P3 Health Partners Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023, compared with the same 2022 periods. The request metadata says “2022 Q2,” but the supplied filing is for Q2 2023. P3 is a physician-led population health company that primarily receives capitation payments to manage care for Medicare Advantage members. At June 30, it served approximately 104,100 at-risk members through a network of about 2,600 primary care physicians in 18 markets across five states.
Financial highlights
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $329.1 million | $269.5 million | $631.2 million | $543.0 million |
| Operating loss | $21.0 million | $912.2 million | $69.9 million | $964.4 million |
| Net loss | $27.6 million | $903.1 million | $80.0 million | $963.9 million |
| Net loss attributable to controlling interest | $9.8 million | $154.4 million | $19.0 million | $164.9 million |
| Adjusted EBITDA loss | $0.2 million income | $28.7 million loss | $18.9 million loss | $47.6 million loss |
| Operating cash flow | Not provided by quarter in the filing text | $52.6 million used | $73.1 million used |
- Revenue and margins: Q2 revenue rose 22%; six-month revenue rose 16%. Capitated revenue was about 99% of revenue. Management attributed the increase mainly to higher capitation rates, reflecting member acuity, and 2% growth in at-risk membership. Q2 gross profit was $26.8 million, versus $2.0 million; six-month gross profit was $43.3 million, versus $9.7 million. Q2 gross margin was approximately 8.2%, compared with 0.7%; six-month gross margin was approximately 6.9%, versus 1.8%. Medical margin, a non-GAAP measure, was $50.5 million for Q2 and $89.7 million for six months.
- Expenses: Q2 medical expense increased 13% to $302.3 million, below revenue growth. Six-month medical expense increased 10% to $587.8 million. Corporate, general and administrative expense fell 34% in Q2 and 19% for the six-month period. The 2022 comparison included an $851.5 million goodwill impairment; there was no comparable impairment in 2023. Excluding that unusual charge, the comparison still shows continuing operating and net losses.
- Liquidity and cash flow: Cash was $59.9 million and restricted cash $5.6 million at June 30, 2023. Six-month operating cash use was $52.6 million; investing cash use was $1.7 million; financing provided $101.3 million, principally from an equity private placement and additional debt. The filing states that existing resources are not sufficient to support planned operations for at least one year from issuance and that substantial doubt exists about the company’s ability to continue as a going concern.
- Debt and liabilities: Long-term debt, net, was $108.2 million, up from $94.4 million at year-end 2022; gross debt was $109.1 million. Debt carries stated rates of 11%, 12% and 14%, with maturities in 2025–2026. The company reported covenant compliance at June 30 but cautioned that future compliance or waivers are not assured. Current claims payable were $158.5 million and the premium deficiency reserve was $29.5 million.
- Capital and dilution: The April 2023 private placement generated approximately $86.6 million net of offering costs, issuing 69.2 million Class A shares plus warrants, including pre-funded warrants. As of June 30, redeemable non-controlling interest was $667.2 million and stockholders’ deficit was $136.2 million. The filing reports substantial potential warrant and other share dilution; see the filing for instrument counts and terms.
Changes, outlook and risks
- At-risk membership increased 2% year over year to 104,100; the physician network remained at approximately 2,600. Revenue growth also reflected a 19% increase in Q2 capitation rates and 14% for the six-month period, as described by management.
- Medical expense increases were attributed partly to participation in the ACO REACH model beginning January 1, 2023, and a new health plan contract effective April 1, partly offset by termination or conversion of certain contracts from at-risk to upside-only risk. The six-month premium deficiency reserve was a $3.1 million expense, versus a $2.8 million benefit in 2022.
- No formal financial guidance is provided. Management expects operating losses and negative operating cash flows to continue as it grows, and says additional capital may be required. If financing is unavailable, the company may need to curtail planned activities. Management’s ability to manage medical costs, growth and capital needs remains important.
- Key exposures include dependence on Medicare Advantage payors and reimbursement, concentration among health plan customers (four customers represented 62% of revenue), medical-cost and claims-estimation risk, debt covenants and financing availability, and potential impairment of substantial intangible assets. A health-plan contract settlement left $4.4 million payable at June 30. A Delaware action involving surviving claims related to the business combination was scheduled for trial in July 2024.
- Disclosure controls were deemed ineffective at June 30 because material weaknesses in internal control over financial reporting remained, including weaknesses in risk assessment, IT controls, segregation of duties, management review, and claims estimation. Remediation was underway, but completion or effectiveness was not assured. The filing also describes an April 2023 business-email-compromise fraud attempt that did not cause material losses and reports a $1.0 million cybersecurity incident loss.
Investor verification priorities
- Confirm funding runway and any subsequent financing or cost-reduction actions, given the explicit going-concern uncertainty and projected cash needs.
- Review medical-cost trends, claims payable and reserve adequacy, including how ACO REACH and contract changes affect margins.
- Assess debt service, covenant headroom, maturity terms and restrictions, especially on the 12% term loan and 14% unsecured note.
- Quantify potential dilution from the private-placement warrants, pre-funded warrants and other equity awards; compare with current shares outstanding.
- Track remediation of material weaknesses and progress and outcomes in the Hudson litigation scheduled for trial in July 2024.