1-4.3.1 Audited financials.pdf

Consolidated Financial Statements and Report of Independent Certified Public Accountants

Pathways Health and Community Support, LLC and Subsidiaries

December 31, 2021

Contents Page

Report of Independent Certified Public Accountants 3

Consolidated Financial Statements

Consolidated balance sheet 5

Consolidated statement of operation 6

Consolidated statement of changes in members' equity 7

Consolidated statement 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 company) and subsidiaries (the “Company”), which comprise the consolidated balance sheet as of December 31, 2021 and the related consolidated statements of operation, changes in members’ equity, and cash flows for the year then ended, and the related notes to the consolidated 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, 2021, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

We conducted our audit 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.

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.

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 issued.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

GRANT THORNTON LLP

111 South Calvert Street

Suite 2320

Baltimore, MD 21202

D +1 410 685 4000

F +1 410 837 0587

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 May 9, 2022

ASSETS

Current assets Cash and cash equivalents 6,600,117$ Restricted cash 5,433,189 Client receivables 35,512,812 Prepaid expenses 8,602,158 Income taxes receivable 49,077 Other current assets 882,174

Total current assets 57,079,527

Capital assets, net 18,328,929

Goodwill, net 13,873,143

Deferred tax asset, net 542,979

Other assets 1,202,853

Total assets 91,027,431$

LIABILITIES AND MEMBERS’ EQUITY

Current liabilities Accounts payable and accrued expenses 15,027,684$ Accrued compensation 17,599,168 Deferred revenue 931,039 Notes payable 2,396,574 Capital lease obligations - current maturities 2,074,100 Loans - current maturities 500,000

Total current liabilities 38,528,565

Non-current liabilities Capital lease obligations, less current maturities 4,167,344 Deferred rent 1,045,434 Loans 37,572,900

Total liabilities 81,314,243

Members’ equity Members' capital 241,468,589 Accumulated deficit (231,755,401)

Total members’ equity 9,713,188

Total liabilities and members’ equity 91,027,431$

Pathways Health and Community Support, LLC and Subsidiaries

CONSOLIDATED BALANCE SHEET

December 31, 2021

The accompanying notes are an integral part of this consolidated financial statement.

Revenues Client service revenues 317,539,462$ Grant revenues 21,404,899

338,944,361 Expenses

Payroll and employee benefits 223,066,144 Facilities management 21,069,294 General and administrative 76,100,008 Depreciation and amortization 6,659,643

326,895,089

Operating income 12,049,272

Interest expense, net 2,052,764

Income before income taxes 9,996,508

Income tax expense (153,212)

NET INCOME 9,843,296$

Pathways Health and Community Support, LLC and Subsidiaries

CONSOLIDATED STATEMENT OF OPERATIONS

Year ended December 31, 2021

Members’ Accumulated Capital Deficit Total

Balance at December 31, 2020 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$

Year ended December 31, 2021

CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY

Pathways Health and Community Support, LLC and Subsidiaries

Cash flows from operating activities:

Net income 9,843,296$ Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 6,659,643 Amortization of loan cost 267,344 Changes in assets and liabilities:

Client receivables 1,956,989 Deferred rent 27,667 Prepaid expenses and other assets (792,278) Accounts payable and accrued expenses 6,088,292 Accrued compensation (6,032,373) Deferred revenue 408,286 Income tax receivables (405,536) Deferred income taxes (287,986)

Net cash provided by operating activities 17,733,344

Cash flows from investing activities:

Purchase of capital assets (2,750,437) Purchase of assets through business combination (8,645,962)

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

Cash flows from financing activities:

Repayment of capital lease obligations (1,942,233) Borrowing on note payable 3,531,662 Repayment on note payable (2,590,577) Repayment of line of credit (332,344,595) Repayment of term loan (125,000) Borrowings under line of credit 342,500,000 Borrowings under term loan 10,000,000 Distributions to members (23,459,522)

