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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-31 · 234 added, 306 removed, 326 unchanged (62% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis is intended to provide the reader with an understanding of our business, including an overview of our results of operations and liquidity.

It should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included elsewhere in this Form 10-K.

This discussion contains forward-looking statements, such as those relating to our plans, objectives, expectations, intentions and beliefs that involve numerous risks and uncertainties.

The following discussion and analysis is intended to provide the reader with an understanding of our business, including an overview of our results of operations and liquidity and should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included elsewhere in this Form 10-K.

This discussion contains forward-looking statements and involves numerous risks and uncertainties.

Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth under “ Cautionary Statement Regarding Forward-Looking Statements ,” “ Item 1A.

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In our model, physicians are able to retain their independence and entrepreneurial spirit, while gaining access to the tools, teams and technologies that are key to success in a VBC model, all while sharing in the savings from successfully improving the quality of patient care and reducing costs.

We operate in the $829 billion Medicare market, which covers approximately 65 million eligible lives as of 2021.

We operate in the $944 billion Medicare market, which covers approximately 66 million eligible lives as of October 2023.

Our core focus is the MA market, which makes up approximately 51% of the overall Medicare market, or nearly 31 million Medicare eligible lives in 2023.

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

We predominantly enter into capitated contracts with the nation’s largest health plans to provide holistic, comprehensive healthcare to Medicare Advantage members.

Under the typical capitation arrangement, we are entitled to PMPM fees from payors to provide a defined range of healthcare services for Medicare Advantage health plan members attributed to our PCPs.

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

We predominantly enter into capitated contracts with the nation’s largest health plans to provide holistic, comprehensive healthcare to MA members.

Under the typical capitation arrangement, we are entitled to PMPM fees from payors to provide a defined range of healthcare services for MA health plan members attributed to our PCPs.

These PMPM fees comprise our capitated revenue and are determined as a percent of the premium (“POP”) payors receive from CMS for these members.

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Our company was formed in 2017 and our first at-risk contract became effective on January 1, 2018.

We have demonstrated an ability to rapidly scale, primarily entering markets with our affiliate physician model, and expanding to a PCP network of approximately 2,800 physicians, in 15 markets (counties) across five states in five full years of operations as of December 31, 2022.

We have demonstrated an ability to rapidly scale, primarily entering markets with our affiliate physician model, and expanding to a PCP network of approximately 2,750 physicians, in 18 markets (counties) across five states in six full years of operations as of December 31, 2023.

Our platform has enabled us to grow our revenue by an average of 84% annually from December 31, 2018 to December 31, 2023.

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

We believe we have significant growth

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

As of December 31, 2023, our PCP network served approximately 108,900 at-risk members.

We believe we have significant growth opportunities available to us across existing and new markets, with less than 1% of the 520,000 PCPs in the U.S.

currently included in our physician network.

COVID-19 and Macroeconomic Update

The COVID-19 pandemic continues to evolve, with pockets of resurgence and the emergence of variant strains contributing to continued uncertainty about its scope, duration, severity, trajectory, and lasting impact.

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

Due to our recurring contracted revenue model, the COVID-19 pandemic did not have a material impact on P3’s revenue during 2021 and 2022.

Nearly 99% the Company’s total revenue during the year ended December 31, 2022 is recurring, consisting of fixed monthly PMPM capitation payments received from MA health plans.

We estimate that we have incurred approximately $95.5 million of direct costs in medical claims expense related to COVID-19 claims during the period from March 1, 2020 through December 31, 2022.

We expect to incur additional COVID-19 related costs given the volume of positive cases and “breakthrough” cases (positive cases in vaccinated patients) present in our markets.

Because of the nature of capitation arrangements, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods.

The full extent to which COVID-19 will directly or indirectly impact our future results of operations and financial condition will depend on multiple factors.

In addition, the economy may continue to be impacted as a result of the COVID-19 pandemic, including any resurgences to infections, and actions taken in response to it.

Such factors include, but are not limited to, the scope and duration of stay-at-home practices and business closures and restrictions, government-imposed or recommended suspensions of elective procedures, and expenses required for supplies and personal protective equipment.

Because of these factors, management may not be able to fully estimate the length or severity of the impact of the pandemic on our business.

However, management will continue to closely evaluate and monitor the nature and extent of these potential impacts to our business, results of operations and liquidity.

Business Combinations

On December 3, 2021, we consummated the Business Combinations by and among Foresight and P3 Health Group Holdings and the other parties thereto.

As a result of the Business Combinations (see Note 5 “Business Combinations” to the consolidated financial statements included elsewhere in this Form 10-K), the Company was deemed to be the acquirer for accounting purposes, and P3 Health Group Holdings, which is the business conducted prior to the closing of the Business Combinations, was deemed to be the acquiree and accounting predecessor.

The Business Combinations were accounted for as a business combination using the acquisition method of accounting, and the Successor’s (defined below) financial statements reflect a new basis of accounting that is based on the fair value of net assets acquired.

As a result of the application of the acquisition method of accounting as of the effective time of the Business Combinations, the financial statements of P3 Health Group Holdings as “Predecessor” for the periods prior to the Closing Date and of the Company as “Successor” for the periods after the Closing Date, including the consolidation of P3 Health Group Holdings, are presented on different bases for the year ended December 31, 2022, the Successor Period, and the Predecessor Period.

The historical financial information of the Company (the acquirer) has not been reflected in the Predecessor Period financial statements.

Recent Acquisitions

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

(“Omni”) and 100% of the equity interests of Medcore Health Plan, Inc.

(“Medcore HP”) for a total purchase price of $40.0 million, including contingent consideration of $3.5 million (together, the “Medcore Acquisition”).

Medcore HP is a health plan licensed under the California Knox-Keene Health Care Service Plan Act of 1975 (the “Knox Keene Act”) and Omni is an independent practice association located in California.

Omni serves as Medcore HP’s contracted physician network providing medical services to Medcore HP’s patients and members.

The Knox Keene Act requires entities that participate in downstream risk-sharing arrangements, including global risk and VBC arrangements, to be licensed health plans.

Our acquisition of Medcore HP allows our network of providers to participate in global risk and VBC arrangements with California payors.

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

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Key Factors Affecting our Performance

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• Growth in membership under our existing contracts and existing markets:

o Patients who are attributed to our physician network who (a) age into Medicare and elect to enroll in MA or (b) elect to convert from Medicare FFS to MA.

◦ Patients who are attributed to our physician network who (a) age into Medicare and elect to enroll in MA or (b) elect to convert from Medicare FFS to MA.

• Adding new contracts (either payor contracts or physician contracts) in existing markets.

• Adding new contracts (either payor contracts or physician contracts) in adjacent and new markets.

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

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

The table below illustrates membership growth from 2021 to 2022:

MA at-risk members

Year-over-year % change

Growing Existing Contract Membership

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

MA penetration of the Medicare beneficiary population has increased from 26% in 2011 to 48% in 2022 of the overall Medicare beneficiary market making up nearly 28 million Medicare eligible lives.

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

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When choosing a market to enter, we make our decision on a county-by-county basis across the United States.

