Privia Health Group, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this quarterly report on Form 10-Q. In addition, the following discussion and analysis and information contains forward-looking statements about the business, operations and financial performance of the Company based on our current expectations that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. including, but not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Information Regarding Forward-Looking Statements” in this quarterly report on Form 10-Q. Overview Privia Health is a technology-driven, national physician-enablement company that collaborates with medical groups, health plans, and health systems to optimize physician practices, improve patient experiences, and reward doctors for delivering high-value care in both in-person and virtual care settings on the “Privia Platform”. We directly address three of the most pressing issues facing physicians today: the transition to the VBC reimbursement model, the ever-increasing administrative requirements to operate a successful medical practice and the need to engage patients using modern user-friendly technology. We seek to accomplish these objectives by entering markets and organizing existing physicians and non-physician clinicians into a unique practice model that combines the advantages of a partnership in a large regional Medical Group with significant local autonomy for Privia Providers joining our Medical Groups. Our Medical Groups are designated as in-network by all major health insurance plans in all of our markets and all Privia Providers are credentialed with such health insurance plans. Our platform is purpose-built, organizing physicians into cost efficient, value-based and primary-care centric networks bolstered by strong physician governance, and promotes a culture of physician leadership. The Privia Platform is powered by the Privia Technology Solution, which efficiently manages all aspects of our Privia Physicians’ provision of healthcare services and eliminates the complexity and reduces the cost of otherwise having to buy more than 30 point solutions. We enhance the patient experience, improve practice economics and influence point of care delivery through investments in data analytics, revenue cycle management (“RCM”), practice and clinical operations and payer alignment. The Privia Platform is designed to succeed across demographic cohorts, acuity levels and reimbursement models, including traditional FFS Medicare, Medicare Shared Savings Program (“MSSP”), Medicare Advantage, Medicaid, commercial insurance and other existing and emerging direct contracting programs with payers and employers. We believe that the Privia model is a highly scalable solution to help our nation’s healthcare system achieve the quadruple aim of better outcomes, lower costs, improved patient experience, and happier and more engaged providers. Our customers have affirmed our model, as Privia has rapidly become one of the nation’s leading independent physician companies since launching our first Medical Group in 2013. There are three core elements to our physician alignment approach: 1) A focus on maximizing the potential of a physician’s medical practice across the physician’s entire patient panel, with the end goal of succeeding in VBC reimbursement; 2) A highly flexible payer-agnostic approach to address the needs of multiple types of physician practices, from independently owned to hospital employed or hospital affiliated practices; and 3) Delivering a profitable model for both Privia and our Privia Physicians, regardless of the reimbursement model, geographic environment or specialty. The Privia Platform is powered by the Privia Technology Solution, which efficiently manages all aspects of our Privia Physicians’ practices and eliminates the complexity and reduces costs. The intended result is engaged physicians and non-physician clinicians delivering high quality virtual and in-person healthcare to patients with superior clinical outcomes and experiences at lower costs. We believe our technology-enabled platform is highly scalable, allowing us to both rapidly build density in new geographic markets and guide those markets from FFS to VBC by shifting the reimbursement model and helping our Privia Providers better manage the cost of care through a focus on quality and success-based reimbursement. This model is designed to enable significant growth, with significant revenue visibility, low invested capital and attractive margins. We believe the Privia Platform aligns with the direction healthcare is headed, including (1) a macro shift towards VBC models that focus on delivering coordinated, high quality care at lower total costs, (2) a greater focus on the patient experience and (3) a focus on optimizing provider workflow and bringing back the joy of practicing medicine. We believe our approach is highly attractive to multiple types of physician practices given our significant value proposition and our comprehensive solution set. 16 Table of Contents We believe our technology-enabled platform is differentiated and well positioned to drive sustainable long-term growth, with attractive margins and attractive returns on invested capital. The Privia Platform has the following key attributes: • Addresses a Large Total Addressable Market: Targets a large and growing total addressable market. • Purpose-Built to Scale Nationally: Flexible model to enter new markets with multiple types of physician practices . • Powered by the Privia Technology Solution: Comprehensive cloud-based technology-enabled platform designed to optimize provider workflow across the full continuum of reimbursement environments as well as both virtual and in-person care settings . • Establishes Provider Density in Local Markets: Supports a proven expansion strategy resulting in increased relevance with payers and patients . • Designed to Transform Care Delivery: Designed to transition care delivery in each market from FFS to VBC and to enhance the care model and ability of Privia Providers to manage higher risk patients . • Demonstrates Physician Value Proposition Consistently: Reduces administrative burden and generally increases provider profitability. • Generates Attractive Financial Results: Has an established scale, diversified revenue mix with no single payer or individual practice concentration, and is profitable and capital efficient with attractive growth . See “Key Metrics” for a discussion of practice collections. • Led by a Highly