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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
or
| | | | | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-40033
P3 Health Partners Inc.
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware | 85-2992794 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2370 Corporate Circle Suite 300 Henderson, Nevada | 89074 |
(Address of principal executive offices) | (Zip Code) |
(702) 910-3950
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Class A common stock, par value $0.0001 per share | | PIII
| | The Nasdaq Stock Market LLC
|
Warrants, each whole warrant exercisable for one share of Class A common stock at an exercise price of $11.50 | | PIIIW | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | o | Accelerated filer | x | Non-accelerated filer | o | Smaller reporting company | x | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 1, 2024, the registrant had 162,863,298 shares of Class A common stock, par value $0.0001 and 195,956,984 shares of Class V common stock, par value $0.0001 outstanding.
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2024 (the “Form 10-Q”) contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our future results of operations and financial position, business and growth strategy, prospective products, research and development costs, future revenue, market opportunity, timing and likelihood of success, plans and objectives of management for future operations, our ability to raise additional capital and continue as a going concern, the anticipated closing of the asset sale discussed herein, future results of anticipated products and prospects, and our ability to regain compliance with the Nasdaq listing rules, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “would” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words.
The forward-looking statements in this Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to a number of known and unknown risks, uncertainties and assumptions, and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, without limitation, the following:
•Our ability to continue as a going concern.
•Our need to raise additional capital to fund our existing operations or develop and commercialize new services or expand our operations.
•We have a history of net losses. We expect to continue to incur losses for the foreseeable future and we may never achieve or maintain profitability.
•We may not be able to maintain compliance with our debt covenants in the future, which could result in an event of default.
•Our relatively limited operating history makes it difficult to evaluate our future prospects and the risks and challenges we may encounter.
•A significant portion of our assets consists of other intangible assets, the value of which may be reduced if we determine that those assets are impaired.
•We rely on our management team and key employees and our business, financial condition, cash flows and results of operations could be harmed if we are unable to retain qualified personnel.
•Our growth depends in part on our ability to identify and develop successful new geographies, physician partners, payors and patients. If we are not able to successfully execute upon our growth strategies, there may be material adverse effect on our business, financial condition, cash flows and results of operations.
•If growth in the number of patients and physician partners on our platform decreases, or the number of services that we are able to provide to physician partners and members decreases, due to legal, economic or business developments, our business, financial condition and results of operations will be harmed.
•We primarily depend on reimbursement by third-party payors, as well as payments by individuals, which could lead to delays, uncertainties and disagreements regarding the timing and process of reimbursement, including any changes or reductions in Medicare reimbursement rates or rules.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 1
•The termination or non-renewal of the Medicare Advantage (“MA”) contracts held by the health plans with which we contract, or the termination or nonrenewal of our contracts with those plans, could have a material adverse effect on our revenue and our operations.
•We are dependent on our affiliated professional entities and other physician partners and other providers to effectively manage the quality and cost of care and perform obligations under payor contracts.
•Reductions in the quality ratings of the health plans we serve could have a material adverse effect on our business, results of operations, financial condition and cash flows.
•Developments affecting spending by the healthcare industry could adversely affect our business.
•Our business and operations would suffer in the event of information technology system failures, security breaches, cyberattacks or other deficiencies in cybersecurity.
•Actual or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements could adversely affect our business, financial condition and results of operations.
•We conduct business in a heavily regulated industry and if we fail to adhere to all of the complex government laws and regulations that apply to our business, we could incur fines or penalties or be required to make changes to our operations or experience adverse publicity, any or all of which could have a material adverse effect on our business, results of operations, financial condition, cash flows, and reputation.
•If our arrangements with our affiliated professional entities and other physician partners are found to constitute the improper rendering of medical services or fee splitting under applicable state laws, our business, financial condition and our ability to operate in those states could be adversely impacted.
•We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation.
•The impact on us of recent healthcare legislation and other changes in the healthcare industry and in healthcare spending is currently unknown, but may adversely affect our business, financial condition and results of operations.
•Our only significant asset is the ownership of a minority of the economic interest in P3 LLC, and such ownership may not be sufficient to generate the funds necessary to meet our financial obligations or to pay any dividends on our Class A common stock.
•We will be required to make payments under the TRA (defined herein) for certain tax benefits we may claim, and the amounts of such payments could be significant.
•Foresight Sponsor Group, LLC and the Chicago Pacific Founders funds, and their respective affiliates and representatives, non-employee directors and other non-employee stockholders are not limited in their ability to compete with us, and the corporate opportunity provisions in our certificate of incorporation could enable such persons to benefit from corporate opportunities that might otherwise be available to us, which presents potential conflicts of interest.
•The impact of the material weaknesses we have identified in our internal control over financial reporting and our ability to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act.
•Our ability to maintain the listing of our securities on The Nasdaq Stock Market, LLC.
•The factors described under Part I, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 2
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed as exhibits hereto completely and with the understanding that our actual future results, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Unless the context otherwise requires, “we,” “us,” “our,” “P3” and the “Company” refer to P3 Health Partners Inc. and its subsidiaries. “P3 LLC” refers to the surviving entity after the consummation of a series of business combinations in December 2021 with Foresight Acquisition Corp. (the “Business Combinations”), which was renamed P3 Health Group, LLC.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 3
PART I—FINANCIAL INFORMATION.
Item 1. Financial Statements.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 4
P3 HEALTH PARTNERS INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash | $ | 62,962 | | | $ | 36,320 | |
Restricted cash | 5,136 | | | 4,614 | |
Health plan receivable, net of allowance for credit losses of $150 | 123,325 | | | 118,497 | |
Clinic fees, insurance and other receivable | 2,495 | | | 2,973 | |
| | | |
Prepaid expenses and other current assets | 11,032 | | | 3,613 | |
Assets held for sale | 10,123 | | | — | |
TOTAL CURRENT ASSETS | 215,073 | | | 166,017 | |
| | | |
Property and equipment, net | 6,315 | | | 8,686 | |
Intangible assets, net | 594,865 | | | 666,733 | |
Other long-term assets | 17,080 | | | 19,531 | |
| | | |
TOTAL ASSETS (1) | $ | 833,333 | | | $ | 860,967 | |
LIABILITIES, MEZZANINE EQUITY, AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 13,468 | | | $ | 8,663 | |
Accrued expenses and other current liabilities | 49,205 | | | 36,884 | |
Accrued payroll | 4,409 | | | 3,506 | |
Health plan settlements payable | 41,169 | | | 34,992 | |
Claims payable | 230,736 | | | 178,009 | |
Premium deficiency reserve | 29,441 | | | 13,670 | |
Accrued interest | 35,929 | | | 23,648 | |
| | | |
Short-term debt | 208 | | | — | |
Liabilities held for sale | 753 | | | — | |
TOTAL CURRENT LIABILITIES | 405,318 | | | 299,372 | |
| | | |
Operating lease liability | 11,158 | | | 13,622 | |
Warrant liabilities | 19,718 | | | 1,085 | |
Contingent consideration | — | | | 4,907 | |
Long-term debt, net | 133,228 | | | 108,319 | |
| | | |
TOTAL LIABILITIES (1) | 569,422 | | | 427,305 | |
COMMITMENTS AND CONTINGENCIES | | | |
MEZZANINE EQUITY: | | | |
Redeemable non-controlling interest | 143,397 | | | 291,532 | |
STOCKHOLDERS’ EQUITY: | | | |
Class A common stock, $0.0001 par value; 800,000 shares authorized; 161,972 and 116,588 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | 16 | | | 12 | |
Class V common stock, $0.0001 par value; 205,000 shares authorized; 195,957 and 196,569 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | 20 | | | 20 | |
Additional paid in capital | 565,054 | | | 509,442 | |
Accumulated deficit | (444,576) | | | (367,344) | |
TOTAL STOCKHOLDERS’ EQUITY | 120,514 | | | 142,130 | |
TOTAL LIABILITIES, MEZZANINE EQUITY, AND STOCKHOLDERS’ EQUITY | $ | 833,333 | | | $ | 860,967 | |
_____________________________________________
(1)The Company’s condensed consolidated balance sheets include the assets and liabilities of its consolidated variable interest entities (“VIEs”). As discussed in Note 13 “Variable Interest Entities,” P3 LLC is itself a VIE. P3 LLC represents substantially all the assets and liabilities of the Company. As a result, the language and amounts below refer only to VIEs held at the P3 LLC level. The condensed consolidated balance sheets include total assets that can be used only to settle obligations of P3 LLC’s consolidated VIEs totaling $13.0 million and $8.6 million as of September 30, 2024 and December 31, 2023, respectively, and total liabilities of P3 LLC’s consolidated VIEs for which creditors do not have recourse to the general credit of the Company totaled $15.8 million and $13.6 million as of September 30, 2024 and December 31, 2023, respectively. These VIE assets and liabilities do not include $46.9 million and $44.2 million of net amounts due to affiliates as of September 30, 2024 and December 31, 2023, respectively, as these are eliminated in consolidation and not presented within the condensed consolidated balance sheets.
