Receivable Agreement payments are not conditioned upon any continued ownership interest in either P3 LLC or us by the P3 Equityholders. The rights of the P3 Equityholders under the Tax Receivable Agreement are assignable to transferees, including transferees of the P3 LLC Units (other than us or P3 LLC as transferee pursuant to subsequent redemptions or exchanges of the transferred P3 LLC Units). We expect to benefit from the remaining 15% of tax benefits, if any, that we may actually realize.
The actual Basis Adjustments, as well as any amounts paid to the P3 Equityholders under the Tax Receivable Agreement, varies depending on a number of factors, including:
● the price of shares of Class A Common Stock in connection at the time of redemptions or exchanges —the Basis Adjustments, as well as any related increase in any tax deductions, are directly related to the price of shares of Class A Common Stock at the time of each redemption or exchange;
● the timing of any subsequent redemptions or exchanges—for instance, the increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable or amortizable assets of P3 LLC at the time of each redemption or exchange or distribution (or deemed distribution);
● the extent to which such redemptions or exchanges are taxable —if a redemption or exchange is not taxable for any reason, the Basis Adjustments, as well as any related increase in tax deductions, relating to such redemption or exchange will not be available; and
● the amount and timing of our income—the Tax Receivable Agreement generally requires us to pay 85% of the tax benefits as and when those benefits are treated as realized under the terms of the Tax Receivable Agreement. If we do not have taxable income, we generally will not be required (absent a change of control or other circumstances requiring an early termination payment) to make payments under the Tax Receivable Agreement for that taxable year because no tax benefits will have been actually realized. However, any tax benefits that do not result in realized tax benefits in a given taxable year will likely generate tax attributes that may be utilized to generate tax benefits in previous or future taxable years. The utilization of any such tax attributes generally will result in payments under the Tax Receivable Agreement.
Decisions made by us in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations, or other changes in control, may influence the timing and amount of payments that are received by the P3 Equityholders under the Tax Receivable Agreement. For example, the earlier disposition of assets following a transaction that results in a Basis Adjustment will generally accelerate payments under the Tax Receivable Agreement and increase the present value of such payments.
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For purposes of the Tax Receivable Agreement, cash savings in income tax are computed by comparing our actual income tax liability (subject to certain assumptions relating to state and local income taxes) to the amount of such taxes that we would have been required to pay had there been no Basis Adjustments and had the Tax Receivable Agreement not been entered into. The Tax Receivable Agreement generally applies to each of our taxable years, beginning with the first taxable year ending after the Business Combinations. There is no maximum term for the Tax Receivable Agreement; however, the Tax Receivable Agreement may be voluntarily terminated by us pursuant to an early termination procedure and shall be terminated upon the occurrence of certain mergers, asset sales, other forms of business combinations, or other changes of control or our material breach of our material obligations under the Tax Receivable Agreement under certain circumstances, and in each case we will be obligated to pay the P3 Equityholders an agreed upon amount equal to the estimated present value of the remaining payments to be made under the agreement (calculated based on certain assumptions, including regarding tax rates and utilization of the Basis Adjustments). However, our ability to make such payment may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which we or P3 LLC are then a party, or any applicable law.
The payment obligations under the Tax Receivable Agreement are our obligations and not of P3 LLC. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments that we may be required to make to the P3 Equityholders will be substantial. Any payments made by us to the P3 Equityholders under the Tax Receivable Agreement will generally reduce the amount of cash that might have otherwise been available to us. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts will be deferred and will accrue interest until paid. Our failure to make any payment required under the Tax Receivable Agreement (including any accrued and unpaid interest) within 90 calendar days of the date on which the payment is required to be made will constitute a material breach of a material obligation under the Tax Receivable Agreement, which will generally terminate the Tax Receivable Agreement and accelerate payments thereunder, unless the applicable payment is not made because (i) we are prohibited from making such payment under the terms of the Tax Receivable Agreement or the terms governing certain of our indebtedness or (ii) we do not have, and despite using commercially reasonable efforts cannot obtain, sufficient funds to make such payment.
The Tax Receivable Agreement provides that if (i) we materially breach any of our material obligations under the Tax Receivable Agreement, (ii) certain mergers, asset sales, other forms of business combinations, or other changes of control were to occur, or (iii) we elect an early termination of the Tax Receivable Agreement, then our obligations, or our successor’s obligations, under the Tax Receivable Agreement would accelerate and become due and payable, based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement, and an assumption that, as of the effective date of the acceleration, any P3 Equityholder that has P3 LLC Units that have not been exchanged is deemed to have exchanged such P3 LLC Units for the fair market value of the shares of Class A Common Stock or the amount of cash that would be received by such P3 Equityholder had such P3 LLC Units actually been exchanged on such date, whichever is lower. However, as noted above, our ability to make such payments may be limited by restrictions on distributions that would either violate any contract or agreement to which we or P3 LLC are then a party, or any applicable law.
As a result of the foregoing, we would be required to make an immediate cash payment equal to the estimated present value (calculated based on a discount rate equal to 10%) of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement based on certain assumptions, which payment may be made significantly in advance of the actual realization, if any, of those future tax benefits and, therefore, we could be required to make cash payments to the P3 Equityholders that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement. In these situations, our obligations under the Tax Receivable Agreement could have a material adverse effect on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations, or other changes of control. We cannot assure that we will be able to finance our obligations under the Tax Receivable Agreement or that we will be able to make the immediate cash payment described above to the extent our or P3 LLC’s ability to make such payment is restricted as described above.
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Payments under the Tax Receivable Agreement are based on the tax reporting positions that we determine, and the IRS or another tax authority may challenge all or part of the Basis Adjustments, as well as other related tax positions we take, and a court could sustain any such challenge. If the outcome of any such challenge to any Basis Adjustments or the deduction of imputed interest deemed paid pursuant to the Tax Receivable Agreement would reasonably be expected to materially affect a recipient’s payments under the Tax Receivable Agreement, then we will not be permitted to settle or to fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of each P3 Equityholder, and any such restrictions will apply for as long as the Tax Receivable Agreement remains in effect. We will not be reimbursed for any cash payments previously made to the P3 Equityholders pursuant to the Tax Receivable Agreement if any tax benefits initially claimed by us are subsequently challenged by a taxing authority and ultimately disallowed. Instead, in such circumstances, any excess cash payments made by us to the P3 Equityholders will be netted against any future cash payments that we might otherwise be required to make under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to the P3 Equityholders for a number of years following the initial time of such payment. As a result, it is possible that we could make cash payments under the Tax Receivable Agreement that are substantially greater than our actual cash tax savings.
Payments are generally due under the Tax Receivable Agreement within a specified period of time following the filing of our tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return. Any late payments that may be made under the Tax Receivable Agreement will continue to accrue interest at LIBOR (or alternate replacement rate) plus 500 basis points until such payments are made, including any late payments that we may subsequently make because we did not have enough available cash to satisfy our payment obligations at the time at which they originally arose or were prohibited from making such payments under the terms governing certain of our indebtedness (although such payments are not considered late payments and therefore would accrue interest at the lower interest if we make such payments promptly after such limitations are removed). Subject to certain exceptions as noted above, our failure to make any payment required under the Tax Receivable Agreement (including any accrued and unpaid interest) within 90 calendar days of the date on which the payment is required to be made will constitute a material breach of a material obligation under the Tax Receivable Agreement under certain circumstances, in which case, the Tax Receivable Agreement will terminate and future payments thereunder will be accelerated, as noted above.
Registration Rights and Lock-Up Agreement
At the Closing, the Sponsors, the Blocker Sellers, certain P3 Equityholders, Brian Gamache, John Svoboda and Robert Zimmerman (collectively, the “Holders”) and Foresight entered into the Registration Rights and Lock-Up Agreement. The Registration Rights and Lock-Up Agreement (i) amends, restates and replaces the registration rights agreement entered into by Foresight with the Sponsors, Brian Gamache, John Svoboda and Robert Zimmerman on February 9, 2021, and (ii) provides registration rights to the Holders pursuant to which P3 will be required to file a shelf registration statement to register the resale shares of Class A Common Stock or any other equity security held by the Holders upon the Closing, including the shares of Class A Common Stock issuable upon the future redemption of P3 LLC Units and shares of Class V Common Stock by such Holders and the Private Placement Units (including the Foresight Warrants and Class A Common Stock included therein and the Class A Common Stock issuable upon exercise of the Foresight Warrants included therein), in each case held by them upon the Closing (collectively, “Registrable Securities”). Assuming all of the P3 LLC Units are redeemed for Class A Common Stock and all of the Private Placement Warrants are exercised, the Registrable Securities consist of an aggregate of 239,866,497 shares of Class A Common Stock and 277,500 Private Placement Warrants.
In addition, subject to certain requirements and customary conditions, the Holders may demand, at any time or from time to time, that Foresight file a shelf registration statement on Form S-3, or if Form S-3 is not available, a Form S-1 to register the Registrable Securities held by such Holders. The Registration Rights and Lock-Up Agreement also provides the Holders with “piggy-back” registration rights, subject to certain requirements and customary conditions.
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Subject to certain exceptions, the Registration Rights and Lock-Up Agreement further provides for the Class A Common Stock, the Class V Common Stock and the Class A Common Stock issuable upon the future exchange of P3 LLC Units and shares of Class V Common Stock held by the P3 Equityholders and the Blocker Sellers after the Closing to be locked-up for a period of six months following the Closing, while the Class A Common Stock received by the Sponsors upon conversion of the Class B Common Stock on the Closing Date will be locked-up for a period of one year following the Closing, subject to earlier release upon (i) the date on which the last reported sale price of the Class A Common Stock equals or exceeds $12.00 per share for any 20 trading days within any 30-day trading period commencing at least 150 days after the Closing or (ii) the date on which the Company completes a liquidation, merger, capital stock exchange or other similar transaction after the Closing that results in all of the Company’s stockholders having the right to exchange their shares of Class A Common Stock for cash, securities or other property. The Private Placement Units, including the Class A Common Stock included therein, the Private Placement Warrants and Class A Common Stock issuable upon exercise of the Private Placement Warrants will be locked-up for a period of thirty days following the Closing.
Except as set forth in the Registration Rights and Lock-Up Agreement, P3 will be required to bear all expenses incurred in connection with the filing of any such registration statements and any such offerings, other than underwriting discounts and commissions on the sale of Registrable Securities, brokerage fees, underwriter marketing costs and, except as specified in the Registration Rights and Lock-Up Agreement, the fees and expenses of counsel to holders of Registrable Securities. The Registration Rights and Lock-Up Agreement also includes customary provisions regarding indemnification and contribution.
Escrow Agreement
On December 3, 2021, we entered into an escrow agreement (the “Escrow Agreement”) with P3 Health Group Holdings, P3 LLC, Hudson Vegas Investment SPV, LLC (the “Class D Member”), Mary Tolan and Sherif Abdou (the “Unitholder Representatives”) and PNC Bank, N.A. (“Escrow Agent”). Pursuant to the Escrow Agreement, certain of the consideration for the Business Combinations was set aside in an escrow until resolution of the disputes described below.
At Closing, (i) cash, certain units of P3 LLC (“P3 LLC Units”) and shares of Class V Common Stock and Class A Common Stock were placed in escrow, to be allocated upon resolution of the dispute regarding the Class D purchase option described in the section titled “Business—Legal Proceedings—Class D Dispute” (the “Class D Dispute”), and (ii) certain members of P3 LLC (the “Contributing P3 Equityholders”) contributed cash, and Hudson contributed P3 LLC Units and shares of Class V Common Stock, into escrow, to be allocated upon resolution of a dispute regarding Hudson’s right to a preference on the cash portion of the Merger consideration (the “Cash Preference Dispute”). If the Class D Dispute is (i) resolved in favor of Hudson, Hudson will receive cash, the P3 LLC Units and shares of Class V Common Stock escrowed for the Class D Dispute and the shares of Class A Common Stock escrowed for the Class D Dispute will be retired or (ii) resolved in favor of the former members of P3 Health Group Holdings (other than Hudson), the former members of P3 Health Group Holdings (including Hudson) will receive cash, the P3 LLC Units and Class V Common Stock or shares of Class A Common Stock, as applicable, escrowed for the Class D Dispute. If the Cash Preference Dispute is (i) resolved in favor of Hudson, the Contributing P3 Equityholders will receive the P3 LLC Units and shares of Class V Common Stock escrowed for the Cash Preference Dispute or shares of Class A Common Stock, as applicable, and Hudson will receive cash, or (ii) resolved in favor of the former members of P3 Health Group Holdings (other than Hudson), Hudson will receive the P3 LLC Units and shares of Class V Common Stock escrowed for the Cash Preference Dispute and the Contributing P3 Equityholders will receive cash.
In the Escrow Agreement, the parties authorized the Unitholder Representatives to direct the voting power of any of the securities in escrow, as applicable, on any matter put to a vote of the applicable securityholders in accordance with the proportional vote totals that such matter received by all voting securities other than those in escrow.
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Foresight Transactions
Founder Shares and Private Placement Units
Founder Shares
In October 2020, our Sponsors purchased an aggregate of 7,906,250 founder shares for a capital contribution of $25,000. In January 2021, our Sponsor transferred 25,000 founder shares to each Messrs. Gamache, Svoboda and Zimmerman, our initial director nominees. On October 4, 2021, all outstanding shares of Class B Common Stock were converted into shares of Class A Common Stock on a one-for-one basis.
Private Placement Units
Our Sponsors purchased an aggregate of 832,500 Private Placement Units for a purchase price of $10.00 per unit in a private placement that occurred simultaneously with the closing of our IPO on February 12, 2021. 682,500 of the Private Placement Units were purchased by our Sponsor and 150,000 Private Placement Units were purchased by FA Co-Investment LLC, an affiliate of one of the underwriters in the IPO.
Transfer Restrictions
The founder shares and the Private Placement Units (including the underlying Private Placement Warrants, the Private Placement Shares and the shares of Class A Common Stock issuable upon exercise of the Private Placement Warrants) are each subject to transfer restrictions pursuant to lock-up provisions in the letter agreement with us entered into by our initial stockholders, officers and directors on February 9, 2021. Those lock-up provisions provide that, subject to limited exceptions, such securities are not transferable or salable (1) in the case of the founder shares, until the earlier of (A) one year after the completion of our Business Combinations and (B) subsequent to our Business Combinations, (x) the date on which we complete a liquidation, merger, stock exchange, reorganization or other similar transaction that results in all of our public stockholders having the right to exchange their shares of Class A Common Stock for cash, securities or other property or (y) if the last reported sale price of the Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our Business Combinations, and (2) in the case of the Private Placement Units (including the underlying Private Placement Warrants, the Private Placement Shares and the shares of Class A Common Stock issuable upon exercise of the Private Placement Warrants), until 30 days after the completion of our Business Combinations.
Waiver of Redemption Rights
In addition, pursuant to the letter agreement, dated February 9, 2021, our initial stockholders, officers and directors have agreed to waive: (1) their redemption rights with respect to any founder shares, the Private Placement Shares and public shares held by them, as applicable, in connection with the completion of our Business Combinations; (2) their redemption rights with respect to any founder shares, the Private Placement Shares and public shares held by them in connection with a stockholder vote to approve an amendment to our Charter (A) to modify the substance or timing of our obligation to allow redemptions in connection with our Business Combinations or to redeem 100% of our public shares if we have not consummated our Business Combinations by February 12, 2023 or (B) with respect to any other provision relating to stockholders’ rights or pre-Business Combinations activity; and (3) their rights to liquidating distributions from the Trust Account with respect to any founder shares and Private Placement Shares they hold if we fail to complete our Business Combinations by February 12, 2023 or during any extension period (although they will be entitled to liquidating distributions from the Trust Account with respect to any public shares they hold if we fail to complete our Business Combinations within the prescribed time frame).
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Voting
Pursuant to the letter agreement, dated February 9, 2021, our initial stockholders, officers and directors have agreed to vote any shares of Class A Common Stock or founder shares owned by them in favor of the Business Combinations.
Administrative Services Agreement
On February 9, 2021, we entered into an Administrative Services Agreement pursuant to which we paid our Sponsor a total of $10,000 per month for office space, administrative and support services. Upon completion of our Business Combinations, we ceased paying these monthly fees. From the period commencing February 9, 2021 through December 31, 2021, we paid the Sponsor an aggregate of $96,071 for such services under the Administrative Services, as well as an additional $149,838 aggregate amount in support fees.
Registration Rights
Pursuant to a registration rights agreement entered into by us on February 9, 2021, the holders of the founder shares, Private Placement Units (including the underlying securities) and units (including the underlying securities) that may be issued upon conversion of working capital loans, and any shares of Class A Common Stock issuable upon the exercise of the Private Placement Warrants or upon the exercise of any warrants included within Working Capital Units issued upon conversion of working capital loans are entitled to registration rights requiring the Company to register such securities for resale (in the case of the founder shares, only after conversion to shares of Class A Common Stock). The holders of these securities will be entitled to make up to three demands, excluding short form registration demands, that we register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the completion of our Business Combinations and rights to require us to register for resale such securities pursuant to Rule 415 under the Securities Act. Notwithstanding the foregoing, FA Co-Investment LLC, an affiliate of one of the underwriters in the IPO, may not exercise its demand or “piggyback” registration rights after five and seven years, respectively, after the effective date of the IPO registration statement and may not exercise its demand rights on more than one occasion. The registration rights agreement does not contain liquidated damages or other cash settlement provisions resulting from delays in registering our securities. We will bear the expenses incurred in connection with the filing of any such registration statements.
Promissory Notes—Related Parties
On October 22, 2020 and October 27, 2020, the Sponsors issued unsecured promissory notes to us, pursuant to which we may borrow up to an aggregate principal amount of $300,000. The promissory notes were non-interest bearing and payable on the earlier of (i) March 31, 2021 or (ii) the consummation of the IPO. The outstanding balance under the promissory notes of $275,000 as of December 31, 2020 was repaid upon the closing of the IPO on February 12, 2021 out of the portion of offering proceeds that was allocated for the payment of offering expenses (other than underwriting commissions) not held in the Trust Account.
On August 19, 2021, our Sponsor committed to providing us with an aggregate of $300,000 in loans. We borrowed $150,000 under the loan, which was non-interest bearing, unsecured and subsequently repaid upon the consummation of the Business Combinations.
Working Capital Loans
On August 19, 2021, the Sponsor committed to provide up to $300,000 in working capital loans as needed by the Company in order to finance transaction costs in connection with a Business Combinations. On October 27, 2021, the Sponsor committed to provide up to an additional $600,000 in working capital loans as needed by the Company in order to finance transaction costs in connection with a Business Combinations. The loans will follow the same structure as the $300,000 working capital loans as described above. The total commitment provided by the Sponsor will total $900,000, where none of which has been borrowed as of December 31, 2021.
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P3 Transactions
Atrio Health Plans
In 2019, Chicago Pacific Founders, a P3 Equityholder,made an equity investment in Atrio Holding Company, LLC (“Atrio Holdings”). Atrio Health Plans, Inc. (“Atrio”) is a wholly owned subsidiary of Atrio Holdings. Two members of P3’s board of directors, Mary Tolan and Lawrence B. Leisure, serve as Managing Partners of Chicago Pacific Founders, and one member of P3’s board of directors, Greg Kazarian, serves as an Operating Partner of Chicago Pacific Founders. Beginning in 2020, P3 entered into a Full-Risk capitation agreement with Atrio pursuant to which P3 is delegated to perform services on behalf of Atrio’s members assigned to P3, including provider network credentialing, patient authorizations and medical management (care management, quality management and utilization management). In 2021, P3 earned capitation revenue from Atrio assigned members of $154.4 million and management fees of $2.2 million; and paid claims of $160.9 million for Atrio assigned members. In 2020, P3 earned capitation revenue from Atrio assigned members of $146.5 million and management fees of $2.2 million; and paid claims of $148.9 million for Atrio assigned members.
Director Independence
Mark Thierer, Greg Wasson, Lawrence B. Leisure, Mary Tolan, Tom E. Price, M.D. and Jeffrey G. Park each qualify as “independent” in accordance with the listing requirements of Nasdaq. The Nasdaq independence definition includes a series of objective tests, including that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, as required by Nasdaq rules, our board of directors has made a subjective determination as to each independent director that no relationships exist, which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management, including the beneficial ownership of our capital stock by each director. There are no family relationships among any of our directors or executive officers.
Item 14. Principal Accountant Fees and Services
The following table summarizes the fees billed to us by BDO USA, LLP, our independent registered public accounting firm, and KPMG LLP, our former independent registered public accounting firms, for services rendered in connection with the years ended December 31, 2021, and 2020, respectively:
Year Ended December 31,
Fee Category
2021
2020
Audit Fees (1)
$
2,295,477
$
837,500
Audit-Related Fees (2)
—
466,438
Tax Fees
—
—
All Other Fees
—
—
Total Fees
$
2,295,477
$
1,303,938
(1) Audit fees consist of fees associated with the audit of the Company’s annual financial statements and review of its condensed quarterly financial statements.
(2) Audit-related fees consist of fees associated with review of the Company’s Form S-1 and Definitive Proxy Statement filed in 2021.
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Audit Committee Pre-Approval Policy and Procedures
The Audit Committee has adopted a policy (the “Pre-Approval Policy”) that sets forth the procedures and conditions pursuant to which audit and non-audit services proposed to be performed by the independent auditor may be pre-approved. The Pre-Approval Policy generally provides that we will not engage our independent auditor to render any audit, audit-related, tax or permissible non-audit service unless the service is either (i) explicitly approved by the Audit Committee (“specific pre-approval”) or (ii) entered into pursuant to the pre-approval policies and procedures described in the Pre-Approval Policy (“general pre-approval”). Unless a type of service to be provided by our independent auditor has received general pre-approval under the Pre-Approval Policy, it requires specific pre-approval by the Audit Committee. The Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve audit services, other than with respect to the annual audit of the Company’s consolidated financial statements, and other services on behalf of the Audit Committee. To the extent that the Audit Committee pre-approves any services under its general pre-approval policy, pre-approved fee levels or budgeted amounts for all services to be provided by the independent auditor will be established annually by the Audit Committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval. For both types of pre-approval, the Audit Committee will consider whether such services are consistent with the SEC’s rules on auditor independence. The Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and efficient service, for reasons such as its familiarity with the Company’s business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. All such factors will be considered as a whole, and no one factor should necessarily be determinative. On a periodic basis, the Audit Committee may review and generally pre-approve the services (and related fee levels or budgeted amounts) that may be provided by the independent auditor without first obtaining specific pre-approval from the Audit Committee. The Audit Committee may revise the list of general pre-approved services from time to time, based on subsequent determinations. The Audit Committee pre-approved all services performed since the Pre-Approval Policy was adopted.
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Part IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements. Reference is made to the Index to Consolidated Financial Statements beginning on Page F-1 hereof.
(a)(2) Financial Statement Schedules.
Financial statements schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits.
The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
Exhibit
Incorporated by Reference
Filed/Furnished
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Herewith
2.1
Agreement and Plan of Merger, dated as of May 25, 2021, by and between Foresight, P3 Health Group Holdings, LLC, FAC Merger Sub LLC.
8-K
001-40033
2.1
6/1/21
2.2
Transaction and Combination Agreement, dated as of May 25, 2021, by and among Foresight, the Merger Corps, the Blockers, Splitter and the Blocker Sellers.
8-K
001-40033
2.2
6/1/21
2.3
First Amendment to Merger Agreement, dated as of November 21, 2021, by and among Foresight, Merger Sub and P3.
8-K
001-40033
2.1
11/22/21
2.4
Second Amendment, dated as of December 3, 2021, to the Agreement and Plan of Merger, dated as of May 25, 2021, by and among Foresight Acquisition Corp. (“Foresight”), FAC Merger Sub LLC and P3 Health Group Holdings, LLC.
8-K
001-40033
2.4
12/9/21
2.5
The First Amendment to the Transaction and Combination Agreement between Foresight, the Merger Corps, the Blockers, Splitter and the Blocker Sellers.