Experienced Executive and Physician Leadership Team: Our management team has significant experience leading payer, provider and healthcare information technology organizations. Privia Physicians join the Medical Group in their geographic market as an owner of the Medical Group. Certain of our Medical Groups are majority-owned by us (each, an “Owned Medical Group”), with Privia Physicians owning a minority interest. However, in those markets in which state regulations do not allow us to own physician practices, the Medical Groups are owned entirely by Privia Physicians. We provide management services to each Medical Group though a local MSO established with the objective of maximizing the independence and autonomy of our Affiliated Practices, while providing Medical Groups with access to VBC opportunities either directly or through Privia-owned ACOs. In markets with Non-Owned Medical Groups, we earn revenue by providing administrative and management services through owned MSO entities (FFS-administrative services revenue). We have national committees that distribute quality guidance, and we employ Chief Medical Officers who provide clinical oversight and direction over the clinical affairs of the Owned Medical Groups. Additionally, we hold the provider contracts, maintain the patient records, set reimbursement rates, and negotiate payer contracts on behalf of the Owned Medical Groups. The Medical Groups have no ownership in the underlying Affiliated Practices, but the Affiliated Practices do provide certain services to our Medical Groups, such as use of space, non-physician staffing, equipment and supplies. We principally derive our revenues from the following three sources: (i) FFS-patient care revenue generated from providing healthcare services to patients through Privia Providers of Owned Medical Groups and FFS-administrative services earned for administrative services provided to Non-Owned Medical Groups, (ii) VBC revenue collected on behalf of our Privia Providers in the form of management and administrative fees, which, at this time, are primarily in the form of PMPM fees and shared savings, which includes quality bonuses, and (iii) other revenue from additional services offered by Privia to its Privia Providers or directly to patients or employers. The operations of our Owned Medical Groups, owned ACOs and owned MSOs are reflected within our consolidated financial results. GAAP Financial Measures • Revenue was $213.6 million and $212.9 million for the three months ended March 31, 2021 and 2020, respectively; • Operating income was $7.9 million and $6.5 million for the three months ended March 31, 2021 and 2020, respectively; and • Net Income attributable to Privia Health Group, Inc. was $5.4 million and $5.4 million, for the three months ended March 31, 2021 and 2020, respectively. Key Metrics and Non-GAAP Financial Measures • Practice Collections was $344.1 million and $327.4 million for the three months ended March 31, 2021. and 2020, respectively; • Care Margin was $52.5 million and $47.8 million for the three months ended March 31, 2021. and 2020, respectively; • Platform Contribution was $25.5 million and $20.3 million for the three months ended March 31, 2021. and 2020, respectively; • Adjusted EBITDA was $9.9 million and $7.1 million for the three months ended March 31, 2021. and 2020, respectively. 17 Table of Contents See “Key Metrics and Non-GAAP Financial Measures” for more information as to how we define and calculate Implemented Providers, attributed lives, Practice Collections, Care Margin, Platform Contribution, Platform Contribution Margin, Adjusted EBITDA and Adjusted EBITDA Margin, and for a reconciliation of income from operations, the most comparable GAAP measure, to Care Margin, income from operations, the most comparable GAAP measure, to Platform Contribution, and net income, the most comparable GAAP measure, to Adjusted EBITDA. The COVID-19 Pandemic and the Coronavirus Aid, Relief and Economic Stimulus Act (“CARES Act”) The current COVID-19 pandemic had an impact on our results of operations, cash flow and financial position for the period ended and as of March 31, 2021, as we experienced lower volumes than anticipated and shifts in the mix of services provided after the onset of the pandemic in the United States. See the Prospectus for additional information on impacts during 2020. We are closely monitoring the impact of the pandemic on all aspects of our business including impacts to employees, customers, patients, suppliers and vendors. On March 27, 2020, the CARES Act was passed. It is intended to provide economic relief to individuals and businesses affected by the coronavirus pandemic. It also contains provisions related to healthcare providers’ operations and the issues caused by the coronavirus pandemic. The following are significant economic impacts for the Company and its subsidiaries as a result of specific provisions of the CARES Act for the three month ended March 31, 2021 and 2020: • The Company elected to defer its portion of Social Security taxes in 2020, which may be repaid over two years as follows: 50% by the end of 2021 and 50% by the end of 2022. Approximately $1.6 million is recorded in accrued expenses on the balance sheet as of March 31, 2021 related to this deferral and the Company intends to remit payment by the end of 2021; and • No additional funds were received from the Public Health and Social Services Emergency Relief Fund under the CARES Act during the three months ended March 31, 2021 and 2020. Our Revenue We recognize revenue from multiple stakeholders, including health care consumers, health insurers, employers, providers and health systems. Our revenue includes (i) FFS revenue generated from providing healthcare services to patients through Privia Providers of Owned Medical Groups or administrative fees collected for providing administrative services to Non-Owned Medical Groups, (ii) VBC revenue collected on behalf of our providers, primarily per member per month (PMPM) fees (including care management fees, management services fees, care coordination fees and all other similar administrative fees) and shared savings (including surplus payments, shared savings, total cost of care budget payments and similar payments), and (iii) other revenue from additional services, such as concierge services, virtual visits, virtual scribes and coding, clinical trials, behavioral health management, and partnerships with self-insured employers to offer direct primary care to their employees. FFS Revenue We generate FFS-patient care revenue when we collect reimbursements for FFS medical services provided by Privia Providers. Our agreements with our providers have a multi-year term length and we have historically experienced a 95% provider retention rate, both of which lead to a highly predictable and recurring revenue model. Our FFS contracts with payer partners typically contain annual rate inflators and enhanced commercial FFS rates given our scale in each of our markets. As a result of receiving these rate inflators and enhancements, if we continue to be successful in expanding our provider base, we expect revenue will grow year-over-year in absolute dollars. In addition, in our FFS-patient care revenue, we include collections generated from ancillary services such as clinical laboratory, imaging and pharmacy operations. We also generate FFS-administrative services revenue by providing administration and management services to medical groups which are not owned or consolidated by us. FFS-patient care revenue represented 79.4%, and 82.1% of total revenue for the three months ended March 31, 2021 and 2020, respectively. FFS-administrative services revenue represented 7.2% and 6.8% of total revenue for the three months ended March 31, 2021 and 2020, respectively. VBC Revenue Over time, we create incremental value for our provider partners by enabling them to succeed in VBC arrangements. We generate VBC revenue when our providers are reimbursed through traditional FFS Medicare, MSSP, Medicare Advantage, commercial payers and other existing and emerging direct payer and employer contracting programs. The revenue is primarily collected in the form of (i) PMPM care management fees to cover costs of services typically not reimbursed under traditional FFS payment models, including population management, care coordination, advanced technology and analytics, and (ii) shared savings earned based on improved quality and lower cost of care for our attributed patients in VBC arrangements. VBC revenue represented 12.4% and 10.6% of total revenue for the three months ended March 31, 2021 and 2020, respectively. We expect VBC revenue to continue to increase as a percentage of total revenue as we grow total Attributed Lives under management as well as increase risk levels undertaken across value-based arrangements. 18 Table of Contents Other Revenue The remainder of our revenue is derived from leveraging our existing base of providers and patients to deliver value-oriented services such as virtual visits, virtual scribes and coding, clinical trials, behavioral health management, and partnerships with self-insured employers to offer direct primary care to their employees. Other revenue represented 1.0% and 0.4% of total revenue for the three months ended March 31, 2021 and 2020, respectively. Key Factors Affecting Our Performance Addition of New Providers Our ability to increase our provider base will enable us to deliver financial growth as our providers generate both our FFS and VBC revenue. Our existing provider penetration and market share provides us with significant opportunity to grow in both existing and new geographies, and we believe the number of providers joining Privia is a key indicator of the market’s recognition of the attractiveness of our platform to our providers, patients and payers. We intend to increase our provider base in existing and new markets by adding new practices and assisting our existing practices with recruiting new providers, using our in-market and national sales and marketing teams. As we add providers to the Privia Platform, we expect them to contribute incremental economics as we leverage our existing brand and infrastructure, both at the corporate and in-market levels. Addition of New Patients Our ability to add new patients to our provider base in existing and new markets will also enable us to deliver revenue growth in both our FFS and VBC contracts. We believe the number of attributed patient lives in VBC programs is a key driver of our VBC revenue growth. Our branding and marketing strategies to drive growth in our practices has continued to result in increased engagement with new and existing patients. We believe our continued success in growing the visibility of the Privia brand will result in increased patient panels per provider and contribute incremental revenue in both FFS and VBC for our practices. Expansion to New Markets Based upon our experience to date, we believe Privia can succeed in all reimbursement environments and payment models. The data we collected from older provider cohorts consistently suggest that we improve their performance in both FFS and VBC metrics over time and inform our expectations for our new markets. We believe our in-market operating structure and ability to serve providers wherever they are on their transition to VBC can benefit physicians and providers throughout the U.S. and that our solution is applicable across all 50 states. We enter a market with an asset-light operating model and employ a disciplined, uniform approach to market structure and development. We partner with market leading medical groups and health systems to form anchor relationships and align other independent, affiliated, or employed providers into a single-TIN medical group. Our business model also gives us flexibility for future, incremental growth through the acquisition of minority or majority stakes in our practices and opening de-novo, fully-owned sites of care focused on Medicare Advantage and direct contracting models. Provider Satisfaction and Retention Privia Providers have high satisfaction with their overall performance on our platform, and we strive to continuously improve provider well-being and patient satisfaction. Our percentage of collections Care Margin model combined with high patient and provider satisfaction results in 90%+ Practice Collections predictability on a rolling twelve month forward basis. We believe these metrics demonstrate the stability of our provider base and the appeal to prospective providers and patients of our platform. Payer Contracts and Ability to Move Markets to VBC Our FFS and VBC revenue is dependent upon our contracts and relationships with payers. We partner with a large and diverse set of payer groups nationally and in each of our markets to form provider networks and to lower the overall cost of care, and we structure bespoke contracts to help both providers and payers achieve their objectives in a mutually aligned manner. Maintaining, supporting