We look at various

factors including:

We look at various factors including:

(i) population size, (ii) payor participants and concentration, (iii) health system participants and concentration, and (iv) competitive landscape.

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When entering an adjacent market, we are able to leverage the investments we previously made to have a faster impact on our expanded footprint.

We have historically demonstrated success in effectively growing into new and adjacent markets.

As of December 31, 2023, we operate in 18 markets, markets being counties, across five states.

P3 is actively pursuing opportunities to expand operations to additional states in the Southwest and Midwest.

One of the primary uses of the net proceeds we obtained from the consummation of the Business Combinations and the concurrent private placement of 20,370,307 shares (the “PIPE Shares”) of our Class A common stock, for an aggregate purchase price of $203.7 million (the “PIPE Investment”) is to fund the investment required to enter these new markets and to take on additional new contracts.

Growing Membership in Existing Markets

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

From 2018 through 2022, we experienced a 98% physician retention rate in our affiliate provider network.

From 2018 through December 31, 2023, we experienced a 98% physician retention rate in our affiliate provider network.

By expanding our affiliate provider network and adding new physicians to the P3 network, we can quickly increase the number of contracted at-risk members under our existing health plan arrangements.

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Additionally, by expanding the number of contracted payors, we can leverage our existing infrastructure to quickly increase our share of patients within our physician network.

We have a proven ability to manage medical costs and improve clinical outcomes of our lives under management on behalf of our payor partners.

This is evidenced by the receipt of inbound partnership requests from payors to improve growth, quality and profitability in their markets.

Growing Capitated Revenue Per Member

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Effectively Managing Member Medical Expense

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

Our medical claims expense is our largest expense category, representing 86% of our total operating expenses for the year ended December 31, 2023.

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

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Our corporate general and administrative expenses at the enterprise level include resources and technology to support payor contracting, quality, data management, delegated services, finance and legal functions.

While we expect

our absolute investment in our enterprise resources to increase over time, we expect our investment will decrease as a percentage of revenue when we are able to leverage our infrastructure across a broader group of at-risk members.

While we expect our absolute investment in our enterprise resources to increase over time, we expect our investment will decrease as a percentage of revenue when we are able to leverage our infrastructure across a broader group of at-risk members.

We expect our corporate, general and administrative expenses to increase in absolute dollars in the future as we continue to invest to support growth of our business, as well as due to the costs required to operate as a public company, including insurance coverage, investments in internal audit, investor relations and financial reporting functions, fees paid to the Nasdaq Stock Market, and increased legal and audit fees.

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As the year progresses, our per-patient revenue declines as new patients join us typically with less complete or accurate documentation (and therefore lower risk-adjustment scores) and patients with more severe acuity profiles (and, therefore, higher per member revenue rates) expire.

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Medical Costs .

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

(“GAAP”), as well as certain key performance metrics, to supplement our consolidated financial statements.

(“GAAP”), as well as key performance metrics, to supplement our consolidated financial statements.

The measures set forth below should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures and key performance metrics as used by us may not be comparable to similarly titled measures used by other companies.

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

We define Adjusted EBITDA as EBITDA, further adjusted to exclude the effect of certain supplemental adjustments, such as mark-to-market warrant gain/loss, premium deficiency reserves, equity-based compensation expense, and certain other items that we believe are not

indicative of our core operating performance.

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

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You should review the reconciliation of net loss to Adjusted EBITDA set forth below and not rely on any single financial measure to evaluate our business.

The following table sets forth a reconciliation of our net loss, the most directly comparable GAAP metric, to Adjusted EBITDA (in thousands):

December 3, 2021

January 1, 2021

through December

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The following table sets forth a reconciliation of our net loss, the most directly comparable GAAP metric, to Adjusted EBITDA:

Year Ended December 31,

(in thousands)

Net loss $ (186,426) $ (1,561,557)

Interest expense, net 15,985 11,404

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Adjusted EBITDA loss $ (85,504) $ (127,914)

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

(2) During the year ended December 31, 2022, other consists of (i) income related to the release of indemnity funds previously escrowed as part of the Medcore Acquisition and (ii) interest income, offset by (iii) accounting, legal, and professional services expenses incurred related to the restatement of our consolidated financial statements for the years ended December 31, 2020, 2019, and 2018 and the condensed consolidated financial statements for the quarterly periods ended March 31, 2021, June 30, 2021, September 30, 2021, March 31, 2020, June 30, 2020, and September 30, 2020, (iv) expenses for third-party consultants to assist us with the development, implementation, and documentation of new and enhanced internal controls and processes for compliance with Sarbanes-Oxley Section 404(b), and (v) severance expense.

During the combined Successor and Predecessor periods included in the year ended December 31, 2021, other consists of interest income offset by valuation allowance on our notes receivable.

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(1) Transaction and other related costs during the year ended December 31, 2023 consisted of legal fees incurred related to acquisition-related litigation and during the year ended December 31, 2022 consisted of accounting, legal, and advisory fees related to transactions that were completed, pending, or abandoned.

(2) Other during the year ended December 31, 2023 consisted of (i) interest income offset by (ii) cybersecurity incident loss, (iii) restructuring and other charges, including severance and benefits paid to employees pursuant to workforce reduction plans, (iv) the disposition of our Pahrump operations, (v) expenses for third-party consultants to assist us with the development, implementation, and documentation of new and enhanced internal controls and processes for compliance with Sarbanes-Oxley Section 404(b), (vi) a legal settlement outside of the ordinary course of business, and (vii) valuation allowance on our notes receivable.

Other during the year ended December 31, 2022 consisted of (i) income related to the release of indemnity funds previously escrowed as part of an acquisition in a prior year and (ii) interest income, offset by (iii) accounting, legal, and professional services expenses incurred related to the restatement of our consolidated financial statements for the years ended December 31, 2020, 2019, and 2018 and the condensed consolidated financial statements for the quarterly periods ended March 31, 2021, June 30, 2021, September 30, 2021, March 31, 2020, June 30, 2020, and September 30, 2020, (iv) expenses for third-party consultants to assist us with the development, implementation, and documentation of new and enhanced internal controls and processes for compliance with Sarbanes-Oxley Section 404(b), and (v) severance expense.

Medical Margin

Medical margin is a non-GAAP financial metric.

We present medical margin because we believe it helps investors understand underlying trends in our business and facilitates an understanding of our operating performance from period to period because it facilitates a comparison of our recurring core business operating results.

We present medical margin because we believe it helps investors understand underlying trends in our business and facilitates an understanding of our operating performance from period to period by facilitating a comparison of our recurring core business operating results.

Medical margin represents the amount earned from capitation revenue after medical claims expenses are deducted.

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New membership added to the platform is typically dilutive to medical margin PMPM.

Furthermore, in light of COVID-19, we continue to evaluate the ultimate impact of the pandemic on medical margin .

Medical margin should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

We compensate for these limitations by relying primarily on our GAAP results and using medical margin on a supplemental basis.

You should review the reconciliation of operating loss to medical margin set forth below and not rely on any single financial measure to evaluate our business.

The following table presents our medical margin (dollars in thousands):

December 3, 2021

January 1, 2021

through December

You should review the reconciliation of gross profit to medical margin set forth below and not rely on any single financial measure to evaluate our business.