8-K
001-40033
2.5
12/9/21
3.1
Amended and Restated Certificate of Incorporation of the Company.
8-K
001-40033
3.1
12/9/21
3.2
Bylaws of the Company.
8-K
001-40033
3.2
12/9/21
4.1
Form of Common Stock Certificate of the Company.
S-1
333-251978
4.2
1/19/21
4.2
Warrant Agreement, dated February 9, 2021, between the Company and Continental Stock Transfer & Trust Company.
8-K
001-40033
4.1
2/16/21
4.3
Form of Warrant Certificate of the Company.
8-K
001-40033
4.1
2/16/21
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4.4
Description of Registered Securities.
*
10.1
First Amendment to Term Loan Agreement, Termination of Management Rights Letter and Consent, dated as of December 3, 2021, by among P3 Health Group Holdings, LLC, as borrower, the subsidiary guarantors party thereto, the lenders from time to time party thereto and CRG Servicing LLC, as administrative agent and collateral agent.
8-K
001-40033
10.1
12/9/21
10.2
Form of Subscription Agreement.
8-K
001-40033
10.2
6/1/21
10.3
Form of Consent and Amendment to Subscription Agreement.
8-K
001-40033
10.1
11/22/21
10.4
Registration Rights and Lock-up Agreement, dated December 3, 2021, by and among the registrant, Foresight Sponsor Group, LLC, FA Co-Investment LLC and the P3 Sellers party thereto.
8-K
001-40033
10.4
12/9/21
10.5
P3 Health Group, LLC Amended and Restated Limited Liability Agreement, dated as of December 3, 2021, by and among P3 Health Group, LLC, the registrant and each of the other members party thereto.
8-K
001-40033
10.5
12/9/21
10.6
Tax Receivable Agreement, dated as of December 3, 2021, by and among P3 Health Group, LLC and the members of P3 Health Group, LLC from time to time party thereto.
8-K
001-40033
10.6
12/9/21
10.7†
Form of Indemnification Agreement for directors and executive officers.
8-K
001-40033
10.7
12/9/21
10.8†
Form of Indemnification Agreement for sponsor affiliated directors.
8-K
001-40033
10.8
12/9/21
10.9†
Offer Letter Agreement, dated as of March 13, 2017, by and between P3 Health Group Holdings, LLC and Todd Lefkowitz.
8-K
001-40033
10.11
12/9/21
10.10†
P3 Health Partners Inc. 2021 Incentive Award Plan.
8-K
001-40033
10.12
12/9/21
10.11†
First Amendment to the P3 Health Partners Inc. 2021 Incentive Award Plan.
*
10.12†
Form of Restricted Stock Unit Award Agreement under the P3 Health Partners Inc. 2021 Incentive Award Plan.
8-K
001-40033
10.13
12/9/21
10.13†
Form of Stock Option Award Agreement under the P3 Health Partners Inc. 2021 Incentive Award Plan.
8-K
001-40033
10.14
12/9/21
10.14†
P3 Health Group Holdings, LLC 2017 Management Incentive Plan.
8-K
001-40033
10.15
12/9/21
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10.15†
Form of Incentive Unit Award Agreement under the P3 Health Group Holdings, LLC 2017 Management Incentive Plan.
8-K
001-40033
10.16
12/9/21
10.16
Form of Joinder and Waiver Agreement.
8-K
001-40033
10.17
12/9/21
10.17
Escrow Agreement, dated as of December 3, 2021, by and among the Company, P3 Health Group Holdings, LLC, P3 Health Group, LLC, Hudson Vegas Investment SPV, LLC, Mary Tolan and Sherif Abdou, as unitholder representatives and PNC Bank, N.A.
8-K
001-40033
10.18
12/9/21
10.18
Repurchase Promissory Note between P3 Health Group Holdings, LLC and IHC Health Services, Inc., dated June 28, 2019.
*
10.19
First Amendment to Repurchase Promissory Note between P3 Health Group Holdings, LLC and IHC Health Services, Inc., dated November 19, 2020.
*
10.20
Second Amendment to Term Loan Agreement and First Amendment to Security Agreement, dated as of December 21, 2021, by and among P3 Health Group, LLC, as borrower, the Subsidiary Guarantors party thereto and CRG Servicing LLC, as administrative agent and collateral agent.
*
10.21†
Employment Agreement, by and among P3 Health Partners Inc., P3 Health Group Management, LLC and Dr. Sherif Abdou.
8-K
001-40033
10.1
5/18/22
10.22†
Employment Agreement, by and among P3 Health Partners Inc., P3 Health Group Management, LLC and Dr. Amir Bacchus.
8-K
001-40033
10.2
5/18/22
10.23†
Transaction Bonus Agreement, by and among P3 Health Partners Inc., P3 Health Group Management, LLC and Dr. Sherif Abdou.
8-K
001-40033
10.3
5/18/22
10.24†
Transaction Bonus Agreement, by and among P3 Health Partners Inc., P3 Health Group Management, LLC and Dr. Amir Bacchus.
8-K
001-40033
10.4
5/18/22
10.25†
Non-Employee Director Compensation Program
*
21.1
List of Subsidiaries
*
31.1
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*
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31.2
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**
101.INS
Inline XBRL Instance Document
*
101.SCH
Inline XBRL Taxonomy Extension Schema Document
*
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
*
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
*
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
*
101.PRE
Inline XBRL Taxonomy Extension Presentation Document
*
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
* Filed herewith.
** Furnished herewith.
†
Indicates management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
P3 Health Partners Inc.
By:
/s/ Sherif W. Abdou
Name:
Sherif W. Abdou, M.D.
Date: October 20, 2022
Title:
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Sherif W. Abdou
Chief Executive Officer and Director
October 20, 2022
Sherif W. Abdou, M.D.
(Principal Executive Officer)
/s/ Eric A. Atkins
Chief Financial Officer
October 20, 2022
Eric A. Atkins
(Principal Financial Officer and Principal Accounting Officer)
/s/ Mark Thierer
Chairman of the Board of Directors
October 20, 2022
Mark Thierer
/s/ Amir S. Bacchus
Chief Medical Officer and Director
October 20, 2022
Amir S. Bacchus, M.D.
/s/ Gregory N. Kazarian
Director
October 20, 2022
Gregory N. Kazarian
/s/ Lawrence B. Leisure
Director
October 20, 2022
Lawrence B. Leisure
/s/ Jeffrey G. Park
Director
October 20, 2022
Jeffrey G. Park
/s/ Thomas E. Price
Director
October 20, 2022
Thomas E. Price, M.D.
/s/ Mary A Tolan
Director
October 20, 2022
Mary A. Tolan
/s/ Greg Wasson
Director
October 20, 2022
Greg Wasson
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Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ; Las Vegas, Nevada ; PCAOB ID# 243 )
F-2
Report of Independent Registered Public Accounting Firm ( KPMG LLP ; Irvine, California ; PCAOB ID# 185 )
F-3
Consolidated Balance Sheets as of December 31, 2021 and 2020
F-4
Consolidated Statements of Operations for the periods December 3, 2021 through December 31, 2021 and January 1, 2021 through December 2, 2021 and the years ended December 31, 2020 and 2019
F-5
Consolidated Statements of Stockholders’ Equity (Deficit) and Mezzanine Equity for the periods December 3, 2021 through December 31, 2021 and January 1, 2021 through December 2, 2021 and years ended December 31, 2020 and 2019
F-6
Consolidated Statements of Cash Flows for the periods December 3, 2021 through December 31, 2021 and January 1, 2021 through December 2, 2021 and the years ended December 31, 2020 and 2019
F-7
Notes to Consolidated Financial Statements
F-8
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
P3 Health Partners Inc.
Henderson, Nevada
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of P3 Health Partners Inc. (the “Company”), as of December 31, 2021 (Successor), and the related statements of operations, changes in stockholders’/members’ equity (deficit) and mezzanine equity, and cash flows for the period from December 3, 2021 to December 31, 2021 (Successor) and the period from January 1, 2021 to December 2, 2021 (Predecessor) , and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 (Successor), and the results of its operations and its cash flows for the period from December 3, 2021 to December 31, 2021 (Successor) and the period from January 1, 2021 to December 2, 2021 (Predecessor) , in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter is also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2021.
Las Vegas, Nevada
October 20, 2022
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders/Members and Board of Directors
P3 Health Partners Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of P3 Health Partners Inc. (formerly, P3 Health Group Holdings, LLC) and subsidiaries (the Company) as of December 31, 2020, the related consolidated statements of operations, stockholders’/members’ equity (deficit) and mezzanine equity, and cash flows for each of the years in the two year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Correction of a Misstatement
As discussed in Note 2 to the consolidated financial statements, the 2020 and 2019 financial statements have been restated to correct misstatements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2021 to 2021.
Phoenix, Arizona
July 2, 2021, except for Note 25, as to which the date is August 11, 2021, and Note 2 as to which the date is October 20, 2022
F-3
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2021 and 2020
Successor
Predecessor
2021
2020
As Restated
ASSETS
CURRENT ASSETS:
Cash
$
140,477,586
$
36,261,104
Restricted Cash
356,286
3,641,843
Health Plan Receivables
50,251,004
44,962,787
Clinic Fees and Insurance Receivables, Net
1,090,104
675,954
Other Receivables
726,903
146,117
Prepaid Expenses and Other Current Assets
6,959,067
5,192,782
TOTAL CURRENT ASSETS
199,860,950
90,880,587
LONG-TERM ASSETS:
Property and Equipment
8,230,250
7,743,414
Less: Accumulated Depreciation
( 182,321 )
( 1,592,827 )
Property and Equipment, Net
8,047,929
6,150,587
Goodwill
1,309,750,216
871,128
Intangible Assets, Net
835,838,605
—
Notes Receivable, Net
3,590,715
3,804,662
Right of Use Asset
7,020,045
4,728,242
TOTAL LONG-TERM ASSETS
2,164,247,510
15,554,619
TOTAL ASSETS (1)
$
2,364,108,460
$
106,435,206
LIABILITIES, MEZZANINE EQUITY and STOCKHOLDERS'/MEMBERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses
$
17,730,683
$
11,793,125
Accrued Payroll
6,304,362
4,003,373
Health Plans Settlements Payable
22,548,694
13,742,775
Claims Payable
101,958,324
56,934,400
Premium Deficiency Reserve
37,835,642
—
Accrued Interest
8,771,065
4,052,406
Current Portion of Long-Term Debt
46,101
89,988
Short-Term Debt
3,578,561
—
TOTAL CURRENT LIABILITIES
198,773,432
90,616,067
LONG-TERM LIABILITIES:
Right of Use Liability
6,296,883
3,634,429
Warrant Liabilities
11,382,826
6,316,605
Contingent Consideration
3,486,593
—
Long-Term Debt
80,000,000
45,387,986
TOTAL LONG-TERM LIABILITIES
101,166,302
55,339,020
TOTAL LIABILITIES (1)
299,939,734
145,955,087
COMMITMENTS AND CONTINGENCIES (NOTE 26)
MEZZANINE EQUITY
Redeemable Non-Controlling Interest
1,790,617,285
—
Class D Units Subject to Possible Redemption (Predecessor), 16,130,034 Units Net of Issuance Costs $ 2,958,446
—
47,041,554
Class A Units Subject to Possible Redemption (Predecessor)
—
43,656,270
STOCKHOLDERS'/MEMBERS’ EQUITY (DEFICIT):
Accumulated Equity-Based Compensation (Predecessor)
—
447,474
Redemption of Profits Interests (Predecessor)
—
( 180,000 )
Class A Common Stock, $ .0001 par value; 800,000,000 shares authorized; 41,578,890 shares issued and outstanding as of December 31, 2021
4,158
—
Class V Common Stock, $ .0001 par value; 205,000,000 shares authorized; 196,553,523 shares issued and outstanding as of December 31, 2021
19,655
—
Additional Paid in Capital
312,945,752
—
Accumulated Deficit
( 39,418,124 )
( 130,485,179 )
TOTAL STOCKHOLDERS'/MEMBERS' EQUITY (DEFICIT)
273,551,441
( 130,217,705 )
TOTAL LIABILITIES, MEZZANINE EQUITY & STOCKHOLDERS'/MEMBERS’ EQUITY (DEFICIT)
$
2,364,108,460
$
106,435,206
(1)
The Company’s consolidated balance sheets include the assets and liabilities of its consolidated variable interest entities (“VIEs”). As discussed in Note 28: Variable Interest Entities, P3 LLC is itself a VIE. P3 LLC represents substantially all the assets and liabilities of the Company. As a result, the language and numbers below refer only to VIEs held at the P3 LLC level. The consolidated balance sheets include total assets that can be used only to settle obligations of P3 LLC’s consolidated VIEs totaling $ 8.1 million and $ 0.8 million as of December 31, 2021 and December 31, 2020, respectively, and total liabilities of P3 LLC’s consolidated VIEs for which creditors do not have recourse to the general credit of the Company totaled $ 6.1 million and $ 1.7 million as of December 31, 2021 and December 31, 2020, respectively. These VIE assets and liabilities do not include $ 6.0 million of investment in affiliates and $ 24.1 million of amounts due to affiliates as of December 31, 2021 and $ 19.4 million of amounts due to affiliates as of December 31, 2020 as these are eliminated in consolidation and not presented within the consolidated balance sheets. See Note 28 “Variable Interest Entities.”
See Accompanying Notes to Consolidated Financial Statements
F-4
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
Year Ended
through December 31,
through December 2,
December 31,
December 31,
2021
2021
2020
2019
As Restated
As Restated
OPERATING REVENUE:
Capitated Revenue
$
57,224,539
$
567,735,297
$
480,739,577
$
139,332,707
Other Patient Service Revenue
1,537,858
10,867,121
10,323,948
6,149,405
TOTAL OPERATING REVENUE
58,762,397
578,602,418
491,063,525
145,482,112
OPERATING EXPENSES:
Medical Expenses
66,877,005
592,465,049
484,502,423
141,029,737
Premium Deficiency Reserve
26,276,575
11,559,067
( 20,539,364 )
6,363,652
Corporate, General and Administrative Expenses
16,983,132
100,243,148
53,390,338
36,423,532
Sales and Marketing Expenses
364,127
1,818,015
1,502,634
801,685
Amortization of Intangible Assets
6,961,666
34,396
—
—
Depreciation
187,558
1,540,335
795,172
399,177
TOTAL OPERATING EXPENSES
117,650,063
707,660,010
519,651,203
185,017,783
OPERATING LOSS
( 58,887,666 )
( 129,057,592 )
( 28,587,678 )
( 39,535,671 )
OTHER INCOME (EXPENSES):
Interest Expense, net
( 1,321,922 )
( 9,677,477 )
( 2,533,180 )
( 2,533,842 )
Mark-to-Market of Stock Warrants
2,271,659
( 7,664,869 )
—
—
Other
—
—
( 290,684 )
97,955
TOTAL OTHER INCOME (EXPENSE)
949,737
( 17,342,346 )
( 2,823,864 )
( 2,435,887 )
LOSS BEFORE INCOME TAXES
( 57,937,929 )
( 146,399,938 )
( 31,411,542 )
( 41,971,558 )
PROVISION FOR INCOME TAXES
—
—
—
—
NET LOSS
( 57,937,929 )
( 146,399,938 )
( 31,411,542 )
( 41,971,558 )
LESS NET LOSS ATTRIBUTABLE TO REDEEMABLE NON-CONTROLLING INTERESTS
( 47,856,729 )
—
—
—
NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS
$
( 10,081,200 )
$
( 146,399,938 )
$
( 31,411,542 )
$
( 41,971,558 )
NET LOSS PER SHARE (BASIC AND DILUTED)
$
( 0.24 )
N/A 1
N/A 1
N/A 1
1
The Company analyzed the calculation of net loss per member unit for predecessor periods prior to the Business Combinations and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, net loss per member unit information has not been presented for predecessor periods prior to the Business Combinations on December 3, 2021.
See Accompanying Notes to Consolidated Financial Statements
F-5
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’/MEMBERS’ EQUITY (DEFICIT) AND MEZZANINE EQUITY
Predecessor
Class A Units Subject to
Class D Units Subject to
Possible Redemption
Possible Redemption
Class B-1
Class C
Redemption
Total
of
Accumulated
Members’
Units
Amount
Units
Amount
Units
Amount
Units
Amount
Profit Interests
Deficit
Deficit
Balance as of December 31, 2018 As Restated
43,051,507
$
41,815,775
—
$
—
2,000,000
$
380,000
425,000
$
67,052
$
—
$
( 56,131,171 )
$
( 55,684,119 )
Issuance of Class D Units
—
—
16,130,034
50,000,000
—
—
—
—
—
—
—
Conversion of Debt to Class A Units
3,764,025
3,764,025
—
—
—
—
—
—
—
—
—
Costs of Issuance of Class D Units
—
—
—
( 2,958,446 )
—
—
—
—
—
—
—
Class A Units Issued
11,184,468
11,184,468
—
—
—
—
—
—
—
—
—
Class B-1 and Class C Unit Based Compensation
—
—
—
—
2,000,000
380,000
633,333
94,042
—
—
474,042
Redemption of Class A Units
( 15,000,000 )
( 15,000,000 )
—
—
—
—
—
—
—
—
—
Modification of Class A
—
1,892,002
—
—
—
( 760,000 )
—
( 161,094 )
—
( 970,908 )
( 1,892,002 )
Net Loss
—
—
—
—
—
—
—
—
—
( 41,971,558 )
( 41,971,558 )
Balance as of December 31, 2019 As Restated
43,000,000
$
43,656,270
16,130,034
$
47,041,554
4,000,000
$
—
1,058,333
$
—
$
—
$
( 99,073,637 )
$
( 99,073,637 )
Class B-1 and Class C Unit Based Compensation
—
—
—
—
2,000,000
380,000
443,750
67,474
—
—
447,474
Redemption of Class C Units
—
—
—
—
—
—
( 200,000 )
—
( 180,000 )
—
( 180,000 )
Net Loss
—
—
—
—
—
—
—
—
—
( 31,411,542 )
( 31,411,542 )
Balance as of December 31, 2020 As Restated
43,000,000
$
43,656,270
16,130,034
$
47,041,554
6,000,000
$
380,000
1,302,083
$
67,474
$
( 180,000 )
$
( 130,485,179 )
$
( 130,217,705 )
Class B-1 and Class C Unit Based Compensation
—
—
—
—
2,000,000
380,000
660,417
901,574
—
—
1,281,574
Class B-2 Units Accelerated on Merger Date
—
—
—
—
4,054,054
81,081
—
—
—
—
81,081
Class B-3 Units Accelerated on Merger Date
—
—
—
—
5,647,438
56,474
—
—
—
—
56,474
Class C-1 Units Accelerated on Merger Date
—
—
—
—
—
—
1,035,833
2,242,703
—
—
2,242,703
Class C-2 Units Accelerated on Merger Date
—
—
—
—
—
—
1,685,000
39,420
—
—
39,420
Net Loss
—
—
—
—
—
—
—
—
—
( 146,399,938 )
( 146,399,938 )
Balance as of December 2, 2021
43,000,000
$
43,656,270
16,130,034
$
47,041,554
17,701,492
$
897,555
4,683,333
$
3,251,171
$
( 180,000 )
$
( 276,885,117 )
$
( 272,916,391 )
Successor
Redeemable
Non-controlling
Class A Common Stock
Class V Common Stock
Additional Paid
Accumulated
Total Stockholders’
Interests
Shares
Amount
Shares
Amount
in Capital 1
Deficit
Equity
STOCKHOLDERS’ EQUITY, December 3, 2021
$
1,833,838,872
41,578,890
$
4,158
196,553,523
$
19,655
$
312,945,752
$
( 29,336,924 )
$
283,632,641
Stock Compensation
4,635,142
—
—
—
—
—
—
—
Net Loss
( 47,856,729 )
—
—
—
—
—
( 10,081,200 )
( 10,081,200 )
STOCKHOLDERS’ EQUITY, December 31, 2021
$
1,790,617,285
41,578,890
$
4,158
196,553,523
$
19,655
$
312,945,752
$
( 39,418,124 )
$
273,551,441
(1)
Included in the opening balance are transactions completed in connection with the Business Combinations, including the PIPE investment of $ 195.3 million (net of issuance costs), the equity consideration to P3 shareholders of $ 80.3 million, and the trust proceeds (net of redemptions) of $ 37.4 million.
See Accompanying Notes to Consolidated Financial Statements
F-6
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
Year Ended
through December 31,
through December 2,
December 31,
December 31,
2021
2021
2020 (As Restated)
2019 (As Restated)
Cash Flows From Operating Activities
Net Loss
$
( 57,937,929 )
$
( 146,399,938 )
$
( 31,411,542 )
$
( 41,971,558 )
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation Expense
187,558
1,540,335
795,172
399,177
Amortization of Intangible Assets
6,961,666
34,396
—
—
Stock-Based Compensation
4,635,142
3,701,252
447,475
474,042
Amortization of Debt Origination Fees
—
658,587
80,237
—
Amortization of Discount from Issuance of Debt
—
1,139,060
144,971
—
Mark-to-Market Adjustment of Stock Warrants
( 2,271,659 )
7,664,869
—
—
Premium Deficiency Reserve
26,276,575
11,559,067
( 20,539,364 )
6,363,652
Changes in Assets and Liabilities, net of Acquisitions:
Accounts Receivable
1,467,289
( 1,484,932 )
139,212
424,137
Health Plan Receivables / Premiums
3,236,036
( 2,770,246 )
( 27,507,240 )
( 9,653,991 )
Other Current Assets
( 4,704,294 )
4,254,368
( 4,160,078 )
( 122,765 )
Net Change in ROU Assets and Liabilities
( 21,886 )
305,677
( 704,500 )
( 1,620,600 )
Accounts Payable
7,731,972
34,224,416
8,102,668
803,503
Accrued Payroll
3,158,624
( 1,134,709 )
2,289,655
502,602
Accrued Interest
( 497,781 )
5,216,440
1,848,265
2,204,141
Health Plan Payables / Premiums
( 2,591,997 )
11,264,767
8,804,203
1,853,358
Claims Payable
( 971,210 )
19,097,060
37,075,052
12,057,792
Net Cash Used in Operating Activities
( 15,341,894 )
( 51,129,531 )
( 24,595,814 )
( 28,286,510 )
Cash Flows From Investing Activities
Purchases of Property, Plant and Equipment
( 120,559 )
( 3,290,482 )
( 2,926,621 )
( 1,451,861 )
Acquisitions, Net of Cash Acquired
( 47,879,102 )
( 4,989,000 )
( 130,000 )
—
Notes Receivable, Net
143,297
70,650
( 109,527 )
( 2,404,862 )
Net Cash Used in Investing Activities
( 47,856,364 )
( 8,208,832 )
( 3,166,148 )
( 3,856,723 )
Cash Flows From Financing Activities
Issuance (Redemption) of Class A, C and D Units
—
—
( 180,000 )
62,041,554
Proceeds from PIPE, Net of Issuance Costs
195,307,872
—
—
—
Proceeds from Long-Term Debt, Net of Discount and Issuance Costs
—
24,625,000
36,433,282
16,164,914
Proceeds from Short-Term Debt
3,377,329
351,872
—
—
Repayment of Long-Term Debt
( 8,008 )
( 186,519 )
( 1,493,221 )
( 14,586,891 )
Net Cash Provided by Financing Activities
198,677,193
24,790,353
34,760,061
63,619,577
Net Change in Cash and Restricted Cash
135,478,935
( 34,548,010 )
6,998,099
31,476,344
Cash and Restricted Cash at Beginning of Period
5,354,937
39,902,947
32,904,848
1,428,504
Cash and Restricted Cash at End of Period
$
140,833,872
$
5,354,937
$
39,902,947
$
32,904,848
Supplemental Cash Flow Information:
Cash Paid for Interest
$
1,346,254
$
2,796,368
$
685,419
$
560,246
Accrued Costs for Software (Development in Process)
$
—
$
—
$
249,454
$
176,352
Conversion of Class A Units to Long-Term Debt
$
—
$
—
$
—
$
15,000,000
Conversion of Long-Term Debt to Class A Units
$
—
$
—
$
—
$
3,764,245
See Accompanying Notes to Consolidated Financial Statements
F-7
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Company Operations
P3 Health Partners Inc. (the “Company” or “P3”) is a patient-centered and physician-led population health management company and, for accounting purposes, is the successor to P3 Health Group Holdings, LLC (“P3 Health Group Holdings”).