and increasing the number of these contracts and relationships, particularly as we enter new markets, is important for our long-term success. Privia’s ability to work within each geographic market as it evolves in its shift towards VBC, with our experience working in all reimbursement environments, enables providers to accelerate and succeed in their transition. Our model is aligned with our payer partners, as we have demonstrated improved patient outcomes while driving incremental revenue growth. We intend to accelerate the move towards the adoption of VBC reimbursement in each market in current and emerging payer programs. To do so, we will need to continue enhancing our VBC capabilities and executing on initiatives to deliver next generation access, superior quality metrics and lower cost of care. 19 Table of Contents Components of Revenue Our FFS revenue is primarily dependent upon the size of our provider base, payer contracted rates and patient volume. Our ability to maintain or improve pricing levels in our contracts with payers and patient volume for our providers will impact our results of operations. In addition to increasing our provider base and contracted rates over time, we also seek to increase patient volume by demonstrating the ability to provide a better patient experience that leads to higher retention rates and drives referrals to preferred, high quality and value-based providers. Our VBC revenue is primarily dependent upon the number of attributed patients in our VBC arrangements, risk levels of our payer contracts, and effective management of our patients’ total cost of care. As we grow our provider base, we also expect to increase our total number of attributed patients in existing and new markets. In addition, we intend to increase the risk levels of our value-based programs as we seek a higher revenue opportunity on a per patient basis over time. Investments in Growth We expect to continue focusing on long-term growth through investments in our sales and marketing, our technology-enabled platform, and our operations. In addition, as we continue our efforts to move markets toward VBC, we expect to continue making additional investments in operations for an expanded suite of clinical capabilities to manage our patient population. Key Metrics and Non-GAAP Financial Measures We review a number of operating and financial metrics, including the following key metrics and non-GAAP financial measures, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plans, and make strategic decisions. Key Metrics For the Three Months Ended March 31, 2021 2020 Implemented Providers (as of end of period) 2,648 2,528 Attributed Lives (in thousands) (as of end of period) 721 752 Practice Collections (1) ($ in millions) $ 344.1 $ 327.4 (1) We define Practice Collections as the total collections from all practices in all markets and all sources of reimbursement (FFS, VBC and other) that we receive for delivering care and providing our platform and associated services. Practice Collections differ from revenue by including collections from Non-Owned Medical Groups. Implemented Providers We define Implemented Providers as the total of all service professionals on Privia Health’s platform at the end of a given period who are credentialed by Privia Health and bill for medical services, in both Owned and Non-Owned Medical Groups during that period . This includes, but is not limited to, physicians, physician assistants, and nurse practitioners. We believe that growth in the number of Implemented Providers is a key indicator of the performance of our business and expected revenue growth. This growth depends, in part, on our ability to successfully add new practices in existing markets and expand into new markets. The number of Implemented Providers increased 4.7% between March 31, 2021 and 2020, due to organic growth in our healthcare delivery business. Attributed Lives We define Attributed Lives as any patient that a payer deems attributed to Privia, in both Owned and Non-Owned Medical Groups, to deliver care as part of a VBC arrangement. We define our Attributed Lives as patients who have selected one of our owned or Non-Owned Medical Groups as their provider of primary care services as of the end of a particular period. The number of Attributed Lives is an important measure that impacts the amount of VBC revenue we receive. While overall Attributed Lives decreased 4.1% between March 31, 2021 and 2020, Attributed Lives in government value-based programs increased by 7.7% and commercial value-based programs decreased by 10.4%. Practice Collections We define Practice Collections as the total collections from all practices in all markets and all sources of reimbursement (FFS, VBC and other) that we receive for delivering care and providing our platform and associated services. Practice Collections differ from revenue by adding collections from Non-Owned Medical Groups. Practice Collections increased 5.1% between March 31, 2021 and 2020 due to organic growth of our healthcare delivery business. Non-GAAP Financial Measures In addition to our financial results determined in accordance with GAAP, we believe Care Margin, Platform Contribution, Platform Contribution Margin, Adjusted EBITDA and Adjusted EBITDA Margin are useful as non-GAAP measures to investors as these are metrics used by management in evaluating our operating performance and in assessing the health of our business. We use Care 20 Table of Contents Margin, Platform Contribution, Platform Contribution Margin, Adjusted EBITDA and Adjusted EBITDA Margin to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measure as a tool for comparison. A reconciliation is provided below for our non-GAAP financial measures to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business . For the Three Months Ended March 31, (amounts in thousands, except for percentages) 2021 2020 Care Margin 1 ($) $ 52,494 $ 47,836 Platform Contribution 1 ($) $ 25,532 $ 20,275 Platform Contribution Margin 1 (%) 48.6% 42.4% Adjusted EBITDA 1 ($) $ 9,947 $ 7,055 Adjusted EBITDA Margin 1 (%) 18.9% 14.7% 1. See below for more information as to how we define and calculate Care Margin, Platform Contribution, Platform Contribution Margin, Adjusted EBITDA and Adjusted EBITDA Margin and for a reconciliation of income from operations, the most comparable GAAP measure, to Care Margin, income from operations, the most comparable GAAP measure, to Platform Contribution, and net income, the most comparable GAAP