1-2022 Audited Financials.pdf

Consolidated Financial Statements and Report of Independent Certified Public Accountants

Pathways Health and Community Support, LLC and Subsidiaries

December 31, 2022 and 2021

Contents Page

Report of Independent Certified Public Accountants 3

Consolidated Financial Statements

Consolidated balance sheets 5

Consolidated statements of operations 6

Consolidated statements of changes in members' equity 7

Consolidated statements of cash flows 8

Notes to consolidated financial statements 9

GT.COM Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms are separate legal entities and are not a worldwide partnership.

Members Pathways Health and Community Support, LLC

Opinion We have audited the consolidated financial statements of Pathways Health and Community Support, LLC (a Delaware corporation) and subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for opinion We conducted our audits of the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America (US GAAS).

Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Emphasis of matter As discussed in Note C to the consolidated financial statements, the Company has adopted new accounting guidance as of January 1, 2022 related to the accounting for leases. Our opinion is not modified with respect to this matter.

Responsibilities of management for the financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

GRANT THORNTON LLP

111 South Calvert St., Suite 2320

Baltimore, MD 21202

D +1 410 685 4000

F +1 410 528 2060

In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date the financial statements are available to be issued.

Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with US GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.

In performing an audit in accordance with US GAAS, we:

Exercise professional judgment and maintain professional skepticism throughout the audit.

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

Baltimore, Maryland September 25, 2023

2022 2021 Current assets

Cash and cash equivalents 3,201,069$ 6,600,117$ Restricted cash 1,313,384 5,433,189 Client receivables 21,332,635 26,478,772 Accrued revenues 10,568,657 9,034,040 Prepaid expenses 8,162,085 8,602,158 Deferred tax assets, current - 49,077 Income taxes receivable 319,693 - Other current assets 12,133,678 882,174

Total current assets 57,031,201 57,079,527

Capital assets 9,709,199 18,328,929 Right-of-use asset - operating leases 34,035,865 - Right-of-use asset - finance leases 4,333,852 - Goodwill 17,747,212 13,873,143 Other assets 1,150,473 1,202,853 Deferred tax asset, net 932,097 542,979

Total assets 124,939,898$ 91,027,431$

Current liabilities Accounts payable and accrued expenses 12,987,127$ 15,027,684$ Accrued compensation 14,518,170 17,599,168 Deferred revenue 718,910 931,039 Operating leases payable - current portion 12,192,865 - Finance leases payable - current portion 1,778,730 - Note payable 4,398,958 2,396,574 Capital lease obligations - current maturities - 2,074,100 Loans - current maturities - 500,000

Total current liabilities 46,594,759 38,528,565

Long-term liabilities Operating leases payable, net 22,959,931 - Finance leases payable, net 3,541,711 - Deferred revenue, net 1,264,591 - Capital lease obligations, net - 4,167,344 Deferred rent, net - 1,045,434 Loans, net 41,958,943 37,572,900

Total liabilities 116,319,935 81,314,243

Members’ equity 8,619,963 9,713,188

Total liabilities and members’ equity 124,939,898$ 91,027,431$

Pathways Health and Community Support, LLC and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31, The accompanying notes are an integral part of these consolidated financial statements.

Revenues

Client service revenues 333,056,562$ 320,293,961$ Grant revenues 32,399,784 21,404,899

Total revenues 365,456,346 341,698,860

Expenses Payroll and employee benefits 249,031,051 223,066,144 Facilities management 23,437,992 21,069,294 General and administrative 84,453,147 78,854,507 Depreciation and amortization 8,091,499 6,659,643

Operating expenses 365,013,689 329,649,588

Operating income 442,657 12,049,272

Other (income) expenses Non-operating gain (231,968) - Non-operating income (9,482,541) - Interest expense 4,646,042 2,052,764

Income before income taxes 5,511,124 9,996,508

Income tax (benefit) expense (130,004) 153,212

NET INCOME 5,641,128$ 9,843,296$

Pathways Health and Community Support, LLC and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, Members’ Accumulated Capital Deficit Total

Balance at January 1, 2021 241,468,589$ (218,139,175)$ 23,329,414$

Distributions to members - (23,459,522) (23,459,522)

Net Income - 9,843,296 9,843,296

Balance at December 31, 2021 241,468,589 (231,755,401) 9,713,188

Distribution to members - (6,734,353) (6,734,353)