P3 Health Group Holdings and Subsidiaries was founded on April 12, 2017 and began commercial operations on April 20, 2017 to provide population health management services on an at-risk basis to insurance plans offering medical coverage to Medicare beneficiaries under Medicare Advantage programs. Medicare Advantage programs are insurance products created solely for Medicare beneficiaries. Insurance plans contract directly with the Centers for Medicare and Medicaid Services (“CMS”) to offer Medicare beneficiaries benefits that replace traditional Medicare Fee for Service (“FFS”) coverage.
On December 3, 2021, (the “Closing Date”), Foresight Acquisition Corp (“Foresight”) and P3 Health Group Holdings consummated a series of business combinations pursuant to which, among other things, P3 Health Group Holdings merged with and into FAC Merger Sub LLC, a Delaware limited liability company and wholly owned subsidiary of Foresight Acquisition Corp. (“Merger Sub”) (the “P3 Merger”), with Merger Sub as the surviving company, which was renamed P3 Health Group, LLC (“P3 LLC”), and FAC-A Merger Sub Corp., a Delaware corporation and a wholly owned subsidiary of Foresight, FAC-B Merger Sub Corp., a Delaware corporation and a wholly owned subsidiary of Foresight (together with FAC-A Merger Sub Corp., the “Merger Corps”) merged with and into CPF P3 Blocker-A, LLC, a Delaware limited liability company, CPF P3 Blocker-B, LLC a Delaware limited liability company (together with CPF P3 Blocker-A, LLC, the “Blockers”), with the Blockers as the surviving entities and wholly-owned subsidiaries of Foresight (collectively, the “Business Combinations”). Upon completion of the Business Combinations (the “Closing”), the Company and P3 LLC were organized in an “Up-C” structure in which all of the P3 LLC operating subsidiaries are held directly or indirectly by P3 LLC, and the Company directly owned approximately 17.1 % of P3 LLC and became the sole manager of P3 LLC. Following Closing, 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. In connection with the closing of the transactions, the Company changed its name from Foresight Acquisition Corp. to P3 Health Partners Inc.
The Company’s contracts with health plans are based on an at-risk shared savings model. Under this model, the Company is financially responsible for the cost of all contractually-covered services provided to members assigned to the Company by health plans in exchange for a fixed monthly “capitation” payment, which is generally a percentage of the payment health plans receive from CMS. Under this arrangement, Medicare beneficiaries generally receive all their healthcare coverage through the Company’s network of employed and affiliated physicians and specialists (except for emergency situations).
The services provided to health plans’ members vary by contract. These may include utilization management, care management, disease education, and maintenance of a quality improvement and quality management program for members assigned to the Company. Effective January 1, 2019, the Company is also responsible for the credentialing of Company providers, processing and payment of claims and the establishment of a provider network for certain health plans. At December 31, 2021, 2020 and 2019, the Company had agreements with seventeen , twelve and seven health plans, respectively.
F-8
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has Management Services Agreements (“MSAs”) and deficit funding agreements with Kahan, Wakefield, Abdou, PLLC and Bacchus, Wakefield, Kahan, PC, P3 Health Partners Professional Services P.C., P3 Medical Group, P.C. and P3 Health Partners California, P.C. (collectively, the “Network”). As more fully described in Note 28 “Variable Interest Entities,” the entities in the Network are variable interest entities and the Company is the primary beneficiary of the Network. The MSAs provide that the Company or its subsidiaries will furnish administrative personnel, office supplies and equipment, general business services, contract negotiation and billing and collection services to the Network. Fees for these services are the excess of the Network’s revenue over expenses. Per the deficit funding agreements, the Company or its subsidiaries are obligated to lend amounts to the Network to the extent expenses exceed revenues. The loan will bear interest at prime plus 2 %.
In addition to the Company’s contracts with health plans, through its relationship with Kahan, Wakefield, Abdou, PLLC and Bacchus, Wakefield, Kahan, PC, the Company provides primary healthcare services through its employed physician clinic locations. These primary care clinics are reimbursed for services provided under FFS contracts with various payers and through capitated – per member, per month (“PMPM”) arrangements.
Note 2: Restatement of Previously Issued Financial Statements
The Company has restated the consolidated financial statements for the years ended December 31, 2020 and 2019.
Network
Since 2017, P3 Health Group Holdings and P3 Health Partners, LLC (collectively with P3 Health Partners, Inc., “P3”) have entered into a collective of arrangements with the Network whereby P3 consolidates the Network under the Variable Interest Entity model in accordance with ASC Topic 810 , Consolidation (“ASC 810”). Historically, all of the net losses incurred by the Network has been allocated to loss attributable to non-controlling interests. Based on an analysis of the deficit funding agreement between P3 and the Network, P3 is obligated to fund losses incurred by the Network. Because P3 is contractually obligated to fund the losses, losses incurred by the Network should not be allocated to non-controlling interests.
Based on management’s evaluation, it was concluded that the Company’s accounting for non-controlling interests related to the Network is not attributed in the manner contemplated by ASC 810. As a result, the Company is reclassifying the loss attributable to non-controlling interest related to the Network to loss attributable to controlling interests on the Consolidated Balance Sheets, Consolidated Statements of Operations, and the Consolidated Statements of Changes in Stockholders’/Members’ Equity for the periods described above.
The Company’s accounting for the loss in controlling interests instead of non-controlling interests has no impact on the Company’s current or previously reported cash position, revenue, operating expenses or total operating, investing or financing cash flows.
Preferred Returns
P3’s capital structure consists of Class A Units, which represent commitments from the Company’s private equity sponsors, and Class D Units, which represents an additional investment from a private equity sponsor. Both the Class A and Class D Units have voting rights and, accrue a preferred return in the amount of 8.0 % per annum.
Historically, all of the accrued returns have been incorrectly recognized as interest expense on P3’s Statements of Operations and as equity on P3’s Balance Sheets. Based on the analysis of the Class A and Class D Units, the preferred returns should not be accrued until they are legally declared. As a result, the Company’s historical recording of preferred returns in equity and interest expense has been removed as no recognition is necessary until legally declared.
F-9
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Class A Units
Historically, the Class A Preferred Units issued by P3 have been accounted for as permanent equity. Since the Class A Preferred Units are redeemable upon the occurrence of a Sale of the Company via the liquidation and distribution preferences that returns invested capital and the preferred return, management evaluated whether the occurrence of such an event is outside of the Company’s control. As the Class A preferred unit holders hold a majority vote, the redemption of Class A Preferred Units upon a Sale of the Company, irrespective of probability, is outside of the Company’s control.
Based on management’s evaluation, the Class A Preferred Units should be reclassified from permanent to mezzanine equity. Additionally, the Company entered into the Second Amended and Restated Limited Liability Company Agreement in 2019, which provided the holders of Class A units an 8 % per annum preferred return. The Company determined that the amendment should be accounted for as a modification. Therefore, the Company recorded the incremental increase in fair value as an adjustment to the carrying value of Class A units with an offset to APIC equivalent and accumulated deficit.
Capitated Revenues
Medicare pays capitation using a “risk adjustment model”, which compensates providers based on the health status (acuity) of each individual patient (via a Risk Adjustment Factor, “RAF”). The Company’s policy is to recognize the variable RAF component of capitation revenues, to the extent that it is probable a significant reversal will not occur. At the December 31, 2020 balance sheet date the Company determined its estimates of the RAF components of certain capitation revenues were constrained and therefore not estimable, as it was not probable a significant reversal would not occur. The Company subsequently collected the RAF components of capitation payments prior to the issuance of the 2020 financial statements, effectively relieving the constraints which previously existed at the December 31, 2020 balance sheet date. Capitation revenues for 2020 are restated based on the results of management’s analysis of the RAF component of cash receipts collected prior to the issuance 2020 financial statements which were previously determined to not be estimable. The total amount of the RAF adjustment was $ 6,532,954 .
There were two other errors related to capitated revenue, other patient service revenue, and medical expenses which were corrected in the restatement. Firstly, the Company has reclassified capitated revenue streams attributable to the Network. These capitated revenues were previously classified as “other patient service revenue” and then have been reclassified into “capitated revenue”. Secondly, the Company has eliminated intercompany revenue and expense related to transactions between Bacchus and P3-NV that should have been eliminated in consolidation. Prior to the restatement noted above regarding capitated revenue, this adjustment was a decrease to other patient service revenue and a decrease to medical expenses.
Disclosure Correction
The amounts reported as intercompany accrued interest for advances made to the Company’s consolidated VIE were incorrectly disclosed for the year ended December 31, 2020 and has been reduced (see Note 27). The disclosure of the condensed financial statement of the VIE have also been corrected for accrued interest and interest expense relating to the advance (see Note 28). There is no impact to the consolidated financial statements of the Company as result of this correction to the disclosures.
F-10
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the restatement adjustments on each financial statement line item affected by the restatement as of the dates, and for the periods, indicated:
As Previously
Network
Preferred Returns
Class A Units
Revenue
Reported
Adjustments
Adjustments
Adjustments
Adjustments
As Restated
Consolidated Balance Sheet as of December 31, 2020
Health Plan Settlement Receivable
$
38,429,833
$
—
$
—
$
—
$
6,532,954
$
44,962,787
Total Current Assets
84,347,633
—
—
—
6,532,954
90,880,587
Total Assets
99,902,252
—
—
—
6,532,954
106,435,206
Class A Units Subject to Possible Redemption
—
—
—
43,656,270
—
43,656,270
Class D Units Subject to Possible Redemption
51,608,900
—
( 4,567,346 )
—
—
47,041,554
Contributed Capital
41,764,270
—
—
( 41,764,270 )
—
—
Class A Preferred Returns
3,815,034
—
( 3,815,034 )
—
—
—
Accumulated Equity-Based Compensation
1,368,567
—
—
( 921,092 )
—
447,475
Retained Loss from Non-Controlling Interests
( 18,187,381 )
18,187,381
—
—
—
—
Accumulated Deficit (formerly Accumulated Loss from Controlling Interest)
( 126,242,225 )
( 18,187,381 )
8,382,381
( 970,908 )
6,532,954
( 130,485,179 )
Total Member’s Deficit
( 97,661,735 )
—
4,567,346
( 43,656,270 )
6,532,954
( 130,217,705 )
Total Liabilities, Mezzanine Equity & Members' Equity (Deficit)
99,902,252
—
—
—
6,532,954
106,435,206
Consolidated Statement of Operations for the Year Ended December 31, 2020
Capitated Revenue
$
471,551,241
$
—
$
—
$
—
$
9,188,336
$
480,739,577
Other Patient Service Revenue
13,990,050
—
—
—
( 3,666,102 )
10,323,948
Total Operating Revenue
485,541,291
—
—
—
5,522,234
491,063,525
Medical Expenses
485,513,143
—
—
—
( 1,010,720 )
484,502,423
Total Operating Expenses
520,661,923
—
—
—
( 1,010,720 )
519,651,203
Operating Loss
( 35,120,632 )
—
—
—
6,532,954
( 28,587,678 )
Interest Expense, net
( 9,970,260 )
—
7,437,080
—
—
( 2,533,180 )
Total Other Income (Expense)
( 10,260,944 )
—
7,437,080
—
—
( 2,823,864 )
Net Loss Attributable to Non-Controlling Interests
( 4,307,071 )
4,307,071
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 41,074,505 )
( 4,307,071 )
7,437,080
—
6,532,954
( 31,411,542 )
Consolidated Statements of Changes in Members' Deficit for the Year Ended December 31, 2020
Preferred Return(s) at 8 % (Class A + Class D Units)
$
7,437,080
$
—
$
( 7,437,080 )
$
—
$
—
$
—
Net Loss
( 45,381,576 )
—
7,437,080
—
6,532,954
( 31,411,542 )
Balance as of December 31, 2020
( 97,661,735 )
—
4,567,346
( 43,656,270 )
6,532,954
( 130,217,705 )
Consolidated Statements of Cash Flows for the Year Ended December 31 2020
Net Loss
$
( 45,381,576 )
$
—
$
7,437,080
$
—
$
6,532,954
$
( 31,411,542 )
Health Plan Settlements Receivable/Premiums Receivable
( 20,974,286 )
—
—
—
( 6,532,954 )
( 27,507,240 )
Class A and Class D Preferred Returns
7,437,080
—
( 7,437,080 )
—
—
—
Consolidated Balance Sheet as of December 31, 2019
Class A Units Subject to Possible Redemption
$
—
$
—
$
—
$
43,656,270
$
—
$
43,656,270
Class D Units Subject to Possible Redemption
47,556,622
—
( 515,068 )
—
—
47,041,554
Contributed Capital
41,764,270
—
—
( 41,764,270 )
—
—
Class A Preferred Returns
430,230
—
( 430,230 )
—
—
—
Accumulated Equity-Based Compensation
921,092
—
—
( 921,092 )
—
—
Retained Loss from Non-Controlling Interests
( 13,880,310 )
13,880,310
—
—
—
—
Accumulated Deficit (formerly Accumulated Loss from Controlling Interest)
( 85,167,716 )
( 13,880,310 )
945,297
( 970,908 )
—
( 99,073,637 )
Total Member’s Deficit
( 55,932,434 )
—
515,068
( 43,656,271 )
—
( 99,073,637 )
Consolidated Statement of Operations for the Year Ended December 31, 2019
Capitated Revenue
$
138,727,943
$
—
$
—
$
—
$
604,764
$
139,332,707
Other Patient Service Revenue
7,166,889
—
—
—
( 1,017,484 )
6,149,405
Total Operating Revenue
145,894,832
—
—
—
( 412,720 )
145,482,112
Medical Expenses
141,442,457
—
—
—
( 412,720 )
141,029,737
Total Operating Expenses
185,430,503
—
—
—
( 412,720 )
185,017,783
Interest Expense, net
( 3,479,139 )
—
945,297
—
—
$
( 2,533,842 )
Total Other Income (Expense)
( 3,381,184 )
—
945,297
—
—
( 2,435,887 )
Net Loss Attributable to Non-Controlling Interests
( 7,907,592 )
7,907,592
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 35,009,263 )
( 7,907,592 )
945,297
—
—
( 41,971,558 )
Consolidated Statements of Changes in Members' Deficit for the Year Ended December 31, 2019
Preferred Return(s) at 8 % (Class A + Class D Units)
$
945,298
$
—
$
( 945,298 )
$
—
$
—
$
—
Net Loss
( 42,916,855 )
—
945,297
—
—
( 41,971,558 )
Conversion of Debt to Class A Units
3,764,025
—
—
( 3,764,025 )
—
—
Class A Units Issued
11,184,468
—
—
( 11,184,468 )
—
—
Redemption of Class A Units
( 15,000,000 )
—
—
15,000,000
—
—
Modification of Class A
—
—
—
( 1,892,002 )
—
( 1,892,002 )
Balance as of December 31, 2019
( 55,932,434 )
—
515,068
( 43,656,271 )
—
( 99,073,637 )
Consolidated Statements of Cash Flows for the Year Ended December 31 2019
Net Loss
$
( 42,916,855 )
$
—
$
945,297
$
—
$
—
$
( 41,971,558 )
Class A and Class D Preferred Returns
945,297
—
( 945,297 )
—
—
—
Consolidated Statements of Changes in Members' Deficit for the Year Ended December 31, 2018
Balance as of December 31, 2018
$
( 13,868,589 )
$
—
$
—
$
( 41,815,530 )
$
—
$
( 55,684,119 )
F-11
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The restated unaudited interim financial information for the quarterly periods ended September 30, 2021, June 30, 2021, March 31, 2021, September 30, 2020, June 30, 2020 and March 31, 2020, is included in Note 30, “Quarterly Financial Information (Unaudited)”.
Note 3: Going Concern and Liquidity
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced losses since its inception and had losses of $ 57,937,929 for the 2021 Successor Period (See Note 4), $ 146,399,938 for the 2021 Predecessor Period (See Note 4), and $ 31,411,542 for the year ended December 31, 2020. Such losses were primarily the result of costs incurred in adding new members, building relationships with physician partners and payors, and developing new services. The Company anticipates operating losses and negative cash flows to continue for the foreseeable future as it continues to grow membership.
As of December 31, 2021, and December 31, 2020, the Company had $ 140,477,586 and $ 36,261,104 , respectively, in unrestricted cash and cash equivalents available to fund future operations. The Company’s 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, and the Company will need to use available capital resources and/or raise additional capital earlier than currently anticipated. When the Company pursues additional debt and/or equity financing, there can be no assurance that such financing will be available on terms commercially acceptable to the Company. If the Company is unable to obtain additional funding when needed, it will need to curtail planned activities in order to reduce costs, which will likely have an unfavorable effect on the Company’s ability to execute on its business plan, and have an adverse effect on its business, results of operations and future prospects. As a result of these matters, substantial doubt exists about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Note 4: Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) .
As a result of the Business Combinations, for accounting purposes, Foresight is the acquirer and P3 Health Group Holdings, LLC, which was renamed P3 Health Group, LLC (“P3 LLC”), is the accounting acquiree and predecessor. The financial statement presentation includes the financial statements of P3 LLC as “Predecessor” for the periods prior to the Closing Date (the “Predecessor Period(s)”) and of the Company as “Successor” for the periods after the Closing Date (the “Successor Period(s)”), including the consolidation of P3 LLC. The Successor Period includes the Company’s results of operations and cash flows for the period December 1 through December 2, 2021.
As a result of the application of the acquisition method of accounting as of the Closing Date of the Business Combinations, the accompanying consolidated financial statements include a black line division that indicates that the Predecessor and Successor reporting entities shown are presented on a different basis and are therefore, not comparable.
The Company qualifies as an emerging growth company (“EGC”) and as such, has elected the extended transition period for complying with certain new or revised accounting pronouncements. During the extended transition period, the Company is not subject to certain new or revised accounting standards applicable to public companies. The accounting pronouncements pending adoption as described in Note 6 “Recent Accounting Pronouncements Not Yet Adopted” reflect effective dates for the Company as an EGC with the extended transition period.
F-12
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with GAAP and include the accounts of the Company, and its subsidiaries, all of which are controlled by the Company through majority voting control and variable interest entities for which the Company is the primary beneficiary. As more fully described in Note 28 “Variable Interest Entities”, the Company is the primary beneficiary of the following physician practices (the “Network”):
● Kahan, Wakefield, Abdou, PLLC (“KWA”)
● Bacchus, Wakefield, Kahan, PC (“BACC”)
● P3 Health Partners Professional Services, P.C.
● P3 Medical Group, P.C.
● P3 Health Partners California, P.C.
All intercompany accounts and transactions have been eliminated in consolidation.
Variable Interest Entities (“VIE” or “VIEs”)
Management analyzes whether the Company has any financial interests in VIEs. This analysis includes a qualitative review based on an evaluation of the design of the entity, its organizational structure, including decision making ability and financial agreements, as well as a quantitative review. ASC 810 , requires a reporting entity to consolidate a VIE when that reporting entity has a variable interest that provides it with a controlling financial interest in the VIE. The entity which consolidates a VIE is referred to as the primary beneficiary of the VIE. See Note 28 “Variable Interest Entities”.
Segment Reporting
The Company presents the financial statements by segment in accordance with Accounting Standard Codification Topic No. 280, Segment Reporting (“ASC 280”) to provide investors with transparency into how the chief operating decision maker (“CODM”) manages the business. The Company determined the CODM is its Chief Executive Officer. The Company’s CODM manages the operations on a consolidated basis to make decisions about overall corporate resource allocation and to assess overall corporate profitability based on consolidated revenues and adjusted EBITDA, as described further in Note 25 “Segment Reporting.” The Company has one reportable segment.
Management’s Use of Estimates
Preparation of these consolidated financial statements and accompanying footnotes, in conformity with GAAP, requires Management to make estimates and assumptions that could affect amounts reported here. Management bases its estimates on the best information available at the time, its experiences and various other assumptions believed to be reasonable under the circumstances including estimates of the impact of COVID-19. See Note 26 “Commitments and Contingencies” for further discussion on the impact of COVID-19.
The areas where significant estimates are used in these accompanying consolidated financial statements include revenue recognition, the liability for unpaid claims, unit-based compensation, premium deficiency reserves, fair value and impairment recognition of long-lived assets (including intangibles and goodwill), fair value of acquired assets and liabilities in business combinations, share-based compensation, fair value of liability classified instruments and judgments related to deferred income taxes. Actual results could differ from those estimates.
F-13
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings (Loss) per Share and Member Unit
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of Public Warrants, Private Placement Warrants, restricted shares and escrow shares. As the Company has reported losses for all periods presented, all potentially dilutive securities are antidilutive and accordingly, basic net loss per share equals diluted net loss per share.
The Company analyzed the calculation of net loss per member unit for Predecessor Periods and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, net loss per member unit information has not been presented for Predecessor Periods.
Cash and Restricted Cash
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at banks. Accounts at each institution are insured up to $ 250,000 by the Federal Deposit Insurance Corporation (“FDIC”). In 2021 and 2020, the Company maintained its cash in bank deposit accounts that, at times, may have exceeded FDIC insured limits. Management does not expect any losses to occur on such accounts.
At December 31, 2021 and 2020, the Company had unrestricted cash of $ 140,477,586 and $ 36,261,104 , respectively, deposited at banking institutions which are subject to the FDIC insured limit.
Successor
Predecessor
December 31,
December 31,
2021
2020
Checking
$
140,477,586
$
36,261,104
Restricted
356,286
3,641,843
Total Cash Balances
$
140,833,872
$
39,902,947
Restricted Cash is that which is held for a specific purpose (such as payment of partner distributions and legal settlements) and is thus not available to the Company for immediate or general business use. Restricted Cash appears as a separate line item on the Company’s consolidated balance sheets.
The following table provides a reconciliation of cash and restricted cash on the balance sheet of the predecessor period at December 2, 2021, December 31, 2020, and December 31, 2019 that sum to the total of these items reported in the statement of cash flows.