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The following table presents our medical margin:

Year Ended December 31,

(in thousands)

Capitated revenue $ 1,252,309 $ 1,034,800

medical claims expenses

medical claims expense (1,117,258) (972,725)

Medical margin $ 135,051 $ 62,075

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

December 3, 2021

January 1, 2021

through December

Operating loss

The following table sets forth a reconciliation of our gross profit, the most directly comparable GAAP metric, to medical margin:

Year Ended December 31,

(in thousands)

Gross profit $ 31,635 $ (7,753)

Other patient service revenue (14,066) (14,671)

Other medical expenses

Premium deficiency reserve

Corporate, general and administrative expenses

Sales and marketing expenses

Depreciation and amortization

Goodwill impairment

Other medical expense 117,482 84,499

Medical margin $ 135,051 $ 62,075

Network Contribution

Network contribution is a non-GAAP financial metric.

We present network contribution because we believe it helps investors understand underlying trends in our business and facilitates a broader understanding of our operating performance from period to period because it facilitates a comparison of our recurring core business operating results.

We define network contribution as total operating revenue less the sum of:

Key Performance Metrics

We monitor the following operating metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.

Gross profit represents the amount earned from total operating revenue less the sum of:

(i) medical claims expenses and (ii) other medical expenses including physician compensation expense related to surplus sharing and bonuses and other direct medical expenses incurred to improve care for our members.

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Other medical expenses are largely variable and proportionate to the level of surplus in each respective market, among other cost factors.

Network contribution should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

We compensate for these limitations by relying primarily on our GAAP results and using network contribution on a supplemental basis.

You should review the reconciliation of operating loss to network contribution set forth below and not rely on any single financial measure to evaluate our business.

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

December 3, 2021

January 1, 2021

through December

The following table presents our gross profit:

Year Ended December 31,

(in thousands)

Total operating revenue $ 1,266,375 $ 1,049,471

medical claims expenses

other medical expenses

Network contribution

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

December 3, 2021

January 1, 2021

through December

Operating loss

Premium deficiency reserve

Corporate, general and administrative expenses

Sales and marketing expenses

Depreciation and amortization

Goodwill impairment

Network contribution

Key Performance Metrics

We monitor the following financial and performance metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions (dollars in thousands):

As of and For the Year Ended

As of and from December 3, 2021

January 1, 2021

through December

MA at-risk members

Affiliate PCPs

Platform support costs

MA At-Risk Members

MA at-risk members represent the approximate number of MA members for whom we receive a fixed PMPM fee under capitation arrangements as of the end of the period.

medical claims expense (1,117,258) (972,725)

other medical expense (117,482) (84,499)

Gross profit $ 31,635 $ (7,753)

At-Risk Membership

At-risk membership represents the approximate number of Medicare members for whom we receive a fixed percentage of premium under capitation arrangements as of the end of the reporting period.

We had 108,900 and 100,400 at-risk members as of December 31, 2023 and 2022, respectively.

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Affiliate Primary Care Physicians

Affiliate primary care physicians represent the approximate number of primary care physicians included in our affiliate network, with whom members may be attributed under our capitation arrangements, as of the end of the period.

We had 2,750 and 2,800 primary care physicians as of December 31, 2023 and 2022, respectively.

Platform Support Costs

Our platform support costs, which include regionally-based support personnel and other operating costs to support our markets, are expected to decrease over time as a percentage of revenue as our physician partners add members and our revenue grows.

Our operating expenses at the enterprise level include resources and technology to support payor contracting, clinical program

development, quality, data management, finance, and legal functions.

Our operating expenses at the enterprise level include resources and technology to support payor contracting, clinical program development, quality, data management, finance, and legal functions.

We exclude costs related to the operations of our owned medical clinics and wellness centers.

The table below represents costs to support our markets and enterprise functions, which are included in corporate, general and administrative expenses (dollars in thousands):

December 3, 2021

January 1, 2021

through December

The table below represents costs to support our markets and enterprise functions, which are included in corporate, general and administrative expenses:

Year Ended December 31,

(dollars in thousands)

Platform support costs $ 96,937 $ 119,167

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Under the at-risk model, we are responsible for the cost of all covered health care services provided to members assigned by the health plans to the Company in exchange for a fixed payment, which generally is a POP based on health plans’ premiums received from CMS.

Through this capitation arrangement, we stand ready to provide assigned Medicare Advantage members all their medical care via our directly employed and affiliated physician/specialist network.

Through this capitation arrangement, we stand ready to provide assigned MA members all their medical care via our directly employed and affiliated physician/specialist network.

The premiums health plans receive are determined via a competitive bidding process with CMS and are based on the costs of care in local markets and the average utilization of services by patients enrolled.

Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual patient.

Medicare Advantage plans with higher acuity patients receive higher premiums.

Conversely, Medicare Advantage plans with lower acuity patients receive lesser premiums.

MA plans with higher acuity patients receive higher premiums.

Conversely, MA plans with lower acuity patients receive lesser premiums.

Under the risk adjustment model, capitation is paid on an interim basis based on enrollee data submitted for the preceding year and is adjusted in subsequent periods after final data is compiled.

As premiums are adjusted via this risk adjustment model (via a Risk Adjustment Factor, “RAF”), our PMPM payments will change commensurately with how our contracted Medicare Advantage plans’ premiums change with CMS.

Management determined the transaction price for these contracts is variable as it primarily includes PMPM fees, which can fluctuate throughout the course of the year based on the acuity of each individual enrollee.

As premiums are adjusted via this risk adjustment model (using a Risk Adjustment Factor, “RAF”), our PMPM payments change commensurately with how our contracted Medicare Advantage plans’ premiums change with CMS.

The transaction price for these contracts is variable as it primarily includes PMPM fees, which can fluctuate throughout the course of the year based on the acuity of each individual enrollee.

In certain contracts, PMPM fees also include adjustments for items such as performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors.

Capitated revenue is recognized based on an estimated PMPM transaction price to transfer the service for a distinct increment of the series (e.g., month) and is recognized net of projected acuity adjustments and performance incentives or penalties as management can reasonably estimate the ultimate PMPM payment of those contracts.

Capitated revenue is recognized based on a PMPM transaction price to transfer the service for a distinct increment of the series and is recognized net of projected acuity adjustments and performance incentives or penalties.

We recognize revenue in the month in which attributed members are entitled to receive healthcare benefits during the contract term.

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These services are provided to patients covered by these payors regardless of whether those patients receive their care from our directly employed or affiliated medical groups.

Operating Expenses

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Operating Expense

Medical expense.

Medical expense primarily includes costs of all covered services provided to members by non-P3 employed providers.

Medical expenses primarily include costs of all covered services provided to members by non-P3 employed providers.

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

IBNR is recorded as claims payable on the accompanying consolidated balance sheets.

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

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

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

correspondingly unfavorable or favorable effect on our current period results that may or may not reflect changes in long term trends in our performance.

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

Premium deficiency reserve.

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Amortization expense is associated with definite lived intangible assets, including trademarks and tradenames, customer contracts, provider network agreements, and payor contracts.