Net Income - 5,641,128 5,641,128

Balance at December 31, 2022 241,468,589$ (232,848,626)$ 8,619,963$

Pathways Health and Community Support, LLC and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

Years ended December 31, 2022 and 2021

Cash flows from operating activities:

Net income 5,641,128$ 9,843,296$ Adjustments to reconcile net income to net cash used in operating activities:

Depreciation of capital assets 4,035,045 3,824,585 Goodwill amortization 1,887,152 839,697 Finance lease ROU asset amortization 2,169,302 - Capital lease assets amortization - 1,995,361 Operating lease ROU asset non-cash expense 15,033,849 - Gain on sale of capital assets (103,140) - Gain on lease termination (128,828) - Deferred rent (1,045,434) 27,667 Amortization of loan costs 89,533 267,344 Changes in assets and liabilities:

Client receivables 5,511,267 2,696,415 Accrued revenues (1,534,617) (739,426) Prepaid expenses and other assets (10,723,600) (792,278) Accounts payable and accrued expenses (2,070,130) 6,088,292 Accrued compensation (3,294,362) (6,032,373) Deferred revenue (1,192,798) 408,286 Income tax receivable (270,616) (405,536) Deferred income taxes (389,118) (287,986) Operating lease liabilities (15,042,546) -

Net cash (used in) provided by operating activities (1,427,913) 17,733,344

Cash flows from investing activities:

Purchase of capital assets (1,108,475) (2,750,437) Disposal of capital assets 717,755 - Proceeds from finance lease terminations 847,271 - Purchase of assets through business combination (3,683,067) (8,645,962) Renew/HRT final WC adjustments (76,256) -

Net cash used in investing activities (3,302,772) (11,396,399)

Cash flows from financing activities:

Repayment of capital lease obligations - (1,942,233) Borrowing on note payable 5,085,061 3,531,662 Repayment on note payable (3,082,677) (2,590,577) Repayment of line of credit (353,848,797) (332,344,595) Repayment of term loan (500,000) (125,000) Repayment of finance lease obligations (1,857,543) - Borrowings under line of credit 358,150,141 342,500,000 Borrowings under term loan - 10,000,000 Distributions to members (6,734,353) (23,459,522)

Net cash used in financing activities (2,788,168) (4,430,265)

NET (DECREASE) INCREASE IN CASH (7,518,853) 1,906,680

Cash, at beginning of year 12,033,306 10,126,626

Cash, end of year 4,514,453$ 12,033,306$

Supplementary cash flows information:

Cash paid during the year for interest 3,360,544$ 1,696,967$

Cash paid during the year for income taxes 502,607$ 931,810$

Supplemental disclosure of non-cash financing activities:

Capital expenditures funded by capital lease borrowings -$ 987,805$

Pathways Health and Community Support, LLC and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022 and 2021

NOTE A - ORGANIZATION

Pathways Health and Community Support, LLC and its wholly owned subsidiaries (collectively, “Pathways” or the “Company”) are committed to delivering comprehensive, accessible, outcome-based behavioral health and human services. Pathways provides a complete range of treatment services, including behavioral health services for children and adults, child welfare, care coordination, educational services, psychiatric medication management, substance abuse, rehabilitative and habilitative services for autism and intellectual disability disorder (“IDD”) populations. Pathways treatment services are managed and delivered by licensed counselors, clinical professionals, masters, bachelor, and peer level staff.

Pathways is a limited liability company ("LLC") that serves as the parent organization of the affiliates listed below. The consolidated financial statements consist of the financial position of Pathways and the following affiliates. Except as noted, all entities are limited liability companies.

AmericanWork, LLC provides behavioral health services and psychiatric medicine management in Georgia.

Camelot Care Centers LLC provides child welfare and behavioral health services in Tennessee and Illinois.

Children’s Behavioral Health LLC provides behavioral health services in Pennsylvania.

Choices Group LLC provides behavioral health and substance use services in Nevada.

College Community Services, Inc. provides behavioral health, substance use, and psychiatry services in California.

Dockside Services LLC provides behavioral health services and child welfare services in Indiana.

Family Preservation Services of Florida LLC provides assertive community treatment in Louisiana.

Family Preservation Services of North Carolina LLC provides behavioral health services and autism and IDD services.

Family Preservation Services of Washington, D.C. LLC provides behavioral health services.