Predecessor
December 2,
December 31,
December 31,
2021
2020
2019
Checking
$
5,300,842
$
36,261,104
$
32,592,496
Restricted
54,095
3,641,843
312,352
Total Cash Balances
$
5,354,937
$
39,902,947
$
32,904,848
F-14
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition and Revenue Sources
The Company categorizes revenue based on various factors such as the nature of contracts and order to billing arrangements as follows:
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
Year Ended
through December 31,
through December 2,
December 31,
December 31,
Revenue Type
2021
% of Total
2021
% of Total
2020
% of Total
2019
% of Total
Capitated Revenue
$
57,224,539
97
%
$
567,735,297
98
%
$
480,739,577
98
%
$
139,332,707
96
%
Other Patient Service Revenue:
Clinical Fees & Insurance Revenue
750,675
2
%
4,318,074
1
%
3,364,504
1
%
3,312,107
2
%
Shared Risk Revenue
180,558
0
%
601,509
0
%
1,111,466
0
%
932,301
1
%
Care Coordination / Management Fees
600,175
1
%
5,880,397
1
%
5,614,539
1
%
1,893,553
1
%
Incentive Fees
6,450
0
%
67,141
0
%
233,439
0
%
11,444
0
Total Other Patient Service Revenue
1,537,858
3
%
10,867,121
2
%
10,323,948
2
%
6,149,405
4
%
Total Revenue
$
58,762,397
100
%
$
578,602,418
100
%
$
491,063,525
100
%
$
145,482,112
100
%
The following table depicts the health plans from which the Company has a concentration of revenue that is 10.0% or more:
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
Year Ended
through December 31,
through December 2,
December 31,
December 31,
Plan Name
2021
% of Total
2021
% of Total
2020
% of Total
2019
% of Total
Health Plan A
$
11,664,112
20
%
$
139,289,079
24
%
$
147,906,495
30
%
$
—
—
Health Plan B
12,757,714
22
%
126,460,232
22
%
112,384,330
23
%
13,557,771
9
%
Health Plan C
6,156,558
10
%
71,061,602
12
%
66,237,074
13
%
27,788,287
19
%
Health Plan D
10,337,160
18
%
114,496,751
20
%
62,683,829
13
%
6,106,544
4
%
Health Plan E
1,820,518
3
%
22,249,245
4
%
28,880,247
6
%
39,265,322
27
%
Health Plan F
2,446,094
4
%
26,670,388
5
%
24,521,349
5
%
26,703,364
18
%
Health Plan G
—
—
%
264,006
—
%
22,646,251
5
%
20,157,166
14
%
All Other
13,580,241
23
%
78,111,115
13
%
25,803,950
5
%
11,903,658
9
%
Total Revenue
$
58,762,397
100
%
$
578,602,418
100
%
$
491,063,525
100
%
$
145,482,112
100
%
Revenue Recognition
The Company follows the accounting requirements of ASC 606, Revenue from Contracts with Customers (“ASC 606”), to recognize revenue. The core principle of ASC 606 is that an entity’s performance obligation is
F-15
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
complete, and revenue is earned, upon the transfer of a promise to deliver services to customers commensurate with consideration to which it would expect to be received in exchange for the actual delivery of those services. The terms of the contract and all relevant facts and circumstances should be considered when applying this guidance. This includes application of a practical expedient (a “portfolio approach”) to contracts with similar characteristics and circumstances. The Company used the portfolio approach to account for any ASC 606 transition adjustments for revenue from its Medicare Advantage contracted health plans.
The principles of ASC 606 are generally applied using the following five steps:
1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract; and
5. Recognize revenue when (or as) the entity satisfies a performance obligation.
The guidance requires disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. The Company initially applied the standard on January 1, 2019, using the modified retrospective adoption method, and elected to apply the modified retrospective method only to contracts that were not completed as of this date. Additionally, the Company utilized the portfolio approach to group contracts together with similar characteristics for the adoption analysis.
Capitated Revenue
The Company contracts with health plans using an at-risk (shared savings) model. Under the at-risk model, the Company is responsible for the cost of all covered services provided to members assigned by the health plans to the Company in exchange for a fixed premium payment, which generally is a percentage of the payment (“POP”) based on health plans’ premiums received from CMS. Through this capitation arrangement, the Company stands ready to provide assigned Medicare Advantage beneficiaries all their medical care via the Company’s directly employed and affiliated physician/specialist network.
The premiums health plans receive are determined via a competitive bidding process with CMS and are based on the costs of care in local markets and the average utilization of services by patients enrolled. Medicare pays capitation using a “risk adjustment model”, which compensates providers based on the health status (acuity) of each individual patient. Medicare Advantage plans with higher acuity patients receive higher premiums. Conversely, Medicare Advantage plans with lower acuity patients receive lesser premiums. Under the risk adjustment model, capitation is paid on an interim basis based on enrollee data submitted for the preceding year and is adjusted in subsequent periods after final data is compiled. The Company generally estimates transaction prices using the most likely methodology. Amounts are only included in the transaction price to the extent any significant uncertainty of reversal on cumulative revenue will not occur and is, furthermore, resolved. 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 cannot 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. In 2019, the Company recorded $ 150,681 of additional revenue related to prior year
F-16
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
premium risk adjustments. There were no premium risk adjustments recorded in 2021 and 2020 as related to prior years. As the period between the time of service and time of payment is typically one year or less, Management elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.
The Company’s contracts with health plans may include core functions and services for managing assigned patients’ medical care. The combination of those services is offered as one “single solution” (“bundle”). Capitation contracts have a single performance obligation that is a stand ready obligation to perform healthcare services to the population of enrolled members and constitutes a series for the provision of managed healthcare services for the term of the contract, which is deemed to be one month since the mix of patients-customers can change month over month The Company does not offer nor price each individual function as a standalone a la carte service to health plans. However, the addition or exclusion of certain services may be negotiated and reflected in each health plan’s specific total POP.
At December 31, 2021, 2020 and 2019, the Company had POP contracts in effect with 17 health plans (across 4 states), 12 health plans (across 4 states) and 7 health plans (across 2 states), respectively.
Each month, in accordance with contractual obligations (for non-delegated health plans; e.g. those for which the Company has not been delegated for claims processing), each plan funds a medical claims payment reserve equal to a defined percentage of premium attributable to members assigned to the Company. In turn, the Company administers and funds medical claims for contractually covered services, for assigned health plan members, from that health plan’s reserve. On a quarterly or monthly basis, health plans conduct a settlement of the reserve to determine any surplus or deficit amount. The reconciliation and distribution of the reserve occur within 120-days following the end of each quarter. An annual settlement reconciliation and distribution from all funds occurs within twenty-one months following each year-end.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, health plan receivables and health plan settlement payables, by health plan, by year, were as follows:
Health Plan Receivables
Successor
Predecessor
December 31,
December 31,
Health Plan Name
2021
2020
Health Plan A
$
4,695,712
$
5,732,221
Health Plan B
15,473,828
15,316,696
Health Plan C
1,380,752
7,332,687
Health Plan D
6,651,586
6,863,270
Health Plan E
2,439,046
2,194,209
Health Plan F
2,925,751
3,222,247
Health Plan G
239,375
2,735,562
Health Plan H
2,185,619
878,866
Health Plan I
1,134,750
17,908
Health Plan J
149,915
285,730
Health Plan K
2,705,147
4,569
Health Plan L
899,560
378,822
Health Plan M
1,747,116
—
Health Plan N
974,092
—
Health Plan O
666,291
—
Health Plan P
106,162
—
Health Plan Q
61,990
—
Health Plan R
3,578,682
—
Health Plan T
2,175,324
—
Health Plan U
60,306
—
Total Health Plan Receivables
$
50,251,004
$
44,962,787
Health Plan Settlement Payables
Successor
Predecessor
December 31,
December 31,
Health Plan Name
2021
2020
Health Plan B
$
11,700,274
$
—
Health Plan C
—
1,928,414
Health Plan D
3,882,250
4,680,185
Health Plan F
6,085,425
6,125,681
Health Plan G
776,164
1,008,495
Health Plan I
( 215,626 )
—
Health Plan O
( 39,151 )
—
Health Plan U
226,209
—
Health Plan V
133,149
—
Total Health Plan Settlement Payables
$
22,548,694
$
13,742,775
At December 31, 2021 and 2020, Management has deemed the Company’s settlement receivables to be fully collectible from those health plans where the Company is not delegated for claims processing. Accordingly, a constraint on the variable consideration associated with settlement receivables was not necessary.
Other Patient Service Revenue(s) – Clinical Fees and Insurance Revenue
Clinic fees and insurance revenues relate to net patient fees received from various payers and direct patients (“self-payers”) under contracts in which the Company’s sole performance obligation is to provide healthcare services through the operation of medical clinics. The Company recognizes clinic fees and insurance revenue in the period in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which services are provided. Under FFS payment arrangements, revenue is recognized on the date of service. The Company’s performance obligations are typically satisfied in the same day services are provided. All the Company’s contracts with its customers under these arrangements include a single performance obligation.
The Company’s contractual relationships with patients, in most cases, also involve third-party payers (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through state-sponsored health insurance exchanges). Transaction prices for services provided are dependent upon specific rules in place with third party payers – specifically, Medicare/Medicaid and pre-negotiated rates with managed care health plans and commercial insurance companies. Contractual arrangements with third parties typically include payments at amounts which are less than standard charges. These charges generally have predetermined rates for diagnostic service codes or discounted FFS rates. Management perpetually reviews the Company’s contractual estimation processes to consider and incorporate updates to laws, regulations and frequent changes in the managed care system. Contractual terms are negotiated and updated accordingly upon renewal.
The Company’s revenue is based upon the estimated amounts Management expects to receive from patients and third-party payers. Estimates of explicit price concessions under managed care and commercial insurance plans are tied to payment terms specified in related contractual agreements. Retroactively calculated explicit price concessions tied to reimbursement agreements with third-party payers are recognized on an estimated basis in the period related services are rendered and adjusted in future periods as final payments are received. Revenue related to uninsured patients, uninsured co-payments, and deductibles (for patients with healthcare coverage) may also be discounted. The Company records implicit price concessions (based on historical collection experience) related to uninsured accounts to recognize self-pay revenues at their most likely amounts to be collected.
The Company deems FFS revenue to be variable consideration and that its estimates of associated transaction prices will not result in a significant revenue reversal in the future.
Based on satisfaction of single performance obligations occurring on the dates of service, revenue is recognized as of the date services are provided. The Company, therefore, applies a portfolio approach to recognizing revenue from its FFS contracts.
Management has elected two of the available practical expedients provided for by ASC 606. First, the Company did not adjust the transaction price for any financing components as those were deemed to be insignificant. Additionally, the Company expensed all incremental customer contract acquisition costs as incurred as such costs are not material and would be amortized over a period less than one year.
Other Patient Service Revenue(s) – Shared Risk Revenue
P3 LLC (via one of its wholly owned subsidiaries – P3 Health Partners ACO, LLC “AzCC”) receives 30 % of the shared risk savings from parties with whom it contracts under four separate arrangements. These arrangements are driven solely by medical cost containment year-over-year (“YoY”) expense reductions. This key performance indicator (“KPI”) is measured by the aggregate change in PMPY (per member, per year medical costs). If the sequential YoY PMPY aggregate change yields a reduction, the Company receives 30 % of the associated total cost savings for that year. Conversely, if the sequential YoY PMPY aggregate change yields an increase in medical costs, no monies are due the Company that year. This KPI is compiled and reviewed on a calendar year basis. The Company recognizes shared risk revenue only upon the receipt of cash. Therefore, the likelihood of any significant revenue reversal in the future is low.
Other Patient Service Revenue(s) – Care Coordination Fees and Management Fees
The Company’s delegated health plans may also pay a Care Coordination Fee (“CCF”) or Management Fee to the Company. CCFs and Management Fees are intended to fund the costs of delegated services provided to certain health plans. CCFs are specifically identified and separated in each monthly capitation payment the Company receives from
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these parties. None of the Company’s other health plans bifurcate CCFs nor are any of them contractually required to do so.
The Company uses a portfolio approach to account for CCFs and Management Fees. Based on similarities of the terms of the care coordination and administrative services, Management believes that revenue recognized by utilizing the portfolio approach approximates that which it would have realized if an individual contract approach were applied.
Patient Fees Receivable
Substantially, all client fees and insurance receivables are due under FFS contracts with third party payors, such as commercial insurance companies (“Commercial”), government-sponsored healthcare programs (“Medicare/ Medicaid”) or directly from patients (“Self-Pay”). Management continuously monitors activities from payors (including patients) and records an estimated price concession based on specific contracts and actual historical collection patterns. Patient fees receivable, where a third-party payor is responsible for the amount due, are carried at amounts determined by the original charges for services provided less implicit and explicit price concessions. Price concessions represent amounts made for contractual adjustments (discounts). Patient fees receivable is included in Clinic Fees and Insurance Receivables in the Company’s consolidated balance sheets and are recorded net of contractual allowances.
Patient fees receivable are recorded at the invoiced amount, net of any expected contractual adjustments and implicit price concessions, and do not bear interest. The Company has agreements with third-party payors that provide for payments at amounts different from the established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Patient service revenues are reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered. Contractual adjustments arising under reimbursement arrangements with third- party payors are accrued on an estimated basis in the period the related services are rendered and are adjusted in future periods as final settlements are determined. Implicit price concessions are taken based on historical collection experience and reflect the estimated amounts the Company expects to collect.
Property and Equipment
Property and equipment is carried at acquisition cost, net of accumulated depreciation. Costs for repairs and maintenance of property and equipment, after such property and equipment has been placed in service, are expensed as incurred. Costs and related accumulated depreciation are eliminated when property and equipment is sold or otherwise disposed. Sales and disposals may result in asset- specific gains or losses. Any such gains or losses are included as a component of net income (loss). Management computes and records depreciation using the straight-line method. Lease terms range from one to ten years . The following table summarizes the estimated useful lives applicable to property and equipment:
Classification
Depreciation Cycle
Leasehold Improvements (Cycle: Lease Term)
1 to 10 Years
Furniture & Fixtures
7 Years
Computer Equipment
3 Years
Medical Equipment
7 Years
Software
3 Years
Software (Development in Process)
N/A
ASC 350-40, Internal Use Software , outlines how companies should capitalize or expense internal-use software, based on achieving two key objectives. The first objective includes ensuring that the Preliminary Project Stage has been completed and the second one being the type of work being completed within the Application Development Stage, which qualifies as a capitalizable activity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Computer software is considered for internal use when it is developed or purchased for the internal usage and needs of the organization only.
Beginning in 2018, the Company began the project build of its own proprietary technology to serve core functions of its business operations such as revenue and medical cost analysis, care management and various facets that promote impactful utilization. At December 31, 2021 and 2020, the Company has categorized $ 2,433,470 and $ 2,794,221 , respectively to property and equipment for these software costs (specifically to work in progress).
The Company’s internally-developed technology has been and is continuing to be designed to standardize the availability of quality data used across the enterprise. The technology requires several components of external input from health plans served by the Company, its provider network and member-patient populations.
As internally developed technology is deemed “substantially complete”, it is placed into service and depreciated over three years. In 2021 and 2020, $ 2,087,022 and $ 534,931 of capitalized costs was placed into service. Any, and all, costs associated with internally developed technology, following deployment are expensed directly to the Company’s consolidated statements of operations, as incurred.
Fair Value Measurements
The Company accounts for fair value measurements in accordance with ASC 820, Fair Value Measurements . The Company uses valuation approaches that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels (see Note 8 “Fair Value Measurements and Hierarchy” for further discussion):
Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
Impairment of Long-Lived Assets
In accordance with ASC 360, Property, Plant, and Equipment , the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. Recoverability of an asset or asset group is measured by comparing its carrying amount to the future undiscounted net cash flows the asset or asset group is expected to generate. If such assets are considered impaired (e.g. – future undiscounted cash flows are less than net book value), an impairment charge is recognized, measured by the difference between the carrying value and the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. To date, the Company has not retired nor sold any property and equipment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
In accordance with ASC 350, Intangibles – Goodwill and Other , Management tests goodwill for impairment at the reporting unit level. The Company has one reporting unit for the goodwill impairment testing purposes. Goodwill is tested for impairment on an annual basis in the fourth quarter, or more frequently if events or changes in circumstances indicate the carrying value of goodwill may not be recoverable (a “triggering event”). On the occurrence of a triggering event, an entity has the option to first assess qualitative factors to determine whether a quantitative impairment test is necessary. If it is more likely than not that goodwill is impaired, the fair value of the reporting unit (the Company) is compared with its carrying value. An impairment charge is recognized for the amount by which the carrying amount exceeds the fair value, provided, the loss recognized cannot exceed the total amount of goodwill. No goodwill impairment charges were recorded in 2021, 2020 and 2019. See Note 11 “Goodwill.”
Intangible Assets
Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. In determining the estimated useful lives of definite-lived intangibles, the Company considers the nature, competitive position, life cycle position and historical and expected future operating cash flows of each acquired asset, as well as its commitment to support these assets through continued investment and legal infringement protection.
The Company reviews intangible assets, 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 to the sum of undiscounted cash flows expected to be generated by the asset. Such events and circumstances include the occurrence of an adverse change in the market involving the business employing the assets or a situation in which it is more likely than not that the Company will dispose of such assets. If the comparison indicates that there is impairment, the impairment loss to be recognized as a non-cash charge to earnings is measured by the amount by which the carrying amount of the asset exceeds its fair value and the impaired asset is written down to its fair value or, if fair value is not readily determinable, to an estimated fair value based on discounted expected future cash flows.
Leases
The Company accounts for leases in accordance with ASC 842, Leases . At the inception of the contract, the Company determines whether a contract is or contains a lease. For leases with terms greater than 12 months, the Company records the related operating or finance right of use asset and lease liability at the present value of lease payments over the lease term. The Company is generally not able to readily determine the implicit rate in the lease and therefore uses the determined incremental borrowing rate at lease commencement to compute the present value of lease payments. The incremental borrowing rate represents an estimate of the market interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. Renewal options are not included in the measurement of the right of use assets and lease liabilities unless the Company is reasonably certain to exercise the optional renewal periods. Some leases also include early termination options, which can be exercised under specific conditions. Additionally, certain leases contain incentives, such as construction allowances from landlords. These incentives reduce the right-of-use asset related to the lease.
Some of the Company’s leases contain rent escalations over the lease term. The Company recognizes expense for operating leases on a straight-line basis over the lease term. The Company does not currently have any finance leases. The Company’s lease agreements contain variable payments for common area maintenance and utilities. The Company has elected the practical expedient to combine lease and non-lease components for all asset categories. Therefore, the lease payments used to measure the lease liability for these leases include fixed minimum rentals along with fixed non-lease component charges. The Company does not have significant residual value guarantees or restrictive covenants in its lease portfolio.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Combinations
In accordance with ASC 805, Business Combinations , the price tendered in business acquisitions is allocated using the acquisition method of accounting among the identifiable tangible and intangible assets and assumed liabilities and non-controlling interests, all of which are based on estimates of corresponding fair value as of the acquisition date. Management applies valuation methods which are ultimately used in the Company’s purchase price allocations. Goodwill is recorded based on the difference between the fair value of consideration exchanged and the fair value of the net assets and liabilities assumed. Such fair values that are not finalized for reporting periods following the acquisition date are estimated and recorded as provisional amounts. Adjustments to these provisional amounts during the measurement period (defined as the date through which all information required to identify and measure the consideration transferred, the assets acquired, the liabilities assumed, and the non-controlling interests obtained, limited to one year from the acquisition date) are recorded when identified.
Equity-Based Compensation
Unit-Based Compensation
Prior to the Business Combinations, P3 Health Group Holdings had granted unit-based awards to certain non-employee Board directors and officers of P3 Health Group Holdings, in the form of non-vested units (the “Incentive Units”). All awards of Incentive Units were equity-classified and measured on the fair value of the award on the date of grant. For equity awards that vest subject to the satisfaction of service-based conditions, compensation cost is measured at the grant date fair value and compensation cost is recognized on a straight-line basis over the requisite service period, which varies by award. For equity awards that vest subject to the satisfaction of performance-based conditions, compensation cost is measured based on the grant date fair value. The Company evaluates the probability of achieving each performance-based condition at each reporting date and recognizes compensation cost when it is deemed probable that the performance-based condition will be met on an accelerated basis over the requisite service period, which varies by award. There have been no issuances of grant awards under the legacy P3 Health Group Holdings incentive program since the Business Combinations. Any future grants will be made under the 2021 Incentive Award Plan.
The Company accounts for forfeitures as they occur. As P3 LLC is a subsidiary of the Company, the Company consolidates compensation cost recognized by P3 LLC in its consolidated financial statements. Stock-based compensation is classified in the accompanying consolidated statements of operations based on the function to which the related services are provided.
The Company estimates the fair value of equity grants using the Black-Sholes option pricing model. The assumptions used in estimating the fair value of these awards, such as expected term, expected dividend yield, volatility, and risk-free interest rate represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As part of our fair value process, we assess the impact of material nonpublic information on our share price or expected volatility, as applicable, at the time of grant. Management’s estimates related to the likelihood of achieving performance conditions is not considered in the estimate of fair value. If actual results are not consistent with the Company’s assumptions and judgments used in making such estimates, the Company may be required to increase or decrease compensation cost, which could be material to the Company’s consolidated results of operations.
In connection with the Business Combinations, each Incentive Unit that was outstanding immediately prior to the effective time of the Business Combinations and that was vested (after taking into account any accelerated vesting that occurred in connection with the Business Combinations) was canceled and converted into the right to receive a portion of the merger consideration, which consisted of Common Units of P3 LLC and cash. Each outstanding Incentive Unit that was subject to time-based vesting but had not vested immediately prior to the effective time of the Business Combinations was converted into the right to receive a portion of the merger consideration, which merger consideration remained subject to the original vesting conditions. Each outstanding Incentive Unit that was subject to performance-vesting requirements that were not achieved in connection with the Business Combinations was forfeited without
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consideration. For each Common Unit held by a participant (whether vested or unvested), the participant also subscribed for a share of Class V Common Stock on a one-for-one basis.
Warrant Liability
The Company has public and private placement warrants classified as liabilities as well as warrants issued to a capital provider classified as equity. The Company classifies as equity any equity-linked contracts that (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement). Warrants classified as equity are initially measured at fair value. Subsequent changes in fair value are not recognized as long as the warrants continue to be classified as equity.
The Company classifies as assets or liabilities any equity-linked contracts that (1) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the Company’s control) or (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). For equity-linked contracts that are classified as liabilities, the Company records the fair value of the equity-linked contracts at each balance sheet date and records the change in the statements of operations as a gain (loss) from change in fair value of warrant liability. The Company’s public warrant liability is valued using observable market prices for those public warrants. The Company’s private placement warrants are valued using a binomial lattice pricing model when the warrants are subject to the make-whole table, or otherwise are valued using a Black-Scholes pricing model. The Company’s warrants issued to a capital provider are valued using a Black-Scholes-Merton pricing model based on observable market prices for public shares and warrants. The assumptions used in preparing these models include estimates such as volatility, contractual terms, discount rates, dividend yield, expiration dates and risk-free rates.
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. The warrant liability relates to Class A Common Stock as of December 31, 2021 and outstanding warrants to purchase Class D Common Stock as of December 31, 2020. The warrant liabilities are subject to remeasurement at each balance sheet date and any change in fair value is recognized in the Company’s consolidated statements of operations. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss. The fair value of the warrants was estimated using an Option Pricing model (Black-Scholes-Merton).
The key inputs into the option pricing model as of December 31, 2021 were as follows:
Volatility
60.0
%
Risk-Free Interest rate
1.26
%
Exercise Price
$
11.50
Expected Term
4.9
Years
Premium Deficiency Reserve (“PDR”)
Premium deficiency reserve liabilities are established 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. We assess if a PDR liability is needed through review of current results and forecasts. For purposes of determining premium deficiency losses, contracts are grouped consistent with our method of acquiring, servicing, and measuring the profitability of such contracts. The Company grouped its Medicare Advantage
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
health plan contracts together as a “single group” as P3 operates in one line of business - Medicare Advantage. This single group represents one line of business, to which the Company serves a homogenous/Medicare Advantage population of members. Management further concluded that the costs to administer these contracts are based on centralized and shared service functions. As of December 31, 2021, the PDR liability was $ 37.8 million. There was no PDR liability as of December 31, 2020.
Healthcare Services Expense and Claims Payable (collectively, “Medical Expenses”)
The cost of healthcare services is recognized in the period services are provided. This also includes an estimate of the cost of services that have been incurred, but not yet reported (“IBNR”). Medical expenses also include costs for overseeing the quality of care and programs, which focus on patient wellness. Additionally, healthcare expenses can include, from time to time, remediation of certain claims that might result from periodic reviews conducted by various regulatory agencies.
IBNR is recorded as “Claims Payable” in the accompanying consolidated balance sheets. The IBNR liability was $ 101,958,324 and $ 56,934,400 as of December 31, 2021 and 2020, respectively.
Management estimates the Company’s IBNR by applying standard actuarial methodologies, which utilize historical data, including the period between the date services are rendered and the date claims are received (and paid), denied claims activity, expected medical cost inflation, seasonality patterns, and changes in membership mix. IBNR estimates are made on an accrual basis and adjusted in future periods as required. Any adjustments to prior period estimates are included in the current period. Such estimates are subject to the impact from changes in both the regulatory and economic environments. The Company’s claims payable represents Management’s best estimate of its liability for unpaid medical costs as of December 31, 2021 and 2020.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe it is more likely than not that they will not be realized. We consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under tax law, and results of recent operations.