Goodwill impairment.

During the year ended December 31, 2022, we recorded a $1,315.0 million goodwill impairment charge due to the presence of certain macroeconomic and financial market conditions, industry-specific considerations, our performance, and the sustained decrease in the price of our Class A common stock.

We do not have any goodwill as of December 31, 2022.

Other Income (Expense)

Interest expense, net.

Interest expense primarily consists of interest on our Term Loan Facility (as defined herein).

Interest expense primarily consists of interest on our term loan facility and unsecured promissory note and amortization of debt issuance costs and original issue discount.

Mark-to-market of stock warrants .

Mark-to-market of stock warrants consists of the change in the fair value on the revaluation of warrant liabilities associated with our public, private placement, and forward purchase warrants.

Mark-to-market of stock warrants consists of the change in the fair value on the revaluation of warrant liabilities associated with our public and private placement Class A common stock warrants.

Other consists of gains and losses resulting from other transactions.

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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.

As a partnership, P3 LLC is generally not subject to taxes, other than entity level state income taxes.

Any taxable income or loss generated by P3 LLC is passed through to and included within the taxable income or loss of its members, including us, on a pro rata basis.

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federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss generated by P3 LLC.

Non-controlling Interests

Non-controlling Interest

We consolidate the financial results of P3 LLC and report a non-controlling interest on our consolidated statements of operations, representing the portion of net income or loss attributable to the non-controlling interest.

The weighted average ownership percentages during the period are used to calculate the net income or loss attributable to P3 Health Partners Inc.

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weighted average ownership percentages during the period are used to calculate the net income or loss attributable to P3 Health Partners Inc.

and the non-controlling interest.

Results of Operations

The Business Combinations resulted in the presentation of the Company’s consolidated financial statements on different bases for the year ended December 31, 2022, the Successor Period, and the Predecessor Period.

The Company has not provided pro forma statements of operations and cash flows for the years ended December 31, 2022 and 2021.

Accordingly, references to certain financial results in 2022 and 2021 may not be comparable.

The historical financial information of Foresight (a special purpose acquisition company or a “SPAC”) prior to the Business Combinations has not been included in the Predecessor financial statements as this information has been determined not to be useful to

a user of the financial statements.

SPACs deposit the proceeds from their initial public offerings into segregated trust accounts until a business combination occurs, at which point they are utilized to fund the business combination.

The operations of a SPAC until the closing of a business combination, other than income from the trust account investments and transaction expenses, are nominal.

Accordingly, the only activity reported in the Predecessor Period was the operations of P3 LLC.

Foresight’s historical financial information is excluded from the Predecessor financial information.

Thus, the financial results of the Successor and Predecessor entities are expected to be largely consistent with the exception of certain financial statement line items impacted by the Business Combinations.

Management believes reviewing our operating results for the twelve-month period ended December 31, 2021 by combining the results of the Predecessor and Successor periods is more useful in discussing our overall operating performance when compared to the same period in the prior year.

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

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

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

December 3, 2021

January 1, 2021

December 31, 2021

December 2, 2021

The following table sets forth our consolidated statements of operations data for the periods indicated.

Amounts may not sum due to rounding.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Year Ended December 31, 2023 % of Revenue Year Ended December 31, 2022 % of Revenue

(dollars in thousands)

Operating revenue:

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Premium deficiency reserve (12,705) (1) (11,461) (1)

Corporate, general & administrative expense

Corporate, general and administrative expense 122,362 10 157,284 15

Sales and marketing expense 3,233 — 5,096 —

Depreciation and amortization

Goodwill impairment — — 1,314,952 125

Depreciation and amortization 86,675 7 87,289 8

Total operating expense 1,434,305 113 2,610,384 248

Operating loss (167,930) (13) (1,560,913) (149)

Other income (expense):

Other (expense) income:

Interest expense, net (15,985) (1) (11,404) (1)

Mark-to-market of stock warrants 433 — 9,865 1

Total other income (expense)

Other (249) — 2,757 —

Total other (expense) income (15,801) (1) 1,218 —

Loss before income taxes (183,731) (15) (1,559,695) (149)

Provision for income taxes (2,695) — (1,862) —

Net loss attributable to redeemable non-controlling interests

Net loss attributable to controlling interests

Amounts may not sum due to rounding.

Capitated revenue was $1,034.8 million for the year ended December 31, 2022, an increase of $409.8 million, or 66%, compared to $625.0 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

This increase was driven primarily by a 50% increase in the total number of at-risk members from 67,000 at December 31, 2021 to 100,400 at December 31, 2022, as we increased the number of health plan contracts from 17 to 24, and a 10% increase in capitation revenue rates, due to increased premiums from patients with a higher average level of acuity.

Capitated revenue was approximately 99% and 98% of total operating revenue for the years ended December 31, 2022 and 2021, respectively.

Other patient service revenue was $14.7 million for the year ended December 31, 2022, an increase of $2.3 million, or 18%, compared to $12.4 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

This increase was primarily driven by increased fees associated with care coordination services and additional fees earned at owned clinics.

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

Net loss (186,426) (15) (1,561,557) (149)

Net loss attributable to redeemable non-controlling interest (128,653) (10) (1,291,430) (123)

Net loss attributable to controlling interest $ (57,773) (5) % $ (270,127) (26) %

Year Ended December 31, Change

2023 2022 Amount %

(dollars in thousands)

Capitated revenue $ 1,252,309 $ 1,034,800 $ 217,509 21 %

Other patient service revenue 14,066 14,671 (605) (4) %

Total operating revenue $ 1,266,375 $ 1,049,471 $ 216,904 21 %

Capitated revenue was $1,252.3 million for the year ended December 31, 2023, an increase of $217.5 million, or 21%, compared to $1,034.8 million for the year ended December 31, 2022.

This increase was primarily driven by a 12% increase in capitated revenue rates, due to increased premiums from patients with a higher average level of acuity, and an 8% increase in the total number of at-risk members from 100,400 at December 31, 2022 to 108,900 at December 31, 2023, which was in part a result of our participation in the Accountable Care Organization Realizing Equity, Access, and

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Community Health (“ACO REACH”) model, which began January 1, 2023.

Capitated revenue was approximately 99% of total operating revenue for each of the years ended December 31, 2023 and 2022.

Other patient service revenue was $14.1 million for the year ended December 31, 2023, a decrease of $0.6 million, or 4%, compared to $14.7 million for the year ended December 31, 2022.

Other patient service revenue was approximately 1% of total operating revenue for each of the years ended December 31, 2023 and 2022.

Operating Expense

Medical Expense

Medical expense was $1,057.2 million for the year ended December 31, 2022, an increase of $397.9 million, or 61%, compared to $659.3 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

The increase was primarily due to a 50% increase in the total number of at-risk members year-over-year.

Year Ended December 31, Change

2023 2022 Amount %

(dollars in thousands)

Medical expense $ 1,234,740 $ 1,057,224 $ 177,516 17 %

Medical expense was $1,234.7 million for the year ended December 31, 2023, an increase of $177.5 million, or 17%, compared to $1,057.2 million for the year ended December 31, 2022.