Family Preservation Services LLC, located in Virginia, provides behavioral health for children and families.

Maple Star Colorado, Inc. provides child welfare and behavioral health services.

Maple Star Nevada LLC provides behavioral health and child welfare services.

Maple Star Oregon, Inc. provides child welfare services.

Pathways at Work LLC provides customized workplace mental health programs.

Pathways Community Services LLC (DE) provides behavioral health, substance use, care coordination, and psychiatry services in California.

Pathways Community Services LLC (PA) provides behavioral health services in Pennsylvania.

Pathways Human Services of North Carolina LLC provides behavioral health services in North Carolina.

Pathways Human Services of Pennsylvania LLC provides behavioral health services in Pennsylvania.

Pathways Human Services of South Carolina LLC provides behavioral health services in South Carolina.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2022 and 2021

Pathways of Arizona LLC provides behavioral health, case management, autism, psychiatry, and child welfare services.

Pathways of Delaware LLC provides alternative schools and behavioral health services.

Pathways of Idaho LLC provides behavioral health services and psychiatric med management.

Pathways of Maine LLC provides behavioral health and autism intellectual and development disabilities (“IDD”) services.

Pathways of Washington LLC provides human services, care coordination in the state of Washington.

Renew Consulting LLC provides behavioral health services in Northwest Oregon counties.

Transitional Family Services LLC provides behavioral health services and psychiatric medication management in Georgia.

Pathways Health Companies, Inc, a holding company that acquired Human Resources Training.

The ReDCo Group LLC provides one-to three-person group homes and day programs and child welfare services in Pennsylvania.

Human Resource Training, Inc. provides wide range of social services to families and youth in the central and northern regions of Arizona.

Raystown Developmental Services LLC provides IDD services and child welfare services in Pennsylvania.

Pathways was acquired by Pyramid Health Holdings, LLC (“Pyramid”) on October 19, 2018. Pyramid is owned by affiliates of Atar Capital, LLC (“Atar”).

Psychological Assessment & Intervention Services LLC (“PAIS”) provides IDD services in West Virginia.

NOTE B - LIQUIDITY

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company’s consolidated cash flows from operations decreased for the year ended December 31, 2022 in comparison to the year ended December 31, 2021. As of December 31, 2022, the Company’s net working capital decreased considerably as compared to that as of December 31, 2021. Furthermore, the Company’s consolidated operating income for the year ended December 31, 2022 also declined considerably in comparison to that for the year ended December 31, 2021. Also, the Company’s consolidated accumulated deficit as of December 31, 2022 increased from the consolidated accumulated deficit as of December 31, 2021. The Company was able to refinance its operating line of credit and term loan in September 2023 (see Note H), has continued to expand its customer base, and aims to reduce its operating expenses in the year ahead.

As of the issuance date of these consolidated financial statements, the Company has sufficient cash and cash equivalents and current availability on its line of credit to satisfy the Company’s obligations as they come due during the one year period following the issuance date of these consolidated financial statements.

December 31, 2022 and 2021

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Pathways Health and Community Support, LLC and its wholly owned subsidiaries as outlined in Note A. All intercompany accounts and transactions have been eliminated in consolidation.

Basis of Accounting

The consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Pathways considers all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents. At times, cash in these checking accounts may exceed the Federal Deposit Insurance Corporation limits. At various times during the year, Pathways may have balances in excess of the insured limit. Pathways does not believe it is exposed to any significant risk for future loss.

Restricted Cash

Pathways maintains restricted cash balances related to client funds from payors that are managed for clients, and cash balances to cash collateralize letters of credit related to the Company's self-insured liabilities for workers compensation.

Client Service Revenues and Client Receivables

Pathways provides a comprehensive range of treatment services, including mental health therapy for children and adults, foster care, care coordination, educational services, psychiatric medication management, substance abuse services, and rehabilitative and habilitative services for autism and IDD.

Pathways recognizes revenue upon transfer of control of promised services to customers in an amount that reflects the consideration Pathways expects to receive in exchange for those services. Revenue is recognized as the performance obligation is satisfied. Performance obligations are satisfied upon completion of the testing process, when patient health and treatment results are reported, or when services have been rendered. The Company determines transaction price based on the standard charges for services provided, fee schedules and contractual rates, reduced by explicit and implicit price concessions.

If the consideration promised in a contract includes a variable amount, Pathways includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.

