P3 Health Partners Inc. — 2022 Form 10-K
Period clarification: The supplied filing is for the fiscal year ended December 31, 2022, filed March 31, 2023; it is not a 2021 Q4 filing. P3’s December 2021 business combination created successor and predecessor accounting periods. The filing combines those 2021 periods for certain comparisons, but cautions that results may not be fully comparable.
Business context and reporting period
P3 is a physician-led population health management company focused principally on Medicare Advantage. It receives mostly per-member-per-month capitated payments and takes financial responsibility for members’ covered medical costs. At year-end 2022, it operated in 15 county markets across five states, with approximately 2,800 affiliated primary care physicians and 100,400 at-risk members. P3 Inc. directly owned approximately 17.1% of P3 LLC; substantially all operations and assets are held by P3 LLC.
Financial performance and liquidity
| Metric | FY 2022 | Prior-period comparison |
|---|---|---|
| Total operating revenue | $1,049.5 million | $637.4 million combined 2021; approximately 65% growth |
| Capitated revenue | $1,034.8 million | $625.0 million combined 2021; 66% growth reported |
| Operating loss | $1,560.9 million | $187.9 million combined 2021 |
| Net loss | $1,561.6 million | $204.3 million combined 2021 |
| Adjusted EBITDA loss | $127.9 million | $95.5 million combined 2021 |
| Medical margin | $62.1 million | Combined 2021 value is not directly comparable; predecessor and successor periods reported separately |
| Network contribution | $(7.8) million | Combined 2021 value is not directly comparable; predecessor and successor periods reported separately |
| Cash used in operating activities | $126.0 million | $66.5 million combined 2021 |
Nearly 99% of 2022 revenue was recurring capitation. Membership increased 50% year over year; management attributed revenue growth to membership expansion, more health plan contracts (24 versus 17), and higher average acuity-related rates. Medical expense was $1,057.2 million, approximately 101% of revenue; the company reported that higher costs primarily reflected membership growth.
The $1,315.0 million goodwill impairment drove most of the reported 2022 loss and left goodwill at zero. The impairment was non-cash; it reflected lower share price and estimated company value, along with operating and market factors. Intangible assets remained $751.1 million. Corporate, general and administrative expense rose 34% to $157.3 million, including higher public-company, restatement-related, and personnel costs. A $11.5 million premium-deficiency reserve benefit partially offset expenses.
Cash and restricted cash totaled $18.5 million at December 31, 2022, down from $140.8 million a year earlier. Current assets were $100.7 million and current liabilities $241.7 million. Long-term debt was $95.0 million gross, comprising the $65.0 million term loan, $15.0 million repurchase note, and $15.0 million drawn under the VGS note. The term loan bears 12% interest; the VGS note bears 14%. The term loan’s 2023 minimum-revenue covenant is $525 million. Management and the auditor identified substantial doubt about P3’s ability to continue as a going concern within one year after issuance of the filing.
Material changes versus the prior comparable period
- At-risk membership rose from approximately 67,000 to 100,400, and affiliate PCPs increased from 2,100 to 2,800.
- Revenue grew substantially, but cash used in operations also increased, and Adjusted EBITDA loss widened.
- The 2022 $1.315 billion goodwill impairment sharply reduced total assets, from $2.364 billion to $876.6 million, and contributed to a net loss far greater than in 2021.
- Cash fell by approximately $122.4 million during 2022. The company drew $15 million on the VGS financing in December.
- Comparison caveat: the December 2021 business combination introduced a new accounting basis, so 2022 and 2021 reported periods are not fully comparable.
Outlook, risks, contingencies and unusual items
- Going concern and funding: Management said existing resources were insufficient for planned operations for at least 12 months from the filing date. It was exploring debt, other non-dilutive financing and equity; no assurance was given that funding would be available on acceptable terms. Without funding, P3 may need to curtail planned activities.
- Subsequent financing: Between January and March 2023, P3 borrowed another $12.9 million under the VGS note. On March 30, 2023, it agreed to a private placement for approximately $89.5 million gross proceeds, involving shares and warrants, expected to close April 6, subject to conditions. The filing date precedes the expected closing.
- Debt covenants: P3 was out of compliance with a covenant requiring audited statements without a going-concern qualification; lenders waived that covenant for the 2022 audit. P3 reported compliance with other covenants at year-end, but future compliance is uncertain.
- Medical-cost and payor exposure: P3 bears medical-cost risk under capitated contracts, depends on Medicare reimbursement and risk-adjustment documentation, and relies on a concentrated group of health plans. Four plans represented 67% of 2022 capitated revenue. A health-plan contract discrepancy resulted in a recorded $10.6 million probable liability; a settlement was recorded at $5.0 million in 2022.
- Controls and reporting: Material weaknesses in internal control over financial reporting remained at December 31, 2022, and management concluded disclosure controls were ineffective. The weaknesses included financial close, IT access and segregation of duties, claims estimates, and complex accounting. Remediation was in progress. Earlier Nasdaq filing deficiencies were cured in October 2022.
- Legal matter: In the Hudson dispute concerning the 2021 business combination, certain claims were dismissed, but contract, fiduciary-duty and tortious-interference claims survived in part and were in discovery. P3 said it did not expect ordinary-course proceedings to materially affect its financial position, net loss or cash flows.
- Other risks: The company cited extensive healthcare regulation, corporate-practice-of-medicine and fee-splitting restrictions, audits and risk-adjustment scrutiny, cybersecurity and privacy risks, competition, employee retention, and potential dilution. COVID-19 had not materially affected revenue in 2021 or 2022, but management reported approximately $95.5 million of cumulative COVID-related medical claims costs through year-end 2022 and expected additional costs.
Most important facts an investor should verify
- Whether the subsequent private placement closed, net proceeds received, and resulting share and warrant dilution.
- Current cash, operating cash burn, liquidity runway, and progress toward a sustainable funding plan.
- Compliance with debt covenants, availability and terms of remaining VGS borrowing capacity, and debt service obligations.
- Membership growth, medical expense trends, and whether medical margin and network contribution improve without relying on reserve releases or other adjustments.
- Resolution and payment of the $5.0 million health-plan settlement and any further Medicare risk-adjustment or payer audit adjustments.
- Progress in remediating material weaknesses and the status and potential financial impact of the Hudson litigation.