measure, to Adjusted EBITDA. Care Margin We define Care Margin as total revenue less the sum of physician and practice expense. Our Care Margin generated from FFS revenue is contractual and recurring in nature, and primarily based on an individually negotiated percentage of collections for each practice that joins Privia. Our Care Margin generated from VBC revenue is based on a percentage of care management fees and shared savings collected. We view Care Margin as all of the dollars available for us to manage our business, including providing administrative support to our practices, investing in sales and marketing to attract new providers to the Privia Platform, and supporting the organization through our corporate infrastructure. We expect Care Margin will grow year-over-year in absolute dollars as we continue to expand our provider base. We would also expect our care management and shared savings economics in our VBC arrangements to improve on a per patient basis as we manage towards lower total cost of care for our Attributed Lives and move towards higher risk VBC arrangements over time. Care Margin increased 9.7% for the three months ended March 31, 2021 when compared to the same period in 2020 due to organic growth of our medical practice business. In addition to our financial results determined in accordance with GAAP, we believe Care Margin, a non-GAAP measure, is useful in evaluating our operating performance. We use Care Margin to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Care Margin is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance. The following table provides a reconciliation of operating income, the most closely comparable GAAP financial measure, to Care Margin. For the Three Months Ended March 31, (unaudited and amounts in thousands) 2021 2020 Operating income $ 7,907 $ 6,496 Depreciation and amortization 445 338 General and administrative 13,996 10,989 Sales and marketing 3,184 2,452 Cost of platform 26,962 27,561 Care margin $ 52,494 $ 47,836 21 Table of Contents Platform Contribution We define Platform Contribution as total revenue less the sum of (i) physician and practice expense and (ii) cost of platform. We consider platform contribution to be an important measure to monitor our performance, specific to pricing of our services, direct costs of delivering care, and cost of our platform and associated services. As a provider spends a longer time on the Privia Platform, we expect the Platform Contribution from that provider to increase both in terms of absolute dollars as well as a percent of Care Margin. We expect that this increase will be driven by improving per provider revenue economics over time as well as our ability to generate operating leverage on our in-market infrastructure costs. Platform Contribution increased 25.9% for the three months ended March 31, 2021 when compared to the same period in 2020 due to organic growth of our medical practice business. Platform Contribution Margin We define Platform Contribution as total revenue less the sum of (i) physician and practice expense and (ii) cost of platform calculated as a percentage of Care Margin. We consider Platform Contribution Margin to be an important measure to monitor our performance, specific to pricing of our services, direct costs of delivering care, and cost of our platform and associated services. As a provider spends a longer time on the Privia Platform, we expect the Platform Contribution from that provider to increase both in terms of absolute dollars as well as a percent of Care Margin. We expect that this increase will be driven by improving per provider revenue economics over time as well as our ability to generate operating leverage on our in-market infrastructure costs. Platform Contribution Margin was 48.6% for three months ended March 31, 2021 an increase from 42.4% during the same period in 2020 as we continue to make strategic investments to provide better service to both our patients and physicians at a pace slower than the increase in revenue. In addition to our financial results determined in accordance with GAAP, we believe platform contribution, a non-GAAP measure, is useful in evaluating our operating performance. We use Platform Contribution to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Platform Contribution is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance. The following table provides a reconciliation of operating income, the most closely comparable GAAP financial measure, to platform contribution: For the Three Months Ended March 31, (unaudited and amounts in thousands) 2021 2020 Operating income $ 7,907 $ 6,496 Depreciation and amortization expense 445 338 General and administrative 13,996 10,989 Sales and marketing 3,184 2,452 Platform contribution $ 25,532 $ 20,275 Adjusted EBITDA We define Adjusted EBITDA as net income (loss) excluding interest income, interest expense, minority interest expense / income, stock-based compensation, severance, other one time or non-recurring expenses and the provision for income taxes. We include Adjusted EBITDA because it is an important measure on which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA has limitations as an analytical tool including: (i) Adjusted EBITDA does not include the dilution that results from stock-based compensation or any cash outflows included in stock-based compensation, including from our purchases of shares of outstanding common stock, and (ii) Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments. Adjusted EBITDA increased 41.0% for the three months ended March 31, 2021 when compared to the same period in 2020 due to organic growth of our medical practice business. Adjusted EBITDA Margin We define Adjusted EBITDA Margin as net income (loss) excluding interest income, interest expense, minority interest expense/income, stock-based compensation, severance, other one time or non-recurring expenses and the provision for income taxes calculated as a percentage of Care Margin. We included Adjusted EBITDA Margin because it is an important measure on which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA Margin to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA Margin was 18.9% for three months ended March 31, 2021 an increase from 14.7% for the same period in 2020 due to of organic growth of our medical practice business. 