Pathways receives its funding through contracts with states, including Medicaid, various cities and counties, federal programs, including Medicare, and agreements with managed care and insurance organizations.

Client service revenues and client receivables are reported at the estimated net realizable amounts from consumers, third-party payors, and others for services rendered. The process for estimating client service

December 31, 2022 and 2021 revenues and the ultimate collection of client receivables involves significant judgment and estimation. The Company follows a standard process, which considers historical denial and collection experience and other factors, to estimate the consideration expected to be received for the services performed.

Payment arrangements are primarily prospectively determined fee-for-service rates. Certain payors pay in advance of the services rendered. As such, Pathways records these payments as deferred revenue until a point in time when services are performed. Pathways does not bill for services until a subsequent period primarily due to delays in the finalization of the billing process for specific services. The unbilled amounts are recorded as accrued revenues on the consolidated balance sheets.

As the performance obligations relate to contracts with a duration of one year or less, the Company is not required to disclose the transaction price for the remaining performance obligations at the end of the reporting period or when the Company expects to recognize the revenue. The Company has minimal unsatisfied performance obligations at the end of the reporting period, as its patients typically are under no obligation to remain admitted in the treatment centers.

For the years ended December 31, 2022 and 2021, the Pennsylvania Department of Human Services (“PADHS”) accounted for approximately 10.04% and 10.42% of the client service revenues, respectively, and 11.53% and 10.57% of client service receivables, respectively. No other payor accounted for more than 10% of client service revenues or client receivables.

Laws and regulations governing these programs are complex and subject to interpretation. Pathways believes that it is in compliance with all applicable laws and regulations. Compliance with such laws and regulations can be subject to future regulatory review and interpretation.

Grant Revenues

Grant revenue is primarily derived from various states as a result of the Coronavirus Aid, Recovery and Economic Security (“CARES”) Act as noted below within the section on Impact of COVID-19 Pandemic.

The Company recognizes grant payments as assets and revenues in the period received and is presented as grant revenues in the consolidated statements of operations.

Capital Assets

Capital assets are stated at cost net of accumulated depreciation. Repairs and maintenance costs are expensed as incurred. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets, as follows:

Buildings and building improvements 39 years Furniture, fixtures, and equipment 7 years Vehicles 5 years Computer, office equipment, and software 3-5 years Leasehold improvements Lesser of the useful life of the asset or remaining non-cancellable lease term

When capital assets are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gains or losses are included in the consolidated statements of operations.

Development costs incurred internally in creating computer software to be sold, licensed, or otherwise marketed, are expensed as incurred unless they meet generally accepted accounting criteria for capitalization and amortization. Software development costs incurred prior to the establishment of technological feasibility do not meet these criteria and are expensed as incurred. Research costs are

December 31, 2022 and 2021 expensed as incurred. For costs that are capitalized, amortization is recorded using the straight-line method over the economic life of the product. Such amortization is recorded over a period typically not exceeding three years. The Company reassesses whether it has met the relevant criteria for continued capitalization and amortization at each reporting date.

Impairment of Long-Lived Assets

Pathways reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, but no less frequently than on an annual basis. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. No impairment losses were recorded for the years ended December 31, 2022 and 2021, as there were no indicators or triggering events requiring recognition or analysis.

Goodwill

Goodwill represents the difference between the total purchase price consideration and the net assets acquired through business combinations. Goodwill is amortized on a straight-line basis over 10 years.

In accordance with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2021-03, the Company elected to evaluate goodwill for impairment at the end of the reporting period to determine whether if events and circumstances indicate the carrying value of goodwill may not be recoverable, in accordance with Accounting Standard Codification (“ASC”) 350, Intangibles - Goodwill and Other. As of December 31, 2022, no circumstances were noted that would indicate the carrying value of goodwill may not be recoverable. Pathways reviews goodwill for impairment at the entity level. When events and circumstances indicate the carrying value of goodwill may not be recoverable, Pathways performs a quantitative assessment of the fair value of the Company. The fair value is determined using a discounted cash flow or market comparable analysis. If the fair value exceeds its carrying value, no impairment exists.

Conversely, if the carrying value of the Company equity exceeds its fair value, Pathways recognizes impairment equal to the excess of the carrying value over its fair value. No impairment losses were recorded for the years ended December 31, 2022 and 2021, as there were no indicators or trigger events requiring recognition.

