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Operator: Good day, and welcome to the P3 Health Partners Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I’d now like to turn the conference over to Karen Blomquist, Director of Investor Relations. Please go ahead.

Karen Blomquist: Thank you, Rocco, and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward-looking statements under the U.S. Federal Securities laws including statements regarding our financial outlook and long-term targets. These forward-looking statements 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 statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.

Additional information concerning factors that could cause actual results to differ from statements made on this call is contained in our periodic reports filed with the SEC. The forward-looking statements made during this call speak only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements. We will refer to certain non-GAAP financial measures on this call. These non-GAAP financial measures are in addition to and not a substitute or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures. For example, other companies may calculate similarly titled non-GAAP financial measures differently.

Refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. Information presented on this call is contained in the press release we issued today and in our SEC filings, which may be accessed from the Investors page of the P3 Health Partners’ website. Thank you. And I will now turn the call over to Dr. Abdou.

Sherif Abdou: Thanks, Karen. Good morning, everyone, and thank you for joining our call today. I am delighted and excited to be here today to announce our new financing and to review the results of the year 2022. We are very excited about the progress that we’ve made in 2022 and the possibilities we see for our populations, our teams and our business and for our shareholders as well. Today, I will discuss three points. Number one, the update on the liquidity and how the capital raise that we just announced early this morning will get us through to cash flow positive and profitability in 2024. Number two, I will share with you our insight and our determination to reach profitability in the year 2024 with a clear path to that end.

And finally, we’ll discuss the possibility and impact and the questions that arose about the CMS advanced notice and any other changes in the risk adjustment, factor calculations by CMS. So first, let me address the capital raise that we announced earlier today. Through a deal with our largest shareholder Chicago Pacific Founders and other shareholders including Leavitt Partners, we have secured approximately $90 million in funding to an equity agreement. We are grateful for the support and the confidence of our shareholders Chicago Pacific Founders, Leavitt Partners and other shareholders as well. The capital that we raised will provide us the financial resources to realize our strategic vision for P3. And we believe and we will address the details of the capital raise tool, Kavthekar our CFO will address those calculations that is sufficient to get us through to cash flow positive and profitability in 2024.

As a matter of fact, we’re confident that that will get us in early 2024 profitability and cash flow positive. Second, I want to share with you our clear path and insight into how we arrived to profitability in 2024. Our consistent and impressive membership growth is continuing in 2023 and in 2024 class we’ve already have in the pipeline very impressive and consistent growth in all the markets that we are in already. Second, let me address the funding per members. According to the files we received, the members that were with us in January 2022 have demonstrated an average about 15% to 16% increase in their funding in January 2023. And overall, all the population in 2023 new and persistence have shown 7.7% increase in funding over January 2022.

Our medical costs continue to improve by an average of 2.5% year-over-year. And our medical margin in 2022 and medical margin calculated by capitated revenue minus medical claim expense as we reported in our filing was $62 million in 2022. And we project and believe that that will be increased by 50% to 100% in year 2023. And as we continue in our leadership and our team performing consistent with the prior years, that will lead to a clear path to profitability with membership growth in the markets that we’re in, funding consistent improvement year-over-year, medical margin improvement year-over-year. And finally, I want to address our operating expenses. We have significantly focused and improved our operating expenses year-over-year. If you clear all the operating expense in 2022 from all the one-time events and one-time costs related to the longer audit that we had to go through in 2022 and all the professional fees attached to it, we still have shown in 2023 a 23% to 25% improvement in our operating costs year-over-year.

So consistent demand and membership growth in the markets that we’re in that allow us to grow with the existing providers and existing payer and existing engaged environment and patients, improvement in funding in a modest way that we’ve shown year-over-year, system improvement in the medical costs of 2% to 2.5% year-over-year. And that leads to advance of the medical margin significantly in ’23 and ’24 and reduce operating expense. That is the clear path to our profitability. That is why where we sit here today, we’re very confident that will reach profitability in early 2024. Finally, let me address the question about CMS, advanced notice and other regulatory proposals to address the risk adjustment factor and the funding in the Medicare Advantage program.

Our risk adjustment factor is very modest. It’s 1.0 to 1.1 across the board for the old populations that we are privileged and honored to serve you today. We believe from all calculations that any removal of diagnoses or codes in advance notice or adjustment to the coefficient factors of calculating the risk adjustment factor will have no material impact in the population that we serve. And by checking the prevalence of the diagnoses that has been removed in our populations and the other impact factor and coating intensity, we see no material impact whatsoever on our funding in the coming years. And we will wait and see the final ruling on Monday as well. So what I shared with you today and excitement about the support of our current shareholders and the capital raise that allow us to have a solid liquidity through profitability and cash flow positive in early 2024 and a clear path and insight into our path to profitability in early 2024.