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

NET INCREASE IN CASH, CASH EQUIVALENTS

AND RESTRICTED CASH 1,906,680

Cash, cash equivalents and restricted cash, beginning of year 10,126,626

Cash, cash equivalents and restricted cash, end of year 12,033,306$

Supplemental disclosure of cash flow information:

Cash paid during the year for interest 1,696,967$ Cash paid during the year for income taxes 931,810$

Supplemental disclosure of noncash financing activities:

Capital expenditures funded by capital lease borrowings 987,805$

Pathways Health and Community Support, LLC and Subsidiaries

CONSOLIDATED STATEMENT OF CASH FLOWS

Year ended December 31, 2021

Pathways Health and Community Support, LLC and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 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 Health and Community Support, LLC 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 of West Virginia LLC, located in Virginia, provides behavioral health for children and families.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 2021

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.

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”).

NOTE B - 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.

December 31, 2021

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 limit. 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 the letters of credit related to the Company's self-insured liabilities under its 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 contractual adjustments, discounts, 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 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 at 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 portion of client receivables totaled $9,034,040 as of December 31, 2021.

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 our treatment centers.

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

December 31, 2021

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 statement of operation.

Capital Assets, Net

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

Assets held under capital leases, consisting of vehicles, are recorded at the lower of net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Assets held under capital leases are amortized by the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Such amortization is included in depreciation and amortization in the consolidated statement of operation.

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 statement of operation.

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 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 identified for the year ended December 31, 2021.

December 31, 2021

Goodwill

Goodwill represents the difference between the total purchase price consideration and the net asset acquired resulting from the business acquisition. 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, 2021, 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.

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 statement of operation.

Marketing and Advertising Costs

Pathways expenses marketing and advertising costs as incurred. For the year ended December 31, 2021, Pathways incurred marketing and advertising costs of $968,502 and is presented as part of general and administrative expense in the consolidated statement of operation.

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.

December 31, 2021

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 $542,979 related to these entities on the consolidated balance sheet.

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, 2021, Pathways did not have any unrecognized tax benefits and has not accrued any interest or penalties through 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.

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, 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. This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date for entities that qualify as a small reporting company. Pathways has elected this extension and the effective date for the Company to adopt this standard will be for fiscal years beginning after December 15, 2022. Pathway 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, 2021

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. ASU 2017-04 is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted. Pathways is currently in the process of evaluating the impact of ASU 2017-04, but it does not expect the adoption of these new accounting rules to have a significant impact on Pathways' consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and subsequent amendments. ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on classification as a finance or operating lease. Certain quantitative and qualitative disclosures about leasing arrangements also are required. ASC 842 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Management is evaluating the impact of these standard on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 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.

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, 2022.

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.

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. ASU 2021-10 is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted. Management is evaluating the impact of this standard on the Company’s consolidated financial statements.

December 31, 2021

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 year ended December 31, 2021, payments of $22,470,685 are included in grant revenues in consolidated statement of operation, under the CARES Act.

Pathways believes it has met the conditions to retain these funds and $2,071,026 are reserved for repayment at December 31, 2021. 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. As of December 31, 2021, deferred payroll taxes of $3,346,351 are included in accrued compensation on the consolidated balance sheet.

NOTE C - BUSINESS ACQUISITION

Acquisitions were accounted for under the acquisition method of accounting in accordance with ASC 805.

Net assets acquired were recorded at their fair values. 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.

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, 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 and is presented as part of general and administrative expense in the consolidated statement of operation.

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 in the consolidated balance sheet. 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, 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 and is presented as part of general and administrative expense in the consolidated statement of operation.