Business Combination

Pathways accounts for business combinations under the acquisition method of accounting, in accordance with ASC 805, Business Combinations. Under ASC 805, the total estimated purchase consideration is allocated to the acquired tangible and intangible assets and assumed liabilities based on their estimated fair values as of the acquisition date. Any excess of the fair value of acquisition consideration over the fair value of the identifiable assets acquired and liabilities assumed is recorded as goodwill.

Debt Issuance Costs

Debt issuance costs are amounts incurred to obtain long-term financing. Debt issuance costs are recorded at cost as a reduction against the associated debt and are amortized, over the respective terms of the financing agreement and are included as a component of interest expense in the consolidated statements of operations.

December 31, 2022 and 2021

Marketing and Advertising Costs

Pathways expenses marketing and advertising costs as incurred. For the years ended December 31, 2022 and 2021, Pathways incurred marketing and advertising costs of $1,083,886 and $968,502, respectively, which are presented as part of general and administrative expense in the consolidated statements of operations.

Fair Value Measurements

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment.

Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1 - Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3 - Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, client receivables, accounts payable and bank indebtedness. The carrying amount of cash and cash equivalents, restricted cash, client receivables, accounts payable, and short-term borrowings approximate fair value because of the short-term maturity of these instruments. The fair value of loans approximates the carrying value as the interest rates fluctuate with market interest rates.

Income Taxes

Pathways is an LLC and has elected to be taxed as a partnership; therefore, Pathways is a pass-through entity and does not have any federal or state income tax, except for Maple Star Colorado, Inc., Maple Star Oregon, Inc., College Community Services, Inc., Pathways Health Companies, Inc., and Human Resource Training, Inc. All other taxes payable by this entity are a distribution to shareholders. The Company has recorded a deferred tax asset, net in an amount of $932,097 and $592,056, related to these entities on the consolidated balance sheets, for 2022 and 2021, respectively.

Pathways applies the elements of ASC 740-10, Income Taxes - Overall, regarding accounting for uncertainty in income taxes. This clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2022 and 2021, Pathways did not have any unrecognized tax benefits and has not accrued any interest or penalties through 2022 and 2021. Pathways does not expect to have any unrecognized tax benefits within the next 12 months. Pathways policy is to recognize interest and penalties related to tax matters within operating expenses.

December 31, 2022 and 2021

Recently Adopted Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU improves transparency and comparability related to the accounting and reporting of leasing arrangements. The guidance requires balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. The Company adopted the guidance on January 1, 2022 using the transition method provided by ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this transition method, the Company applied the new requirements to only those leases that existed as of January 1, 2022, rather than at the earliest comparative period presented in the financial statements. Prior periods will be presented under existing lease guidance. Upon transition, the Company applied the package of practical expedients permitted under the ASC 842 transition guidance. As a result, the Company did not reassess (a) whether expired or existing contracts contain leases under the new definition of a lease, including whether an existing or expired contract contains an embedded lease, (b) lease classification for expired or existing leases and (c) any initial direct costs of existing leases. As a result of the adoption of this guidance on January 1, 2022, the Company recorded operating ROU assets of $35,615,411, finance ROU assets of $5,602,870, operating lease liabilities of $36,657,338 and finance lease liabilities of $6,044,905. Adoption of the guidance did not have a material impact on the Company's consolidated statements of operations or cash provided by or used in operating, investing or financing activities on its consolidated statements of cash flows.

In January 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill (Step 2 of the current impairment test) to measure the goodwill impairment charge. Instead entities will record impairment charges based on the excess of a reporting unit’s carrying amount over its fair value. The Company adopted ASU 2017-04 on January 1, 2022. The adoption of this new accounting rule did not have a significant impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles of the accounting for income taxes and also improves consistent application of and simplification of other areas when accounting for income taxes. The Company adopted ASU 2019-12 on January 1, 2022. The adoption of this new accounting rule did not have a significant impact on the Company's consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance. ASU 2021-10 increases the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The Company adopted ASU 2021-10 on January 1, 2022. The adoption of this new accounting rule did not have a significant impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, and subsequent amendments, which requires companies to measure financial assets at an amortized cost basis to be presented at the net amount expected to be collected. The new accounting rules eliminate the probable initial recognition threshold and, instead, reflect an entity's current estimate of all expected credit losses. ASU 2016-13 is applicable to Pathways' client receivables. Pathways has elected an extension applicable for small reporting companies and the effective date to adopt this standard will be for fiscal years beginning after December 15, 2022.