See accompanying notes to condensed consolidated financial statements.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 5
P3 HEALTH PARTNERS INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
OPERATING REVENUE: | | | | | | | |
Capitated revenue | $ | 357,706 | | | $ | 285,153 | | | $ | 1,116,146 | | | $ | 909,473 | |
Other patient service revenue | 4,418 | | | 3,198 | | | 13,623 | | | 10,041 | |
TOTAL OPERATING REVENUE | 362,124 | | | 288,351 | | | 1,129,769 | | | 919,514 | |
OPERATING EXPENSE: | | | | | | | |
Medical expense | 401,920 | | | 279,220 | | | 1,149,148 | | | 867,061 | |
Premium deficiency reserve | 18,168 | | | (12,489) | | | 15,771 | | | (9,361) | |
Corporate, general and administrative expense | 27,219 | | | 33,065 | | | 81,230 | | | 97,931 | |
Sales and marketing expense | 134 | | | 654 | | | 870 | | | 2,512 | |
Depreciation and amortization | 21,673 | | | 21,721 | | | 64,905 | | | 65,041 | |
TOTAL OPERATING EXPENSE | 469,114 | | | 322,171 | | | 1,311,924 | | | 1,023,184 | |
OPERATING LOSS | (106,990) | | | (33,820) | | | (182,155) | | | (103,670) | |
OTHER INCOME (EXPENSE): | | | | | | | |
Interest expense, net | (5,647) | | | (4,002) | | | (15,339) | | | (11,939) | |
Mark-to-market of stock warrants | 5,737 | | | 755 | | | 14,626 | | | (327) | |
Other | 445 | | | 190 | | | 1,073 | | | (455) | |
TOTAL OTHER INCOME (EXPENSE) | 535 | | | (3,057) | | | 360 | | | (12,721) | |
LOSS BEFORE INCOME TAXES | (106,455) | | | (36,877) | | | (181,795) | | | (116,391) | |
INCOME TAX BENEFIT (PROVISION) | 3,605 | | | (412) | | | 565 | | | (928) | |
NET LOSS | (102,850) | | | (37,289) | | | (181,230) | | | (117,319) | |
LESS: NET LOSS ATTRIBUTABLE TO REDEEMABLE NON-CONTROLLING INTEREST | (56,338) | | | (23,993) | | | (103,998) | | | (85,008) | |
NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST | $ | (46,512) | | | $ | (13,296) | | | $ | (77,232) | | | $ | (32,311) | |
| | | | | | | |
NET LOSS PER SHARE (Note 9): | | | | | | | |
Basic | $ | (0.29) | | | $ | (0.12) | | | $ | (0.55) | | | $ | (0.37) | |
Diluted | $ | (0.31) | | | $ | (0.12) | | | $ | (0.64) | | | $ | (0.41) | |
| | | | | | | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 9): | | | | | | | |
Basic | 161,890 | | | 114,198 | | | 139,292 | | | 88,010 | |
Diluted | 164,701 | | | 312,679 | | | 141,723 | | | 288,379 | |
See accompanying notes to condensed consolidated financial statements.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 6
P3 HEALTH PARTNERS INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Non-controlling Interest | | | Class A Common Stock | | Class V Common Stock | | Additional Paid in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| | | Shares | | Amount | | Shares | | Amount | | | |
STOCKHOLDERS’ EQUITY, December 31, 2022 | $ | 516,805 | | | | 41,579 | | $ | 4 | | | 201,592 | | $ | 20 | | | $ | 315,375 | | | $ | (309,545) | | | $ | 5,854 | |
Cumulative adjustment due to adoption of new credit loss standard | (124) | | | | — | | | — | | | — | | | — | | | — | | | (26) | | | (26) | |
Vesting of Class V common stock awards | — | | | | — | | | — | | | 275 | | | — | | | — | | | — | | | — | |
Equity-based compensation | 291 | | | | — | | | — | | | — | | | — | | | 686 | | | — | | | 686 | |
Net loss | (43,249) | | | | — | | | — | | | — | | | — | | | — | | | (9,199) | | | (9,199) | |
STOCKHOLDERS’ EQUITY, March 31, 2023 | 473,723 | | | | 41,579 | | | 4 | | | 201,867 | | | 20 | | | 316,061 | | | (318,770) | | | (2,685) | |
| | | | | | | | | | | | | | | | |
Exchanges of redeemable non-controlling interest for Class A common stock | — | | | | 3,362 | | | — | | | (3,362) | | | — | | | — | | | — | | | — | |
Equity-based compensation | 291 | | | | — | | | — | | | — | | | — | | | 740 | | | — | | | 740 | |
Fair value adjustment to redeemable non-controlling interest | 330,617 | | | | — | | | — | | | — | | | — | | | (330,617) | | | — | | | (330,617) | |
Remeasurement adjustment to redeemable non-controlling interest resulting from ownership changes | (119,630) | | | | — | | | — | | | — | | | — | | | 119,630 | | | — | | | 119,630 | |
Private placement, net of offering costs | — | | | | 69,157 | | | 7 | | | — | | | — | | | 86,575 | | | — | | | 86,582 | |
Net loss | (17,766) | | | | — | | | — | | | — | | | — | | | — | | | (9,816) | | | (9,816) | |
STOCKHOLDERS’ EQUITY, June 30, 2023 | 667,235 | | | | 114,098 | | | 11 | | | 198,505 | | | 20 | | | 192,389 | | | (328,586) | | | (136,166) | |
| | | | | | | | | | | | | | | | |
Exchanges of redeemable non-controlling interest for Class A common stock | — | | | | 151 | | — | | | (151) | | | — | | | — | | | — | | | — | |
Equity-based compensation | 105 | | | | — | | — | | | — | | — | | | 2,146 | | | — | | | 2,146 | |
Restricted stock unit awards issued in satisfaction of executive transaction bonuses | — | | | | — | | | — | | | — | | | — | | | 5,000 | | | — | | | 5,000 | |
Fair value adjustment to redeemable non-controlling interest | (330,617) | | | | — | | — | | | — | | — | | | 330,617 | | | — | | | 330,617 | |
Remeasurement adjustment to redeemable non-controlling interest resulting from ownership changes | 358 | | | | — | | — | | | — | | — | | | (358) | | | — | | | (358) | |
| | | | | | | | | | | | | | | | |
Net loss | (23,993) | | | | — | | — | | | — | | — | | | — | | | (13,296) | | | (13,296) | |
STOCKHOLDERS’ EQUITY, September 30, 2023 | $ | 313,088 | | | | 114,249 | | $ | 11 | | | 198,354 | | $ | 20 | | | $ | 529,794 | | | $ | (341,882) | | | $ | 187,943 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Non-controlling Interest | | | Class A Common Stock | | Class V Common Stock | | Additional Paid in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| | | Shares | | Amount | | Shares | | Amount | | | |
STOCKHOLDERS’ EQUITY, December 31, 2023 | $ | 291,532 | | | | 116,588 | | | $ | 12 | | | 196,569 | | | $ | 20 | | | $ | 509,442 | | | $ | (367,344) | | | $ | 142,130 | |
| | | | | | | | | | | | | | | | |
Exchanges of redeemable non-controlling interest for Class A common stock | — | | | | 75 | | | — | | | (75) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Issuance of Class A common stock upon settlement of restricted stock units, net of shares withheld for tax | — | | | | 2,746 | | | — | | | — | | | — | | | (73) | | | — | | | (73) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Equity-based compensation | — | | | | — | | | — | | | — | | | — | | | 1,449 | | | — | | | 1,449 | |
| | | | | | | | | | | | | | | | |
Fair value adjustment to redeemable non-controlling interest | (20,579) | | | | — | | | — | | | — | | | — | | | 20,579 | | | — | | | 20,579 | |
Remeasurement adjustment to redeemable non-controlling interest resulting from ownership changes | (1,211) | | | | — | | | — | | | — | | | — | | | 1,211 | | | — | | | 1,211 | |
| | | | | | | | | | | | | | | | |
Net loss | (30,906) | | | | — | | | — | | | — | | | — | | | — | | | (18,700) | | | (18,700) | |
STOCKHOLDERS’ EQUITY, March 31, 2024 | 238,836 | | | | 119,409 | | | 12 | | | 196,494 | | | 20 | | | 532,608 | | | (386,044) | | | 146,596 | |
Exchanges of redeemable non-controlling interest for Class A common stock | — | | | | 537 | | | — | | | (537) | | | — | | | — | | | — | | — | |
| | | | | | | | | | | | | | | | |
Issuance of Class A common stock upon settlement of restricted stock units, net of shares withheld for tax | — | | | | 212 | | | — | | | — | | | — | | | (30) | | | — | | (30) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Equity-based compensation | — | | | | — | | | — | | | — | | | — | | | 1,624 | | | — | | 1,624 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Remeasurement adjustment to redeemable non-controlling interest resulting from ownership changes | (24,095) | | | | — | | | — | | | — | | | — | | | 24,095 | | | — | | 24,095 | |