We record uncertain tax positions in accordance with ASC 740 , Income Taxes on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We consider many factors when evaluating our uncertain tax positions during the course of the year through a review of policies and procedures, reviews of customary and regular tax filings, and discussions with third party experts. This review can involve significant judgment and may require periodic adjustments. The resolution of these uncertain tax positions in a manner inconsistent with management’s expectations could have a material impact on our consolidated financial statements. We recognize interest and penalties related to uncertain tax positions as a component of our provision for income taxes. Accrued interest and penalties are included with the related tax liability.
See Note 17 “Income Taxes.”
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales and Marketing Expenses
The Company uses advertising primarily to promote the health plans with whom it conducts business as well as its physician clinics throughout the geographic areas it serves. Advertising costs are charged directly to operations as incurred. Sales and Marketing Expenses totaled $ 364,127 , $ 1,818,015 , $ 1,502,634 and $ 801,685 in the Successor Period of 2021 and the Predecessor Periods of 2021, 2020 and 2019, respectively.
Redeemable Non-controlling Interests
Redeemable non-controlling interest includes the economic interest of P3 LLC Units not owned by the Company resulting from the Up-C structure as described in Note 1 “Company Operations”. These units have been classified as redeemable non-controlling interest in the Company due to a certain cash redemption feature that is considered outside of the control of the Company. Redeemable non-controlling interests are initially recorded at the transaction price, which is equal to their fair value, then remeasured at fair value at the end of each reporting period, with the remeasurement amount being no less than the initial value, as adjusted for the redeemable non-controlling interest’s share of net income or loss. See Note 24 “Redeemable Non-controlling Interests” for further discussion.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5: Recent Accounting Pronouncements Adopted
ASU 2017-04, Intangible – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”)
In the fourth quarter of 2021, the Company adopted ASU 2017-04 on a prospective basis. The primary provision of ASU 2017-04 was to simplify the subsequent measurement of goodwill whereby the test for impairment of goodwill consists of comparing the fair value of the reporting unit to the carrying value of the reporting unit. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; provided, the loss recognized cannot exceed the total amount of goodwill allocated to the reporting unit. The income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss are considered.
See Note 11 “Goodwill” for a summary of the Company’s 2021 assessment of goodwill.
Note 6: Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance is effective for us beginning January 1, 2023. The new current expected credit losses (CECL) model generally calls for the immediate recognition of all expected credit losses and applies to loans, accounts and trade receivables as well as other financial assets measured at amortized cost, loan commitments and off-balance sheet credit exposures, debt securities and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The new guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available for sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt: Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call-Options (“ASU 2021-04”). ASU 2021-04 clarifies and reduces the diversity in the accounting for modifications or exchanges of freestanding equity-classified written call options (including warrants) that remain equity classified after modification or exchange and is effective beginning in the first quarter of 2022. The Company is evaluating the effect ASU 2021-04 will have on its financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 eliminates two of the three models in ASC 470-20 that require issuers to separately account for embedded conversion features and eliminates some of the requirements for equity classification in ASC 815-40-25 for contracts in an entity’s own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and generally requires them to include the effect of potential share settlement for instruments that may be settled in cash or shares. It is effective for annual periods beginning after December 15, 2023, and interim periods therein. Early adoption is permitted in fiscal years beginning after December 15, 2020, but the Company must adopt the guidance as of the beginning of a fiscal year. The Company is evaluating the effect ASU 2020-06 will have on its financial statements and related disclosures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). ASU 2021-08 requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts as if it had originated the contracts. The amendments in this update are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. Adoption is not currently expected to have a material impact on the Company’s financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance (“ASU 2021-10”). ASU 2021-10 requires annual disclosures about transactions with a government entity that are accounted for by applying a grant or contribution accounting model including (i) information about the nature of the transactions and the related accounting policy used to account for the transaction; (ii) the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item; and (iii) significant terms and conditions of the transactions, including commitments and contingencies. ASU 2021-10 is effective for annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of ASU 2021-10 on its disclosures, which it does not currently expect to be material.
Note 7: Business Combinations
Foresight Business Combinations
On December 3, 2021, the Company entered into the Business Combinations described in Note 1 “Company Operations.” The Business Combinations represent a forward merger and is accounted for using the acquisition method of accounting under which P3 Health Group Holdings is treated as the acquired company for financial reporting purposes. This determination is based primarily on the following facts:
(i) The Company is the sole managing member of P3 LLC subsequent to the consummation of the Business Combinations, and the managing member conducts, directs and exercises full control over all activities of P3 LLC. The non-managing members of P3 LLC do not have substantive kick-out or participating rights; and
(ii) No one predecessor stakeholder of P3 had a controlling interest in P3 before or has a controlling interest in the combined company after the Business Combinations. The Business Combinations is not a transaction between entities under common control.
These factors support the conclusion that the Company acquired a controlling interest in P3 LLC and is the accounting acquirer. For accounting purposes, the accounting acquirer is the entity that has obtained control of another entity and, thus, consummated a business combination. The determination of whether control has been obtained begins with the evaluation of whether control should be evaluated based on the variable interest or voting interest model pursuant to ASC 810. If the acquiree is a variable interest entity, the primary beneficiary would be the accounting acquirer. The Company is the primary beneficiary of P3 LLC, which is a variable interest entity, since it has the power to direct the activities of P3 LLC that most significantly impact P3 LLC’s economic performance through its role as the sole managing member. Therefore, the Company is the accounting acquirer of P3 LLC and the Business Combinations should be accounted for using the acquisition method.
Under the acquisition method of accounting, Foresight’s assets and liabilities are recorded at carrying value and the assets and liabilities associated with P3 LLC are recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The acquisition method of accounting is based on ASC Topic 805 , Business Combinations (“ASC 805”) and uses the fair value concepts defined in ASC Topic 820, Fair Value Measurements (“ASC 820”). In general, ASC 805 requires, among other things, that assets acquired, and liabilities assumed be recognized at their fair values as of the acquisition date by the accounting acquirer, which was determined to be Foresight.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASC 820 defines fair value, establishes a framework for measuring fair value, and sets forth a fair value hierarchy that prioritizes and ranks the level of observability of inputs used to develop the fair value measurements. Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for a non-financial asset assume the highest and best use by these market participants. Many of these fair value measurements can be highly subjective, and it is possible that other professionals applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
As a result of the Business Combinations, P3 LLC which represents substantially all of the economic activity of the Company became a subsidiary of the Company. Since the Company is the sole managing member of P3 LLC following the Business Combinations, the P3 LLC Units held by P3 Equityholders are classified as Redeemable Non-controlling Interests in the Company’s financial statements for financial reporting purposes. An allocation of net income or loss representing the percentage of ownership of P3 LLC not controlled by the Company will be attributed to the Redeemable Non-controlling Interests in the Company’s statement of operations.
Upon the completion of the Business Combinations, the Company entered into a Tax Receivable Agreement with certain of the P3 Equityholders and P3 LLC. The Tax Receivable Agreement provides for the payment to the P3 Equityholders of 85 % of the income tax benefits, if any, that are actually realized. At the completion of the Business Combinations, the Company did not record a Tax Receivable Agreement liability related to the tax savings it would realize from the utilization of such tax benefits after concluding it is not probable that such a liability would be paid based on its estimates of future taxable income, consistent with the Company’s conclusion that it is not more-likely-than-not to realize its deferred tax assets. See Note 14 “Tax Receivable Agreement” for further information.
The following summarizes the purchase price consideration:
Successor
December 31,
2021
Foresight
Equity
$
80,300,733
Fair Value of Non-controlling Interest
1,807,427,576
Stock Compensation Pre-combination Services
26,313,476
Cash Consideration
18,405,083
Payment of P3 Health Group Holdings, LLC’s Transaction Costs
19,151,752
Total Purchase Consideration
$
1,951,598,620
The Company recorded the allocation of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the Closing Date. The allocation reflects the fair value of assets and liabilities associated with the Company’s other acquisitions in 2021 Predecessor Period described below with the exception of Medcore Health Plan, Inc. and Omni IPA Medical Group, Inc., which occurred in the Successor Period.
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate purchase price consideration for the P3 LLC acquisition has been allocated as follows:
Assets Acquired:
Cash
$
5,300,842
Restricted Cash
54,095
Health Plan Settlement Receivables
47,733,033
Clinic Fees and Insurance Receivables, Net
426,064
Other Receivables
1,880,939
Prepaid Expenses and Other Current Assets
938,413
Property and Equipment, Net
7,875,234
Intangible Assets, Net:
Customer Relationships
684,000,000
Provider Network
3,700,000
Trademarks
147,700,000
Goodwill
1,278,452,778
Notes Receivable, Net
3,734,012
Right of Use Assets
6,870,279
Total Assets Acquired
2,188,665,689
Liabilities Assumed:
Accounts Payable and Accrued Expenses
25,819,091
Accrued Payroll
2,868,664
Health Plans Settlements Payable
25,007,542
Claims Payable
76,031,460
Premium Deficiency Reserve
11,559,067
Accrued Interest
9,268,846
Current Portion of Long-Term Debt
301,443
Lease Liability
6,210,956
Long-Term Debt, Net of Current Portion
80,000,000
Total Liabilities Assumed
237,067,069
Net Assets Acquired
$
1,951,598,620
Goodwill represents the excess of the purchase price over the fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and expected future market opportunities. $ 3.8 million of goodwill recognized in the Business Combinations is expected to be deductible for tax purposes. See Note 17 “Income Taxes.” The useful life of acquired definite lived intangible assets is 10 years .
Other Acquisitions
On December 31, and December 27, 2021, respectively, the Company acquired 100 % of the outstanding equity of Medcore Health Plan, Inc. (“Medcore HP”) and the net assets of Omni IPA Medical Group, Inc . (“Omni”) (collectively the “Medcore Acquisition”). Medcore HP is a health plan licensed under the California Knox-Keen Health Care Service Plan Act of 1975, and Omni is an independent practice association located in California. Omni serves as Medcore HP’s contracted and fully delegated physician network providing medical services to Medcore HP’s patients and members. Because of the extensive inter-reliance of these two businesses, the Company accounted for the purchases as a single, combined business. The total purchase price of $ 40,013,321 includes $ 3,486,593 to be paid to the sellers upon resolution of the assumed claims payable, or IBNR, and risk adjustment factor. Due to the volatility of these items, the outcome cannot be currently estimated. Release of this payment, currently expected in the first quarter of 2023, is not
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subject to resolution of a substantive future contingent event and has therefore been included in the total consideration to be transferred. The cash payment, net of cash acquired and the $ 3,486,593 retained, was $ 15,677,205 .
The Company also purchased three other medical practices during the Predecessor Period of 2021 for a total net cash purchase price of $ 4,989,000 . As referenced above, the assets acquired and liabilities assumed in these acquisitions was included in the purchase consideration and allocation for the Business Combinations.
Goodwill represents the excess of the purchase price over the fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and expected future market opportunities. $ 8.1 million of goodwill recognized in the Business Combinations is expected to be deductible for tax purposes.
The aggregate purchase price consideration of the other acquisitions in 2021 has been allocated as follows:
Successor
Predecessor
Period
Period
Assets Acquired:
Cash
$
20,547,337
$
3,000
Restricted Cash
302,187
—
Health Plan Settlement Receivables
5,754,006
—
Clinic Fees and Insurance Receivables, Net
141,186
—
Other Receivables
726,378
—
Prepaid Expenses and Other Current Assets
1,189,575
—
Property and Equipment, Net
113,436
5,896
Intangible Assets, Net:
Customer Relationships
—
2,045,604
Payor Contracts
4,700,271
—
Provider Network
1,100,000
—
Trademarks
900,000
—
Medical Licenses
700,000
—
Goodwill
31,297,438
2,934,500
Total Assets Acquired
67,471,814
4,989,000
Liabilities Assumed:
Accounts Payable and Accrued Expenses
150,196
—
Accrued Payroll
277,074
—
Health Plans Settlements Payable
133,149
—
Claims Payable
26,898,074
—
Total Liabilities Assumed
27,458,493
—
Net Assets Acquired
$
40,013,321
$
4,989,000
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Financial Information (Unaudited)
The following unaudited pro forma financial information summarizes the results of operations for the Company as though the Business Combinations, and the Medcore Acquisition had occurred on January 1, 2020. The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the acquisition taken place on the date indicated, or the future consolidated results of operations of the Company.
Year Ended
Year Ended
December 31,
December 31,
2021
2020
(Unaudited)
(Unaudited)
Total Operating Revenue
$
793,447,211
$
615,487,335
Net Loss
$
( 259,282,984 )
$
( 198,926,617 )
Net Loss Attributable to Non-controlling Interest
$
( 214,167,745 )
$
( 164,313,386 )
Net Loss Attributable to Controlling Interest
$
( 45,115,239 )
$
( 34,613,231 )
The proforma financial information presented above has been derived from the historical consolidated financial statements of the Company, the Company’s Predecessor Periods and the Company’s Successor Period. The Successor and Predecessor Periods for the year ended December 31, 2021 have been combined.
The unaudited pro forma results reflect the step-up amortization adjustments for the fair value of intangible assets acquired, transaction expenses, accelerated vesting of equity compensation, debt discount amortization and income attributable to non-controlling interest holders.
The unaudited pro forma results include certain pro forma adjustments to revenue and net loss that were directly attributable to the P3 Health Group Holdings, LLC acquisition, assuming the acquisition had occurred on January 1, 2020, including the following:
1) Transaction costs of approximately $ 39.4 million are assumed to have occurred on January 1, 2020 and are recognized as if incurred on January 1, 2020.
2) The acceleration of certain stock-based awards of $ 2.4 million are assumed to have occurred on January 1, 2020 and are recognized as if incurred on January 1, 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8: Fair Value Measurements and Hierarchy
See Note 4 “Significant Accounting Policies” for a summary of the Company’s policies relating to fair value measurements.
The following table presents the carrying amounts of the Company’s financial instruments at December 31, 2021 and 2020:
Successor
Predecessor
December 31,
December 31,
2021
2020
Financial Assets:
Cash
$
140,477,586
$
36,261,104
Restricted Cash
$
356,286
$
3,641,843
Clinics Fees and Insurance Receivables, Net
$
1,090,104
$
675,954
Other Receivables
$
726,903
$
146,117
Financial Liabilities:
Accounts Payable and Accrued Expenses
$
17,730,683
$
11,793,125
Liability for Warrants
$
11,382,826
$
6,316,605
The book value of cash, clinic fees and insurance receivables, net, other receivables, and accounts payable and accrued expenses approximate fair value because of the short maturity and high liquidity of these instruments. Liabilities for private placement warrants are measured at fair value using Level 3 inputs.
The key Level 3 inputs into the option pricing model as of December 31, 2020 related to the Class D warrants to purchase Class D Shares were as follows:
Volatility
65.0
%
Risk-Free Interest rate
0.10
%
Exercise Price
$
4.68
Expected Term
1.1
Years
The key Level 3 inputs into the option pricing model as of December 31, 2021 relating to the Private Placement Warrants to purchase Class A Common Stock were as follows:
Volatility
60.0
%
Risk-Free Interest rate
1.26
%
Exercise Price
$
11.50
Expected Term
4.9
Years
Generally, an increase in the market price of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common stock, and an increase in the remaining term of the warrants would each result in a directionally similar change in the estimated fair value of the Company’s warrant liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability. The Company has not, and does not plan to, declare dividends on its common stock and, as such, there is no change in the estimated fair value of the warrant liabilities due to the dividend assumption.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth a summary of changes in the fair value of the Company’s Level 3 fair value measurements for the periods indicated:
Successor
Predecessor
December 3, 2021
through
Year
December 31,
January 1, 2021
Ended
2021
through
December
(Private
December 2, 2021
31, 2020
Placement
(Class D
(Class D
Warrants)
Warrants)
Warrants)
Beginning Balance
$
793,650
$
6,316,605
$
N/A
Issuance of Class D Warrants
—
—
6,316,605
Mark-to-Market Adjustment for Stock Warrants
( 291,374 )
7,664,869
—
Ending Balance
$
502,276
$
13,981,474
$
6,316,605
Note 9: Patient Fees Receivable
Patient fees receivable is included in Clinic Fees and Insurance Receivables in the Company’s consolidated balance sheets and consisted of the following categories for each of the years ending December 31, presented below:
Successor
Predecessor
December 31,
December 31,
2021
2020
Total Receivables: Gross
$
2,641,182
$
1,041,300
Less: Contractual Allowances
( 1,968,750 )
( 791,837 )
Receivables Net of Contractual Allowances
$
672,432
$
249,463
Commercial
$
362,851
$
85,504
Medicare / Medicaid
280,265
116,220
Self Pay
29,316
47,739
Receivables Net of Contractual Allowances
$
672,432
$
249,463
Note 10: Property and Equipment
The Company’s property and equipment balances as of December 31 consisted of the following:
Successor
Predecessor
December 31,
December 31,
2021
2020
Leasehold Improvements
$
1,537,091
$
1,392,688
Furniture & Fixtures
1,108,184
1,150,789
Computer Equipment & Software
2,700,617
1,947,894
Medical Equipment
414,100
457,822
Software (Development in Process)
2,433,470
2,794,221
Other
36,788
—
8,230,250
7,743,414
Less: Accumulated Depreciation
( 182,321 )
( 1,592,827 )
Property and Equipment, Net
$
8,047,929
$
6,150,587
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11: Goodwill
The following tables provide changes in goodwill for the periods indicated.
Predecessor
Balance at December 31, 2019
$
741,128
Acquisitions
130,000
Balance at December 31, 2020
871,128
Acquisitions
2,934,500
Balance at December 2, 2021
$
3,805,628
Successor
Balance at December 3, 2021 1
$
1,278,452,778
Acquisitions
31,297,438
Balance at December 31, 2021
$
1,309,750,216
1)
Represents the opening balance of goodwill as of December 3, 2021 due to the Business Combination
Goodwill recorded in the Predecessor Period of 2021 was associated with the acquisition of three medical practices. The opening balance of goodwill at December 3, 2021 reflects the Business Combinations. Goodwill recorded in the Successor Period of 2021 was associated with the Medcore Acquisition. See Note 7 “Business Combinations.”
Based on Management’s qualitative analysis, no goodwill impairment charges were recorded in the Successor Period of 2021 and the Predecessor Periods of 2021, 2020 and 2019.
Due to the decrease in the share price over the second quarter of 2022, the Company will record a goodwill impairment of $ 851.5 million as of June 30, 2022. The amount was not recorded at December 31, 2021 or March 31, 2022 as the decline in the share price was considered temporary under the ASC 350 guidance as of those dates.
Note 12: Intangible Assets
The follow tables provide changes in intangible assets for the periods indicated.
Predecessor
Customer
Relationships
Total
Balance at December 31, 2020
$
—
$
—
Acquisitions
2,045,604
2,045,604
Amortization
( 34,396 )
( 34,396 )
Balance at December 2, 2021
$
2,011,208
$
2,011,208
Successor
Customer
Payor
Provider
Medical
Relationships
Trademarks
Contracts
Network
Licenses
Total
Balance at December 3, 2021 1
$
684,000,000
$
147,700,000
$
—
$
3,700,000
$
—
$
835,400,000
Acquisitions
—
900,000
4,700,271
1,100,000
700,000
7,400,271
Amortization
( 5,700,000 )
( 1,230,833 )
—
( 30,833 )
—
( 6,961,666 )
Balance at December 31, 2021
$
678,300,000
$
147,369,167
$
4,700,271
$
4,769,167
$
700,000
$
835,838,605
1)
Represents the opening balance of intangibles as of December 3, 2021 due to the Business Combination
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Customer relationships recorded in the Predecessor Period of 2021 were associated with the acquisition of two medical practices. The opening balance of intangible assets at December 3, 2021 reflects the Business Combinations. Intangible assets recorded in the Successor Period of 2021 was associated with the Medcore Acquisition. See Note 7 “Business Combinations.”
Amortization of intangible assets is anticipated to be approximately $ 84.6 million in 2022 and 2023 and $ 84.1 million for each of the years 2024 through 2026 . The weighted average remaining useful life of definite lived intangible assets is as below:
Customer
Payor
Provider
Relationships
Trademarks
Contracts
Network
Weighted average remaining useful life
9.9 years
9.9 years
10 years
9.9 years
Note 13: Notes Receivable, Net
The Company entered into five Promissory Notes (the “Notes”) with three family medical practices (the “Practices”) to fund their working capital needs. The Company simultaneously entered into separate Provider Agreements with each Practice related to four of these five Notes. Each Provider Agreement establishes a preferred, predetermined reimbursement rate for services rendered to the Company’s members and requires that Practice to furnish healthcare services to the Company’s members. The Provider Agreements mature in concert with each practice’s loan. In accordance with each of these four Notes, so long as the corresponding Provider Agreement is in effect on the maturity date of each Note and has not been terminated by the borrower for any reason, the Company will forgive the entire principal, plus accrued interest due on the date of maturity. Likewise, if the Company terminates the Provider Agreement prior to maturity without cause, all principal plus accrued interest due from the borrower will be forgiven. Upon early termination of the Provider Agreement by borrower, all principal and accrued interest will become immediately payable and due the Company. Related to potential forgiveness, the Company records a valuation allowance on a straight-line basis following the early termination date through the date of maturity, due to the probable likelihood of needing to forgive the notes at maturity, with a full valuation allowance set at the time of maturity.
At December 31, 2021 and 2020, the Company has recorded notes receivable of $ 3,590,715 and $ 3,804,662 , including accrued interest receivable of $ 885,243 and $ 572,382 , and net of valuation allowances of $ 526,808 and $ 195,967 , respectively. The Notes carry maturity dates ranging from December 31, 2021 through December 31, 2028 with interest rates ranging from 5.0 % to 10.0 %. Two of the Notes are included in Other Receivables in the Company’s consolidated balance sheet due to their short-term maturity dates of December 31, 2021. The Company forgave two of its notes receivable from one provider group on their maturity date of December 31, 2021. The combined principal and interest forgiven were $ 286,600 and $ 71,762 , respectively, both of which were fully reserved.
Note 14: Tax Receivable Agreement
The Company entered into a Tax Receivable Agreement (“TRA”) with selling equity holders of P3 LLC that requires the Company to pay 85 % of the tax savings that are realized as a result of (i) the Company’s direct and indirect allocable share of existing tax basis acquired in the Business Combinations, (ii) increases in the tax basis in P3 LLC’s assets as a result of the sale and exchange of the P3 LLC units for the Company’s Class A Common Stock and cash, and (iii) the Company’s utilization of certain tax attributes and of certain other tax benefits, including those attributable to payments under the TRA. The Company will retain the benefit of the remaining 15 % of these cash savings.
The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the timing and amount of taxable income generated by the Company each year, as well as the tax rate then applicable, among other factors. Actual tax benefits realized by the Company may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including the use of an assumed weighted-average state and local income tax rate to calculate tax benefits.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The payment obligation under the TRA is an obligation of the Company and not of P3 LLC. The payments that we will be required to make will generally reduce the amount of the overall cash flow that might have otherwise been available, but we expect the cash tax savings we will realize from the utilization of the related tax benefits will exceed the amount of any required payments.
As of December 31, 2021, the Company did not record a TRA liability related to the tax savings it would realize from the utilization of such deferred tax assets because it is not probable that such a liability would be paid based on its estimates of future taxable income, consistent with the Company’s conclusion that it is not more-likely-than-not to realize its deferred tax assets.