Pathways is currently in the process of evaluating the impact of ASU 2016-13, but it does not expect the adoption of these new accounting rules to have a significant impact on Pathways' consolidated financial statements.

December 31, 2022 and 2021

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 simplifies the accounting for contract modifications made to replace London Interbank Offered Rate or other reference rates that are expected to be is continued because of reference rate reform. The guidance provides optional expedients and exceptions for applying U.S. GAAP to these contract modifications if certain criteria are met. The optional expedients and exceptions can be applied to contract modifications made until December 31, 2024.

Management is evaluating the impact of this standard on the Company’s consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, creating an exception to the recognition and measurement principles in ASC 805, Business Combinations. The amendments require an acquirer to use the guidance in ASC 606, Revenue from Contracts with Customers, rather than using fair value, when recognizing and measuring contract assets and contract liabilities related to customer contracts assumed in a business combination.

In addition, the amendments clarify that all contracts requiring the recognition of assets and liabilities in accordance with the guidance in ASC 606, such as contract liabilities derived from the sale of nonfinancial assets within the scope of ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, fall within the scope of the amended guidance in ASC 805. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted. Management is evaluating the impact of this standard on the Company’s consolidated financial statements.

Impact of COVID-19 Pandemic

In March 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic, which has had and continues to have an extensive impact on the global health and economic environments. Like many healthcare providers across the United States, Pathways has directed a sustained response to the pandemic. The Company incurred a significant decline in patient revenue as well as additional costs associated with managing the response.

The Company received grant payments, which are considered non-exchange transactions, from the Public Health and Social Services Emergency Fund for provider relief that was appropriated by Congress to the Department of Health and Human Services (“HHS”). For the years ended December 31, 2022 and 2021, payments of $26,970,032 and $22,470,685, respectively, are included in grant revenues in the consolidated statements of operations, under the CARES Act. Pathways believes it has met the conditions to retain these funds as of December 31, 2022. As of December 31, 2022, $2,071,026 was reserved for repayment. The reserve for repayment relates to excess of grant payments received to cover lost earnings caused by COVID-19 pandemic. The grantors have one year from the date of payment to reconcile and recoup any payments. These payments are subject to audit and compliance with various state regulations. Future grant payments are uncertain at this time.

Additionally, the Internal Revenue Service (“IRS”) allowed the Company to defer remittance of 2020 payroll taxes, whereas fifty percent was due by December 31, 2021 and the remaining balance due by December 31, 2022, which was fully remitted. As of December 31, 2021, deferred payroll taxes $3,346,351 was included in accrued compensation on the consolidated balance sheet.

NOTE D - BUSINESS COMBINATION

Business combinations were accounted for under the acquisition method of accounting. Net assets acquired were recorded at their fair values as of the acquisition date. Goodwill represents the excess of consideration over the fair value of the net tangible assets acquired and it is not deductible for income tax purposes. The goodwill is attributable to the general reputation of the business and the collective experience of management and employees.

December 31, 2022 and 2021

Psychological Assessment & Intervention Services, Inc. (“PAIS”)

On May 6, 2022, the Company completed the acquisition of 100% of the stock of PAIS. The purchase consideration paid on the date of acquisition was through cash payment of $5.02 million.

PAIS was a West Virginia Corporation established to address individuals with developmental disabilities and their families. PAIS’s programs included person-centered home and community-based services, including direct services and case management for individuals with developmental disabilities and their families, along with psychological assessment and general outpatient therapy services for children and adults. At the time of the acquisition, PAIS had over 200 employees and one primary owner.