Private placement, net of offering costs | — | | | | 41,604 | | | 4 | | | — | | | — | | | 6,571 | | | — | | 6,575 | |
Net loss | (16,754) | | | | — | | | — | | | — | | | — | | | — | | | (12,020) | | | (12,020) | |
STOCKHOLDERS’ EQUITY, June 30, 2024 | 197,987 | | | | 161,762 | | | 16 | | | 195,957 | | | 20 | | | 564,868 | | | (398,064) | | | 166,840 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Issuance of Class A common stock upon settlement of restricted stock units, net of shares withheld for tax | — | | | 210 | | — | | — | | — | | (24) | | | — | | (24) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Equity-based compensation | — | | | — | | — | | — | | — | | 1,958 | | | — | | 1,958 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Remeasurement adjustment to redeemable non-controlling interest resulting from ownership changes | 1,748 | | | | — | | | — | | | — | | | — | | | (1,748) | | | — | | | (1,748) | |
| | | | | | | | | | | | | | | | |
Net loss | (56,338) | | | | — | | | — | | | — | | | — | | | — | | | (46,512) | | | (46,512) | |
STOCKHOLDERS’ EQUITY, September 30, 2024 | $ | 143,397 | | | | 161,972 | | | $ | 16 | | | 195,957 | | | $ | 20 | | | $ | 565,054 | | | $ | (444,576) | | | $ | 120,514 | |
See accompanying notes to condensed consolidated financial statements.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 7
P3 HEALTH PARTNERS INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net loss | $ | (181,230) | | | $ | (117,319) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 64,905 | | | 65,041 | |
Equity-based compensation | 5,031 | | | 4,259 | |
Amortization of original issue discount and debt issuance costs | 13 | | | 405 | |
Accretion of contingent consideration | — | | | 113 | |
Gain on write off of contingent consideration | (4,907) | | | — | |
Mark-to-market adjustment of stock warrants | (14,626) | | | 327 | |
Premium deficiency reserve | 15,771 | | | (9,361) | |
Changes in operating assets and liabilities: | | | |
Health plan receivable | (4,828) | | | (45,258) | |
Clinic fees, insurance, and other receivable | 445 | | | 5,275 | |
Prepaid expenses and other current assets | (7,402) | | | (429) | |
Other long-term assets | (2) | | | (1,214) | |
Accounts payable, accrued expenses, and other current liabilities | 1,780 | | | 2,758 | |
Accrued payroll | 903 | | | 2,405 | |
Health plan settlements payable | 6,177 | | | 21,814 | |
Claims payable | 52,727 | | | 4,290 | |
Accrued interest | 12,281 | | | 7,092 | |
Operating lease liability | 72 | | | (348) | |
Net cash used in operating activities | (52,890) | | | (60,150) | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property and equipment | — | | | (2,039) | |
| | | |
Purchase price received in advance of asset sale | 15,000 | | | — | |
Net cash provided by (used in) investing activities | 15,000 | | | (2,039) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Proceeds from long-term debt, net of original issue discount | 25,000 | | | 14,101 | |
Payment of debt issuance costs | (100) | | | (173) | |
Proceeds from liability-classified warrants and private placement offering, net of offering costs paid | 40,547 | | | 87,244 | |
Proceeds from at-the-market sales, net of offering costs paid | 33 | | | — | |
Deferred offering costs paid | (507) | | | — | |
Payment of tax withholdings upon settlement of restricted stock unit awards | (127) | | | — | |
Repayment of short-term and long-term debt | (1,663) | | | — | |
Proceeds from short-term debt | 1,871 | | | — | |
Net cash provided by financing activities | 65,054 | | | 101,172 | |
Net change in cash and restricted cash | 27,164 | | | 38,983 | |
Cash and restricted cash, beginning of period | 40,934 | | | 18,457 | |
Cash and restricted cash, end of period | $ | 68,098 | | | $ | 57,440 | |
See accompanying notes to condensed consolidated financial statements.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 8
P3 HEALTH PARTNERS INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
Note 1: Organization | |
Note 2: Going Concern and Liquidity | |
Note 3: Significant Accounting Policies | |
Note 4: Recent Accounting Pronouncements | |
Note 5: Fair Value Measurements and Hierarchy | |
Note 6: Property and Equipment | |
Note 7: Intangible Assets | |
Note 8: Debt | |
Note 9: Net Loss per Share | |
Note 10: Redeemable Non-controlling Interest | |
Note 11: Segment Reporting | |
Note 12: Capitalization | |
Note 13: Variable Interest Entities | |
Note 14: Income Taxes | |
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P3 Health Partners Inc. | Q3 2024 Form 10-Q | 9
Note 1: Organization
P3 Health Partners Inc. (“P3”) is a patient-centered and physician-led population health management company and, for accounting purposes, the successor to P3 Health Group Holdings, LLC and its subsidiaries (collectively, “P3 LLC,” and together with P3, the “Company”) after the consummation of a series of business combinations in December 2021 with Foresight Acquisition Corp. (the “Business Combinations”). As the sole manager of P3 LLC, P3 operates and controls all of the business and affairs of P3 LLC and P3’s only assets are equity interests in P3 LLC.
P3 LLC was founded on April 12, 2017 and began commercial operations on April 20, 2017 to provide population health management services on an at-risk basis to insurance plans offering medical coverage to Medicare beneficiaries under Medicare Advantage programs. Medicare Advantage (“MA”) programs are insurance products created solely for Medicare beneficiaries. Insurance plans contract directly with the Centers for Medicare and Medicaid Services (“CMS”) to offer Medicare beneficiaries benefits that replace traditional Medicare fee-for-service (“FFS”) coverage.
The Company’s contracts with health plans are based on an at-risk shared savings model. Under this model, the Company is financially responsible for the cost of all contractually-covered services provided to members assigned to the Company by health plans in exchange for a fixed monthly “capitation” payment, which is generally a percentage of the payment health plans receive from CMS. Under this arrangement, Medicare beneficiaries generally receive all their healthcare coverage through the Company’s network of employed and affiliated physicians and specialists.
The services provided to health plans’ members vary by contract. These may include utilization management, care management, disease education, and maintenance of a quality improvement and quality management program for members assigned to the Company. The Company is also responsible for the credentialing of its providers, processing and payment of claims, and the establishment of a provider network for certain health plans.
In addition to the Company’s contracts with health plans, the Company provides primary healthcare services through its employed physician clinic locations. These primary care clinics are reimbursed for services provided under FFS contracts with various payers and through capitated – per member, per month (“PMPM”) arrangements.
Note 2: Going Concern and Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced losses since its inception and had net losses of $102.9 million and $37.3 million for the three months ended September 30, 2024 and 2023, respectively, and $181.2 million and $117.3 million for the nine months ended September 30, 2024 and 2023, respectively. Such losses were primarily the result of costs incurred in adding new members and adverse claims experience, partly driven by general market conditions for MA plans. The Company anticipates operating losses and negative cash flows to continue for the foreseeable future as it continues to grow membership.