The increase was primarily driven by an increase in the total number of at-risk members year-over-year resulting from our participation in the ACO REACH Model, which began January 1, 2023, and a new health plan contract as of April 1, 2023, partially offset by the termination and conversion of certain health plans from at-risk to upside-only risk.

Premium Deficiency Reserve

Premium deficiency reserve was a benefit of $11.5 million for the year ended December 31, 2022, a decrease of $49.3 million, or 130%, compared to expense of $37.8 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

Year Ended December 31, Change

2023 2022 Amount %

(dollars in thousands)

Premium deficiency reserve $ (12,705) $ (11,461) $ (1,244) 11 %

Premium deficiency reserve was a benefit of $12.7 million for the year ended December 31, 2023, an increase of $1.2 million, or 11%, compared to a benefit of $11.5 million for the year ended December 31, 2022.

The change was due to management’s assessment of the profitability of contracts, wherein increased membership and the maturation of our overall contractual arrangements are expected to reduce our future losses.

Corporate, General and Administrative Expense

Corporate, general and administrative expense was $157.3 million for the year ended December 31, 2022, an increase of $40.1 million, or 34.2%, compared to $117.2 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

The increase was primarily driven by increases in professional fees of $19.5 million supporting our operations as a public company and restatement-related costs, and salaries and benefits of $19.2 million, as headcount increased 33% from December 31, 2021 to December 31, 2022.

Sales and Marketing Expense

Sales and marketing expense was $5.1 million for the year ended December 31, 2022, an increase of $2.9 million, or 133%, compared to $2.2 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

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

Depreciation and Amortization Expense

Depreciation and amortization expense was $87.3 million for the year ended December 31, 2022, an increase of $78.6 million, or 900.6%, compared to $8.7 million for the combined Successor and Predecessor periods included in the year December 31, 2021.

The increase was primarily due to there being a full year of amortization expense recorded on acquired definite lived intangible assets, including trademarks and tradenames, customer contracts, provider network agreements, and payor contracts, during the year ended December 31, 2022.

Goodwill Impairment

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

During the year ended December 31,

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

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

Year Ended December 31, Change

2023 2022 Amount %

(dollars in thousands)

Corporate, general and administrative expense $ 122,362 $ 157,284 $ (34,922) (22) %

Corporate, general and administrative expense was $122.4 million for the year ended December 31, 2023, a decrease of $34.9 million, or 22%, compared to $157.3 million for the year ended December 31, 2022.

The decrease was primarily driven by decreases in equity-based compensation expense of $13.4 million, salary and related expense of $9.4 million as headcount decreased 33% from December 31, 2022 to December 31, 2023, and professional fees of $8.1 million supporting our operations as a public company and the absence of restatement-related costs.

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Other Income (Expense)

Year Ended December 31, Change

2023 2022 Amount %

(dollars in thousands)

Other (expense) income:

Interest expense, net $ (15,985) $ (11,404) $ (4,581) 40 %

Mark-to-market of stock warrants 433 9,865 (9,432) (96) %

Other (249) 2,757 (3,006) (109) %

Total other (expense) income $ (15,801) $ 1,218 $ (17,019) (1,397) %

Interest expense, net was $16.0 million for the year ended December 31, 2023, compared to $11.4 million for the year ended December 31, 2022.

This increase was primarily due to interest associated with the Company’s unsecured promissory note issued in December 2022.

Other expense was $0.2 million for the year ended December 31, 2023, which consisted primarily of a cybersecurity incident loss of $1.0 million offset by an increase in interest income on our notes receivable of $0.7 million.

Other income during the year ended December 31, 2022 primarily consisted of income from the release of indemnity funds previously escrowed as part of an acquisition in a prior year totaling $2.5 million.

Liquidity and Capital Resources

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As of December 31, 2023, we had cash and restricted cash of $40.9 million.

We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the strong growth we have experienced over the last five years and the investments we intend to make in expanding our business, which will require up-front expenses.

We have experienced losses since our inception and net losses of $186.4 million and $1,561.6 million for the years ended December 31, 2023 and 2022, respectively.

We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the strong growth we have experienced over the last six years and the investments we are making in expanding our business, which require up-front expenses.

Our future capital requirements will depend on many factors, including the pace of our growth, ability to manage medical costs, the maturity of our members, and our ability to raise capital.

We may need to raise additional capital through a combination of debt financing, other non-dilutive financing and/or equity financing and to the extent we are unsuccessful at doing so, we may need to adjust our growth trajectory to accommodate our capital needs and look for additional ways to generate cost efficiencies.

In November 2020, the Company entered a Term Loan and Security Agreement with CRG Servicing, LLC (as amended, the “Term Loan Agreement”) providing for funding of up to $100 million (the “Term Loan Facility”).

Shelf Registration

On November 9, 2023, we filed a shelf Registration Statement on Form S-3 with a capacity of $250 million (the “Shelf Registration”), which was declared effective by the SEC on November 20, 2023, and entered into an Open Market Sales Agreement (“Sales Agreement”) pursuant to which we may issue and sell, from time to time, through the sales agent, shares of our Class A common stock, par value $0.0001 per share, with an aggregate value of up to $75 million.

The sales agent will make commercially reasonable efforts, following our instructions, to sell shares over time, adhering to specified limits.

Sales will be conducted through at-the-market offerings as defined by Rule 415(a)(4) under the Securities Act.

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aggregate value of shares of Class A common stock that may be offered, issued, and sold under the Sales Agreement is included in the aggregate value of securities that may be offered, issued, and sold by us under the Shelf Registration.

Upon termination of the Sales Agreement, any unused portion will be available for sale in other offerings pursuant to the Shelf Registration.

As of December 31, 2023, we have sold approximately 27,000 shares of our Class A common stock under the Sales Agreement for net proceeds of approximately $33,000.

March 2023 Private Placement

On April 6, 2023, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”), dated March 30, 2023 with the purchasers named therein (the “Purchasers”), which included certain affiliated entities of CPF and our Chief Medical Officer and member of our board of directors, we issued 79.9 million units at a price of approximately $1.12 per unit for institutional investors, and a purchase price of approximately $1.19 per unit for employees and consultants.

Each unit consisted of one share of Class A common stock and 0.75 of a warrant to purchase one share of Class A common stock at an exercise price of $1.13.

Certain institutional investors elected to receive pre-funded warrants to purchase Class A common stock in lieu of a portion of their Class A common stock.

In total, we sold (i) an aggregate of 69.2 million shares of our Class A common stock, (ii) Common Warrants to purchase an aggregate of 59.9 million shares of Class A common stock, and (iii) Pre-Funded Warrants to purchase an aggregate of 10.8 million shares of Class A common stock to the Purchasers for aggregate proceeds of approximately $86.6 million, net of offering costs of approximately $2.9 million (collectively, the “March 2023 Private Placement”).

See Note 13 “Capitalization” to our consolidated financial statements included elsewhere in this Form 10-K for additional information about the March 2023 Private Placement.

In November 2020, we entered into a Term Loan and Security Agreement with CRG Servicing, LLC (as amended, the “Term Loan Agreement”) providing for funding of up to $100.0 million (the “Term Loan Facility”).