A summary of the purchase price related to the PAIS acquisition and the allocation to the net assets acquired is as follows:

Net cash paid at acquisition $ 4,196,792 Escrow 700,000 Transaction costs capitalized 286,275 Adjustment to purchase price (legal settlement) (1,500,000)

Total purchase price $ 3,683,067

Net assets acquired:

Cash $ 51,724 Accounts receivable 365,171 Prepaid expenses 26,570

PP&E 33,952

Deposits 8,880 ROU asset 211,800 Accounts payable (29,573) Accrued payroll (213,363) Lease liability (ASC 842) (211,800) Deferred revenue (2,245,259)

Fair value of net liabilities assumed $ (2,001,898)

Total consideration $ 3,683,067 Fair value of net liabilities assumed 2,001,898

Goodwill on acquisition $ 5,684,965

Renew Consulting

On September 24, 2021, Pathways entered into a Membership Interest Purchase Agreement to purchase the membership interest of Renew Consulting (“Renew”) from RC Holdings, Inc. Renew provides behavioral health services in Northwest Oregon counties. Cash consideration of $7,185,278 was exchanged for all of the Sellers' respective rights, title, and interest in and to the acquired assets. Additionally, Pathways agreed to assume all the related liabilities.

December 31, 2022 and 2021

The following table summarizes the allocation of the purchase considerations:

Cash consideration $ 7,185,278

Fair value of net assets acquired:

Cash and cash equivalent 550,527 Client receivable 530,935 Capital assets 121,107 Prepaid and other assets 1,157,161

2,359,730 Fair value of net liabilities assumed:

Accounts payable 70,629 Accrued compensation 1,507,189 Deferred revenue 35,380 Notes payable 52,892

1,666,090

Fair value of net assets acquired 693,640

Goodwill on acquisition $ 6,491,638

The Company incurred $452,500 of acquisition-related costs for the year-ended December 31, 2021, which is presented as part of general and administrative expense in the consolidated statements of operations.

Human Resource Training, Inc.

On December 29, 2021, Pathways entered into a Share Purchase Agreement to purchase 100% interests in shares of Human Resource Training, Inc. (“HRT”) from its members. HRT provides wide range of social services to families and youth in the central and northern regions of Arizona. The Company paid total cash consideration of $2,953,563 and the remaining unpaid amount of $893,302 is presented as part of accounts payable and accrued expenses at December 31, 2021, in the consolidated balance sheets. The total consideration was exchanged for all of the Sellers' respective rights, title, and interest in and to the acquired assets. Additionally, Pathways agreed to assume all the related liabilities.

December 31, 2022 and 2021

The following table summarizes the allocation of the purchase considerations:

Total consideration $ 3,846,865

Fair value of net assets acquired:

Cash and cash equivalent 942,352 Client receivable 1,312,822 Capital assets 2,023 Prepaid and other assets 93,137

2,350,334 Fair value of net liabilities assumed:

Accounts payable 34,303 Accrued payroll 416,335

450,638

Fair value of net assets acquired 1,899,696

Goodwill on acquisition $ 1,947,169

The Company incurred $191,750 of acquisition-related costs for the year ended December 31, 2021, which is presented as part of general and administrative expense in the consolidated statements of operations.

NOTE E - CAPITAL ASSETS

Capital assets consisted of the following at December 31:

2022 2021

Land and land improvements $ 682,956 $ 682,956 Building and building improvements 6,291,370 6,364,693 Furniture, fixtures, and equipment 1,649,123 1,608,915 Vehicles 3,718,939 13,065,910 Computer equipment 14,281,431 13,730,296 Office equipment 4,433,309 4,150,917 Software 15,317,708 14,761,659 Leasehold improvements 3,841,489 3,541,776

50,216,325 57,907,122

Less: accumulated depreciation and amortization (40,793,522) (40,224,293) Add: construction in progress 286,396 646,100

Total capital assets $ 9,709,199 $ 18,328,929

The net book value of capitalized software held for internal use totaled $2,293,681 and $3,864,331 as of December 31, 2022 and 2021, respectively, and was included in capital assets, in the consolidated balance sheets. Pathways reports uncompleted capitalized software projects as construction in progress.

Amortization is recorded once internally developed software projects are completed and placed in service.

December 31, 2022 and 2021

Amortization related to capitalized software for the years ended December 31, 2022 and 2021 was $2,126,699 and $1,952,936, respectively, and is presented as part of depreciation and amortization in the consolidated statements of operations.

Depreciation and amortization expense related to capital assets was $4,035,045 and $5,819,946 for the years ended December 31, 2022 and 2021, respectively, and is presented as part of depreciation and amortization in the consolidated statements of operations. Depreciation for the year ended December 31, 2021 included $1,995,361 as Amortization of Capital Leases.