And finally, we address the question about funding by CMS. With that, I’m going to turn it over to Atul for a review of our financial results and give you more detail around our new financing and guidance as well as high level look at our 2024 expectations.

Atul Kavthekar: Thank you, Sherif. Good morning, everyone. Since this is my first quarter speaking with you, I just want to take a minute to tell you how excited I am, to be part of the P3 team. I was drawn to P3 for a number of reasons. First and most important is, the mission of the company, which is defined as solution to the healthcare problems facing our nation, including high healthcare costs and poor outcomes. Second is, its history of bringing value you based healthcare quickly and effectively to its members through an asset light affiliate model. The third is the incredible team of professionals at P3 that I get to work with. Now let me walk you through the fourth quarter and the full year 2022 numbers. Top line results for 2022 were strong as the team executed and delivered with revenue of $1.049 billion and is tremendous growth of 65% versus 2021 and squarely in the middle of our guidance.

And even more indicative, on a PMPM basis, revenues grew 10% over ’21. In the fourth quarter, we had revenue of $258 million a 40% increase over the fourth quarter of 2021. In this reporting cycle and to help our investors and analysts to understand our business better, we’ve broken out what we previously referred to as medical expense into two separate components. These include medical claims expense, which are the specific expenses related Part C and D services and network expenses, which include partner physician expenses, related to surplus sharing and other direct medical expenses incurred to improve care for our members. You can see some more detail around that in our 10-K and our hope is that it lends a deeper level of clarity around our model.

As Sherif mentioned, we had strong improved in both medical margin and network contribution in 2022. In 2022, our medical margin which represents the amount earned from capitation revenue after medical claims expenses are deducted, improved 429% over the prior year to $62 million or $52 on a PMPM basis, network contribution which we define as medical margin less network expenses, improved by 65% over the year to a loss of $7.7 million, where we believe that the trends in these two critical data points are proof that our model is working. Another new data point we will begin to provide investors, is our platform support costs. These costs include amounts related to providing support services to our various markets including support personnel and other associated operating costs.

We do exclude costs related to the operations of our owned medical clinics, and wellness centers from this amount. Going forward, we are laser focused in driving efficiencies in our operations and managing our cash expenditures and as a result expect our platform costs, support costs to decrease as a percentage of revenues going forward. In fact, we decrease our platform costs as a percentage of revenues from around 15% in 2021, down to 11% in 2022. Going forward, we’re aiming to bring that percentage down into the high single-digits in 2023 and make continuous progress as we move forward. Our net loss in 2022 was $1.6 billion compared to a net loss of approximately $204 million in the prior year. The increased loss was primarily due to a goodwill impairment charge of $1.3 billion which was taken due to the decrease in our market cap relative to the book value of the goodwill.

Excluding this impairment charge, our net loss increased by $90 million reflecting the ramp up costs associated with onboarding roughly 35,000 new members to our platform, other non-recurring transaction costs, plus additional expenses related to completing the extended 2021 audit. For the three months ended December 13, ’22, we reported a net loss of $532 million compared to a net loss of $118 million in the three months ended December 31, 2021. The increase in the loss was primarily driven by a goodwill impairment charge in the quarter of $463 million. Excluding, the goodwill impairment, the loss increased by $69 million due to the increased number of members and costs associated with the audit – the open audit. Adjusted EBITDA loss was $128 million in ’22 compared to an adjusted EBITDA loss of $95.5 million in the prior year.

As a result of our extended 2021 audit period, completed in October of 2022, our full year EBITDA was impacted by $12 million related to 2021 financial final year settlements which was shifted back into ’21 and recognized in that year. But in normal course would have been recognized in 2022. Also related to the ’21 audit, we incurred approximately $6 million in costs for services provided by audit firms, financial consultants and other service providers. And finally, we incurred approximately $14 million of costs related transactions including the business combinations and the Medcore acquisitions. We have excluded these costs from our calculation of adjusted EBITDA, because we do not expect them to recur in the future. Now looking forward, I’m very pleased with the continued support and the vote of confidence from our investors that participated in the $90 million PIPE offering.

Their conviction in the P3 story and the P3 team is great to see and provides a level of support that lets us keep our focus on executing against our vision every day. This is a strong endorsement from the investors in our differentiated model and we – appreciate the support from our largest existing investor Chicago Pacific Founders, which led this financing with over $70 million. Our external advisors, the management team, Board and the Special Committee of the Board worked hard to source and negotiate the best deal for P3. As part of the offering and is more fully disclosed in the press release and the transaction, the company raised approximately $90 million in gross proceeds by issuing units priced at $1.11 with each unit consisting of a share of P3 common and 0.75 of warrants at an exercise price of $1.13, which represents a 10% premium to the trailing five day moving average.

We were quite intentional about the size of this offering, which does not contemplate the repayment of any debt or redemption of any shareholders position and delivers capital directly to the company. Given the early revenue and medical expense PMPM results so far this year, which are right on track with our plans, we have confidence that this raise will give us ample resources not just to end the year with a cash cushion, but to bridge the company to a point of positive EBITDA and cash flow positivity in 2024. To give you a better sense of what this means to P3, we ended ’22 with approximately $18 million of cash on our balance sheet. Between the new capital from the PIPE and the draws that we made – this year on our unsecured note that totaled just over 100 and with the continued cash inflows generated from our operation, we expect to end the year with resources to bridge the company not just still profitability, but to kill until it’s cash flow positive.

Again, with this new capital, the entire management team is excited to get back to focusing on those key elements that service our MA patients and driver economics. Number one, engaging with our patients, number two, actively managing their health conditions, and number three, keeping a watchful eye in managing our operating expenses and eliminating waste. I want to remind you of our guidance for 2023, which has not changed. We expect 2023 revenue to be between $1.2 billion and $1.25 billion and adjusted EBITDA between $40 million and $60 million – a loss of $40 million to $60 million . In addition to that, we are expecting our medical margin in 2023 to be in the range of $155 million to $175 million. While we aren’t providing quarterly guidance, I think it would be helpful to point out a few unique factors about P3 that may help investors better understand the broad contours of our various quarters and of our earnings progressions a bit better.

P3 recognizes revenue on a very conservative basis. Unlike more established companies in the space, we do not estimate and accrue for revenues for our year and true ups, but rather recognize that revenue based on cash and uncertainty around that revenue. As these true up amounts generally become known to us in the June or July timeframe, we will typically record those revenues in the appropriate quarter. This tends to make the second and third quarter relatively strong on the top line compared to the first and the fourth. Medical expenses can sometimes also have some seasonality, particularly in winter months as the cold and flu season impacts utilization. The third important factor this year will be our overall platform expenses. We have focused intensely on these expenses as a company, and have significant goals in the year.

To that end, we expect much of those cost reductions to reveal themselves in the second quarter and beyond compared to the first quarter. In all, we expect the first quarter to be a bit softer from an overall EBITDA perspective compared to the second and the third quarters with Q4 falling somewhere likely in between. So in closing, let me say we are extremely focused on the prudent growth and conservative management of our resources to meet these goals. We are taking measured steps to control costs and improve the SG&A burden while ensuring that we have the talent necessary to execute on our strategy and achieve our goals. Thank you all once again for your interest in the P3 story. And with that, I’m going to turn it back to the operator Rocco to open the floor to questions.

Rocco?

Operator: Today’s first question comes from Brooks O’Neil with Lake Street Capital Markets. Please go ahead.

Brooks O’Neil: Good morning, everyone. Thanks for taking my questions. I have a couple. I’d like to first start off by just asking you if you could summarize your perception of the demand environment in the marketplace today. Specifically, I’m thinking about interest from provider partners, primary care groups in your existing markets and from payers. But I’m also curious if you could just comment a little bit about the demand environment from the patients as well.

Sherif Abdou: Thanks, Brook, for your question. Really appreciate your interest here. So we’ve seen high level of demand across all the three constituencies that you just described, Brooks. So number one, is that position or provider groups. Usually, the sales cycles or the engagement cycle used to run anywhere between one to two years with the provider groups. Today, we are receiving incoming calls asking to engage and as a pricing pressure on the fee for service compensation from CMS and other payers continue, we see the provider are very engaged and excited and looking forward to move into value based contracting and full risk and also excited about using our tools. And from technology to the team, surrounding them. Secondly, is the payers, as they made commitment to their constituencies and as the evidence increase that people and patients and value base contracting and value based relationship have seen an improved clinical outcome and an improved quality, the payers are excited to move more and more into the value-based contracting.

So we’re getting demands and engagement from all kind of payers in the marketplace. And finally, the patients. The patients have really seen the benefits and experience a different experience from value-based provider than the fee for service where the availability, the accessibility and the transparency of information and communication with them by the providers themselves or the surrounding team from P3, we see that demand intensify and increase continuously year-over-year.

Brooks O’Neil: Great. Thank you, Sherif. Let me ask you two more quick questions. First, I’m curious, well, let me just make a comment. I thought the information you provided at the JPMorgan conference earlier this year was terrific as it relates to the progress you’re making with within markets and with calendar year cohorts of patients. Can you give us any update at all as it relates to continuing progress in markets like Arizona and as your cohorts continue to mature?

Sherif Abdou: Absolutely. Thank you very much for that question, Brooks, because it really highlights the impact and the effectiveness of our medical management team led by Dr. Amir Bacchus, our Co-Founder and Chief Medical Officers and the risk of the medical leadership. We see that in Arizona, the progress continue where independently the market of Arizona will reach breakeven and profitability this year. And the medical margin continue to march positively over $160 million to $180 PMPM medical margin the population that continues with us. And finally, if you look at the medical costs in Arizona, which average about $713 per member per month for the medical claims expenses, almost about $100 to $200 per member per month and Part C medical claims expenses ahead of a lot of our peers in the space and continue to improve as well.

Brooks O’Neil: Great. Let me just ask one last one and appreciate the color. I don’t think you talk much about this obviously, the last couple of years severely impacted by COVID in positive and negative ways. It seems like COVID is into retreat right now, but can you just talk a little bit about what you expect in terms of medical cost trends. Do you expect to take rebound and people coming to the hospital and seeing their doctors? Or do you think it’s going to be a more normal year this year in that regard? Thank you very much.

Sherif Abdou: Thanks, Brooks. So thanks for reminding us. So the COVID is a story of almost three stages. So the second quarter of 2020 saw a significant retreat in the medical utilization and the medical costs. That was artificially developed by the lockdown and the preventive measure from going in public and going into the hospital and emergency room as well. Second, the following when the COVID infection and pandemic intensified and increased utilization through emergency room and the two major variance that hit the population Omicron and Delta variant. That showed increase in utilization. We recorded the last 18 months over $9 million of COVID related expense. In 2023, we see that retreated back and receiving to normal utilization.

I think right now its standard operating procedures. The only adjustment that you will see is our success into managing the population. But I believe the COVID impact is behind us positive or negative. And we’re back into pre-pandemic standard utilization adjusted by our effective medical management and improvement in the medical costs as well. So anyway, thank you very much for the question Brooks, and happy to hear you’re making very strong recovery and back to normal.

Operator: Thank you. And our next question today comes from Joshua Raskin at Nephron Research. Please go ahead.

Joshua Raskin: Hi. Thanks. Good morning. I want to talk about the implied EBITDA margin for 2023. I think it implies a negative adjusted EBITDA margin of 4.1%. That’s an improvement of about 800 basis point, 810 basis points. So I’m trying to figure out how much of that is coming from medical management. I’m assuming a large majority versus the administrative cost improvements that you were talking about? And if you could give some specifics on what’s driving those medical costs ratio improvements that would be helpful? And then I have a second question.

Atul Kavthekar: Yes, Josh, this is Atul speaking. Thanks for the question. Yes, look, I think you can look at it a combination of a lot of things. Principally we’re feeling strong about the way that our revenue PMPMs are progressing. You saw a pretty big jump just looking at ’21 to ’22 that was almost 10% as we were talking about. So we’ve got some assumptions in our forecast in our guidance that I would call non-heroic. I think they are very reasonable and achievable, but it’s a combination of that along with some very modest reductions that we’re thinking of in medical claims expense. And again, as Sherif was talking about earlier, we’ve seen good traction in that regard as well. And as far as the SG&A reductions, I mean they’re – we are considering some of that as well.

But on balance, we think that – this guidance is really driven by all of those components working together it’s not especially dependent on any one factor. We’ve got a number of different levers moving around.

Josh Raskin: Okay – that’s helpful. Which ties to my second question, which is it sounds like a lot of the medical cost improvement is predicated on what you’re calling funding improvements or reimbursement improvements. So I’m trying to figure out how are you seeing a 15% to 16% improvement in funding in the first year of the 2022 members and yet your risk scores are still 1 to 1. I think you said 1.0 or 1.1. And again going back to that medical expense is a large majority of that improvement in risk coding or is some of that medical cost management too?

Sherif Abdou: Thanks, Josh. It’s a combination so – and number one, those percentage for the population that were there in 2022 and now still with us in 2023. It’s a combination of the benchmark improvement in the counties that we are in. In addition to the increase of a percentage of the dual eligible populations that comes with a higher funding and also our engagement with the chronic special need program, which also comes with a higher funding. So the – and the average of the risk scoring that I shared is across all population and – an annual average because at the end – as you very well know that there is a degradation over a period of time for population – the severely young population kind of depart and the new patients come in with the 0.8 average of risks.

So that modifies the risk score across all populations throughout an average year. So like I said, the overall population should increase 7.7% and the specific visits and population have shown an increase of 16% and that’s a combination between the risk scoring, the benchmark adjustment and the increase of dual risk population percentage in our population.

Josh Raskin: Okay. So and I want to make sure I get this clear, because I think it’s important. At 16% that you’re quoting in terms of increased PMPMs, that’s not risk coding, right or are there some component of that?

Sherif Abdou: Correct.

Josh Raskin: But that’s more mixed, okay. How much is the risk coding component of that 16% is there an estimate there?

Sherif Abdou: Yes. So it’s about 3% to 5% across all population, of course vary from one population to other, about 3% to 5% of that is – in risk adjustment.

Josh Raskin: Okay, that’s super helpful. Thanks again.

Operator: Thank you. Our next question today comes from Ryan Daniels at William Blair. Please go ahead.

Unidentified Analyst: Hi, guys. This is Jack on for Ryan Daniel. Thanks for taking my question. So just first, when looking at the cash burn, the fourth quarter looks to be slightly elevated and I understand fourth quarter is historically higher? But I’m curious how should we think about cash burn going forward in 2023 and I believe in your prepared remarks you said you expect to be cash flow positive in early 2024? So does 2023 get you mostly there where the cash burn tapers quite a bit or I guess just kind of how should we think about this going forward? Thanks.

Atul Kavthekar: Yes, Jack, that’s great question. So the way I would suggest you think about and I gave a little bit of an indication of sort of again the seasonality of EBITDA. And I think that that may be a reasonable proxy – for you to think about the burn as we progress through the year. But again, you can think of it as . We gave you EBITDA guidance, 40 to 60 loss over the course of the year. You should probably tack onto that when you think about burn, you should probably tack onto it. Roughly $20 million say of between cash interest, working capital changes as we go through the year. So you can think of that as sort of the entirety of the burn. And again, you can kind of map that out I think over in the quarters as you proportionate to your EBITDA, if that makes sense.

I think in the first quarter, especially as we went through managed our expenses. We were very careful. We were very aggressive in how we managed our cash and our research and we’ll continue do that of course. But I think you’d probably see a little bit of a less burn in the first quarter as compared to the next three.

Unidentified Analyst: Perfect. That’s great color. Thank you. Another quick question too. Are you guys seeing anything in terms of the pipeline for 2024? I know that for 2023. So pretty robust growth in that cohort class. And I know it’s really early and you’re not guiding beyond 2023, but I’m curious if you have any comments on the 2024 progression or if it’s on track at this point?

Sherif Abdou: Yes. We are very confident. Thanks for the question, Jack. And the pipeline is we have a clear line of sight for 2024 growth and especially in the counties and the states and the geographies that we are in today and providers that we’re engaged with today where they want to expand the relationship to all Medicare Advantage and all Medicare SEO patients that will be included in our platform coming 2024. So we have a clean line of sight for 2024 growth and we’re continuing to be very confident about it as well.

Unidentified Analyst: Okay. Understood. Thanks. And then one really just quick last question and this is going off Brooks question on demand. I’m curious you guys have seen any uptick in conversations with health systems. And if this is a segment you’re looking to pursue and maybe if you can just touch on the opportunity there? Thanks.

Sherif Abdou: Thanks. Absolutely, we do. The health system, they are seeing the value in converting from fee for service to value-based contracting and engagement with the organization like ours into improving not only the health outcome, but also the economics of their own medical group or engaged network. So we’re seeing multiple help system that engage with us to create that path to value-based contracting in 2023 and 2024.

Operator: Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Sherif Abdou for any closing remarks.

Sherif Abdou: Thank you very much, Rocco. Thanks again for all of you that joined us today and for your interest in P3. And I just want to finally make a comment about our excitement and commitment to our shareholders and our appreciation for the support of our shareholders in a capital raise that we successfully included late last night, early this morning. And we continue to look very optimistically into 2024 of reaching profitability and positive cash flow. And we look forward to engaging in our next quarter call. Thank you very much everyone.

Operator: Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.