22 Table of Contents In addition to our financial results determined in accordance with GAAP, we believe Adjusted EBITDA Margin, a non-GAAP measure, is useful in evaluating our operating performance. We believe that Adjusted EBITDA, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance. The following table provides a reconciliation of net income (loss) attributable to Privia Health Group, Inc. and subsidiaries, the most closely comparable GAAP financial measure, to Adjusted EBITDA: For the Three Months Ended March 31, (unaudited and amounts in thousands) 2021 2020 Net income $ 5,398 $ 5,414 Net income (loss) attributable to non-controlling interests 218 (85) Provision for income taxes 2,000 700 Interest expense 291 467 Depreciation and amortization 445 338 Stock-based compensation 101 121 Other expenses (1) 1,494 100 Adjusted EBITDA $ 9,947 $ 7,055 (1) Other expenses include certain non-cash or non-recurring costs. Components of Results of Operations Revenue Our revenue is earned in three main categories: FFS revenue, VBC revenue and other revenue. Our FFS-patient care revenue is generated from providing healthcare services to patients. We receive payments pursuant to contracts with the U.S. federal government and large and small payer organizations that are multi-year in nature, typically ranging from three to five years. We also receive payments from patients that may be financially responsible for a portion or all of the service in the form of co-pays, coinsurance or deductibles. Our FFS-administrative services business provides administration and management services to Non-Owned Medical Groups. The Company’s MSAs with Non-Owned Medical Groups range from 5-20 years in duration and outline the terms and conditions of the administration and management services to be provided, which includes RCM services such as billings and collections, as well as other services, including, but not limited to, payer contracting, information technology services and accounting and treasury services. In certain MSAs, the Company is paid administrative fees equal to the cost of supplying certain services as outlined in the MSAs, and if applicable, a margin is added to the cost of certain services. Other MSAs are based on a fixed percentage of net collections. VBC revenue is earned through our clinically integrated network and accountable care organizations which bring together independent physician practices to focus on sharing data, improving care coordination, and collaborating on initiatives to improve outcomes and lower healthcare spending. The Company has contracts with the U.S. federal government and large payer organizations that are multi-year in nature typically ranging from three to five years and is paid as follows: (1) care management fees on a PMPM basis and (2) incentive amounts typically earned on a shared savings basis. The Other revenue is derived from leveraging our existing base of providers and patients to deliver value-oriented services such as concierge services, virtual visits, virtual scribes and coding, clinical trials, behavioral health management, and partnerships with self-insured employers to offer direct primary care to their employees. 23 Table of Contents Operating Expenses Physician and practice expenses Physician payments are set payments made to physicians associated with Owned Medical Groups. These payments are set and adjusted as necessary, pursuant to the Owned Medical Groups’ Board of Directors’ approved guidelines with variances specifically approved by the Owned Medical Groups’ Board of Directors. Practice related payments are used to cover an Affiliated Practice’s staff salary and benefits, medical supplies, rent and other occupancy costs, insurance and office supplies. Affiliated Practices are not owned by the Company and the Company bears no responsibility for any losses incurred by Affiliated Practices. Affiliated Practices are paid a variable amount based on collections and the services provided. Cost of platform Third-party EMR and practice management software expenses are paid on a percentage of revenue basis, while we pay most of the costs of our platform on a variable basis related to the number of implemented physicians we service. Software development costs that do not meet capitalization criteria are expensed as incurred. As we continue to grow, we expect the cost of platform to continue to grow at a rate slower than the revenue growth rate. Sales and marketing Sales and marketing expenses consist of employee-related expenses, including salaries, commissions, and employee benefits costs, for all of our employees engaged in marketing, sales, community outreach, and sales support. In addition, sales and marketing expenses also include central and community-based advertising to generate greater awareness, engagement, and retention among our current and prospective patients as well as the infrastructure required to support all of our marketing efforts. General and administrative Corporate, general and administrative expenses include employee-related expenses, including salaries and related costs and stock-based compensation, technology infrastructure, occupancy costs, operations, clinical and quality support, finance, legal, human resources, and development departments. We expect our general and administrative expenses to increase over time following the closing of the IPO due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company, as well as other costs associated with continuing to grow our business. However, we anticipate general and administrative expenses to decrease as a percentage of revenue over the long term, although they may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses. Depreciation and amortization expense Depreciation and amortization expenses are primarily attributable to our capital investment and consist of fixed asset depreciation and amortization of intangibles considered to have definite lives. We do not allocate depreciation and amortization expenses to other operating expense categories. Interest Expense Interest expense consists primarily of interest payments on our outstanding borrowings under our note payable. See “Liquidity and Capital Resources—General and Note Payable.” 