NOTE F - GOODWILL

Changes in goodwill during the years ended December 31, 2022 and 2021 are as follows:

Goodwill as of December 31, 2020 $ 7,137,960 Acquisition of Renew Consulting 6,491,638 Acquisition of Human Resource Training, Inc. 1,947,169 8,438,807

Measurement period adjustments for acquisition in 2020 (587,956)

Goodwill, net as of December 31, 2021 14,988,811

Acquisition of PAIS 6,056,823 Measurement period 2022 adjustment (PAIS) (371,858) 5,684,965

Other 2022 Measurement period adjustments 76,256

Goodwill as of December 31, 2022 20,750,032

Less: accumulated amortization (3,002,820)

Goodwill, net as of December 31, 2022 $ 17,747,212

Amortization expense totaled $1,887,152 and $839,697 for the years ended December 31, 2022 and 2021, respectively, and is presented as part of depreciation and amortization in the consolidated statements of operations.

The following is a schedule of amortization of goodwill during each of the next five fiscal years:

Year Ending December 31, 2023 $ 2,058,712 2024 2,058,712 2025 2,058,713 2026 2,058,713 2027 2,058,713 2028 and thereafter 7,453,649

$ 17,747,212

December 31, 2022 and 2021

NOTE G - NOTE PAYABLE

On October 19, 2022, Pathways entered into a note payable agreement (the “2022 Note”) with Lockton Insurance Brokers, Inc. related to their commercially procured insurance totaling $3,910,833, of which Pathways borrowed $3,585,061. The agreement has an interest rate of 5.64% and matures October 2023 with monthly payments totaling $367,839. The 2022 Note has an outstanding balance of $2,881,434 as of December 31, 2022 and is recorded within Note Payable in the consolidated balance sheets.

On October 19, 2021, Pathways entered into a note payable agreement (the “2021 Note”) with Lockton Insurance Brokers, Inc. related to their commercially procured insurance totaling $3,534,310, of which Pathways borrowed $2,933,455 in 2021. The agreement had an interest rate of 3.49% and matured in August 2022 with monthly payments totaling $298,058. The notes payable to Lockton Insurance has an outstanding balance of $2,353,559 as of December 31, 2021 and is recorded within Note Payable in the consolidated balance sheets.

NOTE H - LOANS

On November 27, 2019, Pathways entered into a Line of Credit agreement (the “Agreement”) with a financial institution, MidCap Financial Trust. The maximum amount available under the Agreement is $35,000,000 and bears an interest rate of LIBOR plus a margin. The interest rate at December 31, 2021 was 4.50%. The Company is obligated to pay a monthly fee for unused Line of Credit at an annual rate of 0.50%. The collateral for the agreement includes all property, now existing or acquired, mortgaged or pledged to, or purported to be subjected to a lien.

On May 6, 2022 the Line of Credit agreement (the “Agreement”) was amended to increase the maximum borrowing available under the Agreement to $38,000,000. The interest rate at December 31, 2022 was 8.51%. The outstanding line of credit at December 31, 2022 was $ 32,606,326. This line of credit maintained at the same limit was refinanced via a revised agreement effective September 15, 2023 for a further three years maturing November 1, 2026.

The Agreement was amended on September 3, 2021 and September 24, 2021. As part of these amendments, Pathways entered into a secured term loan amounting to $10,000,000 which bears interest at a rate of LIBOR plus a margin. The interest rate at December 31, 2022 and 2021 was 10.51% and 6.25%, respectively. The secured term loan is to be paid monthly, $41,667 per month, until April 1, 2023, at which time the principal payment to be paid monthly increases to $166,666.67 until September 1, 2023 with a bulk final payment to be made on September 30, 2023. Total principal payment of secured term loan due as of year-end December 31, 2022 is $9,375,000. This term loan maintained at the principal of $10 million was refinanced via a revised agreement effective September 15, 2023 for a further three years maturing November 1, 2026.

The loan covenants under the terms of the Agreement require Pathways to maintain a specific fixed charge coverage ratio and a minimum fixed charge coverage as of December 31, 2022. As of December 31, 2022 the Company was in compliance with all covenants.

In connection with the Agreement, Pathways capitalized $802,030 of loan costs. Amortization related to loan costs was $0 and $267,343 for the years ended December 31, 2022 and 2021, respectively. These costs are offset against long-term debt in the consolidated balance sheets.

December 31, 2022 and 2021

Minimum future maturities under long-term debt are as follows:

Year Ending December 31, 2026 $ 41,958,943

Total…