Note 15: Claims Payable
Claims payable includes claims reported as of the balance sheet date, including estimates for IBNR, due to third parties for health care services provided to members. IBNR was $ 101,958,324 and $ 56,934,400 at December 31, 2021 and 2020, respectively. Activity in the liability for claims payable and healthcare expenses for the Periods indicated, was as follows:
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
through December 31,
through December 2,
December 31,
2021
2021
2020
Claims Unpaid, Beginning of Period
$
76,031,460
$
56,934,400
$
19,859,348
Incurred, Related to:
Current Period
55,148,939
525,366,213
418,103,177
Prior Period(s)
174,408
3,313,744
—
Total Incurred
55,323,347
528,679,957
418,103,177
Paid, Related to:
Current Period
53,366,035
453,940,969
361,512,059
Prior Period(s)
2,928,522
55,641,928
19,516,066
Total Paid
56,294,557
509,582,897
381,028,125
Claims Unpaid Assumed in Acquisitions
26,898,074
—
—
Claims Unpaid, End of Period
$
101,958,324
$
76,031,460
$
56,934,400
Estimates for incurred claims are based on historical enrollment and cost trends while also taking into consideration operational changes. Future and actual results typically differ from estimates. Differences could result from an overall change in medical expenses per member, changes in member mix or simply due to the addition of new members.
Note 16: Debt
Long-Term Debt
On November 19, 2020, the Company entered a Term Loan and Security Agreement (the “Facility”) with a commercial lender (“LTD-D”). The Facility was amended on December 21, 2021. The Facility provided funding up to $ 100,000,000 , of which $ 65,000,000 has been drawn as of December 31, 2021. Of the $ 65,000,000 drawn, $ 61,058,281 was received (net of $ 3,941,719 in financing costs). Upon closing of the Business Combinations on December 3, 2021, the unamortized financing costs were written off and the debt was recorded at fair value. The Facility may be used to pay certain indebtedness of the Company and for general working capital needs. Accrued interest was $ 2,259,588 and $ 186,666 at December 31, 2021 and 2020, respectively. The Facility includes certain restrictive covenants, including restrictions on the payment of cash dividends. Repayment of principal of all amounts drawn are due at maturity. The Company’s access to additional borrowings under the Facility ended upon termination of the commitment period on February 28, 2022.
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company was required to meet a borrowing base milestone by demonstrating to the lenders that revenue for any three consecutive month period (ending after the Facility’s closing date, but on or prior to December 31, 2021) was greater than or equal to $ 125.0 million. Additionally, the Company must remain in compliance with financial covenants such as minimum liquidity of $ 5.0 million and annual minimum revenue levels. Starting 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. Also, the Company is subject to certain restrictions that include indebtedness and liens.
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.
The Facility’s expected maturity date is December 31, 2025. This maturity date may be accelerated as a remedy under the certain default provisions in the agreement or in the event a mandatory prepayment trigger occurs. Interest is payable at 12.0 % per annum on a quarterly cycle (in arrears) beginning March 31, 2021. Management may elect to pay the full 12.0 % per annum in cash or 8.0 % per annum interest in cash with the remaining 4.0 % per annum being added to principal as “paid in kind” (“PIK”) for a period of three years (or twelve payments). The PIK is subject to acceleration in the event certain occurrences in the Facility’s agreement are triggered. The Facility’s lenders also received ten-year warrants to purchase 858,351 shares of Series D Preferred Units at $ 4.68 per share. These warrants have been recorded as a liability in the Company’s consolidated balance sheets at fair market value and are marked to market on a quarterly basis until exercised. A discount was recorded on the debt issued for the same amount and written off upon closing of the Business Combinations.
The Security Agreement provides the lenders collateral in 100 % of the Company’s pledged stock, its subsidiaries (including tangible and intangible personal property) and bank accounts.
On June 7, 2020, the Company repurchased 200,000 Class C (Time-based) Units, at $ 0.90 per Unit from a former Executive through issuance of a long-term note (“LTD-E”). This repurchase was recognized in the Company’s consolidated balance sheets as a reduction to Members’ Deficit in the amount of $ 180,000 and a corresponding increase in long-term debt. LTD-E bears interest of 3.25 % and fixed monthly payments of $ 7,757 through date of maturity (June 7, 2022).
In 2019, the Company received bridge loans (“LTD-A”) from some of its existing investors totaling $ 16,164,914 . The bridge loans accrued interest at 12 % and were scheduled to mature on November 12, 2019. All but one was repaid with proceeds raised from the issuance of Class D Units. The remaining and outstanding bridge loan balance was $ 1,516,598 , plus accrued interest of $ 112,712 , at December 31, 2019. This remaining and outstanding balance, plus accrued interest was fully paid in 2020.
In 2019, the Company executed a share repurchase agreement with one of its investors (“LTD-C”), which was subsequently amended on November 19, 2020. The agreement, as amended stipulated $ 15.0 million originally contributed by the investor would be repaid by the earlier of June 30, 2026 or a change in control transaction. As part of this repurchase agreement, the investor exchanged its owned units back for a $ 15.0 million note receivable from the Company - thus, no longer holding its former equity position. The note carries interest of 11.0 % per year. Its principal balance, accrued interest and an exit fee of $ 600,000 is due at maturity. Accrued interest was $ 6,511,477 and $ 3,865,740 at December 31, 2021 and 2020, respectively. The total principal balance is included in Long-Term Debt on the Company’s consolidated balance sheets at December 31, 2021 and 2020.
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables roll forward the long-term debt balances presented in the Company’s consolidated balance sheets:
Predecessor
LTD-A
LTD-C
LTD-D
LTD-E
Totals
Balance at December 31, 2019
$
1,516,598
$
15,000,000
$
—
$
—
$
16,516,598
Issued in 2020
—
—
40,000,000
180,000
40,180,000
Principal Payments in 2020
( 1,516,598 )
—
—
( 43,911 )
( 1,560,509 )
Balance at December 31, 2020
—
15,000,000
40,000,000
136,089
55,136,089
Issued in 2021
—
—
25,000,000
—
25,000,000
Principal Payments in 2021
—
—
—
( 82,563 )
( 82,563 )
Balance at December 2, 2021
$
—
$
15,000,000
$
65,000,000
$
53,526
$
80,053,526
Successor
LTD-A
LTD-C
LTD-D
LTD-E
Totals
Balance at December 3, 2021 1
$
—
$
15,000,000
$
65,000,000
$
53,526
$
80,053,526
Issued in 2021
—
—
—
—
—
Principal Payments in 2021
—
—
—
( 7,425 )
( 7,425 )
Balance at December 31, 2021
$
—
$
15,000,000
$
65,000,000
$
46,101
$
80,046,101
1) Represents the opening balance of goodwill as of December 3, 2021 due to the Business Combination
As of December 31, 2021 for the years presented below, the Company’s annual, minimum payments due under debt obligations are as follows:
Interest
Total Cash
Principal
PIK
Cash Interest
Payments *
2022
$
46,101
$
5,225,890
$
5,479,398
$
5,525,499
2023
—
5,624,513
5,675,461
5,675,461
2024
—
6,061,814
5,882,309
5,882,309
2025
65,000,000
6,274,526
19,518,225
84,518,225
2026
15,000,000
1,851,284
20,054,451
35,054,451
Total
$
80,046,101
$
25,038,027
$
56,609,844
$
136,655,945
*
Total Cash Payments consist of principal and cash interest.
Long-term debt was comprised of the following at December 31, 2021 and 2020:
Successor
Predecessor
December 31, 2021
December 31, 2020
Total Principal
$
80,046,101
$
55,136,089
Less: Current Portion of Long-Term Debt
( 46,101 )
( 89,988 )
Less: Loan Origination Fees
—
( 3,566,718 )
Add: Accumulated Amortization of Loan Origination Fees
—
80,237
Less: Discount for Issuance of Class D Warrants
—
( 6,316,605 )
Add: Accumulated Amortization of Discount
—
144,971
Long Term Debt
$
80,000,000
$
45,387,986
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-Term Debt
In 2021, the Company entered into short term financing agreements totaling $ 3,683,100 for the funding of certain insurance policies. The terms of the agreements ranged from nine to ten months and the weighted average annual interest rate was 2.6 %. Remaining scheduled principal payments as of December 31, 2021 are as follows:
First quarter 2022
$
1,178,344
Second quarter 2022
1,235,955
Third quarter 2022
1,164,262
Total
$
3,578,561
Note 17: Income Taxes
As a result of the Business Combinations, substantially all the Company’s assets and operations are held and conducted by P3 LLC and its subsidiaries, and the Company’s only assets are equity interests 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 in accordance with the terms of the P3 LLC A&R LLC Agreement. Prior to the Business Combinations, the income and losses of P3 LLC were passed through to its members and nontaxable to P3 LLC.
The Company is taxed as a corporation and pays corporate federal, state, and local taxes on income allocated to it from P3 LLC based on the Company’s economic interest held in P3 LLC. While the Company consolidates P3 LLC for financial purposes as a VIE, the Company will not be taxed on the earnings attributed to the non-controlling interests. As a result, the income tax burden on the earnings taxed on the non-controlling interests is not reported by the Company in its financial statements.
Components of Loss Before Taxes
The components of net loss before the provision for income taxes were as follows:
Successor
Predecessor
December 3, 2021
January 1, 2021
through December 31,
through December 2,
2021
2021
2020
2019
Domestic
$
( 57,937,929 )
$
( 146,399,938 )
$
( 31,411,542 )
$
( 41,971,558 )
Foreign
—
—
—
—
Total
$
( 57,937,929 )
$
( 146,399,938 )
$
( 31,411,542 )
$
( 41,971,558 )
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of Income Tax Expense
For the reasons described above, there was no provision for income taxes for the periods December 3, 2021, through December 31, 2021, January 1, 2021, through December 2, 2021, and the years ended December 31, 2020, and 2019. A reconciliation between the income tax provision computed by applying the statutory federal rate and the actual provision is as follows:
Successor
Predecessor
December 3, 2021
January 1, 2021
through December 31,
through December 2,
2021
2021
2020
2019
Tax at Federal statutory rate
$
( 12,166,545 )
$
( 30,743,987 )
$
( 6,596,424 )
$
( 8,814,027 )
State taxes, net of Federal Benefit
( 98,755 )
—
—
—
Allocable loss from investment in P3 LLC
1,550,420
—
—
—
SPAC warrants change in fair-value
( 477,048 )
—
—
—
Non-controlling interest and nontaxable income
8,359,391
30,743,987
6,596,424
8,814,027
Permanent book to tax differences
283
—
—
—
Change in valuation allowance
2,832,254
—
—
—
Total
$
—
$
—
$
—
$
—
Effective tax rate
—
%
—
%
—
%
—
%
Our tax rate is affected primarily by the recognition of a valuation allowance and the portion of income and expense allocated to the non-controlling interest. It is also affected by discrete items that may occur in any given year such as benefits from fair value changes in SPAC warrants.
Deferred Income Taxes
Deferred income taxes result from differences in the recognition of amounts for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of our deferred income tax assets and liabilities are as follows:
Successor
Predecessor
December 31,
December 31,
2021
2020
Deferred tax assets:
Investment in P3 LLC
$
—
$
—
Net operating loss carryforwards
6,921,601
—
Accrued liabilities
3,306,695
—
Section 163j Interest Limitation
1,232,477
—
Other deferred tax assets
3,970
—
Total deferred tax assets
11,464,743
—
Valuation allowance
( 9,621,431 )
—
Net deferred tax assets
1,843,312
—
Deferred tax liabilities:
Other deferred tax liabilities
( 87,415 )
Goodwill and identifiable intangible assets
( 1,755,897 )
—
Total deferred tax liabilities
( 1,843,312 )
—
Net deferred tax asset
$
—
$
—
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available evidence during the year ended December 31, 2021, we believe that it is more likely than not that the tax benefits of the U.S. losses incurred will not be realized. Accordingly, we have recorded a valuation allowance against the tax benefits of the U.S. losses incurred. We intend to maintain the valuation allowance on the U.S. net deferred tax assets until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance. The valuation allowance recorded in 2021 was $ 9.6 million.
We have recognized no deferred taxes in connection with the Medcore Acquisition. Because Medcore does not file a consolidated corporate income tax return with the Company, the deferred tax assets of Medcore are separately assessed for realizability. Based on the weight of all available evidence, including cumulative losses in recent years, we believe that it is more likely than not that the tax benefits of the deferred tax assets will not be realized. Accordingly, we have recorded a valuation allowance against the tax benefits of the acquired deferred tax assets.
We have recognized no deferred taxes in connection with the Network VIEs. Because the Network VIEs do not file a consolidated corporate income tax return with the Company, the deferred tax assets are separately assessed for realizability. Based on the weight of all available evidence, including cumulative losses in recent years, we believe that it is more likely than not that the tax benefits of the deferred tax assets will not be realized. Accordingly, we have recorded a valuation allowance against the tax benefits of the related deferred tax assets.
The Company has not recognized a deferred tax liability in connection with its investment in P3 LLC due to the deferred tax liability recognition exception contained within ASC 740, in circumstances where book goodwill exceeds tax-deductible of goodwill.
As of December 31, 2021, we had net operating loss carryforwards of approximately $ 31.4 million for federal income tax purposes. Federal net operating losses have an unlimited carryforward period but utilization for a given tax year is limited to 80 % of taxable income.
The federal and state net operating loss carryforwards may be subject to limitations under Section 382 and Section 383 of the Internal Revenue Code of 1986 and similar provisions under state law. The Tax Reform Act of 1986 contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. We have yet to complete a Section 382 review to determine if our tax attributes will be limited in the future. However, our federal operating loss carryforwards have an unlimited carryforward life and therefore do not expire.
We will file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Generally, federal and state tax authorities provide that the statutes of limitations remain open for three or four years from the tax year in which net operating losses or tax credits are utilized.
On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan Act”) was passed into law and amended portions of relevant tax laws. The American Rescue Plan Act did not have a significant impact on the provision for income taxes for the year ended December 31, 2021.
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. We intend to treat any redemptions and exchanges of P3 LLC units as direct purchases of the units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent the tax basis is allocated to those capital assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Business Combinations, we entered into a TRA that provides for the payment by us of 85 % of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of P3 LLC resulting from any redemptions or exchanges of P3 LLC, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the “TRA Payments”). We expect to benefit from the remaining 15 % of any tax benefits that we may actually realize.
The estimation of 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, the potential future tax benefits are estimated to be $ 5.4 million, of which $ 4.6 million is estimated to be the associated TRA liability. However, due to the full valuation allowance recorded by the Company, which results in no tax benefits that are to be realized related to the amortization of the step-up, no TRA liability is recorded within the Company’s Consolidated Financial Statements.
As noted above, the Company has no recorded tax benefits associated with the increase in tax basis as a result of the Business Combinations. As a result, the Company determined that payments to TRA holders are not probable and no TRA liability has been recorded as of December 31, 2021.
As non-controlling interest holders exercise their right to exchange their units in P3 LLC, a TRA liability may be recorded based on 85 % of the estimated future tax benefits that the Company may realize as a result of increases in the tax basis of P3 LLC. The amount of the increase in the tax basis, the related estimated tax benefits, and the related TRA liability to be recorded will depend on the price of the Company’s Class A Common Stock at the time of the relevant redemption or exchange.
Note 18: Capitalization and Management Incentive Units
Successor Period
Class A Common Stock
The Company is authorized to issue 800,000,000 shares of Class A common stock with a par value of $ 0.0001 per share, of which 41,578,890 shares were issued and outstanding on December 31, 2021. Upon closing of the Foresight Business Combinations:
● 8,732,517 shares of Class A common stock were issued as part of the purchase consideration;
● 3,737,316 shares of Class A common stock (after redemptions) were no longer subject to redemption;
● 8,738,750 shares of Class A common stock held by the Founder Holders remained outstanding; and
● 20,370,307 shares of Class A common stock were issued in a private placement pursuant to subscription agreements entered into effective as of March 25, 2021 (the “PIPE Investment”).
Class V Common Stock
The Company is authorized to issue 205,000,000 shares of Class V common stock with a par value of $ 0.0001 per share. These shares have no economic value but entitle the holder to one vote per share. The holders of Common Units of P3 Health Group, LLC subscribed for shares of Class V common stock on a one -for-one basis and may exchange their Common Units and Class V common stock together for Class A common stock on a one -for-one basis. All Class V common stock issued as of the Business Combinations date is subject to a 180 day lockup period. As of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, there were 196,553,523 shares of Class V common stock issued and outstanding , and an additional 5,471,400 Class V shares which are restricted and subject to time-based vesting requirements related to the underlying incentive units further discussed in Note 19 “Share-Based Compensation”.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $ 0.0001 per share, of which zero shares were outstanding as of December 31, 2021.
P3 Health Group, LLC Common Units
In connection with the Business Combinations, all outstanding Class A Units, Class B Units, Class C Units and Class D Units of P3 Health Group Holdings, LLC were converted into the right to receive the merger consideration, which consisted of cash and newly-issued Common Units of P3 Health Group, LLC. The Common Units were issued in amounts determined in accordance with the agreement and plan of merger, dated as of May 25, 2021 (as amended), by and among Foresight, P3 Health Group Holdings and FAC Merger Sub LLC, and the then-existing limited liability company agreement of P3 Health Group Holdings, LLC. Each holder of Common Units was issued shares of Class V common stock on a one-for-one basis. At December 31, 2021, there were 243,603,813 Common Units outstanding at P3 LLC of which the Company held 41,578,890 Common units and non-controlling interests held the remaining 202,024,923 Common Units outstanding, 5,471,400 of which are restricted as discussed above.
Predecessor Period
Prior to the Business Combinations, P3 Health Group Holdings, LLC’s capital structure consists of Class A Units, which represent commitments from the Company’s private equity sponsors, Class B Units, which represent founders common equity, Class C Units, which represented Management Incentive Units, and Class D Units, which represents an additional investment from a private equity sponsor.
Class A Units
At December 31, 2019, the Company had received total funding commitments from its Class A Unit holders totaling $ 43.0 million. Class A Units had voting rights and, whether, or not declared or approved by the Board, the holders of Class A Units were entitled to a preferred return in the amount of 8.0 %, per annum (beginning on November 19, 2019). At December 31, 2020 and 2019, there were 43,000,000 Class A Units authorized and outstanding. The Class A Units were subject to possible redemption rights and have been classified in mezzanine equity. At December 31, 2021, there were zero Class A Units authorized and outstanding . In connection with the Business Combinations, all outstanding Class A Units were converted into the right to receive the merger consideration described above.
Class B Units
Class B Units are those, that were issued to the Company’s Founders. At December 2, 2021 and December 31, 2020 and 2019, there were 19,701,492 Class B Units authorized. At December 31, 2021, there were zero Class B Units outstanding. At December 2, 2021 and December 31, 2020 and 2019, there were 19,701,492 Class B Units outstanding. Class B Units are subdivided among three tranches: Subclass B-1; Subclass B-2; and Subclass B-3. Each Subclass is described below:
● Subclass B-1 ( 10,000,000 Units): Subclass B-1 Units were entirely service based (Time-based). 20 % of Subclass B-1 Units vested each year beginning on April 20, 2018 and annually thereafter until April 20, 2022. Subclass B-1 Units very closely resemble Class C Time-based Profits Interest(s) Units.
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
● Subclass B-2 ( 4,054,054 ): Subclass B-2 Units were entirely Performance-based. 100 % of Subclass B-2 Units would vest immediately prior to and conditioned upon the occurrence of a Sale of the Company in which the Company’s EBITDA as of the date of such Sale of the Company is at least $ 20 million or net proceeds distributable among the Members from such Sale of the Company are at least $ 200 million.
● Subclass B-3 ( 5,647,438 ): Subclass B-3 Units were entirely performance-based. 100 % of Subclass B-3 Units would vest immediately prior to and conditioned upon the occurrence of a Sale of the Company in which the Company’s EBITDA as of the date of such Sale of the Company is at least $ 30 million or net proceeds distributable among the members from such Sale of the Company are at least $ 300 million.
Of this 19,701,492 , there were 17,701,492 , 6,000,000 and 4,000,000 Subclass B-1 Units vested as of December 2, 2021 and December 31, 2020 and 2019, respectively. Only vested units are presented in the consolidated statements of changes in members’ deficit. As of December 31, 2020, 4,000,000 Subclass B-1 Units remained unvested. In connection with the Business Combinations, all outstanding Class B Units were converted into the right to receive the merger consideration described above. See Note 19 “Share-Based Compensation.”
Class C Units
P3 Health Group Holdings, LLC maintained a Management Incentive Plan (the “Plan”), which provides for the grant of service-based and performance-based Class C Units to board managers and key employees. Subject to adjustment, a maximum aggregate of 6,845,297 Class C Units have been authorized for issuance under the Plan. Class C Units were governed by the terms of the Plan, the terms of the award agreement documenting the grant and the Limited Liability Company agreement of P3 Health Group Holdings, LLC (the “LLC Agreement”). Class C Units were intended to qualify as “Profits Interests” for Federal income tax purposes.
Service-based Class C Units generally vested, except as otherwise approved by P3 Health Group Holdings, LLC’s Board, over a period of four to five years , with ratable vesting each year following twelve months of continued employment or service with the balance vesting in equal annual installments over the remaining and required service period, provided the grantee continues to be employed by, or provide service to, P3 Health Group Holdings, LLC and be employed on the applicable vesting anniversary date.
Performance-based Class C Units would vest upon the Company’s attainment of certain Board-established milestones (thresholds). Board-established milestones were grant specific and set on the date of each Class C Unit grant.
P3 Health Group Holdings, LLC Board had the right to accelerate the vesting of any Class C incentive units granted under the Plan at such times and upon such terms and conditions as may be deemed advisable, for which any determination could be made on a grant-specific basis. As of December 2, 2021 and December 31, 2020, and 2019, the number of Class C Units issued were 5,235,833 (of which 1,962,500 were vested), 5,420,833 (of which, 1,302,083 were vested) and 4,070,833 (of which 1,058,333 were vested), respectively, and only the vested units are presented in the consolidated statements of changes in members’ deficit. In connection with the Business Combinations, all outstanding Class C Units were converted into the right to receive the merger consideration described above. See Note 19 “Share-Based Compensation.”
Class D Units Subject to Possible Redemption
On November 14, 2019, P3 Health Group Holdings, LLC received $ 50.0 million in funding from Hudson Vegas Investment, SPV, LLC, an investment vehicle of The Straus Group (“Straus”) per the unit purchase agreement executed between the parties. P3 Health Group Holdings, LLC issued Straus 16,130,034 of Class D Units. Class D Units have voting rights and, accrue a preferred return in the amount of 8.0 %, per annum. Of the $ 50.0 million received from Straus, the Company utilized $ 16,752,354 to settle outstanding bridge loans, plus accrued interest and $ 2,958,446 to
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
settle transaction closing costs related to Class D Units. These transaction closing costs were netted against the $ 50.0 million in proceeds raised.
There were 16,130,034 Class D Units authorized and outstanding as of December 31, 2020 and 2019.
Class D units contained a provision whereby at any time after November 4, 2024, the holders of Class D Units could exercise a right that would require the Company to redeem their outstanding units for cash, if certain conditions related to a sale of the Company are not met. Upon exercise of this right, the Company would be required to redeem all the then outstanding Class D units at a price equal to the amount of proceeds that otherwise would have been received in a sale transaction. In accordance ASC 480-10-S99, Distinguishing Liabilities from Equity (“ASC 480”), redemption provisions not solely within the control of the Company require the associated equity instruments to be classified outside of permanent equity. As such, the Class D units have been presented outside of permanent equity. The Company has concluded it is not probable that the conditional redemption feature will be exercised, as significant uncertainties exist that indicate the redemption will not occur; therefore, Class D shares are recorded at initial fair value.
Prior to the Business Combinations, distributions to the unitholders of P3 Health Group Holdings, LLC were made according to the following priority:
● First, to Class D Unitholders in proportion to their unreturned contribution amounts and until each Class D Member’s unreturned contribution amount is reduced to zero.
● Second, to Class A Unitholders in proportion to their unreturned contribution amount and until each Class A Member’s unreturned contribution amount is reduced to zero.
● Third, to Class A and Class D Unitholders in proportion to their respective unpaid preferred return balances have been reduced to zero; and
● Thereafter, any remaining amounts to holders of all vested units, in proportion to their number of vested units.
In connection with the Business Combinations, all outstanding Class D Units were converted into the right to receive the merger consideration described above.
Note 19: Share-Based Compensation
Successor Company
Successor Awards
In connection with the Business Combinations, Foresight’s Board of Directors adopted, and its stockholders approved, the 2021 Incentive Award Plan (the “2021 Plan”), in order to facilitate the grant of cash and equity incentives to employees, consultants, and directors of the Company and certain affiliates. The 2021 Plan became effective on December 3, 2021. As of December 31, 2021, the Successor Company did not issue any awards under the 2021 Plan, as the only shares outstanding at year-end are the unvested awards which were replaced with the Class V shares and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Units. The following table sets forth a summary of Class V share-based compensation activity of the Successor Company:
Weighted
Weighted
Average
Average
Grant-Date
Time Based
Grant-Date
Performance
Fair Value
Units
Fair Value
Based Units
Outstanding and non-vested at December 3, 2021
$
—
—
$
—
—
Granted on December 3, 2021 1
9.20
5,471,400
—
—
Granted during period
—
—
—
—
Vested
—
—
—
—
Cancelled/forfeited
—
—
—
—
Outstanding and non-vested at December 31, 2021
$
9.20
5,471,400
$
—
—
1 Represents predecessor profit interest awards which were replaced with Class V awards on the Merger Date.
Predecessor Company
Predecessor Awards
In 2017, the Predecessor Company adopted the Management Incentive Plan (the “Predecessor Equity Plan”). Under the Predecessor Equity Plan, the Predecessor Company granted awards in the form of profits interests to employees, officers, and directors or in the form of common equity to founders. The Predecessor Plan was administered by the Board of Directors which had full power and authority to select the participants to whom awards were granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award, and to determine the specific terms and conditions of each award, subject to the provisions of the Predecessor Equity Plan. Following the Business Combinations and the effectiveness of the 2021 Plan, the Predecessor Equity Plan terminated and no further awards will be made under the Predecessor Equity Plan.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Class C Units
Under the Predecessor Equity Plan, 6,845,297 Class C units were authorized and 5,235,833 were issued to non-employee directors and officers as of December 2, 2021. Time-based Class C units generally vested over a period of four to five years if the grantee continues to be employed by, or provide services to, the Predecessor Company. The Class C units were equity-classified awards. Vesting of performance-based Class C units was based on the Predecessor Company’s achievement of specified performance hurdles, which were established by the Board of Directors and differ on an individual award-by-award basis. The performance hurdles were based on an achievement of specified returns, the range of which vary on an individual award-by-award basis, upon a change of control or an IPO. Since such a qualifying event was not probable of occurring until it is consummated, the Predecessor Company did not recognize any compensation cost related to performance-based Class C units until the Business Combinations were completed. The following tables set forth a summary of Class C profits interest activity of the Predecessor Company:
Weighted
Weighted
Average
Average
Grant-Date
Time Based
Grant-Date
Performance
Fair Value
Units
Fair Value
Based Units
Outstanding and non-vested at December 31, 2018
$
0.16
1,550,000
$
0.03
500,000
Granted
0.13
1,125,000
0.04
1,375,000
Vested
0.15
( 633,333 )
—
—
Cancelled/forfeited
0.14
( 654,167 )
0.07
( 250,000 )
Outstanding and non-vested at December 31, 2019
$
0.13
1,387,500
0.04
1,625,000
Granted
0.49
600,000
0.04
950,000
Vested
0.30
( 443,750 )
—
—
Cancelled/forfeited
—
—
—
—
Outstanding and non-vested at December 31, 2020
$
0.49
1,543,750
$
0.04
2,575,000
Granted
4.74
985,000
0.38
60,000
Vested
1.12
( 660,417 )
—
—
Cancelled/forfeited
0.49
( 280,000 )
0.04
( 950,000 )
Outstanding and non-vested at December 2, 2021
$
2.66
1,588,333
$
0.04
1,685,000
Business Combination
On December 3, 2021, in connection with the Business Combinations, each Incentive Unit that was outstanding immediately prior to the effective time of the Business Combinations and that was vested (after taking into account any accelerated vesting that occurred in connection with the Business Combinations) was canceled and converted into the right to receive a portion of the merger consideration, which consisted of Common Units of P3 LLC and cash.
Each outstanding Incentive Unit that was subject to time-based vesting, but had not vested immediately prior to the effective time of the Business Combinations, was converted into the right to receive a portion of the merger consideration, which merger consideration remained subject to the original vesting conditions. Pursuant to action taken by the Board of Directors in connection with the closing of the Business Combinations, all of the time-vesting Incentive Units held by two executive officers that were not vested were accelerated such that all of the merger consideration received by these executive officers was not subject to any vesting restrictions, which resulted in an acceleration of compensation cost of $ 2,419,678 recognized by the Predecessor Company. In total, 5,471,400 Common Units were issued in respect of unvested time-based Incentive Units held by directors, executive officers or employees, which were paired with an equal number of unvested Class V shares and remained subject to the original vesting restrictions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain of the performance-based Incentive Units issued to directors, executive officers and employees vested on December 3, 2021 to the extent a qualifying event was consummated and the applicable performance hurdles were achieved upon consummation of the Business Combinations, and were converted into the right to receive a portion of the merger consideration. To the extent not vested upon the consummation of the Business Combinations on December 3, 2021, each unvested performance-based Incentive Unit was forfeited without consideration. Each P3 LLC Unit received as merger consideration was paired with a share of Class V common stock issued in the Successor Company. The acquisition date fair value of the unvested profits interests attributable to post-combination services was $ 23,999,330 which will be expensed over the relevant vesting period by the Successor Company. The acquisition date fair value of the unvested profits interest attributable to pre-combination services was $ 26,313,476 and was included in consideration transferred in connection with the Business Combinations.
Valuation of Equity-Based Awards
The Black-Scholes-Merton option pricing model was used in both the Successor Period and Predecessor Period to value equity-based awards and determine the related compensation cost. The following table illustrates assumptions used to value all classes of awards granted for the periods indicated:
FMV / Unit
Valuation
Volatility
RF Rate
Time
at Grant Date
03.31.2021
60
%
0.06
%
0.90
$
4.74
12.31.2020
65
%
0.10
%
1.10
$
0.49
06.11.2020
45
%
0.19
%
1.70
$
0.15
11.04.2019
45
%
1.60
%
2.30
$
0.13
12.31.2018
40
%
2.46
%
3.10
$
0.15
The table above assumed the risk-free interest rate estimate was based on constant maturity, which is the theoretical value of a U.S. Treasury that is based on recent values of auctioned U.S. Treasuries. The expected dividend yield was based on our expectation of not paying dividends in the foreseeable future. We calculated the expected term primarily based upon the estimated time to a liquidation event. We used company-specific historical information, guideline company information, and implied volatility information to generate the volatility assumptions.
Compensation Expense
Compensation costs during the periods indicated below are as follows:
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
Year Ended
through December 31,
through December 2,
December 31,
December 31,
2021
2021
2020
2019
Grant date fair value of profits interests - time-based
$
23,999,330
$
4,669,885
$
317,958
$
316,000
Profits interest compensation cost - time-based
$
4,635,142
$
3,524,277
$
447,475
$
474,042
Grant date fair value of profits interests - performance-based
$
—
$
103,000
$
65,000
$
15,000
Profits interest compensation cost - performance based
$
—
$
176,975
$
—
$
—
The Company accounts for forfeitures of awards as they occur. As of December 31, 2021, and December 31, 2020, there was $ 19,364,188 and $ 1,198,550 , respectively, of unrecognized equity-based compensation cost. The cost related to the time-based awards is expected to be recognized over a weighted-average period of 0.48 years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company did no t recognize any tax benefits related to stock-based compensation for the Successor Period ended December 31, 2021, the Predecessor Period ended December 2, 2021, and the Predecessor years ended December 31, 2020 and 2019.
Note 20: Earnings (Loss) per Share
Loss per Share – Successor Period
The following table provides the computation of net loss per share and weighted average shares of the Company’s common stock outstanding during the periods presented:
Successor
December 3, 2021
through December 31,
2021
Net Loss
$
( 57,937,929 )
Loss Attributable to Non-controlling Interest
( 47,856,729 )
Net Loss Attributable to Class A Common Stockholders - Basic and Diluted EPS
$
( 10,081,200 )
Weighted Average Class A Common Shares Outstanding - Basic and Diluted EPS
41,578,890
Loss per Share Attributable to Class A Common Shareholders - Basic and Diluted
$
( 0.24 )
The following table presents potentially dilutive securities excluded from the computation of diluted net loss per share for the periods presented because their effect would have been anti-dilutive. The liability-classified Public and Private Warrants are out of the money and thus have no impact on diluted EPS. Additionally, the Company considered the potential conversion of the 196,553,523 shares Class V common stock as potentially dilutive securities. However, net loss has already been allocated to the non-controlling interests in P3 LLC who hold all of the Class V common stock. Therefore, the inclusion of the Class V common stock on an if-converted basis would not impact the diluted EPS calculation and these shares have been excluded from the table below.
Successor
December 3, 2021
through December 31,
2021
Public Warrants
10,541,667
Private Warrants
277,500
Restricted Shares
5,471,400
Total
16,290,567
Note 21: Premium Deficiency Reserve
We assess the profitability of our at-risk share savings arrangements to identify contracts where current operating results or forecasts indicate probable future losses. If anticipated future variable costs exceed anticipated future revenues, a premium deficiency reserve is recognized. No premium deficiency reserves were recorded as of December 31, 2020 given the maturing of these health plans. Management concluded a PDR of $ 37,835,642 existed at December 31, 2021, which represented its estimate of probable contract losses expected to be generated by the Company’s health plans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22: Leases
The Company leases real estate in the form of corporate office space and operating facilities. The Company additionally leases certain machinery in the form of office equipment. Generally, the term for real estate leases ranges from one to eight years at inception of the contract. Generally, the term for equipment leases is one to three years at inception of the contract. Some real estate leases include one to two options to renew that can extend the original term by five to ten years .
Operating lease costs are included within operating expenses on the consolidated statements of operations. The Company does not have any finance leases, short-term lease costs nor any sublease income.
Successor
Predecessor
December 3, 2021
January 1, 2021
through December 31,
through December 2,
2021
2021
2020
2019
Operating Lease Costs
$
262,395
$
2,294,555
$
2,018,210
$
1,592,665
Lease terms and discount rates consisted of the following at each of the periods presented below:
Successor
Predecessor
December 31,
December 31,
Year Ending December 31,
2021*
2020*
Weighted Average Remaining Lease Term (Years)
5.01
3.74
Weighted Average Discount Rate
11.1
%
10.3
%
* All Leases are Operating
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liability recognized on the consolidated balance sheets as of the dates presented.
Successor
December 31,
Year Ending December 31,
2021
2022
$
2,882,304
2023
2,017,479
2024
1,804,823
2025
1,521,074
2026
976,170
Thereafter
1,927,098
Total Payments for Operating Leases
11,128,948
Less: Interest
( 2,744,830 )
Present Value of Operating Lease Liabilities
$
8,384,118
The current portions of ROU liabilities of $ 2,087,235 and $ 2,174,095 are included in Accounts Payable and Accrued Expenses in the Company’s consolidated balance sheets as of December 31, 2021 and December 31, 2020, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental cash flows and other information related to leases for each of the periods ending December 31:
Successor
Predecessor
December 3, 2021
January 1, 2021
through December 31,
through December 2,
2021
2021
2020
New Assets Obtained in Exchange for Operating Lease Liabilities
$
314,242
$
4,073,448
$
882,029
Operating Cash Flows Paid for Operating Leases
255,403
2,255,905
1,843,281
Note 23: Retirement Plan
The Company maintains a retirement savings 401(k) Plan the “401(k) Plan” for full-time employees. Participants may elect to contribute to the 401(k) Plan, through payroll deductions, subject to Internal Revenue Service limitations. At its discretion, the Company can make a matching contribution to the 401(k) Plan. The Company did no t make any contributions to the 401(k) Plan in the Successor Period of 2021, and the Predecessor Periods of 2021, 2020 and 2019.
Note 24: Redeemable Non-Controlling Interests
Non-controlling interests represents the portion of P3 LLC that the Company controls and consolidates but does not own (i.e., the P3 LLC Common Units held directly by the shareholders other than the Company). The non-controlling interests represent approximately 83 % ownership in P3 LLC as of December 3, 2021.
Generally, P3 LLC Common Units participate in net income or loss allocations and distributions and entitle their holder to the right, subject to the terms set forth in the limited liability agreement, to require P3 to redeem all or a portion of the Common Units held by such participant, together with a corresponding number of shares of Class V Common Stock, in exchange for Class A Common Stock or at the Company’s option, and subject to certain limitations, in cash. As the non-controlling interest holders have an approximately 83 % voting interest in the Company through their Class V Common Stock and have appointed most of the initial members to the Board of Directors, the ability to elect cash settlement upon redemption is outside of the control of the Company.
The P3 LLC Common Units held by outside shareholders have been classified as redeemable non-controlling interest in the Company. The cash redemption feature is considered outside of the control of the Company for the reason described above. Therefore, in accordance with ASC Topic 480, Distinguishing Liabilities from Equity , the P3 LLC Units are classified as temporary equity in the Company’s consolidated balance sheet.
The redeemable non-controlling interest was initially measured at its fair value on December 3, 2021. Net income or loss is attributed to the redeemable non-controlling interest during each reporting period based on its ownership percentage, as appropriate. Subsequent to that, the redeemable non-controlling interest is measured at its fair value (i.e., based on the Class A stock price) at the end of each reporting period, with the remeasurement amount being no less than the initial value, as adjusted for the redeemable non-controlling interest’s share of net income or loss. The offset of any fair value adjustment is recorded to equity, with no impact to net income or loss. As of December 31, 2021, the fair value of redeemable non-controlling interest is lower than the initial value, as such, there was no remeasurement adjustment recorded.
In addition, pursuant to the Agreement and Plan of Merger, all non-controlling interest holders are subject to certain lock-up period and as a result, there was no exchange or redemption activity as of December 31, 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25: Segment Reporting
The Company organizes its operations into one reportable segment. The Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), reviews financial information and makes decisions about resource allocation based on the Company’s responsibility to deliver high quality primary medical care services to its patient population. For the periods presented, all the Company’s revenues were earned in the United States.
Likewise, all the Company’s long-lived assets were in the United States.
Note 26: Commitments and Contingencies
The Company is a party to various claims, legal and regulatory proceedings, lawsuits and administrative actions arising in the ordinary course of business and associated with the Business Combinations. The Company carries general and professional liability insurance coverage to mitigate the Company’s risk of potential loss in such cases. An accrual is established when a specific contingency is probable and estimable. The Company also faces contingencies that are reasonably possible to occur that cannot currently be estimated. The Company believes that disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, net loss or cash flows. It is the Company’s policy to expense costs associated with loss contingencies, including any related legal fees, as they are incurred.
In the fourth quarter of 2021, a discrepancy was identified in the service agreement with one of the Company’s health plans resulting in a renegotiation of the agreement. As of the date of the filing of this Annual Report on Form 10-K, the renegotiation was in process. The Company has determined it is probable that resolution of this discrepancy will result in an additional payment to the health plan of approximately $ 10.6 million. This contingent liability is reflected in the Company’s financial statements presented in this Annual Report on Form 10-K. In the Predecessor Period of 2021, the Company recorded a $ 3.6 million reduction in operating revenue and a $ 7.0 million charge to operating expense to account for amounts not previously recorded.
Uncertainties
The healthcare industry is subject to numerous laws and regulations of Federal, state, and local governments. These laws and regulations include, but are not limited to, matters of licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare / Medicaid Fraud, Waste and Abuse Prevention. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of Fraud, Waste and Abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with imposition of significant fines and penalties as well as significant repayment for patient services billed.
Management believes the Company is compliant with Fraud, Waste and Abuse regulations as well as other applicable government laws. While no regulatory inquiries have been made, compliance with such laws and regulations is subject to government review and interpretation, as well as other regulatory actions which might be unknown at this time.
Healthcare reform legislation at both the Federal and state levels continues to evolve. Changes continue to impact existing and future laws and rules. Such changes may impact the manner in which the Company conducts business, restrict the Company’s revenue growth in certain eligibility categories, slow down revenue growth rates for certain eligibility categories, increase certain medical, administrative and capital costs, and expose the Company to increased risk of loss or further liabilities. As a result, the Company’s consolidated financial position could be impacted by such changes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVID-19 Pandemic
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-emergent 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 the Company’s patients.
The COVID-19 pandemic did not have a material impact on the Company’s revenues as of year ended December 31, 2021. Nearly 97 % of the Company’s total revenues are recurring, consisting of fixed monthly PMPM capitation payments received from Medicare Advantage health plans. Based on claims paid to date, direct costs associated with COVID-19 claims was approximately $ 67.4 million for the period March 1, 2020 through December 31, 2021. Management instituted multiple safety measures for the Company’s employees including a work-from-home policy and access to free vaccinations and personal protective equipment.
The full extent to which COVID-19 will directly or indirectly impact the Company, its future results of operations and financial condition will depend on factors which are highly uncertain and cannot be accurately predicted. 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 the Company’s markets. 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 and other uncertainties, Management cannot estimate the length or severity of the impact of the pandemic on the Company’s business. Furthermore, because of the Company’s business model, the full impact of COVID-19 may not be fully reflected in the Company’s results of operations and overall financial condition until future periods. However, Management will continue to closely evaluate and monitor the nature and extent of these potential impacts to the Company’s business, results of operations and liquidity.
Note 27: Related Parties
Intercompany Transactions
BACC entered an agreement (“Services Agreement”) with P3-NV, collectively the “Parties”, under which P3-NV provides BACC with certain management, administrative, and other non-medical support services in connection with BACC’s medical practice.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and its subsidiaries have “Deficit Funding Agreements” with the Network, whereby the Company or its subsidiaries provide loans (“Advances”) from time to time principally for the purpose of working capital support. Interest accrues monthly on each Advance from the date of disbursement. Net Advances made to the Network and accrued interest expense were as follows:
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
through December 31,
through December 2,
December 31, 2020
2021
2021
(As Restated)
Balance at Beginning of Period
$
23,639,987
$
19,354,258
$
14,400,045
Advanced During Period
470,165
2,862,350
3,772,573
Interest Accrued During period
679
1,423,379
1,181,640
Balance at End of Period
$
24,110,831
$
23,639,987
$
19,354,258
Advances, in most cases, have been constructively made by P3 Health Group Holdings, LLC on P3-NV’s behalf, and were therefore deemed Advances made by P3-NV. P3-NV’s Advances to BACC include all years prior, for which balances have, historically, not been settled periodically between the Parties and, thus have carried forward one year to the next. All transactions related to these Services and Deficit Funding Agreements (including accrued interest) have been eliminated in consolidation.
There were no advances transacted between P3-NV and KWA during 2021 or 2020.
Atrio Health Plans
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
Year Ended
through December 31,
through December 2,
December 31,
December 31,
2021
2021
2020
2019
Revenue Earned from Capitation
$
11,483,345
$
142,904,723
$
146,469,571
$
—
Management Fees
180,768
2,022,076
2,230,984
—
Claims Paid
14,684,345
146,216,160
148,905,784
—
Atrio Health Plans was established in 2004 and has since grown to serve Medicare beneficiaries in numerous counties throughout Oregon. Atrio works closely with local providers to improve healthcare outcomes of the population(s) served. In 2019, Chicago Pacific Founders (“CPF”) made an equity investment in Atrio. CPF is also a principal holder of shares of Class V common stock and Common Units of P3 LLC. Beginning in 2020, the Company has a Full-Risk capitation agreement in place with Atrio whereby the Company is delegated to perform services on behalf of Atrio’s members assigned to the Company. These delegated services include but are not limited to provider network credentialing, patient authorizations and medical management (care management, quality management and utilization management).
Note 28: Variable Interest Entities
The Company prepares its consolidated financial statements in accordance with ASC 810 which provides for the consolidation of VIEs of which an entity is the primary beneficiary.
In connection with the Business Combinations further described in Note 1, the Company became the sole managing member of P3 LLC. The rights of the non-managing members of P3 LLC are limited and protective in nature and do not give substantive participation rights over the sole managing member. As a result, P3 LLC is considered a VIE. As the sole managing member, the Company has the right to direct the most significant activities of P3 LLC and the obligation to absorb losses and receive benefits and accordingly is considered the primary beneficiary. Since P3 LLC represents substantially all the assets and liabilities of the Company, the numbers and language below refer to only VIEs held at the P3 LLC level.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, P3 LLC is the primary beneficiary of the Network.
P3, LLC entered Stock Transfer Restriction Agreements with the Practice Shareholders of the Network. The Stock Transfer Restriction Agreements, by way of a call option, unequivocally permit P3 LLC to appoint Successor Physicians if a Practice Shareholder vacates their ownership position.
Pursuant to ASC 810 both the “power of control” and “economics” criteria were reviewed for VIE consideration. P3 LLC’s ability to appoint Successor Physicians to the Network demonstrates “power of control”. Also, there are Deficit Funding Agreements in place between P3 LLC and the Network. The Deficit Funding Agreement between P3 LLC and the members of the Network states that P3 LLC will advance funds, as needed, to support working capital needs to the extent operating expenses exceed gross revenue. These funding arrangements further illustrate and fulfill the economic criteria for VIE consolidation.
Practice Shareholders, who are employees of the Company, retain equity ownership in the Network, which represents nominal non-controlling interests. The non-controlling interests do not participate in the profit or loss of the Network, however.
P3 LLC, directly or indirectly via its wholly-owned subsidiaries, may not use or access any net assets of these VIEs to settle its obligations or the obligations of its wholly-owned subsidiaries. Additionally, the creditors of the VIE do not have recourse to the credit of the Company.
The following tables provide a summary of the VIE’s assets, liabilities and operating performance.
Successor
Predecessor
2020
2021
(As Restated)
ASSETS
Cash
$
7,570,247
$
183,836
Client Fees and Insurance Receivable, net
60,815
335,358
Prepaid Expenses and Other Current Assets
406,372
285,363
Property and Equipment, net
36,416
22,309
Investment in Other P3 Entities
6,000,000
—
TOTAL ASSETS
$
14,073,850
$
826,866
LIABILITIES AND MEMBERS’ DEFICIT
Accounts Payable and Accrued Expenses
$
4,804,704
$
686,680
Accrued Payroll
1,303,615
1,019,940
Due to Consolidated Entities of P3
24,110,831
19,354,259
TOTAL LIABILITIES
30,219,150
21,060,879
MEMBERS’ DEFICIT
( 16,145,300 )
( 20,234,013 )
TOTAL LIABILITIES AND MEMBERS’ DEFICIT
$
14,073,850
$
826,866
Successor
Predecessor
December 3, 2021
January 1, 2021
Year Ended
Year Ended
through December 31,
through December 2,
December 31, 2020
December 31, 2019
2021
2021
(As Restated)
(As Restated)
Revenue
$
843,747
$
7,580,124
$
7,611,427
$
4,389,688
Expenses
1,202,951
12,293,365
13,100,138
13,035,788
Net Loss
$
( 359,204 )
$
( 4,713,241 )
$
( 5,488,711 )
$
( 8,646,100 )
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 29: Warrants
As of December 31, 2020, there were 858,351 Class D warrants outstanding for the predecessor entity. In conjunction with the Term Loan issued November 19, 2020, the predecessor entity issued 858,351 10-year warrants to purchase shares of Series D Preferred Units at $ 4.68 per share. The warrants were recorded as a liability on the consolidated balance sheet with a balance of $ 6,316,605 as of December 31, 2020. During the year ended December 31, 2020, no change in the fair value of the warrant liability was recognized in the consolidated statements of operations (See note 8 “Fair Value Measurements and Hierarchy” for further information). During 2021, 858,351 warrants were exercised on a cashless basis, with an exercise price of $ 4.68 per share as part of the Business Combinations. There were no Class D Warrants outstanding as of December 31, 2021.
As of December 31, 2021, there were an aggregate of 10,819,167 warrants outstanding, which include the Public Warrants and Private Placement Warrants. Each warrant entitles the holder to purchase one share of Class A Common Stock at a price of $ 11.50 per share. The Public Warrants became exercisable 30 days after the completion of the Business Combinations. The Public Warrants will expire five years after the completion of the Business Combinations. The Company has the right to redeem the Public Warrants when the price per Class A ordinary share equals or exceeds $ 18.00 for 20 days within a 30 -day trading period. The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants are subject to certain transfer restrictions, are not redeemable by the Company if they are held by Sponsors and are exercisable on a cashless basis.
The Public Warrants and Private Placement Warrants are recorded as a liability on the consolidated balance sheets with a balance of $ 11,382,826 as of December 31, 2021. A gain of $ 2,271,659 was recognized in the Successor Period of 2021, and a loss of $ 7,664,869 was recognized in the Predecessor Period of 2021 from the change in fair value of the warrant liability in the consolidated statements of operations. During 2021, zero Public Warrants and Private Placement Warrants were exercised.
F-57
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P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 30: Restatement of Quarterly Financial Information (Unaudited)
We have restated herein our previously issued unaudited condensed consolidated financial statements for each interim period within the fiscal years ended December 31, 2021 and December 31, 2020. See Note 2 “Restatement of Previously Issued Financial Statements” for additional information.
As Previously
Network
Preferred Returns
Class A Units
Revenue
Reported
Adjustments
Adjustments
Adjustment
Adjustments
As Restated
Condensed Consolidated Balance Sheet as of September 30, 2021 (Unaudited)
Class A Units Subject to Possible Redemption
$
—
$
—
$
—
$
43,656,270
$
—
$
43,656,270
Class D Units Subject to Possible Redemption
54,936,716
—
( 7,895,162 )
—
—
47,041,554
Contributed Capital
41,764,270
—
—
( 41,764,270 )
—
—
Class A Preferred Returns
6,594,660
—
( 6,594,660 )
—
—
—
Accumulated Equity-Based Compensation
2,747,960
—
—
( 921,092 )
—
1,826,868
Retained Loss from Non-Controlling Interests
( 26,231,059 )
26,231,059
—
—
—
—
Accumulated Deficit (formerly Accumulated Loss from Controlling Interest)
( 203,942,517 )
( 26,231,059 )
14,489,765
( 970,908 )
—
( 216,654,719 )
Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2021 (Unaudited)
Capitated Revenue
$
447,137,121
$
—
$
—
$
—
$
( 3,539,071 )
$
443,598,050
Other Patient Service Revenue
12,366,111
—
—
—
( 3,893,823 )
8,472,288
Total Operating Revenue
459,503,232
—
—
—
( 7,432,894 )
452,070,338
Medical Expenses
459,233,085
—
—
—
( 899,940 )
458,333,145
Total Operating Expenses
520,053,309
—
—
—
( 899,940 )
519,153,369
Operating Loss
( 60,550,077 )
—
—
—
( 6,532,954 )
( 67,083,031 )
Interest Expense, net
( 13,130,628 )
—
6,107,441
—
—
( 7,023,187 )
Total Other Expenses
( 25,193,893 )
—
6,107,441
—
—
( 19,086,452 )
Net Loss Attributable to Non-Controlling Interests
( 8,043,678 )
8,043,678
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 77,700,292 )
( 8,043,678 )
6,107,441
—
( 6,532,954 )
( 86,169,483 )
Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2021 (Unaudited)
Capitated Revenue
$
152,276,992
$
—
$
—
$
—
796,003
$
153,072,995
Other Patient Service Revenue
4,243,263
—
—
—
( 1,130,303 )
3,112,960
Total Operating Revenue
156,520,255
—
—
—
( 334,300 )
156,185,955
Medical Expenses
161,662,423
—
—
—
( 334,300 )
161,328,123
Total Operating Expenses
184,643,797
—
—
—
( 334,300 )
184,309,497
Interest Expense, net
( 4,643,254 )
—
2,114,063
—
—
( 2,529,191 )
Total Other Expenses
( 6,044,940 )
—
2,114,063
—
—
( 3,930,877 )
Net Loss Attributable to Non-Controlling Interests
( 2,801,965 )
2,801,965
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 31,366,517 )
( 2,801,965 )
2,114,063
—
—
( 32,054,419 )
Condensed Consolidated Statement of Changes in Members' Deficit for the Nine Months Ended September 30, 2021
Preferred Return at 8 % for Class A Units
$
2,779,619
$
—
$
( 2,779,619 )
$
—
—
$
—
Net Loss
( 85,743,970 )
—
6,107,441
—
( 6,532,954 )
( 86,169,483 )
Balance as of September 30, 2021
( 179,246,686 )
—
7,895,167
( 43,656,331 )
—
( 215,007,850 )
Condensed Consolidated Statement of Changes in Members' Deficit for the Three Months Ended September 30, 2021
Preferred Return at 8 % for Class A Units
$
962,163
$
—
$
( 962,163 )
$
—
—
$
—
Net Loss
( 34,168,482 )
—
2,114,063
—
—
( 32,054,419 )
Balance as of September 30, 2021
( 179,246,686 )
—
7,895,167
( 43,656,331 )
—
( 215,007,850 )
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2021
Net Loss
$
( 85,743,970 )
$
—
$
6,107,441
$
—
( 6,532,954 )
$
( 86,169,483 )
Health Plan Settlements Receivable/Premiums Receivable
( 7,417,477 )
—
—
—
6,532,954
( 884,523 )
Class A and Class D Preferred Returns
6,107,441
—
( 6,107,441 )
—
—
—
F-58
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As Previously
Network
Preferred Returns
Class A Units
Revenue
Reported
Adjustments
Adjustments
Adjustments
Adjustment
As Restated
Condensed Consolidated Balance Sheet as of June 30, 2021 (Unaudited)
Class A Units Subject to Possible Redemption
$
—
$
—
$
—
$
43,656,270
$
—
$
43,656,270
Class D Units Subject to Possible Redemption
53,784,760
—
( 6,743,207 )
—
—
47,041,553
Contributed Capital
41,764,270
—
—
( 41,764,270 )
—
—
Class A Preferred Returns
5,632,496
—
( 5,632,496 )
—
—
—
Accumulated Equity-Based Compensation
2,392,875
—
—
( 921,092 )
—
1,471,783
Retained Loss from Non-Controlling Interests
( 23,429,094 )
23,429,094
—
—
—
—
Accumulated Deficit (formerly Accumulated Loss from Controlling Interest)
( 172,576,003 )
( 23,429,094 )
12,375,705
( 970,908 )
—
( 184,600,300 )
Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2021 (Unaudited)
Capitated Revenue
$
294,860,130
$
—
$
—
$
—
$
( 4,335,073 )
$
290,525,057
Other Patient Service Revenue
8,122,849
—
—
—
( 2,763,520 )
5,359,329
Total Operating Revenue
302,982,979
—
—
—
( 7,098,593 )
295,884,386
Medical Expenses
297,570,662
—
—
—
( 565,640 )
297,005,022
Total Operating Expenses
335,409,517
—
—
—
( 565,640 )
334,843,877
Operating Loss
( 32,426,538 )
—
—
—
( 6,532,953 )
( 38,959,491 )
Interest Expense, net
( 8,487,374 )
—
3,993,325
—
—
( 4,494,049 )
Total Other Expenses
( 19,148,953 )
—
3,993,325
—
—
( 15,155,628 )
Net Loss Attributable to Non-Controlling Interests
( 5,241,713 )
5,241,713
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 46,333,778 )
( 5,241,713 )
3,993,325
—
( 6,532,953 )
( 54,115,119 )
Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2021 (Unaudited)
Capitated Revenue
$
147,159,665
$
—
$
—
$
—
$
( 5,598,799 )
$
141,560,866
Other Patient Service Revenue
4,258,933
—
—
—
( 1,233,356 )
3,025,577
Total Operating Revenue
151,418,598
—
—
—
( 6,832,155 )
144,586,443
Medical Expenses
150,679,717
—
—
—
( 299,200 )
150,380,517
Total Operating Expenses
170,856,707
—
—
—
( 299,200 )
170,557,507
Operating Loss
( 19,438,108 )
—
—
—
( 6,532,955 )
( 25,971,063 )
Interest Expense, net
( 4,406,240 )
—
2,036,476
—
—
( 2,369,764 )
Total Other Expenses
( 5,529,823 )
—
2,036,476
—
—
( 3,493,347 )
Net Loss Attributable to Non-Controlling Interests
( 1,959,421 )
1,959,421
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 23,008,510 )
( 1,959,421 )
2,036,476
—
( 6,532,955 )
( 29,464,410 )
Condensed Consolidated Statement of Changes in Members' Deficit for the Six Months Ended June 30, 2021
Preferred Return at 8 % for Class A Units
$
1,817,564
$
—
$
( 1,817,564 )
$
—
—
$
—
Net Loss
( 51,575,491 )
—
3,993,325
—
( 6,532,953 )
( 54,115,119 )
Balance as of June 30,2021
( 146,395,455 )
—
6,743,106
( 43,656,170 )
—
( 183,308,519 )
Condensed Consolidated Statement of Changes in Members' Deficit for the Three Months Ended June 30, 2021
Preferred Return at 8 % for Class A Units
$
926,852
$
—
$
( 926,852 )
$
—
—
$
—
Net Loss
( 24,967,931 )
—
2,036,476
—
( 6,532,955 )
( 29,464,410 )
Balance as of June 30,2021
( 146,395,455 )
—
6,743,106
( 43,656,170 )
—
( 183,308,519 )
Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2021
Net Loss
$
( 51,575,491 )
$
—
$
3,993,325
$
—
( 6,532,953 )
$
( 54,115,119 )
Health Plan Settlements Receivable/Premiums Receivable
( 5,320,861 )
—
—
—
6,532,953
1,212,092
Class A and Class D Preferred Returns
3,993,325
—
( 3,993,325 )
—
—
—
*Rounding may cause variances
F-59
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As Previously
Network
Preferred Returns
Class A Units
Revenue
Reported
Adjustment
Adjustment
Adjustments
Adjustment
As Restated
Condensed Consolidated Balance Sheet as of March 31, 2021 (Unaudited)
Health Plan Settlement Receivables
$
3,687,918
$
—
$
—
$
—
$
6,532,954
$
10,220,872
Total Current Assets
78,762,484
—
—
—
6,532,954
85,295,438
Total Assets
94,189,692
—
—
—
6,532,954
100,722,646
Class A Units Subject to Possible Redemption
—
—
—
43,656,270
—
43,656,270
Class D Units Subject to Possible Redemption
52,675,137
—
( 5,633,583 )
—
—
47,041,554
Contributed Capital
41,764,270
—
—
( 41,764,270 )
—
—
Class A Preferred Returns
4,705,644
—
( 4,705,644 )
—
—
—
Accumulated Equity-Based Compensation
1,829,084
—
—
( 921,092 )
—
907,992
Retained Loss from Non-Controlling Interests
( 21,469,673 )
21,469,673
—
—
—
—
Accumulated Deficit (formerly Accumulated Loss from Controlling Interest)
( 149,567,493 )
( 21,469,673 )
10,339,227
( 970,908 )
6,532,954
( 155,135,893 )
Total Liabilities, Mezzanine Equity & Members' Equity (Deficit)
94,189,692
—
—
—
6,532,954
100,722,646
Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2021 (Unaudited)
Capitated Revenue
$
147,700,465
$
—
$
—
$
—
$
1,263,725
$
148,964,190
Other Patient Service Revenue
3,863,915
—
—
—
( 1,530,165 )
2,333,750
Total Operating Revenue
151,564,380
—
—
—
( 266,440 )
151,297,940
Medical Expenses
146,890,945
—
—
—
( 266,440 )
146,624,505
Total Operating Expenses
164,552,810
—
—
—
( 266,440 )
164,286,370
Interest Expense, net
( 4,081,134 )
—
1,956,848
—
—
( 2,124,286 )
Total Other Expenses
( 13,619,130 )
—
1,956,848
—
—
( 11,662,282 )
Net Loss Attributable to Non-Controlling Interests
( 3,282,292 )
3,282,292
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 23,325,268 )
( 3,282,292 )
1,956,848
—
—
( 24,650,712 )
Condensed Consolidated Statements of Changes in Members' Deficit for the 3 Months Ended March 31, 2021
Preferred Return at 8 % for Class A Units
$
890,612
$
—
$
( 890,612 )
$
—
—
$
—
Net Loss
( 26,607,560 )
—
1,956,848
—
—
( 24,650,712 )
Balance as of March 31,2021
( 122,918,168 )
—
5,633,581
( 43,656,269 )
6,532,954
( 154,407,902 )
Condensed Consolidated Statements of Cash Flows for the 3 Months Ended March 31, 2021
Net Loss
$
( 26,607,560 )
$
—
$
1,956,848
—
—
$
( 24,650,712 )
Class A and Class D Preferred Returns
1,956,848
—
( 1,956,848 )
—
—
—
*Rounding may cause variances
F-60
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As Previously
Network
Preferred Returns
Class A Units
Capitated Revenue
Reported
Adjustments
Adjustments
Adjustments
Adjustments
As Restated
Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2020 (Unaudited)
Capitated Revenue
$
351,018,290
$
—
$
—
$
—
$
1,630,111
$
352,648,401
Other Patient Service Revenue
9,645,990
—
—
—
( 2,230,451 )
7,415,539
Total Operating Revenue
360,664,280
—
—
—
( 600,340 )
360,063,940
Medical Expenses
348,258,272
—
—
—
( 600,340 )
347,657,932
Total Operating Expenses
384,971,257
—
—
—
( 600,340 )
384,370,917
Interest Expense, net
( 6,877,619 )
—
5,577,812
—
—
( 1,299,807 )
Total Other Expenses
( 6,877,619 )
—
5,577,812
—
—
( 1,299,807 )
Net Loss Attributable to Non-Controlling Interests
( 3,449,955 )
3,449,955
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 27,734,641 )
( 3,449,955 )
5,577,812
—
—
( 25,606,784 )
Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2020 (Unaudited)
Capitated Revenue
$
124,461,275
$
—
$
—
$
—
$
721,351
$
125,182,626
Other Patient Service Revenue
4,379,716
—
—
—
( 1,018,851 )
3,360,865
Total Operating Revenue
128,840,991
—
—
—
( 297,500 )
128,543,491
Medical Expenses
127,015,976
—
—
—
( 297,500 )
126,718,476
Total Operating Expenses
142,355,570
—
—
—
( 297,500 )
142,058,070
Interest Expense, net
( 2,316,579 )
—
1,859,270
—
—
( 457,309 )
Total Other Expenses
( 2,316,579 )
—
1,859,270
—
—
( 457,309 )
Net Income Attributable to Non-Controlling Interests
875,560
( 875,560 )
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 16,706,718 )
875,560
1,859,270
—
—
( 13,971,888 )
Condensed Consolidated Statements of Changes in Members' Deficit for the 9 Months Ended September 30, 2020
Preferred Return at 8 % for Class A Units
$
2,534,853
$
—
$
( 2,534,853 )
$
—
$
—
$
—
Net Loss
( 31,184,596 )
—
5,577,812
—
—
( 25,606,784 )
Balance as of September 30, 2020
( 84,110,848 )
—
3,558,027
( 43,656,271 )
—
( 124,209,092 )
Condensed Consolidated Statements of Changes in Members' Deficit for the 3 Months Ended September 30, 2020
Preferred Return at 8 % for Class A Units
$
840,805
$
—
$
( 840,805 )
$
—
$
—
$
—
Net Loss
( 15,831,158 )
—
1,859,270
—
—
( 13,971,888 )
Balance as of September 30, 2020
( 84,110,848 )
—
3,558,027
( 43,656,271 )
—
( 124,209,092 )
Condensed Consolidated Statements of Cash Flows for the 9 Months Ended September 30, 2020
Net Loss
$
( 31,184,596 )
$
—
$
5,577,812
$
—
$
—
$
( 25,606,784 )
Class A and Class D Preferred Returns
5,577,812
—
( 5,577,812 )
—
—
—
F-61
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As Previously
Network
Preferred Returns
Class A Units
Captital Revenue
Reported
Adjustments
Adjustments
Adjustments
Adjustments
As Restated
Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2020 (Unaudited)
Capitated Revenue
$
226,557,015
$
—
$
—
$
—
$
908,759
$
227,465,774
Other Patient Service Revenue
5,266,273
—
—
—
( 1,211,599 )
4,054,674
Total Operating Revenue
231,823,288
—
—
—
( 302,840 )
231,520,448
Medical Expenses
221,242,295
—
—
—
( 302,840 )
220,939,455
Total Operating Expenses
242,615,687
—
—
—
( 302,840 )
242,312,847
Interest Expense, net
( 4,561,039 )
—
3,718,542
—
—
( 842,497 )
Total Other Expenses
( 4,561,039 )
—
3,718,542
—
—
( 842,497 )
Net Loss Attributable to Non-Controlling Interests
( 4,325,515 )
4,325,515
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 11,027,923 )
( 4,325,515 )
3,718,542
—
—
( 11,634,896 )
Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2020 (Unaudited)
Capitated Revenue
$
114,042,681
$
—
$
—
$
—
$
472,742
$
114,515,423
Other Patient Service Revenue
2,821,811
—
—
—
( 624,782 )
2,197,029
Total Operating Revenue
116,864,492
—
—
—
( 152,040 )
116,712,452
Medical Expenses
105,777,973
—
—
—
( 152,040 )
105,625,933
Total Operating Expenses
121,527,179
—
—
—
( 152,040 )
121,375,139
Interest Expense, net
( 2,249,977 )
—
1,859,271
—
—
( 390,706 )
Total Other Expenses
( 2,299,977 )
—
1,859,271
—
—
( 440,706 )
Net Loss Attributable to Non-Controlling Interests
( 2,774,562 )
2,774,562
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 4,188,102 )
( 2,774,562 )
1,859,271
—
—
( 5,103,393 )
Condensed Consolidated Statements of Changes in Members' Deficit for the 6 Months Ended June 30, 2020
Preferred Return at 8 % for Class A Units
$
1,694,048
$
—
$
( 1,694,048 )
$
—
$
—
$
—
Net Loss
( 15,353,438 )
—
3,718,542
—
—
( 11,634,896 )
Balance as of June 30, 2020
( 69,173,164 )
—
2,539,562
( 43,656,272 )
—
( 110,289,874 )
Condensed Consolidated Statements of Changes in Members' Deficit for the 3 Months Ended June 30, 2020
Preferred Return at 8 % for Class A Units
$
847,048
$
—
$
( 847,048 )
$
—
$
—
$
—
Net Loss
( 6,962,664 )
—
1,859,271
—
—
( 5,103,393 )
Balance as of June 30, 2020
( 69,173,164 )
—
2,539,562
( 43,656,272 )
—
( 110,289,874 )
Condensed Consolidated Statements of Cash Flows for the 6 Months Ended June 30, 2020
Net Loss
$
( 15,353,438 )
$
—
$
3,718,542
$
—
$
—
$
( 11,634,896 )
Class A and Class D Preferred Returns
3,718,542
—
( 3,718,542 )
—
—
—
F-62
Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As Previously
Network
Preferred Returns
Class A Units
Capitated Revenue
Reported
Adjustments
Adjustments
Adjustments
Adjustments
As Restated
Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2020 (Unaudited)
Capitated Revenue
$
112,514,334
$
—
$
—
$
—
$
436,017
$
112,950,351
Other Patient Service Revenue
2,444,462
—
—
—
( 586,817 )
1,857,645
Total Operating Revenue
114,958,796
—
—
—
( 150,800 )
114,807,996
Medical Expenses
115,464,322
—
—
—
( 150,800 )
115,313,522
Total Operating Expenses
121,088,507
—
—
—
( 150,800 )
120,937,707
Interest Expense, net
( 2,261,063 )
—
1,859,271
—
—
( 401,792 )
Total Other Expenses
( 2,261,063 )
—
1,859,271
—
—
( 401,792 )
Net Loss Attributable to Non-Controlling Interests
( 1,550,953 )
1,550,953
—
—
—
—
Net Loss (formerly Net Loss Attributable to Controlling Interests)
( 6,839,821 )
( 1,550,953 )
1,859,271
—
—
( 6,531,503 )
Condensed Consolidated Statements of Changes in Members' Deficit for the 3 Months Ended March 31, 2020
Preferred Return at 8 % for Class A Units
$
846,999
$
—
$
( 846,999 )
$
—
$
—
$
—
Net Loss
( 8,390,774 )
—
1,859,271
—
—
( 6,531,503 )
Balance as of March 31, 2020
( 63,212,106 )
—
1,527,340
( 43,656,272 )
—
( 105,341,038 )
Condensed Consolidated Statements of Cash Flows for the 3 Months Ended March 31, 2020
Net Loss
$
( 8,390,774 )
$
—
$
1,859,271
$
—
$
—
$
( 6,531,503 )
Class A and Class D Preferred Returns
1,859,271
—
( 1,859,271 )
—
—
—
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Table of Contents
P3 HEALTH PARTNERS INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 31: Subsequent Events
Events Subsequent to the July 2, 2021 Issuance of the December 31, 2020 Financial Statements (Unaudited)
Subsequent to the July 2, 2021 issuance of the December 31, 2020 consolidated financial statements, events or conditions occurred that led to the conclusion that substantial doubt exists about the Company’s ability to continue as a going concern as further described in Note 3.
Transaction Bonus Agreements
As disclosed in the Form 8-K filed on May 18, 2022, the Company’s Board of Directors approved entering into employment agreements and transaction bonus agreements with the Company’s Chief Executive Officer and Chief Medical Officer. The transaction bonus agreements provide for aggregate payments by the Company of $ 10,000,000 in 2022, which will be charged to operating expense in 2022.
Nasdaq Notification
On May 18, 2022, the Company received a notification from the listing qualifications department of the Nasdaq Stock Market LLC (“Nasdaq”) indicating that as a result of the Company’s untimely filing of the its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”) and Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 (the “First Quarter Form 10-Q”), the Company was not in compliance with the requirements for continued listing under Listing Rule 5250(c)(1) (the “Listing Rule”), which requires listed companies to timely file all required periodic financial
On July 19, 2022, Nasdaq granted us a grace period of up to 180 calendar days from the due date of the 2021 Form 10-K, or until September 27, 2022, in which to regain compliance with the Listing Rule. On August 17, 2022, we received a deficiency notice from Nasdaq as a result of the delay in filing its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022 (the “Second Quarter Form 10-Q”), indicating that any additional Nasdaq exception to allow the Company to regain compliance with all delinquent filings, including the Second Quarter Form 10-Q, would be limited to September 27, 2022. Because the Company did not file the 2021 Form 10-K, the First Quarter Form 10-Q and the Second Quarter Form 10-Q with the SEC before September 27, 2022, Nasdaq notified the Company on September 28, 2022, that the Nasdaq Listing Qualifications Department has initiated a process to delist the Company’s securities from Nasdaq as a result of the Company not being in compliance with the Listing Rule. On October 5, 2022, the Company appealed Nasdaq’s delisting determination by requesting a hearing before the Nasdaq Hearing Panel (the “Panel”), which request automatically stays the suspension of the Company’s securities for a period of 15 days from the date of the request. The Nasdaq Staff granted the Company’s request for a hearing, which is scheduled for November 3, 2022, and the Company’s request to extend the stay of any trading suspension pending the hearing and the issuance of a final Panel decision.
There can be no assurance that our appeal will be successful.
Goodwill
Due to the decrease in the share price over the second quarter of 2022, the Company will record a goodwill impairment of $ 851.5 million as of June 30, 2022. The amount was not recorded at December 31, 2021 or March 31, 2022 as the decline in the share price was considered temporary under the ASC 350 guidance as of those dates.
F-64