NOTE D - CAPITAL ASSETS

Capital assets and related accumulated depreciation and amortization consisted of the following at December 31, 2021:

Land and land improvements $ 682,956 Building and building improvements 6,364,693 Furniture, fixtures, and equipment 1,608,915 Vehicles 13,065,910 Computer equipment 13,730,296 Office equipment 4,150,917 Software 14,761,659 Leasehold improvements 3,541,776

57,907,122

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

Total capital assets, net $ 18,328,929

The net book value of capitalized software held for internal use totaled $3,864,331 as of December 31, 2021 and was included in capital assets, net, in the consolidated balance sheet. Pathways reports uncompleted capitalized software projects as construction in progress. Amortization is recorded once internally developed software projects are completed and placed in service. Amortization related to

December 31, 2021 capitalized software for the year ended December 31, 2021 was $1,952,936 and is presented as part of depreciation and amortization in the consolidated statement of operation.

Depreciation and amortization expense related to capital assets was $5,819,946 for the year ended December 31, 2021 and is presented as part of depreciation and amortization in the consolidated statement of operation.

NOTE E - GOODWILL

Changes in goodwill during the year ended December 31, 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

Total acquired goodwill 8,438,807

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

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

Less: accumulated amortization (1,115,668)

Goodwill, net as of December 31, 2021 $ 13,873,143

Amortization expense totaled $839,697 for the year ended December 31, 2021 and is presented as part of depreciation and amortization in the consolidated statement of operation.

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

Year Ending December 31, 2022 $ 1,498,881 2023 1,498,881 2024 1,498,881 2025 1,498,881 2026 1,498,881 2027 and thereafter 6,378,738

$ 13,873,143

NOTE F - NOTE PAYABLE

On October 19, 2020, Pathways entered into a note payable agreement (the “Note”) with Lockton Insurance Brokers, Inc. related to their commercially procured insurance totaling $2,403,693. The agreement had an interest rate of 3.49% and matured in July 2021. The Company paid off the remaining outstanding balance of $1,402,597, which consisted of principal and interest.

December 31, 2021

On October 19, 2021, Pathways entered into notes payable agreement (the “Notes”) 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 has an interest rate of 3.49% and matures 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 Notes Payable in the consolidated balance sheet.

NOTE G - 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. The line of credit expires on October 1, 2023. The outstanding line of credit as of December 31, 2021 amount to $28,197,900.

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, 2021 was 6.25%. The secured term loan is to be paid monthly, $41,667 per month, 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 and 2023 amount to $500,000 and $9,375,000, respectively.

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, 2021. As of December 31, 2021 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 $267,343 for the year ended December 31, 2021. These costs are offset against long-term debt in the consolidated balance sheet.

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

Year Ending December 31, 2022 $ 500,000 2023 37,572,900

Total loans 38,072,900

Less: current portion of loans (500,000)

Long-term portion of loans $ 37,572,900

NOTE H - RETIREMENT PLAN

Pathways has a defined contribution 401(k) plan for all employees meeting minimum eligibility requirements under the employee benefit plan. Eligible employees may elect to defer and contribute to the 401(k) plan, a percentage of their compensation subject to maximum federal limitations. The 401(k) plan’s employer match was 50% for the first 6% contributed per eligible employee, up to $750.

December 31, 2021

Effective on April 6, 2020, the 401(k) plan was amended to allow for discretionary employer matching contributions, up to $750 per eligible employees, and Pathways stopped providing for the matching contribution. However, effective July 1, 2021, Pathways resumed the employer match contribution and the employer match expense for the year ended December 31, 2021 amounted to $891,869 and is included in payroll and employee benefit on the consolidated statement of operation.

NOTE I - RELATED-PARTY TRANSACTIONS

During the year ended December 31, 2021, Pathways made cash distributions to Pyramid totaling $23,459,522.

In exchange for the services provided by Atar, Pathways paid and expensed $3,500,000 for the twelve-month ended December 31, 2021. The fees are for monthly recurring management services. The management services fee was included in general and administrative expenses on the consolidated statement of operation.

NOTE J - COMMITMENTS

Operating Lease

Rent expense is recognized on the straight-line method over the term of the lease agreement. Deferred rent represents the difference between straight-line rent expense recognized and the actual amounts paid to date. Rent expense for the year ended December 31, 2021 was $15,295,445 and is presented as part of facilities management expense within the consolidated statement of operation.

The following is a schedule of future minimum lease payments required under operating leases, which have initial or remaining non-cancellable lease terms in excess of one year:

Year Ending December 31, 2022 $ 13,315,108 2023 9,158,197 2024 7,351,190 2025 4,254,771 2026 1,837,988 2027 and thereafter 780,895

$ 36,698,149

December 31, 2021

Capital Leases

Pathways enters capital lease obligations for certain vehicles and equipment. Capital lease obligations have various maturity dates through 2025 and bear interest at variable rates or fixed rates ranging from 0% to 5% per annum. Future minimum lease payments as of December 31, 2021 are as follows:

Year Ending December 31, 2022 $ 2,098,055 2023 2,003,236 2024 1,956,960 2025 795,316 2026 220,939

Total minimum lease payments 7,074,506

Less: amounts representing interest (833,062)

Present value of minimum lease payment 6,241,444 Less: current maturities (2,074,100)

Capital lease obligations, less current maturities $ 4,167,344

The amortization of assets under capital lease during 2021 amounts to $1,718,045 and is presented as part of depreciation and amortization in the statement of operation. Assets recorded under capital leases and accumulated depreciation thereon as of December 31, 2021 are as follows:

Vehicles $ 7,812,279 Accumulated depreciation (2,944,033)

Total capital leases, net $ 4,868,246

NOTE K - LITIGATION AND CLAIMS

Pathways Health and Community Support, LLC and some of its subsidiary companies have been named defendants in certain lawsuits arising in the normal course of its business. Certain lawsuits may be covered, in full or in part, by external insurance coverage. In the opinion of management, there are no lawsuits outstanding that would have a material adverse effect on the Company’s consolidated financial condition, results of operations, or liquidity. A minimum potential liability was estimated to be $665,672 as of year-end and is included within accounts payable and accrued expenses in the consolidated balance sheet.

NOTE L - INSURANCE

Pathways maintains a professional and general liability, auto liability, and property insurance program. The insurance plan is a combination of self-insurance and commercially procured insurance. The deductible for property coverage is $25,000, except for losses in certain geographic areas and losses as a result of “named storms,” or earthquakes when it becomes a percentage of exposure, $500,000 retention for professional and general liability and $350,000 deductible for auto liability. Once the retention limit is met, commercial insurance responds. Self-insured retention amounts and policy limits are reviewed annually

December 31, 2021 and adjusted as warranted, dependent upon the program requirements and commercial insurance market conditions.

The insurance carrier for the workers’ compensation program makes payments for all eligible claims submitted. Pathways has accrued approximately $891,878 as of December 31, 2021, representing the cost of anticipated claims and related expenses associated with these claims. For the year ended December 31, 2021, the total cost to Pathways for claims incurred and related to program administration was approximately $2,542,764.

Pathways is self-insured for employee medical coverage. The accompanying consolidated balance sheet includes estimated amounts for claims exposure, incurred but not reported, based on historical claims experience data and actuarial estimates for known and anticipated claims. Pathways has accrued approximately $1,543,689 as of December 31, 2021, representing the cost of anticipated claims and related expenses associated with these claims. These liabilities are included within accrued expenses on the consolidated balance sheet. Actual results could differ from those estimates.

NOTE M - RISK AND UNCERTAINTIES

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus COVID-19 as a pandemic, which continues to spread throughout the United States. The spread of COVID-19 has caused significant volatility in U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, Pathways is unable to determine if it will have a material impact to its operations.

NOTE N - SUBSEQUENT EVENTS

Pathways has evaluated subsequent events from the consolidated balance sheet date through May 9, 2022, the date at which the accompanying consolidated financial statements were available to be issued.

Pathways is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements.