Good day, welcome to the P3 Health Partners fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Karen Blomquist, Director of Investor Relations. Please go ahead.
Thank you, Rocco. 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 operation. 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 these factors 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, 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 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 investor page of P3 Health Partners website.
Thank you, I will now turn the call over to Dr. SherifAbdou.
Thanks, Karen Blomquist . Good morning, everyone, 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.
Finally, we'll discuss the possibility and impact and the questions that arose about the CMS Advance Notice and any other changes in the risk adjustment factor calculations by the CMS. 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 through 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.
Atul 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 arrive 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%-16% increase in their funding in January 2023.
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. Our medical margin in 2022, and as medical margin calculated by capitated revenue minus medical claims expenses, as we reported in our filing, was $62 million in 2022. We project and believe that that will be increased by 50%-100% in the year 2023. 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 the membership growth in the markets that we're in, funding consistent improvement year-over-year, medical margin improvement year-over-year. 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 long 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%-25% improvement in our operating costs year- over- year. 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. Consistent improvement in the medical costs of 2% to 2.5% year over year.
That leads to advance of the medical margin significantly in 2023 and 2024, 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 we'll reach profitability in early 2024. Finally, let me address the question about CMS Advance Notice and other regulatory proposals to address the risk adjustment factor and the funding in a Medicare Advantage program. Our risk adjustment factor is very modest. It's 1.0 to 1.1 across the board for the all populations that we are privileged and honored to serve today. We believe from all calculation that any removal of diagnoses or codes in advanced notice or adjustment to the coefficient factors of calculating the risk adjustment factor will have no material impact in the population that we serve.
By checking the prevalence of the diagnoses that have been re-removed in our populations and the other impact factors and coding intensity, we see no material impact whatsoever on our funding in the coming years. We will wait and see the final ruling on Monday as well. What I shared with you today, I'm excited 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. Finally, we addressed the question about funding by CMS. With that, I'm going to turn it over to Atul Kavthekar for 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.
Thank you, Sherif Abdou. 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 to find a solution to the healthcare problems facing our nation, including high healthcare costs and poor outcomes. Second is its history of bringing value-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. 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.
That is tremendous growth of 65% versus 2021, squarely in the middle of our guidance. Even more indicative, on a PMPM basis, revenues grew 10% over 2021. In the fourth quarter, we had revenue of $258 million, a 40% increase over the fourth quarter of 2021. In this reporting cycle, 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 to 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. Our hope is that it lends a deeper level of clarity around our model. As Sherif Abdou mentioned, we had strong improvements 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. Well, 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 decreased 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, 2022, 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 2022, 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 2021 and recognized in that year, but in normal course, would have been recognized in 2022.
Related to the 2021 audit, we incurred approximately $6 million in costs for services provided by audit firms, financial consultants, and other service providers. Finally, we incurred approximately $14 million of costs related to 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. 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 as more fully disclosed in the press release of 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 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 shareholder's position and delivers capital directly to the company. Given the yearly 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 2022 with approximately $18 million of cash on our balance sheet.
Between the new capital from the PIPE and the draws we made on this year on our unsecured note that totaled just over $100, and with the continued cash inflows generated from our operations, we expect to end the year with resources to bridge the company not just till profitability, but 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 drive our economics. Number one, engaging with our patients. Number two, actively managing their health conditions. 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-end true-ups, but rather recognize that revenue based on cash and/or certainty 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 Q4s falling somewhere likely in between. 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. With that, I'm going to turn it back to the operator, Rocco, to open the floor to questions. Rocco?
Yes, sir. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.
Good morning, everyone, and 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. I'm also curious if you could just comment a little bit about the demand environment from the patients as well.
Thanks, Brooks O'Neil, for your question. Really appreciate your interest here. We've seen high level of demand across all the 3 constituencies that you just described, Brooks O'Neil. Number one is the physician or provider groups. Usually the sales cycles or the engagement cycle used to run anywhere between 1 to 2 years with the provider groups. Today, we are receiving incoming calls asking to engage, and as the pricing pressure on a 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 are 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 in the evidence increased that people and patients and value-based 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. We're getting demands and engagement from all kind of payers in the marketplace. Finally, the patients. The patients have really seen the benefits and experience a different experience from value-based provider than a 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.
Great. Thank you, Sherif Abdou. Let me ask you two more quick questions. First, I'm curious. Let me just make a comment. I thought the information you provided at the JP Morgan conference earlier this year was terrific as it relates to the progress you're making 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?
Absolutely. Thank you very much for that question, Brooks O'Neil, 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 rest 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. The medical margin continue to march positively, where over $160-$180 PMPM medical margin for the population that continued with us.
Finally, if you look at the medical costs in Arizona, which average about $713 per member per month for the medical claims expenses, almost $100-$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.
Great. Let me just ask one last one and appreciate the call. I don't think you talked much about this. Obviously, the last couple of years severely impacted by COVID in positive and negative ways. It seems like COVID is in retreat right now, can you just talk a little bit about what you expect in terms of medical cost trends? Do you expect a big rebound in people coming to the hospital and seeing their doctors? Do you think it's gonna be a more normal year this year in that regard? Thank you very much.
Thanks, Brooks O'Neil. Thanks for reminding us. The COVID is a story of almost three stages. The second quarter of 2020 saw a significant retreat in the medical utilization and the medical cost 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 variants that hit the population, Omicron and the Delta variant, that showed increase in utilization. We recorded over the last 18 months over $90 million of COVID-related expense. In 2023, we see that retreated back and receding to normal utilization.
I think right now it's standard operating procedures. The only adjustment that you will see is our success into managing the population. I believe the COVID impact is behind us, positive or negative. We're back into pre-pandemic standard utilization adjusted by our effective medical management and improvement in the medical costs as well. Anyway, thank you very much for the question, Brooks O'Neil, and happy to hear you're making very strong recovery and back to normal.
Thank you. Our next question today comes from Josh Raskin at Nephron Research. Please go ahead.
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, you know, 4.1%. That's an improvement of about 810 basis points. 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. If you could give some specifics on what's driving those medical cost ratio improvements, that'd be helpful. Then I have a second question.
Josh, this is Atul Kavthekar speaking. Thanks for the question. Look, I think you can look at it a combination of a lot of things. Principally, you know, we're feeling strong about the way that our revenue PMPMs are progressing. You saw a pretty big jump just looking at 2021 to 2022. That was almost 10%, as we were talking about. We've got s ome assumptions in our forecast and our guidance that I would call non-heroic. I think they are very reasonable and achievable. It's a combination of that along with some very modest reductions that we're thinking of in medical claims expense. Again, as Sherif was talking about earlier, we've seen good traction in that regard as well.
As far as the SG&A reductions, we're considering some of that as well. O n 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.
Okay. That helpful. Which ties into my second question, which is, sounds like a lot of the medical cost improvement is predicated on what you're calling funding improvements or reimbursement improvements. I'm trying to figure out how are you seeing a 15%-16% improvement in funding, in the first year of the 2022 members, and yet your risk scores are still 1. 1, I think you said 1.0 or 1.1? 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?
Thanks, Josh Raskin. It's a combination. 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 addition to the increase of a percentage of the dual eligible populations that comes with a higher funding. Also, our engagement with the Chronic Special Needs Program, which also comes with a higher funding. 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 ill population kinda depart and the new patients come in with the 0.8 average of risk. That modify the risk score across all populations throughout an average year. Like I said, the overall population has shown an increase 7.7%, and the specific persistent population have shown an increase of 16%. That's a combination between the risk scoring, the benchmark adjustment and increase of the dual risk population percentage in our population.
Okay. I want to make sure I get this clear because I think it's important. That 16% that you're quoting in terms of increased PMPMs, that's not risk coding, or there's some component of that?
Correct.
That's more mixed. Okay. How much is the risk coding component of that 16? Is there an estimate there?
Yeah. It's about 3%-5% across all population. Of course, it vary from one population to other, but about 3%-5% of that is in risk adjustment.
Okay. That's super helpful. Thanks again.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then one. Our next question today comes from Ryan Daniels at William Blair. Please go ahead.
Hey guys, this is Jack Senft on for Ryan Daniels. Thanks for taking my question. Just first, when looking at the cash burn, the fourth quarter looks to be slightly elevated and I understand the fourth quarter is historically higher. I'm curious, how should we think about cash burn going forward in 2023? I believe in your prepared remarks, you said you expect to be cash flow positive in early 2024. Does 2023 get you mostly there where the cash burn tapers quite a bit? I guess, you know, just kinda how should we think about this going forward? Thanks.
Yeah. Jack Senft, that's a great question. The way I would suggest you think about it, I gave a little bit of an indication of again, the seasonality of EBITDA. I think that that may be a reasonable proxy for you to think about the burn as we progress through the year. A gain, you can think of it as high level. We gave you know, EBITDA guidance, you know, $40 million-$60 million loss over the course of the year. You should probably tack on to that. When you think about burn, you should probably tack on to it a roughly $20 million, say of between cash interest, working capital changes as we go through the year.
You can think of that as sort of the entirety of the burn. A gain, you can map that out, I think over in the quarters as you, as you'd, proportionate to your EBITDA, if that makes sense. I think in the first quarter, especially as we went through and managed the, our expenses, we were very careful. We were very aggressive in how we managed our cash and our resources, and we'll continue to do that of course. I think, you'd probably see a little bit of a less burn in the first quarter as compared to the next three.
Perfect. That's great call. Thank you. Another quick question too. Are you guys seeing anything in terms of the pipeline for 2024? I know that for 2023, saw 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.
W e're very confident. Thanks for the question, Jack Senft. The pipeline is we have a clear line of sight for 2024 growth especially in the counties and the states and the geographies that we are in today, and the providers that we're engaged with today, where they want to expand the relationship to all Medicare Advantage and all Medicare ACO patients that will be included in our platform coming 2024. We have a clear line of sight for 2024 growth, and we're continuing to be very confident about it as well.
Okay. Understood. Thanks. One really just quick last question, and this is going off Brooks O'Neil's question on demand. I'm curious if 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.
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 owned medical group or engaged network. We're seeing multiple health system that have engaged with us to create that path to value-based contracting in 2023 and 2024.
Thank you. 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.
Thank you very much, Rocco. Thanks again, for all of you that joined us today and for your interest in P3. 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 the capital raise that we successfully concluded late last night, early this morning. We continue to look very optimistically into 2024 of reaching profitability and positive cash flow. We look forward to engaging in our next quarter call. Thank you very much, everyone.
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 great day.