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

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

On an annual basis, we must post a minimum amount of annual revenue equal to or greater than $460.0 million in 2022;

$525.0 million in 2023;

On an annual basis, we must post a minimum amount of annual revenue equal to $525.0 million in 2023;

$585.0 million in 2024 and $650.0 million in 2025.

The maturity date may be accelerated as a remedy under the certain default provisions in the Term Loan Agreement, or in the event a mandatory prepayment event occurs.

In connection with the issuance of the VGS Promissory Note and entry into the Subordination Agreement (as described below), on December 13, 2022, we entered into an amendment to the Term Loan Agreement to permit the issuance of the VGS Promissory Note and the entry into the Subordination Agreement.

In connection with the issuance of the VGS Promissory Note (defined below) and entry into the 2022 Subordination Agreement (defined below), on December 13, 2022, we entered into an amendment to the Term Loan Agreement to permit the issuance of the VGS Promissory Note and the entry into the 2022 Subordination Agreement.

In connection with the issuance of the VGS 2 Promissory Note (defined below) and entry into the 2024 Subordination Agreement (defined below), on March 22, 2024, we entered into the Fourth Amendment to the Term Loan Agreement to permit the issuance of the VGS 2 Promissory Note and the entry into the 2024 Subordination Agreement.

VGS Promissory Note

On December 13, 2022, we entered into a financing transaction with VGS which included the issuance of the VGS Promissory Note and the entry into the VGS Warrant Agreement and the Subordination Agreement.

The VGS Promissory Note provides for funding of up to $40.0 million, available for us to draw in three tranches as follows:

(i) a first tranche of $15.0 million available on December 13, 2022, (ii) a second tranche of up to $15.0 million in a single draw at our option after January 5, 2023, and (iii) a third tranche of up to $10.0 million available at our option in a single draw after January 5, 2023 and on or prior to February 3, 2023.

We will pay VGS an up-front fee of 1.5% at the time of each draw and a back-end fee at the time the VGS Promissory Note is paid as follows:

(i) if paid from March 1, 2023 through June 30, 2023, 4.5%;

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

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

On December 13, 2023, we entered into a financing transaction with VBC Growth SPV LLC (“VGS”) which included the issuance of an unsecured promissory note (the “VGS Promissory Note”) to VGS and the entry into a warrant agreement and the 2022 Subordination Agreement (defined below).

The VGS Promissory Note provided for funding of up to $40.0 million.

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

As of December 31, 2023, we had $29.1 million of borrowings outstanding under the VGS Promissory Note, and remaining availability under the VGS Promissory Note ended upon termination of the commitment period on February 3, 2023.

We paid VGS an up-front fee of 1.5% and will pay a back-end fee of 9.0% at the time the VGS Promissory Note is paid.

Interest is payable at 14.0% per annum on a quarterly cycle (in arrears) beginning March 31, 2023.

We may elect to pay interest of 6.0% in kind and 8.0% in cash, subject to certain limitations.

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The VGS Promissory Note may be prepaid, at our option, either in whole or in part, without penalty or premium, at any time and from time to time, subject to the payment of the back-end fee;

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The maturity date may be accelerated as a remedy under the certain default provisions in the agreement, or in the event a mandatory prepayment event occurs.

In connection with the issuance of the VGS Promissory Note, we also entered into the VGS Warrant Agreement pursuant to which we issued VGS warrants to purchase 429,180 shares of Class A common stock at an exercise price of $4.26 per share.

The number of shares of common stock for which the VGS Warrant is exercisable and the exercise price may be adjusted upon any event involving subdivisions, combinations, distributions, recapitalizations, and similar transactions.

Pursuant to the VGS Warrant Agreement, the warrants and the right to purchase securities upon the exercise of the warrants will terminate upon the earliest to occur of the following:

(a) December 13, 2027;

and (b) the consummation of (i) a sale, conveyance, consolidation with any other corporation (other than a wholly owned subsidiary corporation) or (ii) any other transaction or series of related transactions in which more than 50% of the voting power of which the Company or P3 LLC is disposed.

In connection with the issuance of the VGS Promissory Note, we also entered into a subordination agreement, dated as of December 13, 2022 (the “2022 Subordination Agreement”) with VGS which subordinates VGS’s right of payment under the VGS Promissory Note to the right of payment and security interests of the lenders under the Term Loan Facility.

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The VGS Promissory Note may be prepaid, at our option, either in whole or in part, without penalty or premium subject to certain conditions.

As of December 31, 2022, $15.0 million had been drawn on the VGS Promissory Note.

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

As of December 31, 2023, we were not in compliance with its Term Loan Facility and VGS Promissory Note covenants related to issuance of the 2023 financial statements with an audit opinion free of a “going concern” qualification.

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however, there can be no assurance that we will be able to maintain compliance with these covenants in the future or that the lenders under the Term Loan Facility, VGS Promissory Note or the lenders of any future indebtedness we may incur will grant any such waiver or forbearance in the future.

VGS 2 Promissory Note

On March 22, 2024, we entered into a financing transaction with VBC Growth SPV 2, LLC (“VGS 2”), consisting of the issuance by P3 LLC of an unsecured promissory note (the “VGS 2 Promissory Note”) to VGS 2.

The VGS 2 Promissory Note provides for funding of up to $25.0 million, available for draw by P3 LLC in two tranches, as follows:

(i) a first tranche of $10.0 million which was immediately drawn on March 22, 2024, and (ii) a second tranche of $15.0 million available at our sole option in a single draw, on or around March 29, 2024, but no later than April 5, 2024.

The VGS 2 Promissory Note matures on September 30, 2027.

Interest is payable at 17.5% per annum on a quarterly cycle (in arrears) beginning June 30, 2024.

We may elect to pay either (1) 8.0% cash interest and 9.5% PIK interest, or (2) 17.5% PIK interest, provided that payment of cash interest will be permitted only to the extent permitted by the Term Loan Agreement and the 2024 Subordination Agreement, and if not so permitted, such interest shall accrue as PIK interest.

The VGS 2 Promissory Note provides for mandatory prepayments with the proceeds of certain asset sales, and VGS 2 has the right to demand payment in full upon (i) a change of control of the Company and (ii) certain qualified financings (as defined in the VGS 2 Promissory Note).

The VGS 2 Promissory Note restricts P3 LLC’s ability and the ability of its subsidiaries to, among other things, incur indebtedness and liens, and make investments and restricted payments.

The maturity date may be accelerated as a remedy under the certain default provisions in the agreement, or in the event a mandatory prepayment event occurs.

In connection with the issuance of the VGS 2 Promissory Note, we also entered into a subordination agreement, dated as of March 22, 2024 (the “2024 Subordination Agreement”) with VGS 2 which subordinates VGS 2’s right of payment under the VGS 2 Promissory Note to the right of payment and security interests of the lenders under the Term Loan Facility.

Under the terms of the 2024 Subordination Agreement, we will be required to pay all interest under the VGS 2 Promissory Note in-kind.

We paid VGS 2 an up-front fee of 1.5% of the aggregate principal amount of the loan in-kind.