24 Table of Contents Results of Operations The following table sets forth our condensed consolidated statements of operations data for the three months ended March 31, 2021 and 2020. For the Three Months Ended March 31, 2021 2020 Change ($) Change (%) (in thousands) Revenue $ 213,607 $ 212,942 $ 665 0.3 % Operating expenses: Physician and practice expense 161,113 165,106 (3,993) (2.4) % Cost of platform 26,962 27,561 (599) (2.2) % Sales and marketing 3,184 2,452 732 29.9 % General and administrative 13,996 10,989 3,007 27.4 % Depreciation and amortization 445 338 107 31.7 % Total operating expenses 205,700 206,446 (746) (0.4) % Operating income 7,907 6,496 1,411 21.7 % Interest expense 291 467 (176) (37.7) % Income before provision for income taxes 7,616 6,029 1,587 26.3 % Provision for income taxes 2,000 700 1,300 185.7 % Net income 5,616 5,329 287 5.4 % Less: Net income (loss) attributable to non-controlling interests 218 (85) 303 (356.5) % Net income attributable to Privia Health Group, Inc. $ 5,398 $ 5,414 $ (16) (0.3) % Comparison of the three months ended March 31, 2021 and 2020. Revenue Revenue was $213.6 million for the three months ended March 31, 2021, a slight increase of $0.7 million or 0.3%, compared to $212.9 million for the three months ended March 31, 2020. Key drivers of this revenue growth were care management fees (PMPM), which increased $2.3 million or 37.6%, shared savings revenue, which increased $1.4 million or 8.5%, other revenue which increased $1.4 million or 161.2%, and FFS-Administrative services revenue which increased $0.9 million or 5.9%, partially offset by a decrease in FFS–patient care revenue of $5.3 million or 3.0%. Growth in FFS–administrative services revenue was due mainly to the addition of a new market for the first quarter of 2021(Tennessee) and the ramp up of the Florida market. Care management fees (PMPM) growth was due mainly to an increase in the total number of VBC contracts that include the payment of care management fees and an increase in Attributed Lives in government programs. Shared savings growth was mainly due to more Attributed Lives in government programs. The increase in other revenue was primarily due to the rise of direct to employer business. The decrease in FFS – patient care revenue was mainly attributed to visit volume declines related to certain state and local initiatives imposed as a result of COVID-19, such as social distancing guidelines partially offset by the addition of new providers. The following table presents our revenues disaggregated by source: For the Three Months Ended March 31, (Dollars in Thousands) 2021 2020 Change ($) Change (%) FFS-patient care $ 169,578 $ 174,870 $ (5,292) (3.0) % FFS-administrative services 15,411 14,555 856 5.9 % Shared savings 17,833 16,439 1,394 8.5 % Care management fees (PMPM) 8,570 6,230 2,340 37.6 % Other revenue 2,215 848 1,367 161.2 % Total Revenue $ 213,607 $ 212,942 $ 665 0.3 % 25 Table of Contents Operating Expenses For the Three Months Ended March 31, (Dollars in Thousands) 2021 2020 Change ($) Change (%) Operating Expenses: Physician and practice expense $ 161,113 $ 165,106 $ (3,993) (2.4) % Cost of platform 26,962 27,561 (599) (2.2) % Sale and marketing 3,184 2,452 732 29.9 % General and administrative 13,996 10,989 3,007 27.4 % Depreciation and amortization expense 445 338 107 31.7 % Total operating expenses $ 205,700 $ 206,446 $ (746) (0.4) % Physician and practice expenses Physician expenses were $161.1 million for the three months ended March 31, 2021, a decrease of $4.0 million, or 2.4%, compared to $165.1 million for the three months ended March 31, 2020. This decrease was driven primarily by lower FFS-patient care revenue partially offset by the growth in Implemented Providers. Cost of platform Cost of platform expenses were $27.0 million for the three months ended March 31, 2021, a slight decrease of $0.6 million, or 2.2%, compared to $27.6 million for the three months ended March 31, 2020. This decrease was driven primarily by a decrease in consulting costs of $0.3 million, and a decrease in travel of $0.2 million. Sales and marketing Sales and marketing expenses were $3.2 million for the three months ended March 31, 2021, an increase of $0.7 million, or 29.9%, compared to $2.5 million for the three months ended March 31, 2020. This increase was driven primarily by an increase in salaries and benefits of $0.9 million related to opening a new market in Tennessee. General and administrative General and administrative expense was $14.0 million for the three months ended March 31, 2021, an increase of $3.0 million, or 27.4%, compared to $11.0 million for the three months ended March 31, 2020. The increase was primarily driven by an increase in salaries and benefits of $1.4 million and an increase of $1.4 million in consulting services due to preparing to be a public company. Depreciation and amortization expense Depreciation and amortization expense was $0.4 million for the three months ended March 31, 2021, an increase of $0.1 million, or 31.7%, compared to $0.3 million for the three months ended March 31, 2020. This increase was driven primarily by an increase in the amortization of leasehold improvements related to the build out of our Physician Operated Laboratory. Interest expense Interest expense was $0.3 million for the three months ended March 31, 2021, a decrease of $0.2 million, or 37.7%, compared to $0.5 million for the three months ended March 31, 2020. The decrease was primarily driven by the repayment of a note payable to related parties in 2020. Provision for income taxes Provision for income taxes increased $1.3 million for the three months ended March 31, 2021, when compared to the same period in 2020. The expense for the three months ended March 31, 2020 is primarily related to an increase in the deferred tax liability related to the tax amortization of an indefinite live intangible with the remaining deferred tax balances fully offset with a valuation allowance. The expense for the three months ended March 31, 2021 is primarily the result of the statutory rate applied to pretax book income as there is no longer a valuation allowance offsetting the deferred tax balances. Net income (loss) attributable to non-controlling interest Net loss attributable to non-controlling interest increased $0.3 million for the three months ended March 31, 2021, when compared to the same period in 2020 primarily due to an increase in net income before non-controlling interest in these markets. 