As of September 30, 2024 and December 31, 2023, the Company had $63.0 million and $36.3 million, respectively, in unrestricted cash and cash equivalents available to fund future operations. The Company’s capital requirements will depend on many factors, including the pace of the Company’s growth, ability to manage medical costs, the maturity of its members, its ability to complete the sale of its Florida operations, and its ability to raise capital. The Company continues to explore raising additional capital through a combination of debt financing and equity issuances and sales of assets. When the Company pursues additional debt and/or equity financing, there can be no assurance that such financing will be available on terms commercially acceptable to the Company or at all. If the Company is unable to obtain additional funding when needed, it will need to curtail planned activities in order to reduce costs, which will likely have an unfavorable effect on the Company’s ability to execute on its business plan, and have an adverse effect on its business, results of operations, and future prospects. As a result of these matters, substantial doubt exists about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 10
Note 3: Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of the U.S. Securities and Exchange Commission (“SEC”) Regulation S-X. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2023. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations dealing with interim financial statements.
Management believes the accompanying unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of periods presented. The consolidated operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, or for any other future annual or interim period.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all significant intercompany transactions and balances have been eliminated.
The Company periodically evaluates entities for consolidation either through ownership of a majority voting interest, or through means other than voting interest, in accordance with the Variable Interest Entity (“VIE”) accounting model. This evaluation includes a qualitative review of the design of the entity, its organizational structure, including decision making ability and financial agreements, as well as a quantitative review. The Company consolidates a VIE when it has a variable interest that provides it with a controlling financial interest in the VIE, referred to as the primary beneficiary of the VIE.
As the sole managing member of P3 LLC, P3 has the right to direct the most significant activities of P3 LLC and the obligation to absorb losses and receive benefits. The rights of the non-managing members of P3 LLC are limited and protective in nature and do not give substantive participation rights over the sole managing member. Accordingly, P3 identifies itself as the primary beneficiary of P3 LLC and began consolidating P3 LLC as of December 3, 2021, the closing date of the Business Combinations (the “Closing Date”), resulting in a non-controlling interest related to the common units of P3 LLC (“Common Units”) held by members other than P3. Additionally, as more fully described in Note 13 “Variable Interest Entities,” P3 LLC is the primary beneficiary of the following physician practices (collectively, the “Network VIEs”):
•Kahan, Wakefield, Abdou, PLLC
•Bacchus, Wakefield, Kahan, PC
•P3 Health Partners Professional Services, P.C.
•P3 Medical Group, P.C.
•P3 Health Partners California, P.C. (f/k/a Omni IPA Medical Group, Inc.)
Comprehensive Loss
Comprehensive loss includes net loss to common stockholders as well as other changes in equity that result from transactions and economic events other than those with stockholders. There was no difference between comprehensive loss and net loss to common stockholders for the periods presented.
Use of Estimates
The preparation of these unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to allowance for credit losses, revenue recognition, the liability for unpaid claims, equity-based compensation, premium deficiency reserves (“PDR”), fair value and impairment recognition of long-lived assets
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 11
(including intangibles), fair value of liability classified instruments, and judgments related to deferred income taxes. The Company bases its estimates on the best information available at the time, its experiences, and various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited consolidated financial statements within Annual Report on Form 10-K for the year ended December 31, 2023. No changes to significant accounting policies have occurred since December 31, 2023.
Revenue Recognition
In 2024, the Company released a portion of the constraint applied in previous periods with respect to risk adjustment revenue for dates of service in 2023, which resulted in increases to capitation revenue of $7.5 million and $22.7 million for the three and nine months ended September 30, 2024, respectively.
The Company categorizes revenue based on various factors such as the nature of contracts as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue Type | | Three Months Ended September 30, 2024 | | % of Total | | Three Months Ended September 30, 2023 | | % of Total |
| | (dollars in thousands) |
Capitated revenue | | $ | 357,706 | | | 98.8 | % | | $ | 285,153 | | | 98.9 | % |
Other patient service revenue: | | | | | | | | |
Clinical fees & insurance revenue | | 1,536 | | | 0.4 | | | 1,246 | | | 0.4 | |
Care coordination / management fees | | 2,770 | | | 0.8 | | | 1,784 | | | 0.6 | |
Incentive fees | | 112 | | | 0.0 | | | 168 | | | 0.1 | |
Total other patient service revenue | | 4,418 | | | 1.2 | | | 3,198 | | | 1.1 | |
Total revenue | | $ | 362,124 | | | 100.0 | % | | $ | 288,351 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue Type | | Nine Months Ended September 30, 2024 | | % of Total | | Nine Months Ended September 30, 2023 | | % of Total |
| | (dollars in thousands) |
Capitated revenue | | $ | 1,116,146 | | | 98.8 | % | | $ | 909,473 | | | 98.9 | % |
Other patient service revenue: | | | | | | | | |
Clinical fees & insurance revenue | | 4,588 | | | 0.4 | | | 3,890 | | | 0.4 | |
Care coordination / management fees | | 8,763 | | | 0.8 | | | 5,699 | | | 0.6 | |
Incentive fees | | 272 | | | 0.0 | | | 452 | | | 0.1 | |
Total other patient service revenue | | 13,623 | | | 1.2 | | | 10,041 | | | 1.1 | |
Total revenue | | $ | 1,129,769 | | | 100.0 | % | | $ | 919,514 | | | 100.0 | % |
During the three months ended September 30, 2024 and 2023, five and four health plan customers, respectively, each accounted for 10% or more of total revenue and collectively comprised 69% and 58% of the Company’s total revenue, respectively. During each of the nine months ended September 30, 2024 and 2023, four health plan customers each accounted for 10% or more of total revenue and collectively comprised 59% and 61% of the Company’s total revenue, respectively. Three health plan customers accounted for 10% or more of total health plan receivable each as of September 30, 2024 and December 31, 2023.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 12
Note 4: Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
ASU 2024-02, Codification Improvements—Amendments to Remove References to the Concepts Statements (“ASU 2024-02”)
Accounting Standards Update (“ASU”) 2024-02 removes references to various Financial Accounting Standards Board (“FASB”) Concepts Statements from the FASB accounting standards codification (the “Codification”) to simplify and clarify the accounting guidance. The ASU aims to distinguish between authoritative and nonauthoritative literature and to address unintended applications of guidance. The Company adopted ASU 2024-02 effective January 1, 2024. The guidance will be applied prospectively to all new transactions recognized on or after January 1, 2024.
ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”)
ASU 2020-06 eliminates two of the three models in ASC 470-20 that require issuers to separately account for embedded conversion features and eliminates some of the requirements for equity classification in ASC 815-40-25 for contracts in an entity’s own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and generally requires them to include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company adopted ASU 2020-06 effective January 1, 2024 using the modified retrospective method. The Company’s liability-classified stock warrants remained classified as liabilities under the amended guidance. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”)
ASU 2024-03 enhances transparency and decision-usefulness of expense disclosures in response to investors’ requests for more detailed, disaggregated expense information, enabling a clearer understanding of a public business entity’s performance and cost structure. The amendments improve disclosure requirements in financial statement notes for specific expense categories, including inventory purchases, employee compensation, depreciation, amortization, and depletion, as well as qualitative descriptions of other expenses. The amendments are effective for fiscal years beginning after December 15, 2026, with early adoption permitted. The Company is evaluating the effect ASU 2024-03 will have on its consolidated financial statements and related disclosures.
ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”)
ASU 2023-09 enhances the transparency and decision usefulness of income tax disclosures, in response to investors’ feedback, indicating the need for improved information to assess an entity’s operations, tax risks, and planning opportunities, particularly in understanding exposure to jurisdictional tax changes and their impact on cash flows. The amendments address these concerns by improving income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. The amendments in this update are effective for annual periods beginning after December 15, 2024 and should be applied prospectively. Early adoption and retrospective application is permitted. The Company is evaluating the effect ASU 2023-09 will have on its consolidated financial statements and related disclosures.
ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”)
ASU 2023-07 improves the disclosures about a public entity’s reportable segments and addresses requests from investors for additional, more detailed information about a reportable segment’s expenses. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The amendments require retrospective application to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is evaluating the effect ASU 2023-07 will have on its consolidated financial statements and related disclosures.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 13
ASU 2023-06, Disclosure Improvements: Codification Amendments In Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”)
ASU 2023-06 clarifies or improves disclosure and presentation requirements on a variety of topics and aligns the requirements in the Codification with the SEC’s regulations. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The amendments in this update should be applied prospectively. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity. The Company is evaluating the effect ASU 2023-06 will have on its consolidated financial statements and related disclosures.
