P3 Health Partners Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2021 Q3,” but the filing is for the quarter ended March 31, 2022 (Q1 2022). It was signed October 20, 2022. The comparative quarter ended March 31, 2021 is marked restated. Because the December 2021 business combination created a new accounting basis, the 2022 successor and 2021 predecessor periods are not fully comparable.
Business context and reporting period
P3 is a physician-led population health management company, principally serving Medicare Advantage members under at-risk capitation contracts. It generally receives a fixed monthly payment and bears responsibility for covered members’ medical costs. At March 31, 2022, it reported approximately 100,000 at-risk members, 2,200 affiliate primary care physicians, 20 health-plan agreements and operations in 18 counties across five states.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021, restated |
|---|---|---|
| Operating revenue | $273.5 million | $151.3 million |
| Operating loss | $52.2 million | $13.0 million |
| Net loss | $60.8 million | $24.7 million |
| Adjusted EBITDA loss | $18.9 million | $10.2 million |
| Cash used in operating activities | $27.8 million | $13.1 million |
- Capitated revenue was $269.7 million, about 98.6% of total revenue, up 81% year over year. Management attributed growth mainly to 77% more at-risk members and a 2% increase in capitation rates.
- Medical expenses rose 81% to $265.8 million, broadly tracking membership growth; management cited a 1% increase in cost per patient. Operating loss was about 19% of revenue, versus about 9% in the prior-year quarter.
- Corporate, general and administrative expense increased 166% to $38.6 million, principally reflecting higher stock compensation, public-company costs, salaries and acquired operations. Amortization of acquired intangible assets was $21.2 million.
- Cash and restricted cash totaled $110.7 million at quarter-end, down $30.1 million from year-end 2021. Current assets were $213.4 million and current liabilities $234.4 million. The company reported $80.0 million of long-term debt and $2.4 million of short-term debt; the term loan bears 12% annual interest, with the company electing to pay 8% in cash and add 4% to principal.
- Claims payable increased to $137.4 million from $102.0 million at year-end. Health-plan receivables increased to $94.6 million from $50.3 million, contributing to operating cash use.
- The four largest health plans represented approximately 67.8% of quarterly revenue. This concentration and receivables collection are relevant to cash-flow risk.
Material changes and unusual items
- Revenue more than grew in line with medical expenses, but losses and operating cash use increased. The prior-year comparison is affected by the acquisition accounting basis and restated predecessor statements.
- The 2021 financial statements were restated for matters including allocation of losses to controlling interests, preferred-return accounting, classification of Class A units, and revenue and medical-expense adjustments. The company said the restatement did not change cash, revenue or total cash flows overall; the comparative quarter is presented as restated.
- Management disclosed that a $10.6 million additional payment to a health plan was probable following renegotiation of a service agreement. It had been reflected in the 2021 Form 10-K.
- After quarter-end, the company stated that it would record an $851.5 million goodwill impairment as of June 30, 2022, due to a share-price decline; no impairment was recorded at March 31.
- After quarter-end, the board approved $10.0 million in aggregate 2022 transaction-bonus payments to the CEO and Chief Medical Officer, to be expensed in 2022.
Outlook, risks and controls
- Going concern: Management said existing cash resources were not sufficient to support planned operations for at least 12 months from issuance and disclosed substantial doubt about the company’s ability to continue as a going concern. It expects continuing operating losses and negative operating cash flows and may seek additional financing or reduce or delay growth plans. Financing availability and terms are uncertain.
- Debt and listing: The $65.0 million term-loan commitment ended February 28, 2022. The lender had waived a covenant related to a going-concern audit qualification and extended the 2021 audit filing deadline. Nasdaq initiated delisting proceedings following late filings; the company appealed and a hearing was scheduled for November 3, 2022. The filing states the appeal’s outcome was uncertain.
- Financial controls: Disclosure controls were deemed ineffective due to material weaknesses, including deficiencies in financial-reporting expertise, IT access and segregation of duties, management review, claims estimates, and accounting for complex transactions. Remediation was underway, but the company could not assure that it would be successful.
- Operating and regulatory risks: Risks include medical-cost and claims-estimate variability, health-plan contract renewal and reimbursement changes, healthcare regulation, COVID-19 effects and the ability to manage growth. Management reported approximately $83 million of direct COVID-19 claims costs from March 2020 through March 2022 and said the full future impact was uncertain.
- No quantified earnings or revenue guidance is provided. Management expects losses and negative cash flows to continue as it invests in growth.
Most important facts for investors to verify
- Confirm the actual reporting period: this is a Q1 2022 filing, not a Q3 2021 report, and review the basis differences and restatement before comparing periods.
- Assess liquidity runway, cash burn, financing plans and any subsequent funding or cost-reduction actions, given the going-concern disclosure.
- Review claims payable and medical-cost development, health-plan receivable collections, and performance of the at-risk contracts.
- Verify the status and accounting impact of the announced $851.5 million goodwill impairment and $10.0 million transaction bonuses.
- Check Nasdaq listing status, debt-covenant compliance, and progress in remediating the disclosed material weaknesses.
- Evaluate payer concentration and the effects of the $10.6 million health-plan agreement matter.