26 Table of Contents Liquidity and Capital Resources General and Note Payable To date, we have financed our operations principally through sale of our equity, payments received from various payers and through the issuance of a note payable to a third-party financial institution. As of March 31, 2021, we had cash and cash equivalents of $81.9 million. We received an additional $212.0 million of net proceeds following the closing of the Company’s IPO and Anthem private placement on May 3, 2021. Our cash and cash equivalents primarily consist of highly liquid investments in money market funds and cash. We believe that following our IPO, our cash and cash equivalents, together with cash flows from operations, will be sufficient to fund our operating and capital needs for at least the next 12 months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, and the timing and extent of spending to increase our sales and marketing activities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected. Indebtedness On December 31, 2018, the Company assumed $8.7 million in notes payable to related parties as part of a merger with a sister organization. The notes mature on dates ranging from December 2020 to December 2021 and have interest rates ranging from 1.25% to 2.93%. On October 31, 2020, $4.0 million of related party receivables was used to repay $4.0 million of the Notes payable to related parties, leaving $4.7 million of Notes payable to related parties. The Company paid interest of $0.2 million through October 31, 2020. In addition, on December 22, 2020, the remaining $4.7 million of Notes payable to related parties was forgiven and assigned to BHG Holdings, leaving no remaining Notes payable to related parties outstanding. On November 15, 2019, the Company entered into a Credit Agreement with a third-party financial institution. The debt agreement provides for up to $35.0 million in term loans that mature on November 15, 2024 with interest payable monthly at the lesser of LIBOR plus 2.0% or ABR plus 1.0% payable monthly (3.0% at March 31, 2021), plus up to an additional $10.0 million of financing in the form of a revolving loan. The Company borrowed $35.0 million in term loans on November 15, 2019. During the first year of any loans, the financing allows for early repayment of part or all of the term loans in increments of $0.5 million with a pre-payment fee of 1% of any debt prepaid. After the first year from any borrowing, the debt may be repaid without the pre-payment fee. As of March 31, 2021 and December 31, 2020, total term loans outstanding was $33.9 million and $34.1 million. On July 17, 2020, the Company increased its capacity under the revolving loan to $15.0 million. No balance is outstanding under the revolving loan as of March 31, 2021. 27 Table of Contents Cash Flows The following table presents a summary of our condensed consolidated cash flows from operating, investing and financing activities for the periods indicated. For the Three Months Ended March 31, 2021 2020 (in thousands) Condensed Consolidated Statements of Cash Flows Data: Net cash used in operating activities $ (2,476) $ (7,079) Net cash used in investing activities — (13) Net cash (used in) provided by financing activities (219) 10,000 Net increase in cash and cash equivalents $ (2,695) $ 2,908 Operating Activities Net cash used in operating activities was $2.5 million for the three months ended March 31, 2021, a decrease of $4.6 million, compared to $7.1 million for the same period in 2020. Significant changes impacting net cash used in operating activities for the three months ended March 31, 2021 compared to the same period in 2020 were as follows: • Increase of $9.7 million due to liability owed by medical practices and providers, which was an increase for the three months ended March 31, 2021 of $17.0 million compared to the same period in 2020 of $7.3 million. This change is primarily driven by the increase in Implemented Providers and additional physician and practice expenses associated with the increase in shared savings revenue. • Increase of $2.7 million related to accounts receivable, net, which was a decrease for the three months ended March 31, 2021 of $17.6 million compared to the same period in 2020 of $14.9 million, primarily driven by the increase in Implemented Providers and an increase in the receivable related to shared savings revenue. • Increase of $1.3 million related to deferred tax benefit which was an increase for the three months ended March 31, 2021 of $2.0 million compared to the same period in 2020 of $0.7 million, primarily due to the release of the valuation allowance and the tax provision for Q1 2021. • Decrease of $4.0 million related to accounts payable and accrued expenses which was an increase of for the three months ended March 31, 2021 of $10.5 million compared to the same period in 2020 of $6.5 million. This change is primarily driven by IPO related costs Investing Activities Net cash used in investing activities remained relatively consistent for three months ended March 31, 2021, and 2020. Financing Activities Net cash used in financing activities was $0.2 million for the three months ended March 31, 2021, a decrease of $10.2 million, compared to $10.0 million provided for financing activities for the same period in 2020. This decrease primarily related to the draw of $10.0 million from the Company's revolver during the first quarter of 2020 in response to COVID-19. Contractual Obligations, Commitments and Contingencies Operating Leases. The Company leases office space under various operating lease agreements. The initial terms of these leases range from 2 to 7 years and generally provide for periodic rent increases, renewal, and termination operations. Total rent expense under operating leases was $0.4 million and $0.6 million for the three months ended March 31, 2021 and 2020, respectively. Off Balance Sheet Obligations. We do not have any off-balance sheet arrangements as of March 31, 2021. Commitments and Contingencies. See Note 11 “Commitments and Contingencies” for further discussion on our commitments and contingencies. 28 Table of Contents Critical Accounting Policies and Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure. On an on-going basis we evaluate significant estimates and assumptions, including, but not limited to, revenue recognition, share-based compensation, estimated useful lives of assets, intangible assets subject to amortization, and the computation of income taxes. Future events and their effects cannot be predicted with certainty; accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as the Company’s operating environment changes. Management evaluates and updates assumptions and estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to the critical accounting policies reported in the Prospectus that affect our significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements other than those outlined in Note 1, "Organization and Summary of Significant Accounting Policies."