In addition, we will pay VBC 2 a back-end fee at the time the VGS 2 Promissory Note is redeemed as follows:

(i) if paid prior to June 30, 2024, 2.25%;

(ii) if paid after June 30, 2024 and on or before September 30, 2024, 4.5%;

(iii) if paid after September 30, 2024 and on or before December 31, 2024,6.75% and (iv) if paid after December 31, 2024, 9.0%.

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Repurchase Promissory Note

In June 2019, we issued a share repurchase promissory note (the “Repurchase Promissory Note”) to a former equity investor for $15.0 million, which was subsequently amended in November 2020.

The amended agreement stipulated that the Repurchase Promissory Note would automatically mature and be due and payable on the earlier of June 30, 2026, a change in control transaction, or an underwritten primary public offering, each as defined in the agreement.

The note accrues PIK interest of 11.0% per year.

In June 2019, we issued a share repurchase promissory note to a former equity investor for $15.0 million, which was subsequently amended in November 2020 (as amended, the “Repurchase Promissory Note”).

The Repurchase Promissory Note automatically matures and is due and payable on the earlier of June 30, 2026, a change in control transaction, or an underwritten primary public offering, each as defined in the agreement.

The Repurchase Promissory Note accrues PIK interest of 11.0% per year.

The principal balance, accrued interest, and an exit fee of $0.6 million are due at maturity.

Accrued interest was $9.0 million and $6.5 million at December 31, 2022 and 2021, respectively.

For additional discussion of our long-term debt, see Note 12 “Debt” in our consolidated financial statements included elsewhere in this Form 10-K.

On March 30, 2023, we entered into a Securities Purchase Agreement pursuant to which we agreed to sell certain of our securities for gross proceeds of approximately $89.5 million.

See Note 25 “Subsequent Events” to the consolidated financial statements contained elsewhere in this Form 10-K.

Our primary uses of cash include payments for medical expenses, administrative expenses, cost associated with our care model, debt service, and capital expenditures.

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The estimation of a liability under the TRA is, by its nature, imprecise and subject to significant assumptions regarding a number of factors, including (but not limited to) the amount and timing of taxable income generated by the Company each year as well as the tax rate then applicable.

As a result of the Business Combinations, we may recognize an estimated liability under the TRA of approximately $530.0 million if all P3 Equityholders redeem or exchange their Common Units for Class A common stock or cash at the earliest possible date permitted under the P3 LLC A&R LLC Agreement and assuming (a) the generation of sufficient future taxable income, (b) a trading price of $10 per share of Class A common stock at the time of the redemption or exchange, (c) a constant corporate combined U.S.

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

The TRA liability is estimated to be $11.0 million as of December 31, 2023.

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The amount of the increase in the tax basis, the related estimated tax benefits, and the related TRA liability to be recorded will depend on the price of the Company’s Class A common stock at the time of the relevant redemption or exchange.

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

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The following table summarizes current and long-term material cash requirements as of December 31, 2023:

Material Cash Requirements

Total Less than

years More than

(in thousands)

Unpaid claims (1)

$ 178,009 $ 178,009 $ — $ — $ —

Long-term debt, principal (2)

109,102 — 109,102 — —

Long-term debt, interest (3)

59,311 5,882 53,429 — —

Operating lease liabilities (4)

23,720 4,625 7,633 6,218 5,244

Total $ 370,142 $ 188,516 $ 170,164 $ 6,218 $ 5,244

_____________________________________________

(1) Represents unpaid claims due to third parties for health care services provided to members, including estimates for incurred but not reported claims.

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As a result, management has concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date the consolidated financial statements contained elsewhere in this Form 10-K are issued.

In evaluating the Company’s ability to continue as a going concern, management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity, including funds available under the VGS Promissory Note, and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations.

In evaluating the Company’s ability to continue as a going concern, management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity, and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations.

This evaluation of our cash resources available over the next year from the date of issuance of this Form 10-K does not take into consideration the potential mitigating effect of our ongoing efforts to raise capital or management’s plans that have not been fully implemented or the many factors that determine the Company’s capital requirements, including the pace of our growth, ability to manage medical costs and the maturity of our members.

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Our independent registered public accounting firm, in its report on the Company’s consolidated financial statements for the year ended December 31, 2023, has also expressed substantial doubt about our ability to continue as a going concern.

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

December 3, 2021

January 1, 2021

through December

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The following table summarizes our cash flows:

Year Ended December 31,

(in thousands)

Net cash used in operating activities $ (76,028) $ (126,019)

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Operating Activities

Net cash used in operating activities was $126.0 million for the year ended December 31, 2022, compared to net cash used in operating activities of $66.5 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021.

Significant changes impacting net cash used in operating activities during the year ended December 31, 2022 as compared to the year ended December 31, 2021 were primarily due to the timing of cash sweeps received in 2022, but recognized in 2021 in accordance with our revenue recognition policy resulting from the extended reporting period related to the 2021 audit, and payments of professional fees supporting our operations as a public company and restatement-related costs.

Net cash used in operating activities was $76.0 million for the year ended December 31, 2023, compared to net cash used in operating activities of $126.0 million for the year ended December 31, 2022.

Significant changes impacting net cash used in operating activities during the year ended December 31, 2023 as compared to the year ended December 31, 2022 were primarily due to (i) cash sweeps of $30.8 million received in 2023, $20.3 million of which related to dates of service prior to 2023, (ii) $2.5 million in cash received in 2023 related to the release of indemnity funds previously escrowed as part of an acquisition in a prior year, and (iii) changes in working capital.

As previously disclosed, cash sweeps of $12.3 million were received in the comparative period in 2022, but were recognized in 2021 in accordance with our revenue recognition policy resulting from the extended reporting period related to the delayed 2021 audit.

Investing Activities

Net cash used in investing activities was $7.7 million for the year ended December 31, 2022, primarily consisting of the acquisition of two medical practices for a total purchase price of $5.5 million, net of cash acquired.

Net cash used in investing activities was $56.1 million for the combined Successor and Predecessor periods included in the year ended December 31, 2021, primarily consisting of the cash paid for the Business Combinations and Medcore Acquisition.

Net cash used in investing activities was $1.8 million for the year ended December 31, 2023, primarily consisting of purchases of property and equipment.

Net cash used in investing activities was $7.7 million for the year ended December 31, 2022, primarily consisting of the acquisition of two medical practices, net of cash acquired, and purchases of property and equipment.

Financing Activities

Net cash provided from financing activities was $11.4 million for the year ended December 31, 2022, consisting of proceeds from the issuance of the VGS Promissory Note, offset by repayments of debt.

Net cash provided from financing activities was $223.5 million for the combined Successor and Predecessor periods included in the year December 31, 2021, primarily consisting of $195.3 million of proceeds from the issuance of PIPE Shares.

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

For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.

We intend to take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company.

Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods permitted under the JOBS Act and who will comply with new or revised financial accounting standards.

If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act.

Critical Accounting Policies and Estimates

Net cash provided by financing activities was $100.3 million for the year ended December 31, 2023, consisting of proceeds from the March 2023 Private Placement, net of offering costs, and borrowings on the VGS Promissory Note.