Note 5: Fair Value Measurements and Hierarchy
Information about the Company’s financial liabilities measured at fair value on a recurring basis is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
Warrant liability as of September 30, 2024 | $ | 422 | | | $ | — | | | $ | 19,296 | | | $ | 19,718 | |
Warrant liability as of December 31, 2023 | $ | 1,056 | | | $ | — | | | $ | 29 | | | $ | 1,085 | |
The key Level 3 weighted average inputs into the option pricing model related to the private placement warrants to purchase Class A common stock were as follows:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Volatility | 90 | % | | 75 | % |
Risk-free interest rate | 3.61 | % | | 4.01 | % |
Exercise price | $ | 0.51 | | | $ | 11.50 | |
Expected term | 6.4 Years | | 2.9 Years |
Generally, an increase in the market price of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common stock, and an increase in the remaining term of the warrants would each result in a directionally similar change in the estimated fair value of the Company’s warrant liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability. The Company has not, and does not plan to, declare dividends on its common stock and, as such, there is no change in the estimated fair value of the warrant liabilities due to the dividend assumption.
The following table sets forth a summary of changes in the fair value of the Company’s private placement warrants to purchase Class A common stock, which are considered to be Level 3 fair value measurements:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
| (in thousands) |
Beginning balance | $ | 29 | | | $ | 40 | |
Issuance of Common Warrants (see Note 12) | 33,260 | | | — | |
Mark-to-market adjustment of stock warrants | (13,993) | | | 11 | |
Ending balance | $ | 19,296 | | | $ | 51 | |
The Company recorded gains of $5.7 million and $0.8 million from changes in the fair value of stock warrants for the three months ended September 30, 2024 and 2023, respectively, and a gain of $14.6 million and loss of $0.3 million from changes in the fair value of stock warrants for the nine months ended September 30, 2024 and 2023, respectively.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 14
The book value of cash; clinic fees, insurance receivables, and other receivables; accounts payable; and accrued expenses and other current liabilities approximate fair value because of the short maturity and high liquidity of these instruments.
During the three and nine months ended September 30, 2024, the Company recorded a gain of $6.2 million reflecting the write-off and settlement of contingent consideration related to the Company’s 2021 acquisition of Medcore HP, a Level 3 fair value measurement, upon resolution with the sellers of the assumed claims payable and risk adjustment factor.
Note 6: Property and Equipment
The Company’s property and equipment balances consisted of the following as of:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| (in thousands) |
Leasehold improvements | $ | 2,332 | | | $ | 2,933 | |
Furniture & fixtures | 1,101 | | | 1,165 | |
Computer equipment & software | 7,070 | | | 3,699 | |
Medical equipment | 1,082 | | | 1,106 | |
Software (development in process) | 343 | | | 3,877 | |
Vehicles | 660 | | | 654 | |
Other | — | | | 33 | |
| 12,588 | | | 13,467 | |
Less: accumulated depreciation | (6,273) | | | (4,781) | |
Property and equipment, net | $ | 6,315 | | | $ | 8,686 | |
Total depreciation of property and equipment recognized on the condensed consolidated statements of operations was $0.6 million and $0.5 million for the three months ended September 30, 2024 and 2023, respectively, and $1.7 million and $1.8 million for the nine months ended September 30, 2024 and 2023, respectively.
Asset Sale
On September 27, 2024, the Company executed a nonbinding proposal with an entity in which the Company’s principal stockholder has an ownership interest (the “Buyer”) setting forth terms and conditions for the proposed sale of substantially all of the assets, clinical and non-clinical, exclusively or primarily used by the Company’s subsidiary, P3 Health Partners-Florida, LLC, on a cash-free, debt-free basis for a purchase price of $15 million. As of September 30, 2024, the Buyer has paid a good faith deposit in the amount of $15 million (the “Good Faith Deposit”), which was recorded within cash and accrued expenses and other current liabilities on the condensed consolidated balance sheet. The completion of the transaction is subject to the negotiation and signing of a definitive agreement and the satisfaction of customary closing conditions, including completion of the Buyer’s financial due diligence, and is expected to close during the fourth quarter of 2024. The terms of a definitive agreement may differ from the anticipated terms described herein and there can be no assurance that the Company will enter into a definitive agreement for the sale. If the Company does not enter into a definitive agreement for the sale, or the sale is not completed for any other reason, the Company will be required to return the Good Faith Deposit to the Buyer.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 15
Net assets classified as held for sale are summarized as follows as of September 30, 2024 (in thousands):
| | | | | |
Assets: | |
Property and equipment, net | $ | 637 | |
Intangible assets, net | 8,777 | |
Other long-term assets | 709 | |
Total assets | $ | 10,123 | |
Liabilities: | |
Accrued expenses and other current liabilities | $ | 46 | |
Operating lease liability | 707 | |
Total liabilities | $ | 753 | |
Net assets | $ | 9,370 | |
Note 7: Intangible Assets
Intangible assets, net consisted of the following as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| (in thousands) |
Indefinite lived intangible assets: | | | | | | | | | | | |
Medical licenses | $ | 700 | | | $ | — | | | $ | 700 | | | $ | 700 | | | $ | — | | | $ | 700 | |
Definite lived intangible assets: | | | | | | | | | | | |
Customer relationships | 671,818 | | | (190,349) | | | 481,469 | | | 684,000 | | | (142,500) | | | 541,500 | |
Trademarks | 148,635 | | | (42,748) | | | 105,887 | | | 148,635 | | | (31,671) | | | 116,964 | |
Payor contracts | 4,700 | | | (1,293) | | | 3,407 | | | 4,700 | | | (940) | | | 3,760 | |
Provider network | 4,734 | | | (1,332) | | | 3,402 | | | 4,800 | | | (991) | | | 3,809 | |
Total | $ | 830,587 | | | $ | (235,722) | | | $ | 594,865 | | | $ | 842,835 | | | $ | (176,102) | | | $ | 666,733 | |
Amortization of intangible assets was $21.0 million and $21.1 million during the three months ended September 30, 2024 and 2023, respectively, and $63.1 million and $63.2 million during the nine months ended September 30, 2024 and 2023, respectively.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 16
Note 8: Debt
Short-term Debt
In January 2024, the Company entered into a short-term financing agreement totaling $1.9 million for the funding of certain insurance policies. The term of the agreement is nine months and the annual interest rate is 8.25%. Remaining scheduled principal payments as of September 30, 2024 are $0.2 million to be paid in the fourth quarter of 2024.
Long-term Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| (in thousands) |
Repurchase promissory note, interest paid at 11.0%, due June 2026 | $ | 15,000 | | | $ | 15,000 | |
Term loan facility, interest paid at 12.0%, due December 2025 | 65,000 | | | 65,000 | |
Unsecured promissory note, interest paid at 14.0%, due May 2026 | 29,102 | | | 29,102 | |
VGS 2 Promissory Note | 25,375 | | | — | |
| | | |
Long-term debt, gross | 134,477 | | | 109,102 | |
Less: unamortized debt issuance costs and original issue discount | (1,249) | | | (783) | |
Long-term debt, net | $ | 133,228 | | | $ | 108,319 | |
| | | |
| | | |
VGS 2 Promissory Note
On March 22, 2024, P3 LLC entered into a related party 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 provided for funding of up to $25.0 million. The VGS 2 Promissory Note matures on September 30, 2027. P3 LLC paid VGS 2 an up-front fee of 1.5% of the aggregate principal amount of the loan in-kind. Interest is payable at 17.5% per annum on a quarterly cycle (in arrears) beginning June 30, 2024. P3 LLC may elect to pay either (1) 8.0% cash interest and 9.5% interest paid in-kind (“PIK”), 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 (defined below), 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 addition, P3 LLC will pay VGS 2 a back-end fee at the time the VGS 2 Promissory Note is redeemed as follows: (i) if paid after June 30, 2024 and on or before September 30, 2024, 4.5%; (ii) if paid after September 30, 2024 and on or before December 31, 2024, 6.75% and (iii) if paid after December 31, 2024, 9.0%. As of September 30, 2024, the Company had recorded debt issuance costs and original issue discount of $0.5 million related to this financing.
2024 Subordination Agreement
In connection with the transactions described above, P3 LLC entered into a subordination agreement, dated as of March 22, 2024 (the “2024 Subordination Agreement”), by and among the Company, CRG Servicing LLC (“CRG”), as administrative agent under the Term Loan Facility and VGS 2. Pursuant to the 2024 Subordination Agreement, VGS 2 agreed to subordinate its 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. The terms of the 2024 Subordination Agreement will effectively require P3 LLC to pay all interest under the VGS 2 Promissory Note in-kind.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 17
Amendment to Term Loan Agreement and Consent
In connection with the transactions described above, P3 LLC entered into that certain (i) Fourth Amendment to Term Loan Agreement (the “Term Loan Amendment”), dated as of the March 22, 2024, by and among P3 LLC, as borrower, the subsidiary guarantors party thereto, the lenders from time to time party thereto and CRG, as administrative agent and collateral agent and (ii) Consent (the “Consent”), dated as of the March 22, 2024, by and between P3 LLC, as borrower, and VBC Growth SPV, LLC, as holder. The Term Loan Amendment and Consent collectively permit the issuance of the VGS 2 Promissory Note and the entry into the 2024 Subordination Agreement.
The Company was in compliance with its covenants under the term loan facility and the unsecured promissory notes as of September 30, 2024; however, there can be no assurance that the Company will be able to maintain compliance with these covenants in the future or that the lenders under the term loan facility and the unsecured promissory notes or the lenders of any future indebtedness the Company may incur will grant any waiver or forbearance with respect to such covenants that we may request in the future.
Note 9: Net Loss per Share
The following table provides the computation of basic and diluted net loss per share:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2024 | | 2023 | | 2024 | | 2023 | |
| (in thousands, except per share data) | |
Numerator–basic: | | | | | | | | |
Net loss attributable to Class A common stockholders–basic | $ | (46,512) | | | $ | (13,296) | | | $ | (77,232) | | | $ | (32,311) | | |
Numerator–diluted: | | | | | | | | |
Net loss attributable to Class A common stockholders–basic | $ | (46,512) | | | $ | (13,296) | | | $ | (77,232) | | | $ | (32,311) | | |
Effective of dilutive securities: | | | | | | | | |
Shares of Class V common stock | — | | | (23,993) | | | — | | | (85,008) | | |
Liability-classified warrants | (5,196) | | | — | | | (13,974) | | | — | | |
Net loss attributable to Class A common stockholders–diluted | $ | (51,708) | | | $ | (37,289) | | | $ | (91,206) | | | $ | (117,319) | | |
Denominator–basic: | | | | | | | | |
Weighted average Class A common shares outstanding–basic | 161,890 | | | 114,198 | | | 139,292 | | | 88,010 | | |
Net loss per share attributable to Class A common stockholders–basic | $ | (0.29) | | | $ | (0.12) | | | $ | (0.55) | | | $ | (0.37) | | |
Denominator–diluted: | | | | | | | | |
Weighted average Class A common shares outstanding–basic | 161,890 | | | 114,198 | | | 139,292 | | | 88,010 | | |
Weighted average effect of dilutive securities: | | | | | | | | |
Shares of Class V common stock | — | | | 198,481 | | | — | | | 200,369 | | |
Liability-classified warrants | 2,811 | | | — | | | 2,431 | | | — | | |
Weighted average shares outstanding–diluted | 164,701 | | | 312,679 | | | 141,723 | | | 288,379 | | |
Net loss per share attributable to Class A common stockholders–diluted | $ | (0.31) | | | $ | (0.12) | | | $ | (0.64) | | | $ | (0.41) | | |
Shares of Class V common stock do not share in the earnings or losses of P3 and are therefore not participating securities. As such, separate presentation of basic and diluted net income per share for Class V common stock under the
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 18
two-class method is not required. The following table presents potentially dilutive securities excluded from the computation of diluted net loss per share for the periods presented because their effect would have been anti-dilutive.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (in thousands) |
Stock warrants (1) | 107,718 | | 81,938 | | 107,718 | | | 81,938 |
Stock options (1) | 22,037 | | 5,867 | | 22,037 | | | 5,867 |
Restricted stock units (1) | 9,497 | | 4,690 | | | 9,497 | | | 4,690 | |
Restricted stock awards (1) | — | | | 250 | | | — | | | 250 | |
Shares of Class V common stock (2) | 195,957 | | — | | | 195,957 | | | — | |
Total | 335,209 | | 92,745 | | 335,209 | | | 92,745 |
__________________
(1)Represents the number of instruments outstanding at the end of the period. Application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted net loss per share
(2)Shares of Class V common stock at the end of the period, including shares tied to unvested Common Units, are considered potentially dilutive shares of Class A common stock under application of the if-converted method.
Note 10: Redeemable Non-controlling Interest
Non-controlling interest represents the portion of P3 LLC that the Company controls and consolidates but does not own (i.e., the Common Units held directly by equity holders other than the Company).
The ownership of the Common Units is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| Units (in thousands) | | Ownership % | | Units (in thousands) | | Ownership % |
P3 Health Partners Inc.’s ownership of Common Units | 161,972 | | 45.3 | % | | 116,588 | | 37.2 | % |
Non-controlling interest holders’ ownership of Common Units | 195,957 | | 54.7 | | | 196,569 | | 62.8 | |
Total Common Units | 357,929 | | 100.0 | % | | 313,157 | | 100.0 | % |
During the nine months ended September 30, 2024 and 2023, there were an aggregate of 0.6 million shares and 3.5 million shares, respectively, of Class A common stock issued to P3 LLC members in connection with such members’ redemptions of an equivalent number of Common Units and corresponding cancellation and retirement of an equivalent number of Class V common stock. Such retired shares of Class V common stock may not be reissued. The redemptions occurred pursuant to the terms of the P3 LLC Amended and Restated Limited Liability Agreement (the “P3 LLC A&R LLC Agreement”).
As of September 30, 2024, there was no remeasurement adjustment recorded as the fair value of redeemable non-controlling interest (i.e., based on the five-day volume-weighted average price of a share of Class A common stock) was less than the carrying value. As of September 30, 2023, there was no remeasurement adjustment recorded as the fair value of redeemable non-controlling interest was less than the carrying value.
Note 11: Segment Reporting
The Company’s operations are organized under one reportable segment. The Chief Executive Officer, who is the Company’s chief operating decision maker, manages the Company’s operations and reviews financial information on a consolidated basis. Decisions regarding resource allocation and assessment of profitability are based on the Company’s responsibility to deliver high quality primary medical care services to its patient population. For the periods presented, all the Company’s revenue was earned in the United States. Likewise, all the Company’s long-lived assets were located in the United States.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 19
Note 12: Capitalization
May 2024 Private Placement
On May 24, 2024, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”), dated May 22, 2024 with the purchasers named therein (the “Purchasers”), which included certain affiliated entities of Chicago Pacific Founders GP, L.P., a Delaware limited partnership (“CPF GP”), and institutional investors, the Company issued approximately 67.4 million units at a price of approximately $0.6270 per unit. Each unit consists of one share of Class A common stock and a warrant (the “Common Warrants”) to purchase one share of Class A common stock at an exercise price of $0.5020. Certain institutional investors elected to receive pre-funded warrants (the “Pre-Funded Warrants,” and together with the Common Warrants, the “Warrants”) to purchase Class A common stock in lieu of a portion of their Class A common stock. In total, the Company sold (i) an aggregate of 41.6 million shares of its Class A common stock (the “Shares”), (ii) Common Warrants to purchase an aggregate of 67.4 million shares of Class A common stock, and (iii) Pre-Funded Warrants to purchase an aggregate of 25.8 million shares of Class A common stock for aggregate proceeds of $39.8 million, net of $2.4 million in offering costs (collectively, the “May 2024 Private Placement”). The Common Warrants were recorded as liability-classified financial instruments totaling $33.2 million and the Pre-Funded Warrants were recorded as equity-classified financial instruments totaling $6.6 million.
The key Level 3 inputs into the option pricing model related to the Common Warrants were as follows:
| | | | | |
Volatility | 95 | % |
Risk-free interest rate | 4.50 | % |
Exercise price | $ | 0.50 | |
Expected term | 7.0 Years |
Registration Rights Agreement
On May 24, 2024, in connection with the May 2024 Private Placement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers. Pursuant to the Registration Rights Agreement, the Company agreed to prepare and file a registration statement with the SEC for purposes of registering the resale of the Shares and shares of common stock issuable upon exercise of the Warrants, which was filed with the SEC on June 18, 2024 and declared effective by the SEC on June 27, 2024. The Registration Rights Agreement also contains certain shelf takedown and piggyback rights.
The Company has also agreed, among other things, to indemnify the Purchasers, their officers, directors, members, employees and agents, successors and assigns under the registration statement from certain liabilities and to pay all fees and expenses incident to the Company’s obligations under the Registration Rights Agreement.
Amended and Restated Letter Agreement with CPF
On May 24, 2024, in connection with entry into the Purchase Agreement, the Company entered into an amended and restated letter agreement (the “Amended and Restated Letter Agreement”) with CPF GP, and Chicago Pacific Founders GP III, L.P., a Delaware limited partnership (“CPF GP III,” and together with CPF GP, “CPF”) (on behalf of the funds of which CPF GP is the general partner, certain funds of which CPF GP III is the general partner and/or certain of their affiliated entities and funds (collectively, the “CPF Parties”)). The Amended and Restated Letter Agreement provides that for as long as the CPF Parties own 40% of the Company’s outstanding common stock, (i) CPF will be entitled to designate one additional independent member of the Company’s board of directors, and (ii) CPF will be entitled to certain information rights and protective provisions. As of the date of the issuance of these financial statements, CPF has not exercised its right to designate a director under the terms of the Amended and Restated Letter Agreement. The CPF Parties also agreed to extend a standstill restriction that limits the ownership of the CPF Parties to 49.99% of the Company’s Class A common stock and Class V common stock from the date of the closing of the May 2024 Private Placement to July 31, 2025.
Restricted Stock Unit Settlement
On December 31, 2023, 1.5 million restricted stock units (“RSU”), each RSU representing the right to receive one share of Class A common stock of the Company, previously granted to Sherif Abdou, M.D., the Company’s former Chief
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 20
Executive Officer, vested pursuant to the terms of a Restricted Stock Unit Agreement between the Company and Dr. Abdou. The Company timely paid $0.7 million in withholding taxes attributable to the vesting of the RSUs to the Internal Revenue Service on behalf of Dr. Abdou on January 10, 2024. Dr. Abdou repaid such sum to the Company on May 2, 2024.
Note 13: Variable Interest Entities
P3 LLC has Management Services Agreements (“MSAs”) and deficit funding agreements with the Network VIEs. The MSAs provide that the P3 LLC will furnish administrative personnel, office supplies and equipment, general business services, contract negotiation, and billing and collection services to the Network VIEs. Fees for these services are the excess of the Network VIEs’ revenue over expenses. Per the deficit funding agreements, P3 LLC is obligated to advance funds, as needed, to support the Network VIE’s working capital needs to the extent operating expenses exceed gross revenue. These advances accrue interest at a rate of prime plus 2%. Net advances made to the Network VIEs and accrued interest on those advances are presented within due to consolidated entities of P3 in the table below. Additionally, P3 LLC entered into stock transfer restriction agreements with the practice shareholders of the Network VIEs, which, by way of a call option, unequivocally permit P3 LLC to appoint successor physicians if a practice shareholder vacates their ownership position. Accordingly, P3 LLC identifies itself as the primary beneficiary of the Network VIEs. Practice shareholders, who are employees of P3 LLC, retain equity ownership in the Network VIEs, which represents nominal non-controlling interests; however, the non-controlling interests do not participate in the profit or loss of the Network VIEs.
P3 LLC, directly or indirectly via its wholly owned subsidiaries, may not use or access any net assets of the Network VIEs to settle its obligations or the obligations of its wholly owned subsidiaries. Additionally, the creditors of the Network VIEs do not have recourse to the net assets of P3 LLC.
Since P3 LLC represents substantially all the assets and liabilities of the Company, the following tables provide a summary of the assets, liabilities, and operating performance of only VIEs held at the P3 LLC level.
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| (in thousands) |
ASSETS | | | |
Cash | $ | 7,371 | | | $ | 6,491 | |
Clinic fees, insurance and other receivable | 1,757 | | | 138 | |
Health plan receivable | 566 | | | 571 | |
Prepaid expenses and other current assets | 3,152 | | | 1,261 | |
Property and equipment, net | 32 | | | 23 | |
Other long-term assets | 115 | | | 153 | |
| | | |
TOTAL ASSETS | $ | 12,993 | | | $ | 8,637 | |
LIABILITIES AND MEMBERS’ DEFICIT | | | |
Accounts payable | $ | 5,166 | | | $ | 5,073 | |
Accrued expenses and other current liabilities | 516 | | | 515 | |
Accrued payroll | 3,769 | | | 3,141 | |
Claims payable | 5,388 | | | 3,973 | |
Other long-term liabilities | 932 | | | 946 | |
Due to consolidated entities of P3 | 46,934 | | | 44,200 | |
TOTAL LIABILITIES | 62,705 | | | 57,848 |
MEMBERS’ DEFICIT | (49,712) | | | (49,211) | |
TOTAL LIABILITIES AND MEMBERS’ DEFICIT | $ | 12,993 | | | $ | 8,637 | |
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 21
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (in thousands) |
Revenue | $ | 8,923 | | | $ | 9,024 | | | $ | 28,041 | | | $ | 29,374 | |
Expense | 8,379 | | | 11,364 | | | 28,079 | | | 36,886 | |
Net income (loss) | $ | 544 | | | $ | (2,340) | | | $ | (38) | | | $ | (7,512) | |
Note 14: Income Taxes
The Company’s tax rate is affected primarily by the recognition of a valuation allowance and the portion of income and expense allocated to the non-controlling interest. It is also affected by discrete items that may occur in any given year such as benefits from changes in the fair value of private placement and public warrants. During the three and nine months ended September 30, 2024, the Company’s tax rate was impacted by the release of the valuation allowance on deferred tax assets related to one of its consolidated VIEs.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 22
Item 2. 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 and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q, as well as our audited financial statements and related notes and in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 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,” in Part II, Item 1A. “Risk Factors” and elsewhere in this Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any periods in the future.
Overview
P3 is a patient-centered and physician-led population health management company. We strive to offer superior care to all those in need. We believe that the misaligned incentives in the fee-for-service (“FFS”) healthcare payment model and the fragmentation between physicians and care teams has led to sub-optimal clinical outcomes, limited access, high spending and unnecessary variability in the quality of care. We believe that a platform such as ours, which helps to realign incentives and focuses on treating the full patient, is uniquely positioned to address these healthcare challenges.
We have leveraged the expertise of our management team’s more than 20 years of experience in population health management, to build our “P3 Care Model.” The key attributes that differentiate P3 include: 1) patient-focused model, 2) physician-led model, and 3) our broad delegated model. Our model operates by entering into arrangements with payors providing for monthly payments to manage the total healthcare needs of members attributed to our primary care physicians. In tandem, we enter into arrangements directly with existing physician groups or independent physicians in the community to join our value-based care (“VBC”) network. 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 $944 billion Medicare market, which covers approximately 67.5 million eligible lives as of June 2024. 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 an MA plan, under which payors contract with the Centers for Medicare and Medicaid Services (“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 per member per month (“PMPM”) fees from payors to provide a defined range of healthcare services for MA health plan members attributed to our primary care physicians (“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. Our contracted recurring revenue model offers us highly predictable revenue, and rewards us for providing high-quality care rather than driving a high volume of services. In this capitated arrangement, our goals are well-aligned with payors and patients alike—the more we improve health outcomes, the more profitable we will be over time.
Under this capitated contract structure, we are generally responsible for all members’ medical costs across the care continuum, including, but not limited to emergency room and hospital visits, post-acute care admissions, prescription drugs, specialist physician spend, and primary care spend. Keeping members healthy is our primary objective. When they need medical care, delivery of the right care in the right setting can greatly impact outcomes. When our members need care outside of our network of PCPs, we utilize a number of tools including network management, utilization management and claims processing to ensure that the appropriate quality care is provided.
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 3,100 physicians, in 27 markets (counties) across five states in over six full years of operations as of September 30, 2024. As of September 30, 2024, our PCP network served approximately 128,900 at-risk members.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 23
Key Factors Affecting our Performance
Growing Medicare Advantage Membership on Our Platform
Membership and revenue are tied to the number of members attributed to our physician network by our payors. We believe we have multiple avenues to serve additional members, including through:
•Growth in membership under our existing contracts and existing markets:
◦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.
Growing Existing Contract Membership
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.
In addition to age-ins, Medicare eligible patients can change their enrollment selections during select periods throughout the year. Our sales and marketing teams actively work with local community partners to connect with Medicare eligible patients and make them aware of their healthcare choices and the services that we offer with our VBC model, including greater access to their physicians and customized care plans catered to their needs. The ultimate effect of our marketing efforts is increased awareness of P3 and additional patients choosing us as their primary care provider. We believe that our marketing efforts also help to grow our payor partners’ membership base as we grow our own patient base and help educate patients about their choices on Medicare, further aligning our model with that of healthcare payors.
Growing Membership in Adjacent and New Markets
Our affiliate model allows us to quickly and efficiently enter into new and adjacent markets in two ways: (1) partnering with payors and (2) partnering with providers. Because our model honors the existing patient-provider relationship, we are able to deploy our care model around existing physicians in a given a market. By utilizing the local healthcare infrastructure, we can quickly build a network of PCPs to serve the healthcare needs of contracted members.
We maintain an active pipeline of new partnership opportunities for both providers and payors. These potential opportunities are developed through significant inbound interest and the deep relationships our team has developed with their more than 20 years of experience in the VBC space and our proactive assessment of expansion markets. 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: (i) population size, (ii) payor participants and concentration, (iii) health system participants and concentration, and (iv) competitive landscape.
When entering a new market, we supplement the existing physician network with local market leadership teams and support infrastructure to drive the improvement in medical cost and quality. When entering an adjacent market, we are able to leverage the investments we previously made to have a faster impact on our expanded footprint.
Growing Membership in Existing Markets
Once established in a market, we have an opportunity to efficiently expand both our provider and payor contracts. Given the benefits PCPs experience from joining our P3 Care Model, which offers providers the teams, tools and technologies to better support their patient base, we often experience growth in our affiliate network after entering a market. Because of the benefits, we have also historically experienced high retention with our affiliate providers. From 2018 through September 30, 2024, we experienced a 96% 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.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 24
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. However, we have and intend to continue to conduct periodic strategic reviews of our provider and payor contracts, as a result of which we may elect to periodically exit underperforming provider and payor contracts from our network.
Growing Capitated Revenue Per Member
Medicare pays capitation using a risk adjusted model, which compensates payors based on the health status, or acuity, of each individual member. Payors with higher acuity members receive a higher payment and those with lower acuity members receive a lower payment. Moreover, some of our capitated revenue also includes adjustments for performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors. Given the prevalence of FFS arrangements, our patients often have historically not participated in a VBC model, and therefore their health conditions are poorly documented. Through the P3 Care Model, we determine and assess the health needs of our patients and create an individualized care plan consistent with those needs. We capture and document health conditions as a part of this process. We expect that our PMPM revenue will continue to improve the longer members participate in our care model as we better understand and assess their health status (acuity) and coordinate their medical care.
Effectively Managing Member Medical Expense
Our medical expense is our largest expense category, representing 88% of our total operating expense for the nine months ended September 30, 2024. We manage our medical costs by improving our members access to healthcare. Our care model focuses on maintaining health and leveraging the primary care setting as a means of avoiding costly downstream healthcare costs, such as emergency department visits and acute hospital inpatient admissions.
Achieving Operating Efficiencies
As a result of our affiliate model and ability to leverage our existing local and national infrastructure, we generate operating efficiencies at both the market and enterprise level. Our local corporate, general and administrative expense, which includes our local leadership, care management teams and other operating costs to support our markets, are expected to decrease over time as a percentage of revenue as we add members to our existing contracts, grow membership with new payor and physician contracts, and our revenue subsequently increases. 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. 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.
Impact of Seasonality
Our operational and financial results reflect some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas:
At-Risk Member Growth. While new members are attributed to our platform throughout the year, we experience the largest portion of our at-risk member growth during the first quarter. Contracts with new payors typically begin on January 1, at which time new members become attributed to our network of physicians. Additionally, new members are attributed to our network on January 1, when plan enrollment selections made during the prior Annual Enrollment Period from October 15 through December 7 of the prior year take effect.
Revenue Per Member. Our revenue is based on percentage of premium we have negotiated with our payors as well as our ability to accurately and appropriately document the acuity of a member’s health status. We experience some seasonality with respect to our per member revenue as it will generally decline over the course of the year. In January of each year, CMS revises the risk adjustment factor for each patient based upon health conditions documented in the prior year, leading to an overall increase in per-patient revenue. 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.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 25
Medical Costs. Medical expense is driven by utilization of healthcare services by our attributed membership. Medical expense will vary seasonally depending on a number of factors, including the weather and the number of business days. Certain illnesses, such as the influenza virus, are far more prevalent during colder months of the year, which will result in an increase in medical expenses during these time periods. We would therefore expect to see higher levels of per-member medical expense in the first and fourth quarters. Business days can also create year-over-year comparability issues if one year has a different number of business days compared to another.
Non-GAAP Financial Measures and Key Performance Metrics
We use certain financial measures, which are not calculated in accordance with accounting principles generally accepted in the U.S. (“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. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. The presentation of non-GAAP financial measures and key performance metrics provides additional information to investors regarding our results of operations that our management believes is useful for identifying trends, analyzing and benchmarking the performance of our business.
Non-GAAP Financial Measures
Adjusted EBITDA
The key non-GAAP metric we utilize to measure our profitability and performance is Adjusted EBITDA. We present Adjusted EBITDA 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.
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.
Adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP. It is unaudited and should not be considered an alternative to, or more meaningful than, net income (loss) as an indicator of our operating performance. Uses of cash flows that are not reflected in Adjusted EBITDA include capital expenditures, interest payments, debt principal repayments, and other expenses defined above, which can be significant. As a result, Adjusted EBITDA should not be considered as a measure of our liquidity.
Because of these limitations, Adjusted EBITDA 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 Adjusted EBITDA on a supplemental basis. 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.
P3 Health Partners Inc. | Q3 2024 Form 10-Q | 26
The following table sets forth a reconciliation of our net loss, the most directly comparable GAAP metric, to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
2024 | | 2023 | | 2024 | | 2023 |
| (in thousands) |
Net loss | $ | (102,850) | | | $ | (37,289) | | | $ | (181,230) | | | $ | (117,319) | |
Interest expense, net | 5,647 | | | 4,002 | | | 15,339 | | | 11,939 | |
Depreciation and amortization | 21,673 | | | 21,721 | | | 64,905 | | | 65,041 | |
Income tax (benefit) provision | (3,605) | | | 412 | | | (565) | | | 928 | |
Mark-to-market of stock warrants | (5,737) | | | (755) | | | (14,626) | | | 327 | |
Premium deficiency reserve | 18,168 | | | (12,489) | | | 15,771 | | | (9,361) | |
Equity-based compensation | 1,958 | | | 2,251 | | | 5,031 | | | 4,259 | |
Other(1) | (6,254) | | | (185) | | | (4,242) | | | 2,868 | |
Transaction and other related costs(2) | — | | | — | | | — | | | 70 | |
Adjusted EBITDA loss | $ | (71,000) | | | $ | (22,332) | | | $ | (99,617) | | | $ | (41,248) | |
_____________________________________________
(1)Other during the three and nine months ended September 30, 2024 consisted of (i) interest income and (ii) gain recognized upon the settlement and write-off of contingent consideration related to an acquisition completed in a prior year partially offset by (iii) severance and related expense in connection with our chief executive officer transition and (iv) valuation allowance on our notes receivable. Other during the three and nine months ended September 30, 2023 consisted of (i) interest income offset by (ii) cybersecurity incident loss with respect to the nine months ended September 30, 2023, (iii) restructuring and other charges, including severance and benefits paid to employees pursuant to workforce reduction plans with respect to the nine months ended September 30, 2023, (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) with respect to the nine months ended September 30, 2023, (vi) a legal settlement outside of the ordinary course of business with respect to the nine months ended September 30, 2023, and (vii) valuation allowance on our notes receivable.
(2)Transaction and other related costs during the nine months ended September 30, 2023 consisted of legal fees incurred related to acquisition-related litigation.
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 by facilitating a comparison of our recurring core business operating results.
Medical margin represents the amount earned from capitated revenue after medical claims expenses are deducted. Medical claims expenses represent costs incurred for medical services provided to our members. As our platform grows and matures over time, we expect medical margin to increase in absolute dollars; however, medical margin PMPM may vary as the percentage of new members brought onto our platform fluctuates. New membership added to the platform is typically dilutive to medical margin PMPM.
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 gross profit 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
2024 | | 2023 | | 2024 | | 2023 |
| (in thousands) |
Capitated revenue | $ | 357,706 | | | $ | 285,153 | |