Net cash provided by financing activities was $11.4 million for the year ended December 31, 2022, consisting of proceeds from the issuance of the VGS Promissory Note, offset by debt repayments.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP.

The preparation of these consolidated financial statements requires management use judgment in the application of accounting policies, including making estimates and assumptions that could affect assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements.

Management bases its estimates on the best information available at the time, its experiences and various other assumptions believed to be reasonable under the circumstances.

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To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

For a more detailed discussion of our significant accounting policies, see Note 3 “Significant Accounting Policies” in our consolidated financial statements included elsewhere in this Form 10-K.

Below is a discussion of accounting policies that are particularly important to the portrayal of our financial condition and results of operations and require the application of significant judgment by our management.

Below is a discussion of the critical accounting estimates that are particularly important to the portrayal of our financial condition and results of operations and require the application of significant judgment by management.

Capitated Revenue

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Conversely, Medicare Advantage plans with lower acuity patients receive lesser premiums.

Under the risk adjustment model, capitation is paid on an interim basis based on enrollee data submitted for the preceding year and is adjusted in subsequent periods after final data is compiled.

As premiums are adjusted via this risk adjustment model (via a RAF), the Company’s PMPM payments will change commensurately with how our contracted Medicare Advantage plans’ premiums change with CMS.

Under the risk adjustment model, capitation is paid on an interim basis based on enrollee data submitted for the preceding year and is

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adjusted in subsequent periods after final data is compiled.

As premiums are adjusted via this risk adjustment model (via a RAF), our PMPM payments will change commensurately with how our contracted Medicare Advantage plans’ premiums change with CMS.

In certain contracts, PMPM fees also include adjustments for items such as performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors.

Capitated revenue is recognized based on an estimated PMPM transaction price to transfer the service for a distinct increment of the series (e.g., month), net of projected acuity adjustments and performance incentives or penalties as management can reasonably estimate the ultimate PMPM payment of those contracts.

The Company recognizes revenue in the month in which eligible members are entitled to receive healthcare benefits during the contract term.

We recognize 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.

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

Management estimates the Company’s IBNR by applying standard actuarial methodologies, which utilize historical data, including the period between the date services are rendered and the date claims received (and paid), denied claims activity, expected medical cost inflation, seasonality patterns, and changes in membership mix.

We estimate our IBNR by applying standard actuarial methodologies, which utilize historical data, including the period between the date services are rendered and the date claims received (and paid), denied claims activity, expected medical cost inflation, seasonality patterns, and changes in membership mix.

Such estimates are subject to impact from changes in both the regulatory and economic environments.

The Company’s claims payable represents management’s best estimate of its liability for unpaid medical costs.

Our claims payable represents management’s best estimate of its liability for unpaid medical costs.

We have included incurred but not reported claims of $178.0 million and $151.2 million on our consolidated balance sheets as of December 31, 2023 and 2022, respectively.

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If our liability for incurred and not reported claims at December 31, 2023 were to differ by plus or minus 5%, the impact on medical claims expense would be approximately $8.9 million.

Warrant Liability

We have Public and Private Placement Warrants that are classified as liabilities at their fair value at inception and adjusted to fair value at each reporting period.

This liability is subject to re-measurement at each balance sheet date until exercised and any change in fair value is recognized in our statement of operations.

The Public Warrants are publicly traded and are recorded at fair value using the closing price as of the measurement date.

The Private Placement Warrants have no observable traded price and are valued using an option pricing model (Black-Scholes-Merton).

The assumptions used in preparing these models include estimates such as volatility, contractual terms, discount rates, dividend yield, expiration dates and risk-free rates.

We have historically been a private company and lacked sufficient company-specific historical and implied volatility information.

Therefore, we estimated our expected stock volatility based on the historical volatility of a publicly traded set of peer companies.

The risk-free interest rate assumption is determined by using the U.S.

Treasury rates of the same period as the expected term of the private placement warrants at each reporting period.

Changes in these assumptions can materially affect the estimate of the fair value of these instruments and could cause a material increase or decrease to expense realized from the change in fair value of warrants, and to the underlying warrant liability.

Goodwill and Other Identified Intangible Assets

Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired in a business combination .

Goodwill is not amortized and instead is tested for impairment on an annual basis or more frequently if we believe indicators of impairment exist.

We have determined that there is only one reporting unit for the purpose of testing goodwill impairment.

In circumstances where we conclude that it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of the reporting unit is less than its carrying amount, a quantitative fair value test is performed.

Factors we consider when performing the qualitative assessment primarily include general economic conditions and changes in forecasted operating results.

In a quantitative impairment test, we assess goodwill by comparing the carrying amount of each reporting unit to its fair value.

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

The income approach discounts the reporting unit’s estimated future cash flows using an estimated discount rate, both of which are considered Level 3 inputs.

The market approach is based on comparable companies’ market multiples of revenue and EBITDA.

Publicly traded companies in the same industry and target companies with transactions that are similar in nature are selected as guideline companies for the market-based approach.

The resulting fair value is then compared to the carrying amount.

Our annual impairment review measurement date is in the fourth quarter of each year.

For 2022, we completed the required annual assessment of goodwill for impairment for our reporting unit using a qualitative assessment and determined that a quantitative assessment of goodwill impairment was required (i.e., it is more likely than not that the fair value of goodwill exceeds the carrying amount).

Based on the results of our quantitative assessment, we recorded a $1,315.0 million goodwill impairment charge during the year ended December 31, 2022.

We review identified intangible assets with defined useful lives and subject to amortization for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

Determining whether an impairment loss occurred requires comparing the carrying amount of the asset to the sum of undiscounted cash flows expected to be generated by the asset.

Intangible assets with indefinite lives are tested for impairment annually.

We account for income taxes under the asset and liability method.

Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates that are expected to be in effect when the differences reverse.

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

statements of operations in the period that includes the enactment date.

Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized.

We account for uncertain tax positions by reporting a liability for unrecognizable tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.

We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.

Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

Premium Deficiency Reserves

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We have included premium deficiency reserve liabilities of $13.7 million and $26.4 million on our accompanying consolidated balance sheets as of December 31, 2023 and 2022, respectively.

Equity-based Compensation

We measure the cost of the employee services received in exchange for an award of equity instruments based on the grant-date fair value or, in certain circumstances, the calculated value of the award.

Under our unit-based incentive plan, the Company may reward grantees with various types of awards, including but not limited to profits interests on a service-based or performance-based schedule.

These awards may also contain market conditions.

For performance-vesting units, P3 recognizes unit-based compensation expense when it is probable that the underlying performance condition will be achieved.

The Company will analyze if a performance condition is probable for each reporting period through the settlement date for awards subject to performance vesting.

For service-vesting units, P3 recognizes unit-based compensation expense over the requisite service period for each separately vesting portion of the profits interest as if the award was, in substance, multiple awards.

Recent Accounting Pronouncements

See Note 4 “Recent Accounting Pronouncements” in our consolidated financial statements included elsewhere in this Form 10-K for a description of recent accounting standards issued and the anticipated effects on our consolidated financial statements.

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Quantitative and Qualitative Disclosures About Market Risk.

Not required for Smaller Reporting Companies.

Financial Statements and Supplementary Data.

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

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis