Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of ATI Physical Therapy, Inc. and its subsidiaries (herein referred to as “we,” ”us,” “the Company,” “our Company,” or "ATI") should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included elsewhere in this Annual Report. For management's discussion and analysis on the Company's financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2022.
We make statements in this discussion that are forward-looking and involve risks and uncertainties. These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of the Company. The forward-looking statements are based on our current views and assumptions, and actual results could differ materially from those anticipated in such forward-looking statements due to factors including, but not limited to, those discussed under “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A. “Risk Factors.”
Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Our forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement may no longer be accurate.
Certain amounts in this Management's Discussion and Analysis may not add due to rounding. All percentages have been calculated using unrounded amounts for the years ended December 31, 2022, 2021 and 2020.
All dollar amounts are presented in thousands, unless indicated otherwise.
Company Overview
We are a nationally recognized outpatient physical therapy provider in the United States specializing in outpatient rehabilitation and adjacent healthcare services, with 923 clinics (as well as 20 clinics under management service agreements) located in 25 states as of December 31, 2022. We operate with a commitment to providing our patients, medical provider partners, payors and employers with evidence-based, patient-centric care.
We offer a variety of services within our clinics, including physical therapy to treat spine, shoulder, knee and neck injuries or pain; work injury rehabilitation services, including work conditioning and work hardening; hand therapy; and other specialized treatment services. Our Company’s team of professionals is dedicated to helping return patients to optimal physical health.
Physical therapy patients receive team-based care, leading-edge techniques and individualized treatment plans in an encouraging environment. To achieve optimal results, we use an extensive array of techniques including therapeutic exercise, manual therapy and strength training, among others. Our physical therapy model aims to deliver optimized outcomes and time to recovery for patients, insights and service satisfaction for referring providers and predictable costs and measurable value for payors.
In addition to providing services to physical therapy patients at outpatient rehabilitation clinics, we provide services through our ATI Worksite Solutions (“AWS”) program, Management Service Agreements (“MSA”) and Sports Medicine arrangements. AWS provides an on-site team of healthcare professionals at employer worksites to promote work-related injury prevention, facilitate expedient and appropriate return-to-work follow-up and maintain the health and well-being of the workforce. Our MSA arrangements typically include the Company providing management and physical therapy-related services to physician-owned physical therapy clinics. Sports Medicine arrangements provide certified healthcare professionals to various schools, universities and other institutions to perform on-site physical therapy and rehabilitation services.
Appointment of Chief Executive Officer
On April 28, 2022, the Company appointed Sharon Vitti as its Chief Executive Officer and to the Board of Directors. Ms. Vitti has 30 years of healthcare experience, including nearly two decades of executive leadership in clinical and consumer-focused healthcare companies.
In connection with Ms. Vitti’s appointment, John (Jack) Larsen stepped down as Executive Chairman of the Company, effective April 28, 2022 and continued in his role as Chairman of the Board of the Company. Mr. Larsen was appointed Executive Chairman of the Company on August 9, 2021. In addition, effective April 28, 2022, John (Jack) Larsen, Joseph Jordan, the Company’s Chief Financial Officer, and Ray Wahl, the Company’s former Chief Operating Officer, no longer fulfilled the role of Principal Executive Officer.
Recent changes in company leadership
Effective July 8, 2022, Joe Zavalishin, Chief Development Officer, resigned from the Company. The Company and Mr. Zavalishin entered into a mutual release pursuant to which Mr. Zavalishin is eligible for the payments and benefits in accordance with his employment agreement.
Effective August 29, 2022, the Company appointed Eimile Tansey as its Chief People Officer. Ms. Tansey has more than 20 years of experience in human resources and operations, including more than 15 years in leadership and executive roles.
Effective November 4, 2022, Diana Chafey, Chief Legal Officer and Corporate Secretary, resigned from the Company. The Company appointed Erik Kantz as the Company's Chief Legal Officer and Corporate Secretary effective November 4, 2022. Mr. Kantz previously served as Vice President and Deputy General Counsel of the Company, and has over 20 years of experience in corporate and securities law.
Effective December 16, 2022, Ray Wahl, Chief Operating Officer, resigned from the Company. The Company and Mr. Wahl entered into a mutual release pursuant to which Mr. Wahl is eligible for the payments and benefits in accordance with his employment agreement. The Company appointed Chris Cox as the Company's Chief Operating Officer effective December 16, 2022. Mr. Cox has nearly 15 years of progressively higher-level leadership positions in the healthcare industry.
Effective January 3, 2023, the Company appointed Scott Gregerson as the Company's Chief Growth Officer. Mr. Gregerson has 20 years of healthcare experience including chief executive, presidential and vice-presidential roles in which he developed and led strategic business development and growth, often connecting large-scale provider groups with hospital and health systems.
2022 Debt Refinancing and Preferred Stock Financing
On February 24, 2022, the Company entered into various financing arrangements to refinance its existing long-term debt (the "2022 Debt Refinancing"). The Company entered into a new 2022 Credit Agreement which is comprised of a senior secured term loan which matures on February 24, 2028, and a "super priority" senior secured revolver, which matures on February 24, 2027. Refer to Note 8 - Borrowings in the consolidated financial statements for further details.
In connection with the 2022 Debt Refinancing, the Company issued shares of non-convertible preferred stock and warrants to purchase shares of the Company's common stock. Refer to Note 11 - Mezzanine and Stockholders' Equity in the consolidated financial statements for further details.
The Business Combination
On June 16, 2021 (the “Closing Date”), a Business Combination transaction (the “Business Combination”) was finalized pursuant to the Agreement and Plan of Merger ("Merger Agreement"), dated February 21, 2021 between the operating company, Wilco Holdco, Inc. (“Wilco Holdco”), and Fortress Value Acquisition Corp. II (herein referred to as "FAII" and "FVAC"), a special purpose acquisition company. In connection with the closing of the Business Combination, the Company changed its name from Fortress Value Acquisition Corp. II to ATI Physical Therapy, Inc. The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company’s common stock is listed on the New York Stock Exchange ("NYSE") under the symbol “ATIP.” Refer to Note 3 - Business Combinations and Divestitures in the consolidated financial statements for further details.
Home Health divestiture
On October 1, 2021, the Company divested its Home Health service line for a sale price of $7.3 million. The major classes of assets and liabilities associated with the Home Health service line consisted predominantly of accounts receivable, accrued expenses and other liabilities which were not material.
2021 acquisitions
During the fourth quarter of 2021, the Company completed 3 acquisitions consisting of 7 total clinics. The Company paid approximately $4.5 million in cash and $1.4 million in future payment consideration, subject to certain time or performance conditions set out in the purchase agreements, to complete the acquisitions.
Trends and Factors Affecting the Company’s Future Performance and Comparability of Results
During 2022, we observed the following trends in our operations:
•Improved referral and patient visit volumes relative to the comparative periods in 2021 and relative to volume softness experienced during the beginning of 2022 which was driven, in part, by an increase in COVID-19 cases due to the outbreak of additional variants.
•A continued tight labor market for available physical therapy and other healthcare providers in the workforce, contributing to competition in hiring, attrition, clinical staffing level challenges, increased use of contract labor and continued wage inflation in the physical therapy industry and at ATI.
•Decrease in rate per visit primarily driven by Medicare rate cuts that became effective on January 1, 2022, Medicare sequestration reductions that began after March 31, 2022 and June 30, 2022 and less favorable payor and state mix when compared to prior periods.
Our ability to achieve our business plan depends upon a number of factors, including, but not limited to, the success of a number of continued steps being taken related to increasing clinical staffing levels, increasing clinician productivity, controlling costs and capital expenditures, increasing visit volumes and referrals and stabilizing rate per visit.
During the year ended December 31, 2022, the Company identified interim triggering events as a result of factors including potential changes in discount rates and decreases in share price. The Company determined that the combination of these factors constituted interim triggering events that required further analysis with respect to potential impairment to goodwill, trade name indefinite-lived intangible and other assets. Accordingly, the Company performed interim quantitative impairment testing as of March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 and determined that the fair value amounts were below the respective carrying amounts. As a result, the Company recorded non-cash impairment charges of $318.9 million related to goodwill and $164.4 million related to the trade name indefinite-lived intangible asset during the year ended December 31, 2022. Refer to Note 5 - Goodwill, Trade Name and Other Intangible Assets in the consolidated financial statements for further details.
COVID-19 pandemic and volume impacts
The coronavirus ("COVID-19") pandemic in the United States resulted in changes to our operating environment. We continue to closely monitor the impact of COVID-19 on all aspects of our business, and our priorities remain protecting the health and safety of employees and patients, maximizing the availability of services to satisfy patient needs, and improving the operational and financial stability of our business.
As a result of the COVID-19 pandemic, visits per day ("VPD") decreased to a low point of 12,643 during the quarter ended June 30, 2020. The Company has experienced relative increases in quarterly VPD following the low point, as local restrictions in certain markets, referral levels and individual routines evolved compared to prior periods. During the fourth quarter of 2021, we observed volume softness caused, in part, by an increase in COVID-19 cases due to the outbreak of additional variants, which continued to impact visit volumes in the beginning of 2022. Through the remainder of the first quarter of 2022 and the second quarter of 2022, we experienced increases in visit volumes relative to the beginning of 2022. Additionally, while we observed volume softness during the third quarter due, in part, to seasonality, we experienced increases in quarterly VPD through the fourth quarter of 2022 relative to the comparative quarters in 2021.
The chart below reflects the quarterly trend in VPD.
As demand for physical therapy services has increased in the market since its low point during the quarter ended June 30, 2020, the Company has focused on attempting to increase its clinical staffing levels by hiring clinicians, optimizing clinician hours based on available workforce and attempting to reduce levels of clinician attrition that have been elevated relative to historical levels. The elevated levels of attrition were initially caused, in part, by changes made during the COVID-19 pandemic related to compensation, staffing levels and support for clinicians. We have implemented a range of actions related to compensation, staffing levels, clinical and professional development and other initiatives in an effort to retain and attract therapists across our platform, which has increased our current and future expectations for labor costs. While the Company has observed improvement in hiring and attrition levels since implementing these actions, attrition remains above historical levels due to a continued tight labor market for available physical therapy and other healthcare providers in the workforce which may impede our progress toward increasing visit volumes. In an effort to drive more volume and visits per day, in addition to focusing on clinical staffing levels and clinician productivity, we are working to establish relationships with new referral sources and strengthen relationships with our partner providers and existing referral sources across our geographic footprint.
The COVID-19 pandemic is still evolving and the full extent of its future impact remains unknown and difficult to predict. The future impact of the COVID-19 pandemic on our performance will depend on certain developments, including the duration and spread of the virus and its newly identified strains, effectiveness and adoption rates of vaccines and other therapeutic remedies, the potential for continued or reinstated restrictive policies enforced by federal, state and local governments, and the impact of the virus and vaccination requirements on our workforce, all of which create uncertainty and cannot be predicted. While we expect the disruption caused by COVID-19 and resulting impacts to diminish over time, we cannot predict the length of such impacts, and if such impacts continue for an extended period, it could have a continued effect on the Company’s results of operations, financial condition and cash flows, which could be material.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act") was signed into law providing reimbursement, grants, waivers and other funds to assist health care providers during the COVID-19 pandemic. The Company has realized benefits under the CARES Act including, but not limited to, the following:
•In 2020, the Company received approximately $91.5 million of general distribution payments under the Provider Relief Fund. These payments have been recognized in other expense (income), net in the consolidated statements of operations throughout 2020 in a manner commensurate with the reporting and eligibility requirements issued by the U.S. Department of Health & Human Services ("HHS"). Based on the terms and conditions of the program, including reporting guidance issued by HHS in 2021, the Company believes that it has met the applicable terms and conditions. This includes, but is not limited to, the fact that the Company’s COVID-19 related expenses and lost revenues for the year ended December 31, 2020 exceeded the amount of funds received. To the extent that reporting requirements and terms and conditions are subsequently modified, it may affect the Company’s ability to comply and ability to retain the funds.
•The Company applied for and obtained approval to receive $26.7 million of Medicare Accelerated and Advance Payment Program ("MAAPP") funds during the quarter ended June 30, 2020. During the years ended December 31, 2022 and 2021, the Company applied $12.3 million and $12.6 million in MAAPP funds against the outstanding liability, respectively. During the year ended December 31, 2021, the Company transferred $1.8 million in MAAPP funds as part of the divestiture of its Home Health Service line. During the quarter ended September 30, 2022, the Company met the required performance obligations and performed the remaining services related to the MAAPP funds. Therefore, the remaining funds were applied and repaid during the quarter ended September 30, 2022. As of December 31, 2022 and December 31, 2021, zero and $12.3 million of the funds are recorded in accrued expenses and other liabilities, respectively.
•The Company elected to defer depositing the employer portion of Social Security taxes for payments due from March 27, 2020 through December 31, 2020, interest-free and penalty-free. The Company repaid the remaining deferred payments during the fourth quarter of 2022. Related to these payments, as of December 31, 2022 and December 31, 2021, zero and $5.9 million is included in accrued expenses and other liabilities, respectively.
Market and industry trends and factors
•Outpatient physical therapy services growth. Outpatient physical therapy continues to play a key role in treating musculoskeletal conditions for patients. According to the Centers for Medicare & Medicaid Services ("CMS"), musculoskeletal conditions impact individuals of all ages and include some of the most common health issues in the U.S. As healthcare trends in the U.S. continue to evolve, with a growing focus on value-based care emphasizing up-front, conservative care to deliver better outcomes, quality healthcare services addressing such conditions in lower cost outpatient settings may continue increasing in prevalence.
•U.S. population demographics. The population of adults aged 65 and older in the U.S. is expected to continue to grow and thus expand the Company’s market opportunity. According to the U.S. Census Bureau, the population of adults over the age of 65 is expected to grow 30% from 2020 through 2030.
•Federal funding for Medicare and Medicaid. Federal and state funding of Medicare and Medicaid and the terms of access to these reimbursement programs affect demand for physical therapy services. In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. Beginning in January 2022, the physical therapy industry observed a reduction of Medicare reimbursement rates of approximately 0.75%, as well as a 15% decrease in payments for services performed by physical therapy assistants. Additionally, a further reduction through resuming sequestration was postponed. Sequestration reductions resumed at 1% after March 31, 2022, and by an additional 1% after June 30, 2022, which resulted in an overall reduction of 2% in reimbursement rates related to sequestration after June 30, 2022. In July 2022, the CMS released its proposed 2023 Medicare Physician Fee Schedule which called for an approximate 4.5% reduction in the calendar year 2023 conversion factor. In December 2022, the Consolidated Appropriations Act (2023) was signed into law. The Consolidated Appropriations Act (2023) provides partial relief related to Medicare cuts including 2.5% relief in 2023 and 1.25% relief in 2024. As a result, the reimbursement rate reduction beginning in January 2023 was approximately 2.0%.
•Workers’ compensation funding. Payments received under certain workers’ compensation arrangements may be based on predetermined state fee schedules, which may be impacted by changes in state funding.
•Number of people with private health insurance. Physical therapy services are often covered by private health insurance. Individuals covered by private health insurance may be more likely to use healthcare services because it helps offset the cost of such services. As health insurance coverage rises, demand for physical therapy services tends to also increase.
Key Components of Operating Results
Net patient revenue. Net patient revenues are recorded for physical therapy services that the Company provides to patients including physical therapy, work conditioning, hand therapy, aquatic therapy and functional capacity assessment. Net patient revenue is recognized based on contracted amounts with payors or other established rates, adjusted for the estimated effects of any variable consideration, such as contractual allowances and implicit price concessions. Visit volume is primarily driven by conversion of physician referrals and marketing efforts.
Other revenue. Other revenue consists of revenue generated by our AWS, MSA and Sports Medicine service lines.
Salaries and related costs. Salaries and related costs consist primarily of wages and benefits for our healthcare professionals engaged directly and indirectly in providing services to patients.
Rent, clinic supplies, contract labor and other. Comprised of non-salary, clinic related expenses consisting of rent, clinic supplies, contract labor and other costs including travel expenses and depreciation at our clinics.
Provision for doubtful accounts. Provision for doubtful accounts represents the Company’s estimate of accounts receivable recorded during the period that may ultimately prove uncollectible based upon several factors, including the age of outstanding receivables, the historical experience of collections, the impact of economic conditions and, in some cases, the specific customer account's ability to pay.
Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of wages and benefits for corporate personnel, corporate outside services, marketing costs, depreciation of corporate fixed assets, amortization of intangible assets and certain corporate level professional fees, including those related to legal, accounting and payroll.
Goodwill, intangible and other asset impairment charges. Goodwill, intangible and other asset impairment charges represent non-cash charges associated with the write-down of goodwill, trade name indefinite-lived intangible and other assets.
Change in fair value of warrant liability. Represents non-cash amounts related to the change in the estimated fair value of the IPO Warrants.
Change in fair value of contingent common shares liability. Represents non-cash amounts related to the change in the estimated fair value of Earnout Shares and Vesting Shares.
Loss on settlement of redeemable preferred stock. Represents the loss on settlement of the Wilco Holdco redeemable preferred stock liability based on the value of cash and equity provided to preferred stockholders in relation to the outstanding Wilco Holdco redeemable preferred stock liability at the time of the closing of the Business Combination.
Interest expense, net. Interest expense includes the cost of borrowing under the Company’s credit facility and amortization of deferred financing costs.
Interest expense on redeemable preferred stock. Represents interest expense related to accruing dividends on the Wilco Holdco redeemable preferred stock based on contract terms.
Other expense (income), net. Other expense (income), net is comprised of income statement activity not related to the core operations of the Company.
Key Business Metrics
When evaluating the results of operations, management has identified a number of metrics that allow for specific evaluation of performance on a more detailed basis. See “Results of Operations” for further discussion on financial statement metrics such as net revenue, net income, EBITDA and Adjusted EBITDA.
Patient visits
As the main operations of the Company are driven by physical therapy services provided to patients, management considers total patient visits to be a key volume measure of such services. In addition to total patient visits, management analyzes (1) average VPD calculated as total patient visits divided by business days for the period, as this allows for comparability between time periods with an unequal number of business days, and (2) average VPD per clinic, calculated as average VPD divided by the average number of clinics open during the period (excluding clinics under management service agreements).
Net patient revenue ("NPR") per visit
The Company calculates net patient revenue per visit, its most significant reimbursement metric, by dividing net patient revenue in a period by total patient visits in the same period.
Clinics
To better understand geographical and location-based trends, the Company evaluates metrics based on the 923 clinics (excluding clinics under management service agreements) and 20 managed clinic locations as of December 31, 2022. De novo clinics represent organic new clinics opened during the current period based on sophisticated site selection analytics. Acqui-novo clinics represent new clinics opened during the current period, that were existing clinic operations not previously owned by the Company, in a target geography that provides the Company with an immediate presence, available staff and referral relationships of the former owner within the surrounding areas. Acquired clinics represent new clinics from purchases of physical therapy practices. Same clinic revenue growth rate identifies revenue growth year over year on clinics that have been owned and operating for over one year. This metric is determined by isolating the population of clinics that have been open for at least 12 months and calculating the percentage change in revenue of this population between the current and prior comparable periods.
The following table presents selected operating and financial data that we believe are key indicators of our operating performance:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Number of clinics (end of period) | | | | | 923 | | 910 | | 875 |
Number of clinics managed (end of period) | | | | | 20 | | 20 | | 22 |
New clinics during the period | | | | | 36 | | 58 | | 23 |
Business days | | | | | 255 | | 257 | | 257 |
Average visits per day | | | | | 21,817 | | 20,608 | | 18,274 |
Average visits per day per clinic | | | | | 23.6 | | 23.1 | | 21.0 |
Total patient visits | | | | | 5,563,243 | | 5,296,161 | | 4,696,475 |
Net patient revenue per visit | | | | | $ | 103.53 | | $ | 105.94 | | $ | 112.76 |
Same clinic revenue growth rate | | | | | 1.8 | % | | 4.6 | % | | (26.9) | % |
The following table provides a rollforward of activity related to the number of clinics during the corresponding periods:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Number of clinics (beginning of period) | | | | | 910 | | 875 | | 872 |
Add: New clinics opened during the period | | | | | 36 | | 51 | | 23 |
Add: Clinics acquired during the period | | | | | — | | 7 | | — |
Less: Clinics closed/sold during the period | | | | | 23 | | 23 | | 20 |
Number of clinics (end of period) | | | | | 923 | | 910 | | 875 |
| | | | | | | | | |
| | | | | | | | | |
Results of Operations
Year ended December 31, 2022 compared to year ended December 31, 2021
The following table summarizes the Company’s consolidated results of operations for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2022 | | 2021 | | Increase/(Decrease) |
($ in thousands, except percentages) | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
Net patient revenue | | $ | 575,940 | | | 90.6 | % | | $ | 561,080 | | | 89.4 | % | | $ | 14,860 | | | 2.6 | % |
Other revenue | | 59,731 | | | 9.4 | % | | 66,791 | | | 10.6 | % | | (7,060) | | | (10.6) | % |
Net revenue | | 635,671 | | | 100.0 | % | | 627,871 | | | 100.0 | % | | 7,800 | | | 1.2 | % |
Cost of services: | | | | | | | | | | | | |
Salaries and related costs | | 357,982 | | | 56.3 | % | | 336,496 | | | 53.6 | % | | 21,486 | | | 6.4 | % |
Rent, clinic supplies, contract labor and other | | 202,568 | | | 31.9 | % | | 180,932 | | | 28.8 | % | | 21,636 | | | 12.0 | % |
Provision for doubtful accounts | | 13,869 | | | 2.2 | % | | 16,369 | | | 2.6 | % | | (2,500) | | | (15.3) | % |
Total cost of services | | 574,419 | | | 90.4 | % | | 533,797 | | | 85.0 | % | | 40,622 | | | 7.6 | % |
Selling, general and administrative expenses | | 114,724 | | | 18.0 | % | | 111,809 | | | 17.8 | % | | 2,915 | | | 2.6 | % |
Goodwill, intangible and other asset impairment charges | | 486,262 | | | 76.5 | % | | 962,303 | | | 153.3 | % | | (476,041) | | | (49.5) | % |
Operating loss | | (539,734) | | | (84.9) | % | | (980,038) | | | (156.1) | % | | 440,304 | | | (44.9) | % |
Change in fair value of warrant liability | | (4,243) | | | (0.7) | % | | (22,595) | | | (3.6) | % | | 18,352 | | | (81.2) | % |
Change in fair value of contingent common shares liability | | (42,525) | | | (6.7) | % | | (175,140) | | | (27.9) | % | | 132,615 | | | (75.7) | % |
Loss on settlement of redeemable preferred stock | | — | | | — | % | | 14,037 | | | 2.2 | % | | (14,037) | | | n/m |
Interest expense, net | | 45,278 | | | 7.1 | % | | 46,320 | | | 7.4 | % | | (1,042) | | | (2.2) | % |
Interest expense on redeemable preferred stock | | — | | | — | % | | 10,087 | | | 1.6 | % | | (10,087) | | | n/m |
Other expense, net | | 3,333 | | | 0.5 | % | | 241 | | | — | % | | 3,092 | | | n/m |
Loss before taxes | | (541,577) | | | (85.2) | % | | (852,988) | | | (135.9) | % | | 311,411 | | | (36.5) | % |
Income tax benefit | | (48,530) | | | (7.6) | % | | (70,960) | | | (11.3) | % | | 22,430 | | | (31.6) | % |
Net loss | | $ | (493,047) | | | (77.6) | % | | $ | (782,028) | | | (124.6) | % | | $ | 288,981 | | | (37.0) | % |
Net patient revenue. Net patient revenue for the year ended December 31, 2022 was $575.9 million compared to $561.1 million for the year ended December 31, 2021, an increase of approximately $14.9 million or 2.6%.
The increase in net patient revenue was primarily driven by increased visit volumes as a result of higher clinician staffing, higher clinician productivity and higher clinic count in the current period, partially offset by unfavorable net patient revenue per visit and two less business days in the current period. Total patient visits increased by approximately 0.3 million visits, or 5.0%, driving an increase in average visits per day of 1,209, or 5.9%. Net patient revenue per visit decreased $2.41, or 2.3%, to $103.53 for the year ended December 31, 2022 compared to $105.94 for the year ended December 31, 2021. The decrease in net patient revenue per visit during the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily driven by Medicare rate cuts and unfavorable mix shifts related to payor classes and states.
The following chart reflects additional detail with respect to drivers of the change in year-to-date net patient revenue (in millions):
Other revenue. Other revenue for the year ended December 31, 2022 was $59.7 million compared to $66.8 million for the year ended December 31, 2021, a decrease of $7.1 million or 10.6%. The decrease in other revenue was primarily driven by the absence of Home Health service line revenue for the year ended December 31, 2022 as a result of its divestiture on October 1, 2021.
Salaries and related costs. Salaries and related costs for the year ended December 31, 2022 were $358.0 million compared to $336.5 million for the year ended December 31, 2021, an increase of approximately $21.5 million or 6.4%. Salaries and related costs as a percentage of net revenue was 56.3% and 53.6% for the year ended December 31, 2022 and 2021, respectively. The increase of $21.5 million was primarily driven by higher compensation due to wage inflation for clinic labor and increased clinician and support staff due to higher visit volumes. The increase as a percentage of net revenue was primarily driven by higher compensation due to wage inflation for clinic labor, higher share-based compensation for clinical employees and lower net patient revenue per visit during the year ended December 31, 2022.
Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the year ended December 31, 2022 were $202.6 million compared to $180.9 million for the year ended December 31, 2021, an increase of approximately $21.6 million or 12.0%. Rent, clinic supplies, contract labor and other costs as a percentage of net revenue was 31.9% and 28.8% for the year ended December 31, 2022 and 2021, respectively. The increase of $21.6 million and increase as a percentage of net revenue was primarily driven by higher contract labor costs and a higher clinic count during the year ended December 31, 2022.
Provision for doubtful accounts. Provision for doubtful accounts for the year ended December 31, 2022 was $13.9 million compared to $16.4 million for the year ended December 31, 2021, a decrease of $2.5 million or 15.3%. Provision for doubtful accounts as a percentage of net revenue was 2.2% and 2.6% for the years ended December 31, 2022 and 2021, respectively. The decrease of $2.5 million and decrease as a percentage of net revenue was primarily driven by favorable cash collections during the year ended December 31, 2022.
Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2022 were $114.7 million compared to $111.8 million for the year ended December 31, 2021, an increase of $2.9 million or 2.6%. Selling, general and administrative expenses as a percentage of net revenue was 18.0% and 17.8% for the year ended December 31, 2022 and 2021, respectively. The increase of $2.9 million and increase as a percentage of net revenue was primarily due to a loss on legal settlement, higher public company operating costs and non-ordinary legal and regulatory costs during the year ended December 31, 2022, partially offset by lower reorganization and severance costs and lower transaction costs incurred relative to the year ended December 31, 2021.
Goodwill, intangible and other asset impairment charges. Goodwill, intangible and other asset impairment charges for the year ended December 31, 2022 was $486.3 million compared to $962.3 million for the year ended December 31, 2021. The amount primarily relates to the non-cash write-down of goodwill and the trade name indefinite-lived intangible asset as a result of factors including increases in discount rates, decreases in share price and lower public company comparative multiples in 2022, and revised forecasts reflecting lower than expected patient visit volumes, the acceleration of clinician attrition, competition for clinicians in the labor market and net patient revenue per visit decreases primarily driven by unfavorable payor, state and service mix shifts in 2021. Refer to Note 5 - Goodwill, Trade Name and Other Intangible Assets in the consolidated financial statements for further details.
Change in fair value of warrant liability. Change in fair value of warrant liability for the year ended December 31, 2022 was a gain of $4.2 million compared to a gain of $22.6 million for the year ended December 31, 2021. The gain in each period relates to the decrease in the estimated fair value of the Company’s IPO Warrants, primarily driven by decreases in price of the Company's Public Warrants during the years ended December 31, 2022 and 2021, respectively.
Change in fair value of contingent common shares liability. Change in fair value of contingent common shares liability for the year ended December 31, 2022 was a gain of $42.5 million compared to a gain of $175.1 million for the year ended December 31, 2021. The gain in each period relates to the decrease in the estimated fair value of the Company’s Earnout Shares and Vesting Shares, primarily driven by decreases in the Company's share price during the years ended December 31, 2022 and 2021, respectively.
Loss on settlement of redeemable preferred stock. Loss on settlement of redeemable preferred stock for the year ended December 31, 2021 was $14.0 million. The loss is based on the value of cash and equity provided to preferred stockholders in relation to the outstanding Wilco Holdco redeemable preferred stock liability at the time of the closing of the Business Combination.
Interest expense, net. Interest expense, net for the year ended December 31, 2022 was $45.3 million compared to $46.3 million for the year ended December 31, 2021, a decrease of $1.0 million or 2.2%. The decrease in interest expense was primarily driven by lower outstanding principal balances under the Company's credit agreement and higher cash flow hedge benefits recognized during the year ended December 31, 2022, partially offset by higher interest rates under the Company’s credit agreement during the year ended December 31, 2022.
Interest expense on redeemable preferred stock. Interest expense on redeemable preferred stock for the year ended December 31, 2021 was $10.1 million. The redeemable preferred stock was fully settled in June 2021 and no longer accrued interest following the Business Combination.
Other expense, net. Other expense, net for the year ended December 31, 2022 was $3.3 million compared to $0.2 million for the year ended December 31, 2021, an increase of approximately $3.1 million. The increase was driven by $2.8 million in loss on debt extinguishment related to the derecognition of the unamortized deferred financing costs and original issuance discount associated with the full repayment of the 2016 first lien term loan during the year ended December 31, 2022. In addition, during the year ended December 31, 2021, the Company recorded $5.5 million in loss on debt extinguishment related to the derecognition of the unamortized deferred financing costs and original issue discount associated with the partial and full repayment of the 2016 first and second lien term loans, respectively, and recorded a $5.8 million gain on the sale of its Home Health service line.
Income tax benefit. Income tax benefit for the year ended December 31, 2022 was $48.5 million compared to $71.0 million for the year ended December 31, 2021, a decrease in benefit of approximately $22.4 million. The decrease was primarily driven by the difference in the effective tax rate for the respective periods. The effective tax rate was different between the respective periods primarily due to higher nondeductible impairment charges, nondeductible transaction costs, nondeductible loss on settlement of redeemable preferred stock, interest expense on redeemable preferred stock and fair value adjustments related to liability-classified share-based instruments for the year ended December 31, 2021.
Net loss. Net loss for the year ended December 31, 2022 was $493.0 million compared to $782.0 million for the year ended December 31, 2021, a decrease in loss of approximately $289.0 million. The comparatively lower loss was primarily driven by lower goodwill, intangible and other asset impairment charges, partially offset by lower gains related to changes in fair value of warrant liability and contingent common shares liability, lower income tax benefit and no expenses related to redeemable preferred stock during the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Non-GAAP Financial Measures
The following table reconciles the supplemental non-GAAP financial measures, as defined under the rules of the U.S. Securities and Exchange Commission ("SEC"), presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. EBITDA and Adjusted EBITDA are defined as net income from continuing operations calculated in accordance with GAAP, less net income attributable to non-controlling interests, plus the sum of income tax expense, interest expense, net, depreciation and amortization (“EBITDA”) and further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, goodwill, intangible and other asset impairment charges, changes in fair value of warrant liability and contingent common shares liability, share-based compensation, non-ordinary legal and regulatory matters, loss on legal settlement, loss on debt extinguishment, transaction and integration costs, reorganization and severance costs, pre-opening de novo costs, gain on sale of Home Health service line, business optimization costs, loss on settlement of redeemable preferred stock and charges related to lease terminations (“Adjusted EBITDA”).
We present EBITDA and Adjusted EBITDA because they are key measures used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions. The Company believes EBITDA and Adjusted EBITDA are useful to investors for the purposes of comparing our results period-to-period and alongside peers and understanding and evaluating our operating results in the same manner as our management team and board of directors.
These supplemental measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. In addition, since these non-GAAP measures are not determined in accordance with GAAP, they are susceptible to varying calculations and may not be comparable to other similarly titled non-GAAP measures of other companies.
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The following is a reconciliation of net loss, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA (each of which is a non-GAAP financial measure) for each of the periods indicated. For additional information on these non-GAAP financial measures, see “Non-GAAP Financial Measures” above.
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| | | Year Ended |
($ in thousands) | | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Net loss | | | | | $ | (493,047) | | | $ | (782,028) | | | $ | (298) | |
Plus (minus): | | | | | | | | | |
Net loss (income) attributable to non-controlling interests | | | | | 668 | | | 3,700 | | | (5,073) | |
Interest expense, net | | | | | 45,278 | | | 46,320 | | | 69,291 | |
Interest expense on redeemable preferred stock | | | | | — | | | 10,087 | | | 19,031 | |
Income tax (benefit) expense | | | | | (48,530) | | | (70,960) | | | 2,065 | |
Depreciation and amortization expense | | | | | 39,841 | | | 37,995 | | | 39,700 | |
EBITDA | | | | | $ | (455,790) | | | $ | (754,886) | | | $ | 124,716 | |
Goodwill, intangible and other asset impairment charges(1) | | | | | 486,262 | | | 962,303 | | | — | |
Goodwill, intangible and other asset impairment charges attributable to non-controlling interests(1) | | | | | (2,415) | | | (7,949) | | | — | |
Changes in fair value of warrant liability and contingent common shares liability(2) | | | | | (46,768) | | | (197,735) | | | — | |
Share-based compensation | | | | | 7,432 | | | 5,769 | | | 1,936 | |
Non-ordinary legal and regulatory matters(3) | | | | | 6,408 | | | 2,914 | | | — | |
Loss on legal settlement(4) | | | | | 3,000 | | | — | | | — | |
Loss on debt extinguishment(5) | | | | | 2,809 | | | 5,534 | | | — | |
Transaction and integration costs(6) | | | | | 3,289 | | | 9,788 | | | 4,790 | |
Reorganization and severance costs(7) | | | | | 1,797 | | | 3,913 | | | 7,512 | |
Pre-opening de novo costs(8) | | | | | 992 | | | 1,929 | | | 1,565 | |
Gain on sale of Home Health service line, net | | | | | (199) | | | (5,846) | | | — | |
Business optimization costs(9) | | | | | (105) | | | — | | | 10,377 | |
Loss on settlement of redeemable preferred stock(10) | | | | | — | | | 14,037 | | | — | |
Charges related to lease terminations(11) | | | | | — | | | — | | | 4,253 | |
Adjusted EBITDA | | | | | $ | 6,712 | | | $ | 39,771 | | | $ | 155,149 | |
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(1)Represents non-cash charges related to the write-down of goodwill, trade name indefinite-lived intangible and other assets. Refer to Note 5 of the accompanying consolidated financial statements for further details.
(2)Represents non-cash amounts related to the change in the estimated fair value of IPO Warrants, Earnout Shares and Vesting Shares. Refer to Notes 3, 13 and 14 of the accompanying consolidated financial statements for further details.
(3)Represents non-ordinary course legal costs related to the previously disclosed ATIP stockholder class action complaints, derivative complaint and SEC inquiry. Refer to Note 18 of the accompanying consolidated financial statements for further details.
(4)Represents charge for net settlement liability related to billing dispute. Refer to Note 18 of the accompanying consolidated financial statements for further details.
(5)Represents charges related to the derecognition of the unamortized deferred financing costs and original issuance discount associated with the full repayment of the 2016 first lien term loan and the partial and full repayment of the 2016 first and second lien term loans, respectively. Refer to Note 8 of the accompanying consolidated financial statements for further details.
(6)Represents costs related to the Business Combination, non-capitalizable debt and capital transaction costs and consulting and planning costs related to preparation to operate as a public company.
(7)Represents severance, consulting and other costs related to discrete initiatives focused on reorganization and delayering of the Company’s labor model, management structure and support functions.
(8)Represents expenses associated with renovation, equipment and marketing costs relating to the start-up and launch of new locations incurred prior to opening.
(9)Represents non-recurring costs to optimize our platform and ATI transformative initiatives. Costs primarily relate to duplicate costs driven by IT and Revenue Cycle Management conversions, labor related costs during the transition of key positions and other incremental costs of driving optimization initiatives.
(10)Represents loss on settlement of redeemable preferred stock based on the value of cash and equity provided to preferred stockholders in relation to the outstanding redeemable preferred stock liability at the time of the closing of the Business Combination.
(11)Represents charges related to lease terminations prior to the end of term for corporate facilities no longer in use.
Liquidity and Capital Resources
Our principal sources of liquidity are historical operating cash flows, borrowings under our credit agreement and proceeds from equity issuances. We have used these funds for our short-term and long-term capital needs, which include salaries, benefits and other employee-related expenses, rent, clinical supplies, outside services, capital expenditures, acquisitions, de novos, acqui-novos and debt service. Our capital expenditure, acquisition, de novo and acqui-novo spend will depend on many factors, including, but not limited to, the targeted number of new clinic openings, patient volumes, clinician labor market, revenue growth rates and level of operating cash flows.
As of December 31, 2022 and December 31, 2021, we had $83.1 million and $48.6 million in cash and cash equivalents, respectively. As of December 31, 2022, we had no available capacity under our 2022 revolving credit facility.
For the year ended December 31, 2022, we had operating cash outflows of $65.5 million driven by items including net losses and the application and repayment of MAAPP funds and deferred employer Social Security taxes. Our ability to generate future operating cash flows depends on many factors, including clinical staffing levels and productivity, costs and capital expenditures, patient volumes, referrals and revenue growth rates.
As of December 31, 2022 and December 31, 2021, the Company had zero and $12.3 million of MAAPP funds included in the balance of cash and cash equivalents, respectively. In addition, as of December 31, 2022 and December 31, 2021, the Company had zero and $5.9 million of deferred Social Security taxes included in the balance of cash and cash equivalents. The Company began applying MAAPP funds to Medicare billings in the second quarter of 2021 and began remitting payments on its deferred employer Social Security taxes in the third and fourth quarters of 2021. The remaining MAAPP funds and deferred employer Social Security taxes were applied and repaid during 2022. The repayment of CARES Act funds, together with net losses and other operational activity, led to a net operating cash outflow for 2022.
We make reasonable and appropriate efforts to collect accounts receivable, including payor amounts and applicable patient deductibles, co-payments and co-insurance, in a consistent manner for all payor types. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect.
Liquidity and going concern
In accordance with Accounting Standards Codification ("ASC") Topic 205-40, Going Concern, the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that these consolidated financial statements are issued. This evaluation includes considerations related to the covenants contained in the Company’s 2022 Credit Agreement as well as the Company’s liquidity position overall.
As detailed in Note 8 - Borrowings, the Company’s 2022 Credit Agreement contains customary covenants and restrictions, including financial and non-financial covenants. The financial covenants require the Company to maintain $30.0 million of minimum liquidity, as defined in the agreement, at each test date through the first quarter of 2024. Additionally, beginning in the second quarter of 2024, the Company must maintain a Secured Net Leverage Ratio, as defined in the agreement, not to exceed 7.00:1.00. The net leverage ratio covenant decreases in the third quarter of 2024 to 6.75:1.00 and further decreases in the first quarter of 2025 to 6.25:1.00, which level remains applicable through maturity. The financial covenants are tested as of each fiscal quarter end for the respective periods. Failure to comply with these covenants and restrictions would result in an event of default, subject to customary cure periods.
In addition, the 2022 Credit Facility contains customary representations and warranties, events of default, reporting and other affirmative covenants and negative covenants, including requirements related to the delivery of independent audit reports without certain going concern qualifications, limitations on indebtedness, liens, investments, negative pledges, dividends, junior debt payments, fundamental changes and asset sales and affiliate transactions. Failure to comply with the 2022 Credit Facility covenants and restrictions, including the provision related to certain going concern qualifications for any fiscal year, including the year ended December 31, 2022, could result in an event of default under the 2022 Credit Facility, subject to customary cure periods. In such an event, all amounts outstanding under the 2022 Credit Facility, together with any accrued interest, could then be declared immediately due and payable.
As of December 31, 2022, the Company had $83.1 million in cash and cash equivalents and no available capacity under its 2022 revolving credit facility. As measured based on the definitions in the Company’s 2022 Credit Agreement, liquidity was $72.9 million as of December 31, 2022.
The Company has negative operating cash flows, operating losses and net losses. For the year ended December 31, 2022, the Company had cash flow used in operating activities of $65.5 million, operating loss of $539.7 million and net loss of $493.0 million. In addition, as of December 31, 2022, the Company had an accumulated deficit of $1,339.5 million. These results are, in part, due to trends experienced by the Company including a tight labor market for available physical therapy and other healthcare providers in the workforce, visit volume softness, decreases in rate per visit and increases in interest costs. Based on current liquidity and projected cash use, the Company anticipates violation of its $30.0 million minimum liquidity covenant under its 2022 Credit Agreement within the next twelve months. As a result of the above factors, there is substantial doubt about the Company’s ability to continue as a going concern within twelve months following the issuance date of the consolidated financial statements as of and for the period ended December 31, 2022.
Improving operating results and cash flow is dependent upon the Company’s ability to achieve its business plan to increase clinical staffing levels and clinician productivity, control costs and capital expenditures, increase patient visit volumes and referrals and stabilize rate per visit. However, there can be no assurance that it will be successful in any of these respects.
If the Company does not complete the Transaction as contemplated by the TSA or otherwise access additional financing, the Company will need to consider other alternatives, including pursuing separate amendments to or waivers of the minimum liquidity covenant, the requirement to deliver audited financial statements without certain going concern qualifications, and other requirements under the 2022 Credit Agreement, as well as raising funds from other sources, obtaining alternate financing, disposal of assets, or pursuing other strategic alternatives to improve its liquidity position and business results. There can be no assurance that the Company will be successful in completing the Transaction or accessing such alternative options or financing when needed. Failure to do so could have a material adverse impact on our business, financial condition, results of operations and cash flows, and may lead to events including bankruptcy, reorganization or insolvency.
In addition, the report of the Independent Registered Public Accounting Firm accompanying the consolidated financial statements for the year ended December 31, 2022 contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Absent an amendment or waiver, the 2022 Credit Agreement provides that the receipt of a report of the Independent Registered Public Accounting Firm containing an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern could be an event of default, subject to certain exceptions. Pursuant to the TSA, the First Lien Lenders have agreed that, prior to the Outside Closing Date, they will forbear in the exercise of any rights, remedies, powers, privileges and defenses under the 2022 Credit Agreement arising on account of a default, alleged default or event of default (if any) resulting from the going concern explanatory paragraph in the report of the Independent Registered Public Accounting Firm accompanying the consolidated financial statements for the year ended December 31, 2022. However, if the transactions contemplated by the TSA are not consummated on its terms or at all, the First Lien Lenders could claim that a default or event of default has occurred under the 2022 Credit Agreement. If such claim is not waived by the First Lien Lenders and the Company is unsuccessful in disputing any such claims (including with respect to the applicability of one of the enumerated exceptions to the 2022 Credit Agreement requirement), the Company could be considered to have an event of default after the expiration of the applicable cure periods. In such event, all amounts outstanding under the 2022 Credit Facility, together with any accrued interest, could then be declared immediately due and payable and could be reclassified to current in the Company's consolidated financial statements for the period. A default on our obligations and an acceleration of our indebtedness by our lenders would have a material adverse impact on our business, financial condition, results of operations and cash flows, and may lead to events including bankruptcy, reorganization or insolvency.
On March 15, 2023, the Company entered into a Transaction Support Agreement (the “TSA”) with certain of its first lien lenders under the 2022 Credit Agreement (the "First Lien Lenders"), the administrative agent under the 2022 Credit Agreement, holders of its Series A Senior Preferred Stock (the "Preferred Equityholders") and holders of the majority of its common stock (together with the First Lien Lenders and the Preferred Equityholders, the “Parties”), setting forth the principal terms of a comprehensive transaction to enhance the Company's liquidity (the "Transaction"). Pursuant to the TSA, and subject to the terms and conditions thereof, the Parties have agreed to support, act in good faith and take all steps reasonably necessary and desirable to consummate the transactions referenced therein by June 15, 2023 (the “Outside Closing Date”).
The TSA contemplates, among other things, (i) a delayed draw new money financing, available under certain circumstances until the 18 month anniversary of the closing date of the transactions, in an aggregate principal amount equal to $25.0 million in the form of new second lien PIK exchangeable notes (“Second Lien PIK Exchangeable Notes”), (ii) exchange of $100.0 million of the aggregate principal amount of the term loans under the 2022 Credit Facility held by certain of the Preferred Equityholders for Second Lien PIK Exchangeable Notes, (iii) a reduction of the thresholds applicable to the minimum liquidity financial covenant under the 2022 Credit Agreement for certain periods, (iv) a waiver of the requirement to comply with the Secured Net Leverage Ratio financial covenant under the 2022 Credit Agreement for the fiscal quarters ending June 30, 2024, September 30, 2024 and December 31, 2024 and a modification of the levels and certain component definitions applicable thereto in the fiscal quarters ending after December 31, 2024, (v) waiver of the requirement for the Company to deliver audited financial statements without certain going concern qualifications for the years ended December 31, 2022, December 31, 2023, and December 31, 2024, (vi) an increase in the interest rate payable on the existing term loans and revolving loans until the achievement of a specified financial metric and (vii) board representation and observer rights, and other changes to the governance of the Company. The Second Lien PIK Exchangeable Notes would be exchangeable for shares of Class A common stock of the Company at a fixed price of $0.25, and the holders thereof would have the right to vote on corporate matters on an as-exchanged basis. The TSA contains certain representations, warranties and other agreements by the Company and Parties. In accordance with the TSA, the First Lien Lenders agreed that, prior to the Outside Closing Date, they will forbear in the exercise of any rights, remedies, powers, privileges and defenses under the 2022 Credit Agreement arising on account of an alleged default or event of default (if any) resulting from the going concern explanatory paragraph in the independent auditors' report accompanying the consolidated financial statements for the year ended December 31, 2022 (the "Credit Agreement Forbearance"). The Parties' obligations under the TSA are, and the closing of the Transaction is, subject to various customary terms and conditions set forth therein, including the execution and delivery of definitive documentation and approval by the Company's stockholders.
There is no assurance that the transactions contemplated by the TSA will be consummated on the terms as described above, on a timely basis or at all.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business within twelve months after the date that these consolidated financial statements are issued.
2022 Credit Agreement
On February 24, 2022 (the "Refinancing Date"), the Company entered into various financing arrangements to refinance its existing long-term debt, which consisted of $555.0 million in principal under the Company's existing term loan (the "2016 first lien term loan"), which was repaid in full on the Refinancing Date. As part of the 2022 Debt Refinancing, ATI Holdings Acquisition, Inc. (the "Borrower"), an indirect subsidiary of ATI Physical Therapy, Inc., entered into a credit agreement among the Borrower, Wilco Intermediate Holdings, Inc. ("Holdings"), as loan guarantor, Barclays Bank PLC, as administrative agent and issuing bank, and a syndicate of lenders (the "2022 Credit Agreement"). The 2022 Credit Agreement provides a $550.0 million credit facility (the "2022 Credit Facility") that is comprised of a $500.0 million senior secured term loan (the "Senior Secured Term Loan") which was fully funded at closing and a $50.0 million "super priority" senior secured revolver (the "Revolving Loans") with a $10.0 million letter of credit sublimit. The 2022 Credit Facility refinanced and replaced the Company's prior credit facility for which Barclays Bank PLC served as administrative agent for a syndicate of lenders.
The Company recognized $2.8 million in loss on debt extinguishment related to the derecognition of the remaining unamortized deferred financing costs and unamortized original issue discount in conjunction with the repayment of the 2016 first lien term loan. The Company capitalized debt issuance costs totaling $12.5 million related to the 2022 Credit Facility as well as an original issue discount of $10.0 million. The Company capitalized issuance costs of $0.5 million related to the Revolving Loans.
The Senior Secured Term Loan matures on February 24, 2028 and bears interest, at the Company's election, at a base interest rate of the Alternate Base Rate ("ABR"), as defined in the agreement, plus an applicable credit spread, or the Adjusted Term Secured Overnight Financing Rate ("SOFR"), as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio. The Company may elect to pay 2.0% interest in-kind at a 0.5% premium during the first year under the agreement. The Company elected to pay a portion of its interest in-kind during the third and fourth quarters of 2022. As of December 31, 2022, borrowings on the Senior Secured Term Loan bear interest at 1-month SOFR, subject to a 1.0% floor, plus 7.25% plus the 0.5% paid-in-kind interest premium. As of December 31, 2022, the interest rate on the Senior Secured Term Loan was 12.1% and the effective interest rate was 13.1%. As of December 31, 2022, the outstanding principal amount under the Senior Secured Term Loan was $503.5 million.
The Revolving Loans are subject to a maximum borrowing capacity of $50.0 million and mature on February 24, 2027. Borrowings on the Revolving Loans bear interest, at the Company's election, at a base interest rate of the ABR, as defined in the agreement, plus an applicable credit spread, or the Adjusted Term SOFR Rate, as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio. Commitment fees on the Revolving Loans are payable quarterly at 0.5% per annum on the daily average undrawn portion for the quarter and are expensed as incurred. In December 2022, the Company drew $48.2 million in Revolving Loans. As of December 31, 2022, $48.2 million in Revolving Loans were outstanding and bearing interest at rate of 8.3%.
The 2022 Credit Facility is guaranteed by certain of the Company’s subsidiaries and is secured by substantially all of the assets of Holdings, the Borrower and the Borrower’s wholly owned subsidiaries, including a pledge of the stock of the Borrower, in each case, subject to customary exceptions.
The 2022 Credit Agreement contains customary covenants and restrictions, including financial and non-financial covenants. The financial covenants require the Company to maintain $30.0 million of minimum liquidity, as defined in the agreement, at each test date through the first quarter of 2024. Additionally, beginning in the second quarter of 2024, the Company must maintain a Secured Net Leverage Ratio, as defined in the agreement, not to exceed 7.00:1.00. The net leverage ratio covenant decreases in the third quarter of 2024 to 6.75:1.00 and further decreases in the first quarter of 2025 to 6.25:1.00, which remains applicable through maturity. The financial covenants are tested as of each fiscal quarter end for the respective periods. As of December 31, 2022, the Company has met its minimum liquidity financial covenant.
The 2022 Credit Facility contains customary representations and warranties, events of default, reporting and other affirmative covenants and negative covenants, including requirements related to the delivery of independent audit reports without certain going concern qualifications, limitations on indebtedness, liens, investments, negative pledges, dividends, junior debt payments, fundamental changes and asset sales and affiliate transactions. Failure to comply with the 2022 Credit Facility covenants and restrictions could result in an event of default under the 2022 Credit Facility, subject to customary cure periods. In such an event, all amounts outstanding under the 2022 Credit Facility, together with any accrued interest, could then be declared immediately due and payable.
Under the 2022 Credit Facility, the Company may be required to make certain mandatory prepayments upon the occurrence of certain events, including: an event of default, a Prepayment Asset Sale or receipt of Net Insurance Proceeds (as defined in the 2022 Credit Agreement) in excess of $15.0 million, or excess cash flows exceeding certain thresholds (as defined in the 2022 Credit Agreement).
Preferred Stock Financing
In connection with the 2022 Debt Refinancing, the Company issued 165,000 shares of non-convertible preferred stock (the "Series A Senior Preferred Stock") plus 5.2 million warrants to purchase shares of the Company's common stock at an exercise price of $3.00 per share (the "Series I Warrants") and warrants to purchase 6.3 million shares of the Company's common stock at an exercise price equal to $0.01 per share (the "Series II Warrants"). The shares of the Series A Senior Preferred Stock have a par value of $0.0001 per share and an initial stated value of $1,000 per share, for an aggregate initial stated value of $165.0 million. The Series I and Series II Warrants are exercisable for 5 years from the Refinancing Date.
The gross proceeds received from the issuance of the Series A Senior Preferred Stock and the Series I and Series II Warrants were $165.0 million, which was allocated among the instruments based on the relative fair values of each instrument. Of the gross proceeds, $144.7 million was allocated to the Series A Senior Preferred Stock, $5.1 million to the Series I Warrants and $15.2 million to the Series II Warrants. The resulting discount on the Series A Senior Preferred Stock will be recognized as a deemed dividend when those shares are subsequently remeasured upon becoming redeemable or probable of becoming redeemable. The Company recognized $2.9 million in issuance costs and $1.4 million of original issue discount related to the Series A Senior Preferred Stock. The Company recognized total issuance costs and original issue discount of approximately $0.2 million and $0.5 million related to the Series I Warrants and Series II Warrants, respectively.
The Series A Senior Preferred Stock has priority over the Company's Class A common stock and all other junior equity securities of the Company, and is junior to the Company's existing or future indebtedness and other liabilities (including trade payables), with respect to payment of dividends, distribution of assets, and all other liquidation, winding up, dissolution, dividend and redemption rights.
The Series A Senior Preferred Stock carries an initial dividend rate of 12.0% per annum (the "Base Dividend Rate"), payable quarterly in arrears. Dividends will be paid in-kind and added to the stated value of the Series A Senior Preferred Stock. The Company may elect to pay dividends on the Series A Senior Preferred Stock in cash beginning on the third anniversary of the Refinancing Date and, with respect to any such dividends paid in cash, the dividend rate then in effect will be decreased by 1.0%.
The Base Dividend Rate is subject to certain adjustments, including an increase of 1.0% per annum on the first day following the fifth anniversary of the Refinancing Date and on each one-year anniversary thereafter, and 2.0% per annum upon the occurrence of either an Event of Noncompliance (as defined in the Certificate of Designation) or a failure by the Company to redeem in full all Series A Senior Preferred Stock upon a Mandatory Redemption Event, which includes a change of control, liquidation, bankruptcy or certain restructurings. The paid in-kind dividends related to the Series A Preferred Stock were $17.9 million for the year ended December 31, 2022. As of December 31, 2022, the accumulated paid in-kind dividends related to the Series A Preferred Stock were $17.9 million and the aggregate stated value was $182.9 million.
The Company has the right to redeem the Series A Senior Preferred Stock, in whole or in part, at any time (subject to certain limitations on partial redemptions). The Redemption Price for each share of Series A Senior Preferred Stock is equal to the stated value subject to certain price adjustments depending on when such optional redemption takes place, if at all.
The Series A Senior Preferred Stock is perpetual and is not mandatorily redeemable at the option of the holders, except upon the occurrence of a Mandatory Redemption Event. Upon the occurrence of a Mandatory Redemption Event, to the extent not prohibited by law, the Company is required to redeem all Series A Senior Preferred Stock, in cash, at a price per share equal to the then applicable Redemption Price. Based on the Company’s assessment of the conditions which would trigger the redemption of the Series A Senior Preferred Stock, the Company has determined that the Series A Senior Preferred Stock is neither currently redeemable nor probable of becoming redeemable. Because the Series A Senior Preferred Stock is classified as mezzanine equity and is not considered redeemable or probable of becoming redeemable, the paid in-kind dividends that are added to the stated value do not impact the carrying value of the Series A Senior Preferred Stock in the Company’s consolidated balance sheets. Should the Series A Senior Preferred Stock become probable of becoming redeemable, the Company will recognize changes in the redemption value of the Series A Senior Preferred Stock immediately as they occur and adjust the carrying amount accordingly at the end of each reporting period. As of December 31, 2022, the redemption value of the Series A Senior Preferred Stock was $182.9 million, which is the stated value.
If an Event of Noncompliance occurs, then the holders of a majority of the then outstanding shares of Series A Senior Preferred Stock (the “Majority Holders”) have the right to demand that the Company engage in a sale/refinancing process to consummate a Forced Transaction. A Forced Transaction includes a refinancing of the Series A Senior Preferred Stock or a sale of the Company. Upon consummation of any Forced Transaction, to the extent not prohibited by law, the Company is required to redeem all Series A Senior Preferred Stock, in cash, at a price per share equal to the then applicable Redemption Price.
Holders of shares of Series A Senior Preferred Stock have no voting rights with respect to the Series A Senior Preferred Stock except as set forth in the Certificate of Designation, other documents entered into in connection with the Purchase Agreement and the transactions contemplated thereby, or as otherwise required by law. For so long as any Series A Senior Preferred Stock is outstanding, the Company is prohibited from taking certain actions without the prior consent of the Majority Holders as set forth in the Certificate of Designation which include: issuing equity securities ranking senior to or pari passu with the Series A Senior Preferred Stock, incurring indebtedness or liens, engaging in affiliate transactions, making restricted payments, consummating certain investments or asset dispositions, consummating a change of control transaction unless the Series A Senior Preferred Stock is redeemed in full, altering the Company’s organizational documents, and making material changes to the nature of the Company’s business.
Holders of Series A Senior Preferred Stock, voting as a separate class, have the right to designate and elect one director to serve on the Company’s board of directors until such time after the Refinancing Date that (i) as of any applicable fiscal quarter end, the Company’s trailing 12-month Consolidated Adjusted EBITDA (as defined in the Certificate of Designation) exceeds $100 million, or (ii) the Lead Purchaser ceases to hold at least 50.1% of the Series A Senior Preferred Stock held by it as of the Refinancing Date.
As a result of the 2022 Debt Refinancing and the Preferred Stock Financing, the Company added approximately $77.3 million of cash to its balance sheet.
Consolidated Cash Flows
The following table presents selected data from our consolidated statements of cash flows:
| | | | | | | | | | | |
| Year Ended |
($ in thousands) | December 31, 2022 | | December 31, 2021 |
| | | |
Net cash used in operating activities | $ | (65,508) | | | $ | (42,100) | |
Net cash used in investing activities | (28,048) | | | (39,889) | |
Net cash provided by (used in) financing activities | 128,079 | | | (11,523) | |
Net increase (decrease) in cash and cash equivalents | 34,523 | | | (93,512) | |
Cash and cash equivalents at beginning of period | 48,616 | | | 142,128 | |
Cash and cash equivalents at end of period | $ | 83,139 | | | $ | 48,616 | |
Year ended December 31, 2022 compared to year ended December 31, 2021
Net cash used in operating activities for the year ended December 31, 2022 was $65.5 million compared to $42.1 million for the year ended December 31, 2021, an increase in cash used of $23.4 million. The change was primarily the result of approximately $27.7 million higher net losses as adjusted for non-cash items such as goodwill, intangible and other asset impairment charges and changes in fair value of warrant liability and contingent common shares liability during the year ended December 31, 2022, partially offset by a $3.6 million payment of transaction-related amount due to former owners not recurring in 2022.
Net cash used in investing activities for the year ended December 31, 2022 was $28.0 million compared to $39.9 million for the year ended December 31, 2021, a decrease of approximately $11.8 million. The decrease was primarily driven by cash outflows related to purchases of acqui-novo clinics during the year ended December 31, 2021 not recurring in 2022 and lower capital expenditures during the year ended December 31, 2022 due to fewer clinic openings.
Net cash provided by financing activities for the year ended December 31, 2022 was $128.1 million compared to $11.5 million of cash used in financing activities for the year ended December 31, 2021, an increase in cash provided of $139.6 million. The change was primarily driven by net cash inflows related to the 2022 Debt Refinancing (refer to Note 8 - Borrowings for further details) and drawing Revolving Loans under the 2022 Credit Agreement during the year ended December 31, 2022.
Commitments and Contingencies
The Company may be subject to loss contingencies, such as legal proceedings and claims arising out of its business. The Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. During the year ended December 31, 2022, the Company recorded an accrual related to the outcomes of certain legal matters described in Note 18 - Commitments and Contingencies. As of December 31, 2022, the liability has been fully settled. Refer to Note 18 to our consolidated financial statements included elsewhere in this Annual Report for further information.
We enter into contractual obligations and commitments from time to time in the normal course of business, primarily related to our debt financing and operating leases. Refer to Notes 8 and 17 to our consolidated financial statements included elsewhere in this Annual Report for further information. Additionally, the Company has contractual commitments related to cloud computing and telecommunication service agreements. Refer to Note 18 to our consolidated financial statements included elsewhere in this Annual Report for further information.
Off-Balance Sheet Arrangements
As of December 31, 2022 and December 31, 2021, the Company did not have any off-balance sheet arrangements.
Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of the Company’s consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. The Company’s management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company’s consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company’s financial position and results of operations.
Critical accounting estimates are those that the Company’s management considers the most important to the portrayal of the Company’s financial condition and results of operations because they require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting estimates in relation to its consolidated financial statements include those related to:
•Patient revenue recognition and allowance for doubtful accounts
•Realization of deferred tax assets
•Goodwill and intangible assets
Additional information related to our critical accounting estimates can be found in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies of our audited consolidated financial statements included elsewhere in this Annual Report.
Patient revenue recognition and allowance for doubtful accounts
Net patient revenue
We provide an array of services to our patients including physical therapy, work conditioning, hand therapy, aquatic therapy, functional capacity assessment, sports medicine and wellness programs. Net patient revenue consists of these physical therapy services.
Net patient revenue is recognized at an amount equal to the consideration the Company expects to receive from third-party payors, patients and others for services rendered when the performance obligations under the terms of the contract are satisfied.
There is an implied contract between the Company and the patient upon each patient visit resulting in the Company’s patient service performance obligation. Generally, the performance obligation is satisfied at a point in time, as each service provided is distinct and future services rendered are not dependent on previously rendered services. The Company has separate contractual agreements with third-party payors (e.g., insurers, managed care programs, government programs, workers' compensation) that provide for payments to the Company at amounts different from its established rates. While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the patients covered by the third-party payors. The payor contracts do not indicate performance obligations of the Company but indicate reimbursement rates for patients who are covered by those payors when the services are provided.
To determine the transaction price associated with the implied contract, the Company includes the estimated effects of any variable consideration, such as contractual allowances and implicit price concessions. When the Company has contracts with negotiated prices for services provided (contracted payors), the Company considers the contractual rates when estimating contractual allowances. Variable consideration is estimated using a portfolio approach that incorporates whether or not the Company has historical differences from negotiated rates due to non-compliance with contract provisions. Historical results indicate that it is probable that negotiated prices less variable consideration will be realized; therefore, this amount is deemed the transaction price and recorded as revenue. The Company records an estimated provision for doubtful accounts based on historical collections for claims with similar characteristics, such as location of service and type of third-party payor, at the time of recognition. Any subsequent impairment of the related receivable is recorded as provision for doubtful accounts.
For non-contracted payors, the Company determines the transaction price by applying established rates to the services provided and adjusting for contractual allowances provided to third-party payors and implicit price concessions. The Company estimates the contractual allowances and implicit price concessions using a portfolio approach based on historical collections for claims with similar characteristics, such as location of service and type of third-party payor, in relation to established rates, because the Company does not have a contract with the underlying payor. Any subsequent changes in estimate on the realization of the receivable is recorded as a revenue adjustment. Management believes that calculating at the portfolio level would not differ materially from considering each patient account separately.
The Company continually reviews the revenue transaction price estimation process to consider updates to laws and regulations and changes in third-party payor contractual terms that result from contract renegotiations and renewals. Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payors and government entities, which are often subject to interpretation, the Company may receive reimbursement for healthcare services that is different from the estimates, and such differences could be material.
In its evaluation of the revenue transaction price, management assesses historical collection experience in relation to contracted rates, or for non-contracted payors, established rates. The practice of applying historical collection experience to determine the revenue transaction price for current transactions involves significant judgment and estimation. Management subsequently monitors the appropriateness of its estimates for claims on a date of service basis as cash collections on previous periods mature. Actual cash collections upon maturity may differ from the transaction price estimated upon initial recognition, and such differences could be material. If initial revenue recognition estimates increased or decreased by 100 basis points relative to an annual period, the impact to collections of the annual net patient revenue would be approximately $5.8 million. Management believes subsequent changes in estimate as a result of maturity of claims with dates of service in 2019, 2020 and 2021 have not been material to the consolidated statements of operations.
The following table disaggregates net patient revenue for each associated payor class for the periods indicated below:
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| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Commercial | | | | | 57.6 | % | | 56.3 | % | | 53.1 | % |
Government | | | | | 24.2 | % | | 23.7 | % | | 22.2 | % |
Workers’ Compensation | | | | | 12.4 | % | | 14.3 | % | | 17.6 | % |
Other (1) | | | | | 5.8 | % | | 5.7 | % | | 7.1 | % |
| | | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(1) Other is primarily comprised of net patient revenue related to auto personal injury which by its nature may have longer-term collection characteristics relative to other payor classes.
The following table disaggregates accounts receivable, net associated with net patient revenue for each associated payor class as of:
| | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | |
Commercial | 43.9 | % | | 40.3 | % | |
Government | 13.7 | % | | 9.1 | % | |
Workers’ Compensation | 15.5 | % | | 18.1 | % | |
Other (1) | 26.9 | % | | 32.5 | % | |
| 100.0 | % | | 100.0 | % | |
(1) Other is primarily comprised of accounts receivable associated with net patient revenue related to auto personal injury.
Allowance for doubtful accounts
The allowance for doubtful accounts is based on estimates of losses related to receivable balances. The risk of collection varies based upon the service, the payor class and the patient’s ability to pay the amounts not reimbursed by the payor. The Company estimates the allowance for doubtful accounts based upon several factors, including the age of the outstanding receivables, the historical experience of collections, the impact of economic conditions and, in some cases, evaluating specific customer accounts for the ability to pay. Management judgment is used to assess the collectability of accounts and the ability of the Company’s customers to pay. The provision for doubtful accounts is included in cost of services in the consolidated statements of operations. When it is determined that a customer account is uncollectible, that balance is written off against the existing allowance.
Realization of deferred tax assets
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in operations in the period that includes the enactment date.
We evaluate the realizability of deferred tax assets and reduce those assets using a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Among the factors used to assess the likelihood of realization are projections of future taxable income streams and the expected timing of the reversals of existing temporary differences. The judgments made at any point in time may be impacted by changes in tax codes, statutory tax rates or future taxable income levels. This could materially impact our assessment of the need for valuation allowance reserves and could cause our provision for income taxes to vary significantly from period to period.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill and indefinite-lived intangible assets under ASC Topic 350, Intangibles – Goodwill and Other, which requires the Company to test goodwill and other indefinite-lived assets for impairment annually or whenever events or circumstances indicate that impairment may exist.
The cost of acquired businesses is allocated first to its identifiable assets, both tangible and intangible, based on estimated fair values. Costs allocated to finite-lived identifiable intangible assets are generally amortized on a straight-line basis over the remaining estimated useful lives of the assets. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill.
Goodwill and intangible assets with indefinite lives are not amortized but must be reviewed at least annually for impairment. If the impairment test indicates that the carrying value of an intangible asset exceeds its fair value, then an impairment loss should be recognized in the consolidated statements of operations in an amount equal to the excess carrying value over fair value. Fair value is determined using valuation techniques based on estimates, judgments and assumptions the Company believes are appropriate in the circumstances. The Company completed the interim and annual impairment analyses of goodwill as of March 31, 2022, June 30, 2022, September 30, 2022, October 1, 2022 and December 31, 2022 using an average of a discounted cash flow analysis and comparable public company analysis. Goodwill impairment charges were recorded during the first, second, third and fourth quarters of 2022. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples.
The Company completed the interim and annual impairment analysis of the indefinite lived intangible asset as of March 31, 2022, June 30, 2022, September 30, 2022, October 1, 2022 and December 31, 2022 using the relief from royalty method. Indefinite lived intangibles asset impairment charges were recorded during the first, second, third and fourth quarters of 2022. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate.
The Company has one reporting unit for purposes of the Company’s goodwill impairment tests.
During the year ended December 31, 2022, the Company identified interim triggering events as a result of factors including potential changes in discount rates and decreases in share price. The Company determined that the combination of these factors constituted interim triggering events that required further analysis with respect to potential impairment to goodwill, trade name indefinite-lived intangible and other assets. Accordingly, the Company performed interim quantitative impairment testing as of March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 and determined that the fair value amounts were below the respective carrying amounts. As a result, the Company recorded non-cash impairment charges of $318.9 million related to goodwill and $164.4 million related to the trade name indefinite-lived intangible asset during the year ended December 31, 2022. Refer to Note 5 - Goodwill, Trade Name and Other Intangible Assets in the consolidated financial statements for further details.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of the Company’s reporting unit and the indefinite-lived intangible asset requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include projected revenue growth rates, EBITDA margins, terminal growth rates, discount rates, relevant market multiples, royalty rates and other market factors. If current expectations of future growth rates, margins and cash flows are not met, or if market factors outside of our control change significantly, including discount rates, relevant market multiples, company share price and other market factors, then our reporting unit or the indefinite-lived intangible asset might become impaired in the future, negatively impacting our operating results and financial position. As the carrying amounts of goodwill and the Company’s trade name indefinite-lived intangible asset were impaired as of December 31, 2022 and written down to fair value, those amounts are more susceptible to an impairment risk if there are unfavorable changes in assumptions and estimates. Additionally, goodwill and indefinite-lived intangible assets associated with acquisitions that may occur in the future are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to impairment risk if business operating results or market conditions deteriorate.
To further illustrate sensitivity of the valuation models, if we had changed the assumptions used to estimate the fair value of our goodwill reporting unit and trade name indefinite-lived intangible asset in our most recent quantitative analysis, these isolated changes, which are reasonably possible to occur, would have led to the following approximate increase/(decrease) in the aggregate fair value of the reporting unit under the discounted cash flow analysis or trade name indefinite-lived intangible asset (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | Terminal growth rate(1) | | EBITDA margin | | Royalty rate |
| 50 basis points | | 100 basis points | | 100 basis points | | 50 basis points |
| Increase | | Decrease | | Increase | | Decrease | | Increase | | Decrease | | Increase | | Decrease |
Goodwill | $(40,000) | | $45,000 | | $45,000 | | $(35,000) | | $40,000 | | $(40,000) | | | | |
Trade name | $(10,000) | | $15,000 | | $15,000 | | $(10,000) | | | | | | $35,000 | | $(35,000) |
(1) An increase of 100 basis points to our assumed non-terminal revenue growth rates would result in approximately $50 million of an estimated increase to the fair value of our goodwill reporting unit, whereas a 100 basis point decrease would result in approximately $40 million of an estimated decrease to the fair value of our goodwill reporting unit.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2 - Basis of Presentation and Summary of Significant Accounting Policies in the accompanying consolidated financial statements.
Item 8. Financial Statements and Supplementary Data
ATI Physical Therapy, Inc.
Index to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of ATI Physical Therapy, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ATI Physical Therapy, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive loss, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2022 appearing under Item 15 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above 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 each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to insufficient complement of tax personnel and ineffective controls over the income tax provision.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has negative operating cash flows, operating losses and net losses that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of patient service revenue and related accounts receivable - contractual allowances
As described in Notes 2 and 4 to the consolidated financial statements, net patient revenue is recognized at an amount equal to the consideration the Company expects to receive from third-party payors, patients and others for services rendered when the performance obligations under the terms of the contract are satisfied. For the year ended December 31, 2022, net patient service revenue was $575.9 million and related accounts receivable was $80.7 million as of December 31, 2022. There is an implied contract between the Company and the patient upon each patient visit resulting in the Company’s patient service performance obligation. To determine the transaction price associated with the implied contract, management includes the estimated effects of any variable consideration, such as contractual allowances and implicit price concessions. When the Company has contracts with negotiated prices for services provided, management considers the contractual rates when recording revenue and adjusts for any variable consideration to the transaction price to arrive at revenue. For non-contracted payors, management determines the transaction price by applying established rates to the services provided and adjusting for contractual allowances provided to third-party payors and implicit price concessions. Management estimates the contractual allowances and implicit price concessions using a portfolio approach based on historical collections for claims with similar characteristics, such as location of service and type of third-party payor, in relation to established rates, because the Company does not have a contract with the underlying payor. Any subsequent changes in estimate on the realization of the receivable is recorded as a revenue adjustment. Management continually reviews the revenue transaction price estimation process to consider updates to laws and regulations and changes in third-party payor contractual terms that result from contract renegotiations and renewals.
The principal considerations for our determination that performing procedures relating to the valuation of patient service revenue and related accounts receivable for contractual allowances is a critical audit matter are (i) the significant judgment by management in estimating the value of patient service revenue and related accounts receivable for contractual allowances, and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the contractual allowances.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s valuation of patient accounts receivable, including controls over the contractual allowance model, completeness and accuracy of historical collection data and review of adjustments made by management to contractual allowances. These procedures also included, among others, testing management’s process for developing the estimate for contractual allowances, including (i) evaluating the appropriateness of the analysis used by management, (ii) testing the completeness and accuracy of underlying historical collection data used in the analysis, (iii) testing, on a sample basis, the accuracy of revenue transactions and cash collections from the historical billing and collection data used in management’s analysis, (iv) performing a retrospective comparison of actual cash collected subsequent to the prior year-end to evaluate the reasonableness of the prior year estimate, and (v) evaluating the reasonableness of adjustments made by management to contractual allowances.
Goodwill and trade name indefinite-lived intangible asset impairment assessments
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s consolidated goodwill and trade name indefinite-lived intangible asset balances were $286.5 million and $245.0 million, respectively, as of December 31, 2022. Goodwill and intangible assets with indefinite lives are not amortized but must be reviewed at least annually for impairment, or whenever events or circumstances indicate that impairment may exist. If the impairment test indicates that the carrying value of goodwill of the reporting unit or an intangible asset exceeds its fair value, then an impairment loss should be recognized in the consolidated statements of operations in an amount equal to the excess carrying value over fair value. Management completed the interim and annual impairment analyses of goodwill as of March 31, 2022, June 30, 2022, September 30, 2022, October 1, 2022 and December 31, 2022 by estimating the fair value of the Company’s single reporting unit using an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value of the reporting unit include projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate, and relevant market multiples. Management completed the interim and annual impairment analyses of the trade name indefinite-lived intangible asset as of March 31, 2022, June 30, 2022, September 30, 2022, October 1, 2022 and December 31, 2022 by estimating the fair value of the trade name indefinite-lived intangible asset using the relief from royalty method. The key assumptions associated with determining the estimated fair value of the trade name indefinite-lived intangible asset include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate. During the year ended December 31, 2022, the Company recorded $318.9 million and $164.4 million of total impairment charges related to goodwill and the trade name indefinite-lived intangible asset, respectively.
The principal considerations for our determination that performing procedures relating to the goodwill and trade name indefinite-lived intangible asset impairment assessments is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the reporting unit and trade name indefinite-lived intangible asset, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples, related to goodwill and projected revenue growth rates, the royalty rate, the terminal growth rate, and the discount rate related to the trade name indefinite-lived intangible asset, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and indefinite-lived intangible asset impairment assessments, including controls over the valuation of the Company’s single reporting unit and the trade name indefinite-lived intangible asset. These procedures also included, among others, (i) testing management’s process for developing the fair value estimates, (ii) evaluating the appropriateness of management’s fair value analyses, (iii) testing the completeness and accuracy of the underlying data used in the analyses, and (iv) evaluating significant assumptions used by management related to the projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate, and relevant market multiples related to goodwill and projected revenue growth rates, the royalty rate, the terminal growth rate and the discount rate related to the trade name indefinite-lived intangible asset. Evaluating management’s assumptions related to projected revenue growth rates and EBITDA margins involved evaluating whether the assumptions were reasonable considering past performance of the Company, the consistency with external data from other sources, and whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the discounted cash flow analysis, comparable public company analysis and relief from royalty method, and (ii) the reasonableness of the assumptions related to the discount rates, the terminal growth rate, the royalty rate, and relevant market multiples.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
March 16, 2023
We have served as the Company's auditor since 2021.
ATI Physical Therapy, Inc.
Consolidated Balance Sheets
($ in thousands, except share and per share data)
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Assets: | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 83,139 | | | $ | 48,616 | |
Accounts receivable (net of allowance for doubtful accounts of $47,620 and $53,533 at December 31, 2022 and December 31, 2021, respectively) | 80,673 | | | 82,455 | |
Prepaid expenses | 13,526 | | | 9,303 | |
Other current assets | 10,040 | | | 3,204 | |
Assets held for sale | 6,755 | | | — | |
Total current assets | 194,133 | | | 143,578 | |
| | | |
Property and equipment, net | 123,690 | | | 139,730 | |
Operating lease right-of-use assets | 226,092 | | | 256,646 | |
Goodwill, net | 286,458 | | | 608,811 | |
Trade name and other intangible assets, net | 246,582 | | | 411,696 | |
Other non-current assets | 2,030 | | | 2,233 | |
Total assets | $ | 1,078,985 | | | $ | 1,562,694 | |
| | | |
Liabilities, Mezzanine Equity and Stockholders' Equity: | | | |
Current liabilities: | | | |
Accounts payable | $ | 12,559 | | | $ | 15,146 | |
Accrued expenses and other liabilities | 53,672 | | | 64,584 | |
Current portion of operating lease liabilities | 47,676 | | | 49,433 | |
Current portion of long-term debt | — | | | 8,167 | |
Liabilities held for sale | 2,614 | | | — | |
Total current liabilities | 116,521 | | | 137,330 | |
| | | |
Long-term debt, net | 531,600 | | | 543,799 | |
Warrant liability | 98 | | | 4,341 | |
Contingent common shares liability | 2,835 | | | 45,360 | |
Deferred income tax liabilities | 18,886 | | | 67,459 | |
Operating lease liabilities | 218,424 | | | 250,597 | |
Other non-current liabilities | 1,834 | | | 2,301 | |
Total liabilities | 890,198 | | | 1,051,187 | |
Commitments and contingencies (Note 18) | | | |
Mezzanine equity: | | | |
Series A Senior Preferred Stock, $0.0001 par value; 1.0 million shares authorized; $1,108.34 stated value per share and 0.2 million shares issued and outstanding at December 31, 2022; none issued and outstanding at December 31, 2021 | 140,340 | | | — | |
Stockholders' equity: | | | |
Class A common stock, $0.0001 par value; 470.0 million shares authorized; 207.5 million shares issued, 198.4 million shares outstanding at December 31, 2022; 207.4 million shares issued, 197.4 million shares outstanding at December 31, 2021 | 20 | | | 20 | |
Treasury stock, at cost, 0.08 million shares and 0.03 million shares at December 31, 2022 and December 31, 2021, respectively | (146) | | | (95) | |
Additional paid-in capital | 1,378,696 | | | 1,351,597 | |
Accumulated other comprehensive income | 4,899 | | | 28 | |
Accumulated deficit | (1,339,511) | | | (847,132) | |
Total ATI Physical Therapy, Inc. equity | 43,958 | | | 504,418 | |
Non-controlling interests | 4,489 | | | 7,089 | |
Total stockholders' equity | 48,447 | | | 511,507 | |
Total liabilities, mezzanine equity and stockholders' equity | $ | 1,078,985 | | | $ | 1,562,694 | |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ATI Physical Therapy, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| | | | | | | | | |
Net patient revenue | | | | | $ | 575,940 | | | $ | 561,080 | | | $ | 529,585 | |
Other revenue | | | | | 59,731 | | | 66,791 | | | 62,668 | |
Net revenue | | | | | 635,671 | | | 627,871 | | | 592,253 | |
| | | | | | | | | |
Cost of services: | | | | | | | | | |
Salaries and related costs | | | | | 357,982 | | | 336,496 | | | 306,471 | |
Rent, clinic supplies, contract labor and other | | | | | 202,568 | | | 180,932 | | | 166,144 | |
Provision for doubtful accounts | | | | | 13,869 | | | 16,369 | | | 16,231 | |
Total cost of services | | | | | 574,419 | | | 533,797 | | | 488,846 | |
Selling, general and administrative expenses | | | | | 114,724 | | | 111,809 | | | 104,320 | |
Goodwill, intangible and other asset impairment charges | | | | | 486,262 | | | 962,303 | | | — | |
Operating loss | | | | | (539,734) | | | (980,038) | | | (913) | |
Change in fair value of warrant liability | | | | | (4,243) | | | (22,595) | | | — | |
Change in fair value of contingent common shares liability | | | | | (42,525) | | | (175,140) | | | — | |
Loss on settlement of redeemable preferred stock | | | | | — | | | 14,037 | | | — | |
Interest expense, net | | | | | 45,278 | | | 46,320 | | | 69,291 | |
Interest expense on redeemable preferred stock | | | | | — | | | 10,087 | | | 19,031 | |
Other expense (income), net | | | | | 3,333 | | | 241 | | | (91,002) | |
(Loss) income before taxes | | | | | (541,577) | | | (852,988) | | | 1,767 | |
Income tax (benefit) expense | | | | | (48,530) | | | (70,960) | | | 2,065 | |
Net loss | | | | | (493,047) | | | (782,028) | | | (298) | |
Net (loss) income attributable to non-controlling interests | | | | | (668) | | | (3,700) | | | 5,073 | |
Net loss attributable to ATI Physical Therapy, Inc. | | | | | $ | (492,379) | | | $ | (778,328) | | | $ | (5,371) | |
| | | | | | | | | |
Loss per share of Class A common stock: | | | | | | | | | |
Basic | | | | | $ | (2.51) | | | $ | (4.69) | | | $ | (0.04) | |
Diluted | | | | | $ | (2.51) | | | $ | (4.69) | | | $ | (0.04) | |
Weighted average shares outstanding: | | | | | | | | | |
Basic and diluted | | | | | 203,150 | | | 165,805 | | | 128,286 | |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ATI Physical Therapy, Inc.
Consolidated Statements of Comprehensive Loss
($ in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| | | | | | | | | |
Net loss | | | | | $ | (493,047) | | | $ | (782,028) | | | $ | (298) | |
Other comprehensive income (loss): | | | | | | | | | |
Unrealized gain (loss) on interest rate cap | | | | | 4,871 | | | 1,935 | | | (582) | |
Comprehensive loss | | | | | $ | (488,176) | | | $ | (780,093) | | | $ | (880) | |
Net (loss) income attributable to non-controlling interests | | | | | (668) | | | (3,700) | | | 5,073 | |
Comprehensive loss attributable to ATI Physical Therapy, Inc. | | | | | $ | (487,508) | | | $ | (776,393) | | | $ | (5,953) | |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ATI Physical Therapy, Inc.
Consolidated Statements of Changes in Stockholders' Equity
($ in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Non-Controlling Interests | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | | | |
Balance at January 1, 2020 | 938,557 | | $ | 9 | | | — | | $ | — | | | $ | 952,796 | | | $ | (1,325) | | | $ | (63,028) | | | $ | 16,467 | | | $ | 904,919 | |
Retrospective application of reverse recapitalization | 127,346,957 | | 4 | | | — | | — | | | (4) | | | — | | | — | | | — | | | — | |
Adjusted balance at January 1, 2020 | 128,285,514 | | $ | 13 | | | — | | $ | — | | | $ | 952,792 | | | $ | (1,325) | | | $ | (63,028) | | | $ | 16,467 | | | $ | 904,919 | |
Non-cash share-based compensation | — | | — | | | — | | — | | | 1,936 | | | — | | | — | | | — | | | 1,936 | |
Cumulative impact of ASC 842 adoption | — | | — | | | — | | — | | | — | | | — | | | (405) | | | — | | | (405) | |
Other comprehensive loss | — | | — | | | — | | — | | | — | | | (582) | | | — | | | — | | | (582) | |
Distribution to non-controlling interest holders | — | | — | | | — | | — | | | — | | | — | | | — | | | (4,453) | | | (4,453) | |
Net income attributable to non-controlling interests | — | | — | | | — | | — | | | — | | | — | | | — | | | 5,073 | | | 5,073 | |
Net loss attributable to ATI Physical Therapy, Inc. | — | | — | | | — | | — | | | — | | | — | | | (5,371) | | | — | | | (5,371) | |
Balance at December 31, 2020 | 128,285,514 | | $ | 13 | | | — | | $ | — | | | $ | 954,728 | | | $ | (1,907) | | | $ | (68,804) | | | $ | 17,087 | | | $ | 901,117 | |
Net proceeds received from FAII in Business Combination | 25,512,254 | | 3 | | | — | | — | | | 210,102 | | | — | | | — | | | — | | | 210,105 | |
Shares issued through PIPE investment | 30,000,000 | | 3 | | | — | | — | | | 299,997 | | | — | | | — | | | — | | | 300,000 | |
Shares issued to Wilco Holdco Series A Preferred stockholders | 12,845,282 | | 1 | | | — | | — | | | 128,452 | | | — | | | — | | | — | | | 128,453 | |
Warrant liability recognized upon the closing of the Business Combination | — | | — | | | — | | — | | | (26,936) | | | — | | | — | | | — | | | (26,936) | |
Contingent common shares liability recognized upon the closing of the Business Combination | — | | — | | | — | | — | | | (220,500) | | | — | | | — | | | — | | | (220,500) | |
Vesting of restricted shares distributed to holders of ICUs | 691,232 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock upon vesting of restricted stock awards | 105,473 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
Tax withholdings related to net share settlement of restricted stock awards | (29,791) | | — | | | 29,791 | | (95) | | | — | | | — | | | — | | | — | | | (95) | |
Non-cash share-based compensation | — | | — | | | — | | — | | | 5,754 | | | — | | | — | | | — | | | 5,754 | |
Other comprehensive income | — | | — | | | — | | — | | | — | | | 1,935 | | | — | | | — | | | 1,935 | |
Distribution to non-controlling interest holders | — | | — | | | — | | — | | | — | | | — | | | — | | | (6,298) | | | (6,298) | |
Net loss attributable to non-controlling interests | — | | — | | | — | | — | | | — | | | — | | | — | | | (3,700) | | | (3,700) | |
Net loss attributable to ATI Physical Therapy, Inc. | — | | — | | | — | | — | | | — | | | — | | | (778,328) | | | — | | | (778,328) | |
Balance at December 31, 2021 | 197,409,964 | | $ | 20 | | | 29,791 | | $ | (95) | | | $ | 1,351,597 | | | $ | 28 | | | $ | (847,132) | | | $ | 7,089 | | | $ | 511,507 | |
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Issuance of 2022 Warrants | — | | — | | | — | | — | | | 19,725 | | | — | | | — | | | — | | | 19,725 | |
Vesting of restricted shares distributed to holders of ICUs | 360,371 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock upon vesting of restricted stock units and awards | 634,256 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
Tax withholdings related to net share settlement of restricted stock units and awards | (47,235) | | — | | | 47,235 | | (51) | | | — | | | — | | | — | | | — | | | (51) | |
Non-cash share-based compensation | — | | — | | | — | | — | | | 7,374 | | | — | | | — | | | — | | | 7,374 | |
Other comprehensive income | — | | — | | | — | | — | | | — | | | 4,871 | | | — | | | — | | | 4,871 | |
Distribution to non-controlling interest holders | — | | — | | | — | | — | | | — | | | — | | | — | | | (1,932) | | | (1,932) | |
Net loss attributable to non-controlling interests | — | | — | | | — | | — | | | — | | | — | | | — | | | (668) | | | (668) | |
Net loss attributable to ATI Physical Therapy, Inc. | — | | — | | | — | | — | | | — | | | — | | | (492,379) | | | — | | | (492,379) | |
Balance at December 31, 2022 | 198,357,356 | | $ | 20 | | | 77,026 | | $ | (146) | | | $ | 1,378,696 | | | $ | 4,899 | | | $ | (1,339,511) | | | $ | 4,489 | | | $ | 48,447 | |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ATI Physical Therapy, Inc.
Consolidated Statements of Cash Flows
($ in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Operating activities: | | | | | |
Net loss | $ | (493,047) | | | $ | (782,028) | | | $ | (298) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | |
Goodwill, intangible and other asset impairment charges | 486,262 | | | 962,303 | | | — | |
Depreciation and amortization | 40,590 | | | 37,995 | | | 39,700 | |
Provision for doubtful accounts | 13,869 | | | 16,369 | | | 16,231 | |
Deferred income tax provision | (48,573) | | | (71,088) | | | 1,814 | |
Amortization of right-of-use assets | 48,253 | | | 45,536 | | | 44,526 | |
Non-cash share-based compensation | 7,374 | | | 5,754 | | | 1,936 | |
Amortization of debt issuance costs and original issue discount | 2,873 | | | 3,252 | | | 4,109 | |
Non-cash interest expense | 3,481 | | | — | | | 6,335 | |
Non-cash interest expense on redeemable preferred stock | — | | | 10,087 | | | 19,031 | |
Loss on extinguishment of debt | 2,809 | | | 5,534 | | | — | |
Loss on settlement of redeemable preferred stock | — | | | 14,037 | | | — | |
Loss (gain) on disposal and impairment of assets | 9 | | | (5,189) | | | 469 | |
Loss on lease terminations | — | | | — | | | 3,863 | |
Change in fair value of warrant liability | (4,243) | | | (22,595) | | | — | |
Change in fair value of contingent common shares liability | (42,525) | | | (175,140) | | | — | |
Changes in: | | | | | |
Accounts receivable, net | (12,573) | | | (10,201) | | | (3,307) | |
Prepaid expenses and other current assets | (5,024) | | | (6,688) | | | 4,841 | |
Other non-current assets | 39 | | | (284) | | | 413 | |
Accounts payable | (48) | | | 1,831 | | | 798 | |
Accrued expenses and other liabilities | 854 | | | (5,288) | | | 9,174 | |
Operating lease liabilities | (53,628) | | | (50,942) | | | (42,819) | |
Other non-current liabilities | 28 | | | 861 | | | 5,056 | |
Medicare Accelerated and Advance Payment Program Funds | (12,288) | | | (12,605) | | | 26,732 | |
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Transaction-related amount due to former owners | — | | | (3,611) | | | — | |
Net cash (used in) provided by operating activities | (65,508) | | | (42,100) | | | 138,604 | |
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Investing activities: | | | | | |
Purchases of property and equipment | (28,147) | | | (40,293) | | | (21,887) | |
Purchases of intangible assets | — | | | (1,675) | | | (250) | |
Proceeds from sale of property and equipment | 157 | | | 223 | | | 328 | |
Proceeds from sale of clinics | 77 | | | 248 | | | — | |
Proceeds from sale of Home Health service line | — | | | 6,131 | | | — | |
Business acquisitions, net of cash acquired | — | | | (4,523) | | | — | |
Payment of holdback liabilities related to acquisitions | (135) | | | — | | | — | |
Net cash used in investing activities | (28,048) | | | (39,889) | | | (21,809) | |
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Financing activities: | | | | | |
Proceeds from long-term debt | 500,000 | | | — | | | — | |
Deferred financing costs | (12,952) | | | — | | | (350) | |
Original issue discount | (10,000) | | | — | | | — | |
Principal payments on long-term debt | (555,048) | | | (456,202) | | | (8,167) | |
Proceeds from issuance of Series A Senior Preferred Stock | 144,667 | | | — | | | — | |
Proceeds from issuance of 2022 Warrants | 20,333 | | | — | | | — | |
Proceeds from revolving line of credit | 48,200 | | | — | | | 68,750 | |
Payments on revolving line of credit | — | | | — | | | (68,750) | |
Cash inflow from Business Combination | — | | | 229,338 | | | — | |
Payments to Series A Preferred stockholders | — | | | (59,000) | | | — | |
Proceeds from shares issued through PIPE investment | — | | | 300,000 | | | — | |
Equity issuance costs and original issue discount | (4,935) | | | (19,233) | | | — | |
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Payment of contingent consideration liabilities | (203) | | | — | | | — | |
Taxes paid on behalf of employees for shares withheld | (51) | | | (128) | | | — | |
Distribution to non-controlling interest holders | (1,932) | | | (6,298) | | | (4,453) | |
Net cash provided by (used in) financing activities | 128,079 | | | (11,523) | | | (12,970) | |
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Changes in cash and cash equivalents: | | | | | |
Net increase (decrease) in cash and cash equivalents | 34,523 | | | (93,512) | | | 103,825 | |
Cash and cash equivalents at beginning of period | 48,616 | | | 142,128 | | | 38,303 | |
Cash and cash equivalents at end of period | $ | 83,139 | | | $ | 48,616 | | | $ | 142,128 | |
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Supplemental noncash disclosures: | | | | | |
Derivative changes in fair value | $ | (4,871) | | | $ | (1,935) | | | $ | 582 | |
Purchases of property and equipment in accounts payable | $ | 1,660 | | | $ | 4,177 | | | $ | 3,010 | |
Warrant liability recognized upon the closing of the Business Combination | $ | — | | | $ | (26,936) | | | $ | — | |
Contingent common shares liability recognized upon the closing of the Business Combination | $ | — | | | $ | (220,500) | | | $ | — | |
Shares issued to Wilco Holdco Series A Preferred stockholders | $ | — | | | $ | 128,453 | | | $ | — | |
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Other supplemental disclosures: | | | | | |
Cash paid for interest | $ | 41,617 | | | $ | 41,937 | | | $ | 58,421 | |
Cash received from hedging activities | $ | 3,497 | | | $ | — | | | $ | — | |
Cash paid for (received from) taxes | $ | 84 | | | $ | 81 | | | $ | (1,098) | |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Note 1. Overview of the Company
ATI Physical Therapy, Inc., together with its subsidiaries (herein referred to as “we,” “the Company,” “ATI Physical Therapy” and “ATI”), is a nationally recognized healthcare company, specializing in outpatient rehabilitation and adjacent healthcare services. The Company provides outpatient physical therapy services under the name ATI Physical Therapy and, as of December 31, 2022, had 923 clinics (as well as 20 clinics under management service agreements) located in 25 states. The Company offers a variety of services within its clinics, including physical therapy to treat spine, shoulder, knee and neck injuries or pain; work injury rehabilitation services, including work conditioning and work hardening; hand therapy; and other specialized treatment services. The Company’s direct and indirect wholly-owned subsidiaries include, but are not limited to, Wilco Holdco, Inc., ATI Holdings Acquisition, Inc. and ATI Holdings, LLC.
On June 16, 2021 (the “Closing Date”), a Business Combination transaction (the “Business Combination”) was finalized pursuant to the Agreement and Plan of Merger ("Merger Agreement"), dated February 21, 2021 between the operating company, Wilco Holdco, Inc. (“Wilco Holdco”), and Fortress Value Acquisition Corp. II (herein referred to as "FAII" and "FVAC"), a special purpose acquisition company. In connection with the closing of the Business Combination, the Company changed its name from Fortress Value Acquisition Corp. II to ATI Physical Therapy, Inc. The Company’s common stock is listed on the New York Stock Exchange ("NYSE") under the symbol “ATIP.”
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles ("GAAP"). Under this method of accounting, FAII is treated as the acquired company and Wilco Holdco is treated as the acquirer for financial statement reporting and accounting purposes. As a result, the historical operations of Wilco Holdco are deemed to be those of the Company. Therefore, the financial statements included in this report reflect (i) the historical operating results of Wilco Holdco prior to the Business Combination; (ii) the combined results of FAII and Wilco Holdco following the Business Combination on June 16, 2021; (iii) the assets and liabilities of Wilco Holdco at their historical cost; and (iv) the Company’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the Business Combination is reflected retroactively to the earliest period presented and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination consistent with the treatment of the transaction as a reverse recapitalization of Wilco Holdco, Inc. Refer to Note 3 - Business Combinations and Divestitures for additional information.
Impact of COVID-19 and CARES Act
The coronavirus ("COVID-19") pandemic in the United States resulted in changes to our operating environment. We continue to closely monitor the impact of COVID-19 on all aspects of our business, and our priorities remain protecting the health and safety of employees and patients, maximizing the availability of services to satisfy patient needs and improving the operational and financial stability of our business. While we expect the disruption caused by COVID-19 and resulting impacts to diminish over time, we cannot predict the length of such impacts, and if such impacts continue for an extended period, it could have a continued effect on the Company’s results of operations, financial condition and cash flows, which could be material.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law providing reimbursement, grants, waivers and other funds to assist health care providers during the COVID-19 pandemic. The Company has realized benefits under the CARES Act including, but not limited to, the following:
•In 2020, the Company received approximately $91.5 million of general distribution payments under the Provider Relief Fund. These payments have been recognized in other expense (income), net in the consolidated statements of operations throughout 2020 in a manner commensurate with the reporting and eligibility requirements issued by the U.S. Department of Health & Human Services ("HHS"). Based on the terms and conditions of the program, including reporting guidance issued by HHS in 2021, the Company believes that it has met the applicable terms and conditions. This includes, but is not limited to, the fact that the Company’s COVID-19 related expenses and lost revenues for the year ended December 31, 2020 exceeded the amount of funds received. To the extent that reporting requirements and terms and conditions are subsequently modified, it may affect the Company’s ability to comply and ability to retain the funds.
•The Company applied for and obtained approval to receive $26.7 million of Medicare Accelerated and Advance Payment Program ("MAAPP") funds during the quarter ended June 30, 2020. During the years ended December 31, 2022 and 2021, the Company applied $12.3 million and $12.6 million in MAAPP funds against the outstanding liability, respectively. During the year ended December 31, 2021, the Company transferred $1.8 million in MAAPP funds as part of the divestiture of its Home Health Service line. During the quarter ended September 30, 2022, the Company met the required performance obligations and performed the remaining services related to the MAAPP funds. Therefore, the remaining funds were applied and repaid during the quarter ended September 30, 2022. As of December 31, 2022 and December 31, 2021, zero and $12.3 million of the funds are recorded in accrued expenses and other liabilities, respectively.
•The Company elected to defer depositing the employer portion of Social Security taxes for payments due from March 27, 2020 through December 31, 2020, interest-free and penalty-free. The Company repaid the remaining deferred payments during the fourth quarter of 2022. Related to these payments, as of December 31, 2022 and December 31, 2021, zero and $5.9 million is included in accrued expenses and other liabilities, respectively.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Company were prepared in accordance with U.S. GAAP and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The Company's indirect wholly-owned subsidiaries include, but are not limited to, ATI Holdings Acquisition, Inc. and ATI Holdings, LLC.
Liquidity and going concern
In accordance with Accounting Standards Codification ("ASC") Topic 205-40, Going Concern, the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that these consolidated financial statements are issued. This evaluation includes considerations related to the covenants contained in the Company’s 2022 Credit Agreement as well as the Company’s liquidity position overall.
As detailed in Note 8 - Borrowings, the Company’s 2022 Credit Agreement contains customary covenants and restrictions, including financial and non-financial covenants. The financial covenants require the Company to maintain $30.0 million of minimum liquidity, as defined in the agreement, at each test date through the first quarter of 2024. Additionally, beginning in the second quarter of 2024, the Company must maintain a Secured Net Leverage Ratio, as defined in the agreement, not to exceed 7.00:1.00. The net leverage ratio covenant decreases in the third quarter of 2024 to 6.75:1.00 and further decreases in the first quarter of 2025 to 6.25:1.00, which level remains applicable through maturity. The financial covenants are tested as of each fiscal quarter end for the respective periods. Failure to comply with these covenants and restrictions would result in an event of default, subject to customary cure periods.
In addition, the 2022 Credit Facility contains customary representations and warranties, events of default, reporting and other affirmative covenants and negative covenants, including requirements related to the delivery of independent audit reports without certain going concern qualifications, limitations on indebtedness, liens, investments, negative pledges, dividends, junior debt payments, fundamental changes and asset sales and affiliate transactions. Failure to comply with the 2022 Credit Facility covenants and restrictions, including the provision related to certain going concern qualifications for any fiscal year, including the year ended December 31, 2022, could result in an event of default under the 2022 Credit Facility, subject to customary cure periods. In such an event, all amounts outstanding under the 2022 Credit Facility, together with any accrued interest, could then be declared immediately due and payable.
As of December 31, 2022, the Company had $83.1 million in cash and cash equivalents and no available capacity under its 2022 revolving credit facility. As measured based on the definitions in the Company’s 2022 Credit Agreement, liquidity was $72.9 million as of December 31, 2022.
The Company has negative operating cash flows, operating losses and net losses. For the year ended December 31, 2022, the Company had cash flow used in operating activities of $65.5 million, operating loss of $539.7 million and net loss of $493.0 million. In addition, as of December 31, 2022, the Company had an accumulated deficit of $1,339.5 million. These results are, in part, due to trends experienced by the Company including a tight labor market for available physical therapy and other healthcare providers in the workforce, visit volume softness, decreases in rate per visit and increases in interest costs. Based on current liquidity and projected cash use, the Company anticipates violation of its $30.0 million minimum liquidity covenant under its 2022 Credit Agreement within the next twelve months. As a result of the above factors, there is substantial doubt about the Company’s ability to continue as a going concern within twelve months following the issuance date of the consolidated financial statements as of and for the period ended December 31, 2022.
Improving operating results and cash flow is dependent upon the Company’s ability to achieve its business plan to increase clinical staffing levels and clinician productivity, control costs and capital expenditures, increase patient visit volumes and referrals and stabilize rate per visit. However, there can be no assurance that it will be successful in any of these respects.
If the Company does not complete the Transaction as contemplated by the TSA or otherwise access additional financing, the Company will need to consider other alternatives, including pursuing separate amendments to or waivers of the minimum liquidity covenant, the requirement to deliver audited financial statements without certain going concern qualifications, and other requirements under the 2022 Credit Agreement, as well as raising funds from other sources, obtaining alternate financing, disposal of assets, or pursuing other strategic alternatives to improve its liquidity position and business results. There can be no assurance that the Company will be successful in completing the Transaction or accessing such alternative options or financing when needed. Failure to do so could have a material adverse impact on our business, financial condition, results of operations and cash flows, and may lead to events including bankruptcy, reorganization or insolvency.
In addition, the report of the Independent Registered Public Accounting Firm accompanying the consolidated financial statements for the year ended December 31, 2022 contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Absent an amendment or waiver, the 2022 Credit Agreement provides that the receipt of a report of the Independent Registered Public Accounting Firm containing an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern could be an event of default, subject to certain exceptions. Pursuant to the TSA, the First Lien Lenders have agreed that, prior to the Outside Closing Date, they will forbear in the exercise of any rights, remedies, powers, privileges and defenses under the 2022 Credit Agreement arising on account of a default, alleged default or event of default (if any) resulting from the going concern explanatory paragraph in the report of the Independent Registered Public Accounting Firm accompanying the consolidated financial statements for the year ended December 31, 2022. However, if the transactions contemplated by the TSA are not consummated on its terms or at all, the First Lien Lenders could claim that a default or event of default has occurred under the 2022 Credit Agreement. If such claim is not waived by the First Lien Lenders and the Company is unsuccessful in disputing any such claims (including with respect to the applicability of one of the enumerated exceptions to the 2022 Credit Agreement requirement), the Company could be considered to have an event of default after the expiration of the applicable cure periods. In such event, all amounts outstanding under the 2022 Credit Facility, together with any accrued interest, could then be declared immediately due and payable and could be reclassified to current in the Company's consolidated financial statements for the period. A default on our obligations and an acceleration of our indebtedness by our lenders would have a material adverse impact on our business, financial condition, results of operations and cash flows, and may lead to events including bankruptcy, reorganization or insolvency.
On March 15, 2023, the Company entered into a Transaction Support Agreement (the “TSA”) with certain of its first lien lenders under the 2022 Credit Agreement (the "First Lien Lenders"), the administrative agent under the 2022 Credit Agreement, holders of its Series A Senior Preferred Stock (the "Preferred Equityholders") and holders of the majority of its common stock (together with the First Lien Lenders and the Preferred Equityholders, the “Parties”), setting forth the principal terms of a comprehensive transaction to enhance the Company's liquidity (the "Transaction"). Pursuant to the TSA, and subject to the terms and conditions thereof, the Parties have agreed to support, act in good faith and take all steps reasonably necessary and desirable to consummate the transactions referenced therein by June 15, 2023 (the “Outside Closing Date”).
The TSA contemplates, among other things, (i) a delayed draw new money financing, available under certain circumstances until the 18 month anniversary of the closing date of the transactions, in an aggregate principal amount equal to $25.0 million in the form of new second lien PIK exchangeable notes (“Second Lien PIK Exchangeable Notes”), (ii) exchange of $100.0 million of the aggregate principal amount of the term loans under the 2022 Credit Facility held by certain of the Preferred Equityholders for Second Lien PIK Exchangeable Notes, (iii) a reduction of the thresholds applicable to the minimum liquidity financial covenant under the 2022 Credit Agreement for certain periods, (iv) a waiver of the requirement to comply with the Secured Net Leverage Ratio financial covenant under the 2022 Credit Agreement for the fiscal quarters ending June 30, 2024, September 30, 2024 and December 31, 2024 and a modification of the levels and certain component definitions applicable thereto in the fiscal quarters ending after December 31, 2024, (v) waiver of the requirement for the Company to deliver audited financial statements without certain going concern qualifications for the years ended December 31, 2022, December 31, 2023, and December 31, 2024, (vi) an increase in the interest rate payable on the existing term loans and revolving loans until the achievement of a specified financial metric and (vii) board representation and observer rights, and other changes to the governance of the Company. The Second Lien PIK Exchangeable Notes would be exchangeable for shares of Class A common stock of the Company at a fixed price of $0.25, and the holders thereof would have the right to vote on corporate matters on an as-exchanged basis. The TSA contains certain representations, warranties and other agreements by the Company and Parties. In accordance with the TSA, the First Lien Lenders agreed that, prior to the Outside Closing Date, they will forbear in the exercise of any rights, remedies, powers, privileges and defenses under the 2022 Credit Agreement arising on account of an alleged default or event of default (if any) resulting from the going concern explanatory paragraph in the independent auditors' report accompanying the consolidated financial statements for the year ended December 31, 2022 (the "Credit Agreement Forbearance"). The Parties' obligations under the TSA are, and the closing of the Transaction is, subject to various customary terms and conditions set forth therein, including the execution and delivery of definitive documentation and approval by the Company's stockholders.
There is no assurance that the transactions contemplated by the TSA will be consummated on the terms as described above, on a timely basis or at all.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business within twelve months after the date that these consolidated financial statements are issued.
Principles of consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, entities for which the Company has a controlling financial interest, and variable interest entities ("VIEs") for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation, and net earnings are reduced by the portion of net earnings attributable to non-controlling interests.
Variable interest entities
The Company consolidates all variable interest entities where the Company is the primary beneficiary. The Company identifies the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity's economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. The Company may change the original assessment of a VIE upon subsequent events such as the modification of contractual agreements.
The Company has an investment in RSFH-ATI Physical Therapy, LLC ("RSFH") that qualifies as a VIE. Based on the provisions of the RSFH agreement, the Company manages the entity and handles all day-to-day operating decisions in exchange for management fees and may receive distributions proportionate with its level of ownership. Accordingly, the Company has the decision-making power over the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the entity.
As of December 31, 2022 and 2021, total assets of RSFH were $10.1 million and $13.3 million, respectively, and total liabilities were $5.0 million and $6.5 million, respectively. In general, the assets are available primarily for the settlement of obligations of RSFH.
Use of estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The effect of any change in estimates will be recognized in the current period of the change.
Segment reporting
The Company reports segment information based on the management approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. All of the Company’s operations are conducted within the United States. Our chief operating decision maker (“CODM”) is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making decisions, assessing financial performance and allocating resources. We operate our business as one operating segment and therefore we have one reportable segment.
Cash, cash equivalents and restricted cash
Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less when issued. Restricted cash that was included within cash and cash equivalents as presented within our consolidated balance sheets as of December 31, 2022 and our consolidated statements of cash flows for the year ended December 31, 2022 was $0.8 million.
Accounts receivable
The Company's accounts receivable are reported net of contractual adjustments and allowances for doubtful accounts. The majority of accounts receivable are due from commercial insurance companies, workers' compensation plans, auto personal injury claims and government health programs, such as Medicare or Medicaid. The Company reports accounts receivable at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients.
Allowance for doubtful accounts
The allowance for doubtful accounts is based on estimates of losses related to receivable balances. The risk of collection varies based upon the service, the payor class and the patient’s ability to pay the amounts not reimbursed by the payor. The Company estimates the allowance for doubtful accounts based upon several factors, including the age of the outstanding receivables, the historical experience of collections, the impact of economic conditions and, in some cases, evaluating specific customer accounts for the ability to pay. Management judgment is used to assess the collectability of accounts and the ability of the Company’s customers to pay. The provision for doubtful accounts is included in cost of services in the consolidated statements of operations. When it is determined that a customer account is uncollectible, that balance is written off against the existing allowance.
Concentrations of business risk
The Company provides physical therapy services to a large number of patients who participate in government healthcare programs, resulting in a customer concentration relating to Medicare and Medicaid’s service reimbursement programs. The Company believes that the concentration of credit risk with respect to other patient accounts receivable is limited due to the large number of patients that make up the Company’s patient base and the dispersion across many different insurance companies, preferred provider organizations and individuals.
Net patient revenue
Net patient revenue consists of revenue for physical therapy services. Net patient revenue is recognized at an amount equal to the consideration the Company expects to receive from third-party payors, patients and others for services rendered when the performance obligations under the terms of the contract are satisfied.
There is an implied contract between the Company and the patient upon each patient visit resulting in the Company’s patient service performance obligation. Generally, the performance obligation is satisfied at a point in time, as each service provided is distinct and future services rendered are not dependent on previously rendered services. The Company has separate contractual agreements with third-party payors (e.g., insurers, managed care programs, government programs, workers' compensation) that provide for payments to the Company at amounts different from its established rates. While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the patients covered by the third-party payors. The payor contracts do not indicate performance obligations of the Company but indicate reimbursement rates for patients who are covered by those payors when the services are provided.
To determine the transaction price associated with the implied contract, the Company includes the estimated effects of any variable consideration, such as contractual allowances and implicit price concessions. When the Company has contracts with negotiated prices for services provided (contracted payors), the Company considers the contractual rates when recording revenue and adjusts for any variable consideration to the transaction price to arrive at revenue. Variable consideration is estimated using a portfolio approach that incorporates whether or not the Company has historical differences from negotiated rates due to non-compliance with contract provisions. Historical results indicate that it is probable that negotiated prices less variable consideration will be realized; therefore, this amount is deemed the transaction price and recorded as revenue. The Company records an estimated provision for doubtful accounts based on historical collections for claims with similar characteristics, such as location of service and type of third-party payor, at the time of recognition. Any subsequent impairment of the related receivable is recorded as provision for doubtful accounts.
For non-contracted payors, the Company determines the transaction price by applying established rates to the services provided and adjusting for contractual allowances provided to third-party payors and implicit price concessions. The Company estimates the contractual allowances and implicit price concessions using a portfolio approach based on historical collections for claims with similar characteristics, such as location of service and type of third-party payor, in relation to established rates, because the Company does not have a contract with the underlying payor. Any subsequent changes in estimate on the realization of the receivable is recorded as a revenue adjustment. Management believes that calculating at the portfolio level would not differ materially from considering each patient account separately.
The Company continually reviews the revenue transaction price estimation process to consider updates to laws and regulations and changes in third-party payor contractual terms that result from contract renegotiations and renewals. Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payors and government entities, which are often subject to interpretation, the Company may receive reimbursement for healthcare services that is different from the estimates, and such differences could be material.
Other revenue
Revenue from the ATI Worksite Solutions business is derived from on-site services provided to clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization. Revenue is determined based on the number of hours and respective rate for services provided.
Revenues from Management Service Agreements (“MSA”) are derived from contractual arrangements whereby the Company manages a non-controlled clinic or clinics for third-party owners. The Company does not have any ownership interest in these clinics. Typically, revenue is determined based on the number of visits conducted at the clinic and recognized when services are performed. Costs, primarily salaries for the Company’s employees, are recorded when incurred.
Other revenue includes physical or occupational therapy services and athletic training provided on-site, such as at schools and industrial worksites. Contract terms and rates are agreed to in advance between the Company and the third-parties. Services are typically performed over the contract period, and revenue is recorded in accordance with the contract terms. If the services are paid in advance, revenue is deferred and recognized as the services are performed.
Property and equipment
Property and equipment acquired is recorded at cost less accumulated depreciation, except during an acquisition of a business, in which case the assets are initially recorded at fair value. Depreciation is calculated using the straight-line method and is provided in amounts sufficient to attribute the cost of depreciable assets to operations over the estimated useful lives. The approximate useful life of each class of property and equipment is as follows:
| | | | | |
Equipment | 3 - 5 years |
Furniture & fixtures | 5 - 7 years |
Automobiles | 3 - 5 years |
Software | 3 - 5 years |
Buildings | 40 years |
Leasehold improvements | Lesser of lease term or estimated useful lives of the assets (generally 5 - 15 years) |
Major repairs that extend the useful life of an asset are capitalized to the property and equipment account. Routine maintenance and repairs are charged to rent, clinic supplies, contract labor and other expenses and selling, general and administrative expenses. Gains or losses associated with property and equipment retired or sold are included in earnings.
Computer software is included in property and equipment and consists of purchased software and internally developed software. The Company capitalizes application-stage development costs for significant internally developed software projects. Once the software is ready for its intended use, these costs are amortized on a straight-line basis over the software’s estimated useful life. Costs recognized in the preliminary project phase and the post-implementation phase, as well as maintenance and training costs, are expensed as incurred.
Impairment of long-lived assets
The Company reviews the recoverability of long-lived assets whenever events or circumstances occur indicating that the carrying value of the asset may not be recoverable. If the undiscounted cash flows related to the long-lived asset or asset group are not sufficient to recover the remaining carrying value of such asset or asset group, an impairment charge is recognized for the excess carrying amount over the fair value of the asset or asset group. The Company noted triggering events during 2022 which resulted in the recording of impairment losses, which were not material. The Company did not note any triggering events during 2021 or 2020 that resulted in the recording of an impairment loss.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill and indefinite-lived intangible assets under Accounting Standards Codification (“ASC”) Topic 350, Intangibles – Goodwill and Other, which requires the Company to test goodwill and other indefinite-lived assets for impairment annually or whenever events or circumstances indicate that impairment may exist. The Company noted triggering events during 2021 and 2022 which resulted in the recording of impairment losses. The Company did not note any triggering events during 2020 that resulted in the recording of an impairment loss. Refer to Note 5 - Goodwill, Trade Name and Other Intangible Assets for further details. Due to the current economic uncertainty resulting from the COVID-19 pandemic, rising interest rates, inflation and other macroeconomic factors, the Company will continue to review the carrying amounts of goodwill and indefinite-lived assets for potential triggering events.
The cost of acquired businesses is allocated first to its identifiable assets, both tangible and intangible, based on estimated fair values. Costs allocated to finite-lived identifiable intangible assets are generally amortized on a straight-line basis over the remaining estimated useful lives of the assets. The excess of purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill.
The approximate useful life of each class of intangible asset is as follows:
| | | | | |
ATI Physical Therapy trade name/trademark | Indefinite |
Non-compete agreements | 2 - 5 years |
Other intangible assets | 15 years |
Goodwill and intangible assets with indefinite lives are not amortized but must be reviewed at least annually for impairment. If the impairment test indicates that the carrying value of the reporting unit exceeds its fair value, then a goodwill impairment loss should be recognized in the consolidated statements of operations in an amount equal to the excess carrying value over fair value. If the impairment test indicates that the carrying value of an intangible asset exceeds its fair value, then an impairment loss should be recognized in the consolidated statements of operations in an amount equal to the excess carrying value over fair value. Fair value is determined using valuation techniques based on estimates, judgments and assumptions the Company believes are appropriate in the circumstances. The Company completed the interim and annual impairment analyses of goodwill as of March 31, 2022, June 30, 2022, September 30, 2022, October 1, 2022 and December 31, 2022 by estimating its fair value using an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples. The Company completed the interim and annual impairment analyses of the indefinite-lived intangible asset as of March 31, 2022, June 30, 2022, September 30, 2022, October 1, 2022 and December 31, 2022 by estimating its fair value using the relief from royalty method. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate.
Deferred financing costs
Original debt issuance discounts and costs incurred related to debt financing are recorded as a reduction to debt and amortized ratably over the term of the related debt agreement, using the effective interest method. Deferred financing costs related to revolving credit facilities are recognized as assets and amortized ratably over the term of the related agreement using the effective interest method. Deferred financing costs are amortized to interest expense, net in the Company’s consolidated statements of operations. The Company recognized amortization of deferred debt issuance costs of $1.7 million, $2.3 million and $3.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company recognized amortization of original debt issuance discounts of $1.2 million, $1.0 million and $1.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Preferred stock
Preferred stock is classified as debt, equity or mezzanine equity based on its redemption features. Preferred stock with redemption features outside of the control of the issuer, such as contingent redemption features, is classified as mezzanine equity. Preferred stock with mandatory redemption features is classified as debt. Preferred stock with no redemption features, or redemption features over which the issuer has control, is classified as equity.
The Company has preferred stock that is classified as mezzanine equity in the Company's consolidated balance sheets. Refer to Note 11 - Mezzanine and Stockholders' Equity for more information about the Company’s outstanding Series A Senior Preferred Stock.
The Company had preferred stock that was classified as debt (redeemable preferred stock) in the Company’s consolidated balance sheets, prior to its redemption as part of the Business Combination. Refer to Note 12 - Wilco Holdco Redeemable Preferred Stock for more information about the Company’s previously outstanding preferred stock.
Treasury stock
Treasury stock amounts are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares are credited or charged to paid-in capital in excess of par value using the average-cost method.
Warrant liability
The Company accounts for its outstanding Public Warrants and Private Placement Warrants in accordance with the guidance contained in ASC 815-40, Derivatives and Hedging - Contracts on an Entity’s Own Equity, and determined that the IPO Warrants do not meet the criteria for equity treatment thereunder. As such, each IPO Warrant must be recorded as a liability and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in change in fair value of warrant liability in the Company’s consolidated statements of operations.
Contingent common shares liability
The Company accounts for its potential Earnout Shares and Vesting Shares as a liability in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in the Company’s consolidated statements of operations.
Non-controlling interests in consolidated affiliates
The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates where the Company has a controlling financial investment. The Company has separately reflected net (loss) income attributable to the non-controlling interests in net (loss) income in the consolidated statements of operations.
Fair value of financial instruments
The Company determines fair value measurements used in its consolidated financial statements based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs, as determined by either the principal market or the most advantageous market at the measurement date.
Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
•Level 1: Observable inputs, which include unadjusted quoted prices in active markets for identical instruments.
•Level 2: Observable inputs other than Level 1 inputs, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instruments.
•Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Refer to Note 15 - Fair Value Measurements for valuation techniques and inputs related to the Company's financial instruments and share-based liabilities.
Income taxes
The Company accounts for income taxes in accordance with ASC Topic 740 (“ASC 740”), Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in operations in the period that includes the enactment date.
ASC 740 provides guidance on how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are more likely than not of being sustained by the applicable tax authority. A tax position that meets the more-likely-than-not recognition threshold is measured and recognized in the consolidated financial statements at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Tax positions deemed to not meet a more-likely-than-not threshold may not be recognized in the financial statements. The Company reviews these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and if any tax uncertainties were identified, the Company would recognize them accordingly. The liability relating to uncertain tax positions is classified as current in the consolidated balance sheets to the extent the company anticipates making a payment within one year. Interest and penalties associated with income taxes are classified in the income tax (benefit) expense line in the consolidated statements of operations.
Cost of services
Cost of services consist of salaries specific to the Company’s clinic operations along with rent, clinic supplies expense, depreciation and advertising costs. In addition, cost of services includes the provision for doubtful accounts.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of wages and benefits for corporate personnel, corporate outside services, marketing costs, depreciation of corporate fixed assets, amortization of intangible assets and certain corporate level professional fees, including those related to legal, accounting and payroll.
Advertising costs
Advertising costs are expensed as incurred or when services are rendered. Advertising costs included in cost of services were $3.4 million, $3.2 million and $2.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Advertising costs included in selling, general and administrative expenses were $4.7 million, $5.1 million and $4.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Share-based compensation
The Company applies the guidance in ASC Topic 718, Compensation - Stock Compensation, in its accounting for share-based compensation. The Company recognizes compensation expense for all share-based compensation awarded to employees, net of forfeitures, using a fair value-based method. The grant-date fair value of each award is amortized to expense on a straight-line basis over the award’s vesting period. Compensation expense associated with share-based awards is included in salaries and related costs and selling, general and administrative expenses in the accompanying consolidated statements of operations, depending on whether the award recipient is a clinic-level or corporate employee, respectively. Share-based compensation expense is adjusted for forfeitures as incurred.
Loss per share
The Company applies the guidance in ASC Topic 260, Earnings Per Share, in its computation of loss per share. Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. Refer to Note 19 - Loss per Share for more information.
Leases
The Company applies the guidance in ASC Topic 842 (“ASC 842”), Leases, to classify individual leases of assets as either operating or finance leases at contract inception. All leased assets have been classified as operating lease arrangements, and the Company’s classes of leased assets include real estate and equipment. The Company adopted ASC 842 on January 1, 2020 using the alternative transition method.
Operating lease balances are included in operating lease right-of-use (“ROU”) assets, current portion of operating lease liabilities and operating lease liabilities in the Company’s consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, adjusted for prepaid or accrued lease payments and lease incentives. The Company’s lease terms include the impact of options to extend or terminate the lease when it is reasonably certain that the options will be exercised or not exercised, as appropriate. When discount rates implicit in leases cannot be readily determined, the Company uses the applicable incremental borrowing rate at lease commencement to perform lease classification tests on lease components and to measure lease liabilities and ROU assets. The Company's incremental borrowing rate is the rate of interest that it would have to pay to borrow on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
The ROU asset is subject to testing for impairment if there is an indicator for impairment, as is the case for owned assets. The Company noted triggering events during 2021 and 2022 which resulted in the recording of impairment losses, which were not material. The Company did not note any triggering events during 2020 that resulted in the recording of an impairment loss. The amortization of operating lease ROU assets and the accretion of operating lease liabilities are reported together as fixed lease expense. The fixed lease expense is recognized on a straight-line basis over the life of the lease. If the ROU asset has been impaired, lease expense is no longer recognized on a straight-line basis. The lease liability continues to amortize using the effective interest method, while the ROU asset is subsequently amortized on a straight-line basis.
Some of the Company’s operating leases include variable lease payments, which include periodic adjustments of the Company's payments for the use of the asset based on changes in factors such as consumer price indices, fair market value, tax rates imposed by taxing authorities or lessor cost of insurance. To the extent they are not included in operating lease liabilities and operating lease ROU assets, these variable lease payments are recognized as incurred. Additionally, the Company makes payments for property taxes, insurance, common area maintenance or other services and accounts for these costs as variable lease payments.
Recently adopted accounting guidance
In February 2016, the Financial Accounting Standards Board (“FASB”) established ASC Topic 842, Leases, by issuing Accounting Standards Update ("ASU") No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. ASC 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU No. 2019-01, Codification Improvements; and ASU No. 2019-10, Leases (Topic 842). ASC 842 establishes a right-of-use model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
ASC 842 was effective for the Company on January 1, 2021, with early adoption permitted. The Company elected to early adopt this standard on January 1, 2020 using the alternative transition method provided by ASC 842. Under the alternative transition method, the effects of initially applying the new guidance were recognized as a cumulative-effect adjustment to retained earnings at the date of initial application, which is January 1, 2020.
As part of transitioning to ASC 842, the Company elected to apply the package of transition practical expedients, which allowed the Company to not reassess under ASC 842 prior conclusions about lease identification, lease classification and initial direct costs. As a result of adopting ASC 842 and election of the transition practical expedients, the Company recognized ROU assets and lease liabilities for those leases classified as operating leases under ASC 840 that continued to be classified as operating leases under ASC 842 at the date of initial application. Leases classified as capital under ASC 840 are classified as finance under ASC 842. As of the date of transition to ASC 842, the Company did not have any capital leases under ASC 840.
The Company elected the practical expedient within ASC 842 to not separate lease and non-lease components within lease transactions for all classes of assets. Additionally, the Company elected the short-term lease exception for all classes of assets.
In applying the alternative modified retrospective transition method, the Company measured lease liabilities at the present value of the sum of remaining minimum lease payments. The Company’s operating lease liabilities were measured using the Company’s incremental borrowing rates as of January 1, 2020 (the date of initial application). Additionally, the Company’s operating lease ROU assets were measured as the initial measurement of applicable lease liabilities adjusted for any unamortized initial direct costs, prepaid/accrued rent, unamortized lease incentives and any liabilities on account of exit or disposal cost obligations.
Adoption of ASC 842 at January 1, 2020, and application of the alternative modified retrospective transition method resulted in the recognition of:
(1) operating lease ROU assets of $263.2 million;
(2) operating lease liabilities of $306.4 million;
(3) the cumulative effect adjustment to increase the opening balance of the accumulated deficit by $0.4 million;
Adoption of this standard did not have a material impact on the Company’s consolidated statements of operations and consolidated statements of cash flows. Refer to Note 17 - Leases for more information about the Company’s lease related obligations.
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, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This standard was subsequently amended by ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, and by ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This standard is optional and may be applied by entities after March 12, 2020, but no later than December 31, 2024. As of December 31, 2022, the Company has a derivative instrument for which the interest rate is indexed to the London InterBank Offered Rate (“LIBOR”). During the period ended March 31, 2022, the Company modified the reference rate index on its hedged items, which are future variable-rate cash payments, from LIBOR to the Secured Overnight Financing Rate ("SOFR"). The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivative, which is LIBOR. The guidance allows for different expedient elections to be made at different points in time. As of December 31, 2022, the Company continues to apply the hedge accounting expedients and does not anticipate that this guidance will have a material impact on its consolidated financial statements, however, the Company will continue to assess the potential impact on its future hedging relationships and expedient elections, as applicable.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers, which provides guidance to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice. This ASU is effective for the Company on January 1, 2023, with early adoption permitted, and shall be applied on a prospective basis to business combinations that occur on or after the adoption date. The Company adopted this new accounting standard effective January 1, 2023. The Company does not expect the adoption of this ASU to have a material 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, which provides guidance to increase the transparency of government assistance transactions with business entities that are accounted for by applying a grant or contribution accounting model. This ASU is effective for the Company's annual financial statements to be issued for the year ended December 31, 2022, with early adoption permitted. The Company adopted this new accounting standard in this Annual Report on Form 10-K for the year ended December 31, 2022. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Note 3. Business Combinations and Divestitures
The Business Combination
As discussed in Note 1 - Overview of the Company, on June 16, 2021, a business combination between Wilco Holdco and FAII was consummated, which was accounted for as a reverse recapitalization of Wilco Holdco, Inc. At the time of the Business Combination, stockholders of Wilco Holdco, Inc. received 130.3 million shares of the Company’s Class A common stock, par value $0.0001 per share (the “Common Stock”), for the outstanding shares of Wilco Holdco common stock, par value $0.01 per share, that such stockholders owned. Upon distribution of shares of Common Stock to holders of vested and unvested Incentive Common Units (“ICUs”) granted prior to the Business Combination under the Wilco Acquisition, LP 2016 Equity Incentive Plan, 2.0 million of these shares were restricted subject to vesting requirements, resulting in total unrestricted shares of 128.3 million and an exchange ratio of 136.7 unrestricted shares of ATI Physical Therapy, Inc. for every previously outstanding Wilco Holdco share.
Immediately following the Business Combination, there were 207.3 million shares issued and 196.6 million outstanding shares of common stock of ATI Physical Therapy, Inc., consisting of the following (in thousands):
| | | | | |
| Class A Common Shares |
FAII Class A common stock prior to Business Combination | 34,500 |
FAII Class F common stock prior to Business Combination(1) | 8,625 |
Less: FAII Class A common stock redemptions | (8,988) |
FAII common shares (Class A and Class F) | 34,137 |
Add: Shares issued to Wilco Holdco stockholders(2, 3) | 130,300 |
Add: Shares issued through PIPE investment | 30,000 |
Add: Shares issued to Wilco Holdco Series A Preferred stockholders | 12,845 |
Total shares issued as of the Closing Date of the Business Combination(4) | 207,282 |
Less: Vesting Shares(1) | (8,625) |
Less: Restricted shares(3) | (2,014) |
Total shares outstanding as of the Closing Date of the Business Combination(4) | 196,643 |
(1) Per the Merger Agreement, as of the closing of the Business Combination, all Class F shares converted into the equivalent number of Class A common shares and became subject to certain vesting and forfeiture provisions ("Vesting Shares") as detailed in Note 14 - Contingent Common Shares Liability.
(2) Includes 1.2 million unrestricted shares upon distribution to holders of vested ICUs under the Wilco Acquisition, LP 2016 Equity Incentive Plan. Refer to Note 10 - Share-Based Compensation for further details.
(3) Includes 2.0 million restricted shares upon distribution to holders of unvested ICUs under the Wilco Acquisition, LP 2016 Equity Incentive Plan. Refer to Note 10 - Share-Based Compensation for further details.
(4) Excludes 15.0 million Earnout Shares, 6.9 million Public Warrants and 3.0 million Private Placement Warrants to purchase Class A common stock. Refer to Note 13 - IPO Warrant Liability and Note 14 - Contingent Common Shares Liability for further details.
PIPE investment
Concurrently with the closing of the Business Combination, pursuant to Subscription Agreements executed between FAII and certain investors, 30.0 million shares of Class A common stock (the “PIPE” investment) were newly issued in a private placement at a purchase price of $10.00 per share for an aggregate purchase price of $300.0 million. The initial PIPE investment included 7.5 million shares of Class A common stock newly issued to certain investment funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) at a purchase price of $10.00 per share for an aggregate purchase price of $75.0 million.
Wilco Holdco Series A Preferred Stock
Immediately following the Business Combination, all holders of the previously outstanding shares of Wilco Holdco Series A Preferred Stock received a proportionate share of $59.0 million and 12.8 million shares of ATI Physical Therapy, Inc. Class A common stock based on the terms of the Merger Agreement. Refer to Note 12 - Wilco Holdco Redeemable Preferred Stock for further details.
Earnout Shares
Subject to the terms and conditions of the Merger Agreement, certain stockholders of Wilco Holdco, Inc. were provided the contingent right to receive, in the aggregate, up to 15.0 million shares of Class A common stock that may be issued pursuant to an earnout arrangement if certain Class A common stock price targets are achieved between the Closing Date and the 10 year anniversary of the Closing Date (“Earnout Shares”). The Earnout Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Earnout Shares price target.
Refer to Note 14 - Contingent Common Shares Liability and Note 15 - Fair Value Measurements for further details.
Vesting Shares
Pursuant to the Sponsor Letter Agreement executed in connection with the Merger Agreement, 8.6 million shares of Class F common stock of FAII outstanding immediately prior to the Business Combination converted to potential Class A common shares and became subject to certain vesting and forfeiture provisions (“Vesting Shares”). The Vesting Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Vesting Shares price target.
Refer to Note 14 - Contingent Common Shares Liability and Note 15 - Fair Value Measurements for further details.
IPO Warrants
Immediately following the Business Combination, the Company had outstanding Public Warrants to purchase an aggregate of 6.9 million shares of the Company’s Class A common stock ("Public Warrants") and outstanding Private Placement Warrants to purchase an aggregate of 3.0 million shares of the Company's Class A common stock ("Private Placement Warrants") (collectively, the “IPO Warrants”). In conjunction with the Business Combination, 3.0 million Private Placement Warrants were transferred and surrendered for no consideration based on terms of the Sponsor Letter Agreement.
Refer to Note 13 - IPO Warrant Liability and Note 15 - Fair Value Measurements for further details.
The following table reflects the components of cash movement related to the Business Combination, PIPE investment and debt repayments (in thousands):
| | | | | |
Cash in trust with FAII as of the Closing Date of the Business Combination | $ | 345,036 | |
Cash used for redemptions of FAII Class A common stock | (89,877) | |
FAII transaction costs paid at closing | (25,821) | |
Cash inflow from Business Combination | 229,338 | |
Wilco Holdco, Inc. transaction costs offset against proceeds | (19,233) | |
Net proceeds from FAII in Business Combination | 210,105 | |
Cash proceeds from PIPE investment | 300,000 | |
Repayment of second lien subordinated loan | (231,335) | |
Partial repayment of 2016 first lien term loan | (216,700) | |
Cash payment to Wilco Holdco Series A Preferred stockholders | (59,000) | |
Wilco Holdco, Inc. transaction costs expensed during 2021 | (5,543) | |
Net decrease in cash related to Business Combination, PIPE investment and debt repayments | $ | (2,473) | |
During 2021, the Company expensed $5.5 million in transaction costs related to the Business Combination, which were classified as selling, general and administrative expenses in the consolidated statements of operations. In addition, $19.2 million of Wilco Holdco, Inc. transaction costs related to the Business Combination were offset against additional paid-in capital in the consolidated statements of changes in stockholders’ equity as these costs were determined to be directly attributable to the recapitalization.
Home Health divestiture
On October 1, 2021, the Company divested its Home Health service line for a sale price of $7.3 million, and the Company recognized a gain of $5.8 million in other expense (income), net in its consolidated statements of operations. The major classes of assets and liabilities associated with the Home Health service line consisted predominantly of accounts receivable, accrued expenses and other liabilities which were not material.
2021 acquisitions
During 2021, the Company completed 3 acquisitions consisting of 7 total clinics. The Company paid approximately $4.5 million in cash and $1.4 million in future payment consideration, subject to certain time or performance conditions set out in the purchase agreements, to complete the acquisitions. The acquisitions qualified for purchase accounting treatment under ASC Topic 805, Business Combinations, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the respective acquisition dates. Of the total amount of consideration, $5.5 million was allocated to goodwill based on management's valuations, which were preliminary and subject to completion of the Company's valuation analysis through the 12 month measurement period. Management finalized its valuation analysis as of March 31, 2022, and valuation adjustments to the assets acquired and liabilities assumed were not material. Goodwill represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized, such as assembled workforce, synergies, and location. The entire amount of goodwill recorded from these purchases will be deductible for income tax purposes. Acquisition-related costs to complete the transactions, net revenue and net income recognized in 2021 related to the acquisitions were not material, individually and in the aggregate. Unaudited proforma consolidated financial information for the acquisitions have not been included as the results are not material, individually and in the aggregate.
2022 clinics held for sale
During the fourth quarter of 2022, the Company classified the assets and liabilities of certain clinics as held for sale as a result of the Company's decision to sell the clinics. The divestiture transactions are anticipated to be completed within twelve months. The clinics did not meet the criteria to be classified as discontinued operations.
Major classes of assets and liabilities classified as held for sale as of December 31, 2022 were as follows (in thousands):
| | | | | | | | |
| | December 31, 2022 |
Accounts receivable, net | | $ | 486 | |
Prepaid expenses | | 23 | |
Property and equipment, net | | 1,113 | |
Operating lease right-of-use assets | | 1,929 | |
Goodwill, net | | 3,192 | |
| | |
Other non-current assets | | 12 | |
Total assets held for sale | | $ | 6,755 | |
| | |
Accounts payable | | $ | 22 | |
Accrued expenses and other liabilities | | 201 | |
Current portion of operating lease liabilities | | 685 | |
Operating lease liabilities | | 1,706 | |
Total liabilities held for sale | | $ | 2,614 | |
Note 4. Revenue from Contracts with Customers
The following table disaggregates net revenue by major service line for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Net patient revenue | | | | | $ | 575,940 | | | $ | 561,080 | | | $ | 529,585 | |
ATI Worksite Solutions (1) | | | | | 35,515 | | | 34,583 | | | 30,864 | |
Management Service Agreements (1) | | | | | 12,857 | | | 15,246 | | | 15,837 | |
Other revenue (1) | | | | | 11,359 | | | 16,962 | | | 15,967 | |
| | | | | $ | 635,671 | | | $ | 627,871 | | | $ | 592,253 | |
(1)ATI Worksite Solutions, Management Service Agreements and Other revenue are included within other revenue on the face of the consolidated statements of operations.
The following table disaggregates net patient revenue for each associated payor class as a percentage of total net patient revenue for the periods indicated below:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Commercial | | | | | 57.6 | % | | 56.3 | % | | 53.1 | % |
Government | | | | | 24.2 | % | | 23.7 | % | | 22.2 | % |
Workers’ compensation | | | | | 12.4 | % | | 14.3 | % | | 17.6 | % |
Other (1) | | | | | 5.8 | % | | 5.7 | % | | 7.1 | % |
| | | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(1) Other is primarily comprised of net patient revenue related to auto personal injury.
Note 5. Goodwill, Trade Name and Other Intangible Assets
Our indefinite-lived intangible asset consists of the ATI trade name. We test the indefinite-lived intangible asset for impairment on an annual basis as of October 1. The Company concluded that no indefinite-lived intangible asset impairment existed at the time of annual impairment tests performed for the years ended December 31, 2022, 2021 and 2020. For the annual impairment tests performed in 2022 and 2021, no impairments existed as of October 1 since impairments were recorded on September 30. The Company noted separate interim triggering events during 2022 and 2021 which resulted in the recording of impairment losses.
The Company has one reporting unit for purposes of the Company’s goodwill impairment test, which is completed as of October 1. The Company concluded that no goodwill impairment existed at the time of the annual impairment test performed for the years ended December 31, 2022, 2021 and 2020. For the annual impairment tests performed in 2022 and 2021, no impairments existed as of October 1 since impairments were recorded on September 30. The Company noted separate interim triggering events during 2022 and 2021 which resulted in the recording of impairment losses.
As the carrying amounts of the Company's goodwill and trade name indefinite-lived intangible asset were impaired during 2022 and 2021, those amounts are more susceptible to an impairment risk if there are unfavorable changes in assumptions and estimates. If the estimated cash flows decrease or market factors change, impairment charges may need to be recorded in the future. Factors that could result in the cash flows being lower than the current estimates include decreased revenue caused by unforeseen changes in the healthcare market or the Company's business, or the inability to achieve the estimated operating margins in the forecasts due to unforeseen factors. Additionally, changes in the broader economic environments could cause changes to the estimated discount rates and comparable company valuation indicators which may impact the estimated fair values.
Changes in the carrying amount of goodwill consisted of the following (in thousands):
| | | | | | | | |
| | Total Goodwill |
| | |
| | |
| | |
Goodwill at December 31, 2021 (1) | | $ | 608,811 | |
Impairment charges | | (318,925) | |
Acquisitions (2) | | (236) | |
Held for sale reclassifications (3) | | (3,192) | |
Goodwill at December 31, 2022 | | $ | 286,458 | |
(1) Net of accumulated impairment losses of $726.8 million.
(2) Represents final valuation adjustments related to 2021 acquisitions. Refer to Note 3 - Business Combinations and Divestitures for additional information.
(3) Goodwill reclassified to assets held for sale is related to clinics held for sale as of December 31, 2022. Refer to Note 3 - Business Combinations and Divestitures for additional information.
The table below summarizes the Company’s carrying amount of trade name and other intangible assets at December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Gross intangible assets: | | | |
ATI trade name (1) | $ | 245,000 | | | $ | 409,360 | |
Non-compete agreements | 2,395 | | | 2,405 | |
Other intangible assets | 640 | | | 640 | |
Accumulated amortization: | | | |
Accumulated amortization – non-compete agreements | (1,126) | | | (425) | |
Accumulated amortization – other intangible assets | (327) | | | (284) | |
Total trade name and other intangible assets, net | $ | 246,582 | | | $ | 411,696 | |
(1) Not subject to amortization. The Company recorded $164.4 million of impairment charges related to the trade name indefinite-lived intangible asset during the year ended December 31, 2022.
Amortization expense for the years ended December 31, 2022, 2021 and 2020 was immaterial. The Company estimates that amortization expense related to intangible assets is expected to be immaterial over the next five fiscal years and thereafter.
Interim impairment testing during 2021
During the quarters ended June 30, 2021 and September 30, 2021, the Company identified interim triggering events. In late July 2021, the Company revised its earnings forecast to reflect (i) the impact of clinician attrition on both volume and operating cost expectations and (ii) payor, state and service mix shift impacts on net patient revenue per visit expectations. These factors accelerated in the second quarter and continued into the third quarter. In October 2021, the Company further revised its forecast to reflect lower than expected patient visit volume. The Company determined that the combination of these factors constituted interim triggering events that required further analysis with respect to potential impairment to goodwill, trade name indefinite-lived intangible and other assets.
As it was determined that it was more likely than not that the fair value of our trade name indefinite-lived intangible asset was below its carrying value, the Company performed an interim quantitative impairment test as of the June 30, 2021 and September 30, 2021 balance sheet dates. The Company utilized the relief from royalty method to estimate the fair value of the trade name indefinite-lived intangible asset. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate. As a result of the analyses, during the year ended December 31, 2021, the Company recognized $234.3 million in non-cash interim impairments in the line item goodwill, intangible and other asset impairment charges in its consolidated statements of operations, which represented the difference between the estimated fair value of the Company’s trade name indefinite-lived intangible asset and its carrying value.
The Company evaluated its asset groups, including operating lease right-of-use assets that were evaluated based on clinic-level cash flows and clinic-specific market factors, noting no material impairment.
As it was determined that it was more likely than not that the fair value of our single reporting unit was below its carrying value, the Company performed an interim quantitative impairment test as of the June 30, 2021 and September 30, 2021 balance sheet dates. In order to determine the fair value of our single reporting unit, the Company utilized an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, earnings before interest, taxes, depreciation and amortization ("EBITDA") margins, the terminal growth rate, the discount rate and relevant market multiples. As a result of the analyses, during the year ended December 31, 2021, the Company recognized $726.8 million in non-cash interim impairments in the line item goodwill, intangible and other asset impairment charges in its consolidated statements of operations, which represented the difference between the estimated fair value of the Company’s single reporting unit and its carrying value.
Interim impairment testing during 2022
During the quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022, the Company identified interim triggering events as a result of factors including potential changes in discount rates and decreases in share price. The Company determined that the combination of these factors constituted interim triggering events that required further analysis with respect to potential impairment to goodwill, trade name indefinite-lived intangible and other assets.
As it was determined that it was more likely than not that the fair value of our trade name indefinite-lived intangible asset was below its carrying value, the Company performed an interim quantitative impairment test as of the March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 balance sheet dates. The Company utilized the relief from royalty method to estimate the fair value of the trade name indefinite-lived intangible asset. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate. As a result of the analyses, during the year ended December 31, 2022, the Company recognized $164.4 million in non-cash interim impairments in the line item goodwill, intangible and other asset impairment charges in its consolidated statements of operations, which represents the difference between the estimated fair value of the Company’s trade name indefinite-lived intangible asset and its carrying value.
The Company evaluated its asset groups, including its operating lease right-of-use assets and leasehold improvement assets that were evaluated based on location-specific cash flows and market factors, noting no material impairment.
As it was determined that it was more likely than not that the fair value of our single reporting unit was below its carrying value, the Company performed an interim quantitative impairment test. In order to determine the fair value of our single reporting unit, the Company utilized an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples. As a result of the analyses, the Company recognized a $318.9 million non-cash interim impairment in the line item goodwill, intangible and other asset impairment charges in its consolidated statements of operations, which represented the difference between the estimated fair value of the Company’s single reporting unit and its carrying value.
The impairment in the fourth quarter included an out of period adjustment to reduce goodwill impairment charges of $8.8 million, of which $1.8 million relates to the year ended December 31, 2021. We evaluated the impact of this error on our previously issued financial statements, assessing both quantitatively and qualitatively, and concluded the error was not material to any of our prior period or the current period financial statements.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of the Company’s reporting unit and the indefinite-lived intangible asset requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include projected revenue growth rates, EBITDA margins, terminal growth rates, discount rates, relevant market multiples, royalty rates and other market factors. If current expectations of future growth rates, margins and cash flows are not met, or if market factors outside of our control change significantly, including discount rates, relevant market multiples, company share price and other market factors, then our reporting unit or the indefinite-lived intangible asset might become impaired in the future, negatively impacting our operating results and financial position. As the carrying amounts of goodwill and the Company’s trade name indefinite-lived intangible asset have been impaired as of December 31, 2022 and written down to fair value, those amounts are more susceptible to an impairment risk if there are unfavorable changes in assumptions and estimates.
Note 6. Property and Equipment
Property and equipment consisted of the following at December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Equipment | $ | 38,102 | | | $ | 36,278 | |
Furniture and fixtures | 17,215 | | | 17,141 | |
Leasehold improvements | 191,182 | | | 183,542 | |
Automobiles | 19 | | | 19 | |
Computer equipment and software | 102,651 | | | 95,362 | |
Construction-in-progress | 3,727 | | | 3,793 | |
| 352,896 | | | 336,135 | |
Accumulated depreciation and amortization | (229,206) | | | (196,405) | |
Property and equipment, net (1) | $ | 123,690 | | | $ | 139,730 | |
(1) Excludes $1.1 million reclassified as held for sale as of December 31, 2022. Refer to Note 3 - Business Combinations and Divestitures for additional information.
Property and equipment includes internally developed computer software costs in the amount of $64.3 million and $58.7 million as of December 31, 2022 and 2021, respectively. The related amortization expense was $8.2 million, $6.8 million, and $9.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Depreciation and amortization expense is recorded within rent, clinic supplies, contract labor and other and selling, general and administrative expenses within the consolidated statements of operations, depending on the use of the underlying fixed assets. The depreciation and amortization expense recorded in cost of services relates to revenue-generating assets, which primarily includes clinic leasehold improvements and therapy equipment. The depreciation and amortization expense included in selling, general and administrative expenses is related to infrastructure items, such as corporate leasehold improvements, computer equipment and software.
The following table presents the amount of depreciation and amortization expense related to property and equipment recorded in rent, clinic supplies, contract labor and other and selling, general and administrative expenses in the Company’s consolidated statements of operations for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Rent, clinic supplies, contract labor and other | | | | | $ | 27,429 | | | $ | 26,664 | | | $ | 25,409 | |
Selling, general and administrative expenses | | | | | 12,417 | | | 10,873 | | | 14,101 | |
Total depreciation expense | | | | | $ | 39,846 | | | $ | 37,537 | | | $ | 39,510 | |
Note 7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following at December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Salaries and related costs | $ | 28,949 | | $ | 27,257 |
| | | |
Credit balances due to patients and payors | 6,117 | | 4,240 |
Accrued professional fees | 5,551 |
| 5,998 |
Accrued contract labor | 4,483 | | 2,057 |
Accrued occupancy costs | 2,410 |
| 1,895 |
| | | |
| | | |
CARES Act funds (1) | — | | 18,179 |
| | | |
| | | |
| | | |
Other payables and accrued expenses | 6,162 | | 4,958 |
Total | $ | 53,672 | | $ | 64,584 |
(1) Includes current portion of MAAPP funds received and deferred employer Social Security tax payments.
Note 8. Borrowings
Long-term debt consisted of the following at December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Senior Secured Term Loan (1, 2) (due February 24, 2028) | $ | 503,481 | | | $ | — | |
Revolving Loans (3) (due February 24, 2027) | 48,200 | | | — | |
2016 first lien term loan (4) | — | | | 555,048 | |
Less: unamortized debt issuance costs | (11,137) | | | (1,935) | |
Less: unamortized original issue discount | (8,944) | | | (1,147) | |
Total debt, net | 531,600 | | | 551,966 | |
Less: current portion of long-term debt | — | | | (8,167) | |
Long-term debt, net | $ | 531,600 | | | $ | 543,799 | |
(1) Interest rate of 12.1% at December 31, 2022, with interest payable in designated installments at a variable interest rate. The effective interest rate for the Senior Secured Term Loan was 13.1% at December 31, 2022.
(2) During the third and fourth quarters of 2022, the Company elected to pay a portion of its interest in-kind on its Senior Secured Term Loan by capitalizing and adding such interest to the principal amount of the debt. As of December 31, 2022, the Company recognized paid in-kind interest in the amount of $3.5 million.
(3) Interest rate of 8.3% at December 31, 2022, with interest payable in designated installments at a variable interest rate.
(4) Loan balance was repaid in its entirety on February 24, 2022. The effective interest rate for the 2016 first lien term loan was 4.9% at December 31, 2021.
2016 first and second lien credit agreements
In connection with the Business Combination on June 16, 2021, the Company paid down $216.7 million of its 2016 first lien term loan. The Company recognized $1.7 million in loss on debt extinguishment related to the derecognition of the proportionate amount of remaining unamortized deferred financing costs and unamortized original issue discount associated with the partial debt repayment.
In connection with the Business Combination on June 16, 2021, the Company paid $231.3 million to settle its second lien subordinated term loan. The Company recognized $3.8 million in loss on debt extinguishment related to the derecognition of the remaining unamortized deferred financing costs in conjunction with the debt repayment.
The total loss on debt extinguishment associated with the partial repayment of the first lien term loan and the settlement of the second lien subordinated term loan was $5.5 million for the year ended December 31, 2021. This amount has been reflected in other expense (income), net in the consolidated statements of operations.
On February 24, 2022, the Company paid $555.0 million to settle its existing term loan (the "2016 first lien term loan"). The Company accounted for the transaction as a debt extinguishment and recognized $2.8 million in loss on debt extinguishment related to the derecognition of the remaining unamortized deferred financing costs and unamortized original issue discount in conjunction with the debt repayment. The loss on debt extinguishment associated with the repayment of the 2016 first lien term loan has been reflected in other expense (income), net in the consolidated statements of operations.
2022 Credit Agreement
On February 24, 2022 (the "Refinancing Date"), the Company entered into various financing arrangements to refinance its existing long-term debt (the "2022 Debt Refinancing"). As part of the 2022 Debt Refinancing, ATI Holdings Acquisition, Inc. (the "Borrower"), an indirect subsidiary of ATI Physical Therapy, Inc., entered into a credit agreement among the Borrower, Wilco Intermediate Holdings, Inc. ("Holdings"), as loan guarantor, Barclays Bank PLC, as administrative agent and issuing bank, and a syndicate of lenders (the "2022 Credit Agreement"). The 2022 Credit Agreement provides a $550.0 million credit facility (the "2022 Credit Facility") that is comprised of a $500.0 million senior secured term loan (the "Senior Secured Term Loan") which was fully funded at closing and a $50.0 million "super priority" senior secured revolver (the "Revolving Loans") with a $10.0 million letter of credit sublimit. The 2022 Credit Facility refinanced and replaced the Company's prior credit facility for which Barclays Bank PLC served as administrative agent for a syndicate of lenders.
In connection with the 2022 Debt Refinancing, the Company also entered into a preferred stock purchase agreement, consisting of senior preferred stock with detachable warrants to purchase common stock for an aggregate stated value of $165.0 million (collectively, the “Preferred Stock Financing”). See Note 11 - Mezzanine and Stockholders' Equity for further information regarding the Preferred Stock Financing.
The Company capitalized debt issuance costs totaling $12.5 million related to the 2022 Credit Facility as well as an original issue discount of $10.0 million, which are amortized over the terms of the respective financing arrangements.
The Senior Secured Term Loan matures on February 24, 2028 and bears interest, at the Company's election, at a base interest rate of the Alternate Base Rate ("ABR"), as defined in the agreement, plus an applicable credit spread, or the Adjusted Term SOFR Rate, as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio. The Company may elect to pay 2.0% interest in-kind at a 0.5% premium during the first year under the agreement. The Company elected to pay a portion of its interest in-kind during the third and fourth quarters of 2022. As of December 31, 2022, borrowings on the Senior Secured Term Loan bear interest at 1-month SOFR, subject to a 1.0% floor, plus 7.25% plus the 0.5% paid-in-kind interest premium.
The Revolving Loans are subject to a maximum borrowing capacity of $50.0 million and mature on February 24, 2027. Borrowings on the Revolving Loans bear interest, at the Company's election, at a base interest rate of the ABR, as defined in the agreement, plus an applicable credit spread, or the Adjusted Term SOFR Rate, as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio. In December 2022, the Company drew $48.2 million in Revolving Loans. As of December 31, 2022, $48.2 million in Revolving Loans were outstanding and bearing interest at 1-month SOFR plus a credit spread of 4.1%.
The Company capitalized issuance costs of $0.5 million related to the Revolving Loans. Unamortized issuance costs of $0.2 million related to the revolving loans under the 2016 credit agreement were added to the balance of unamortized issuance costs to be amortized over the term of the Revolving Loans pursuant to debt extinguishment accounting guidance. Commitment fees on the Revolving Loans are payable quarterly at 0.5% per annum on the daily average undrawn portion for the quarter and are expensed as incurred. The balances of unamortized issuance costs related to the Revolving Loans and the revolving loans under the 2016 credit agreement, respectively, were $0.6 million as of December 31, 2022, and $0.3 million as of December 31, 2021.
The 2022 Credit Facility is guaranteed by certain of the Company’s subsidiaries and is secured by substantially all of the assets of Holdings, the Borrower and the Borrower’s wholly owned subsidiaries, including a pledge of the stock of the Borrower, in each case, subject to customary exceptions.
The 2022 Credit Agreement contains customary covenants and restrictions, including financial and non-financial covenants. The financial covenants require the Company to maintain $30.0 million of minimum liquidity, as defined in the agreement, at each test date through the first quarter of 2024. Additionally, beginning in the second quarter of 2024, the Company must maintain a Secured Net Leverage Ratio, as defined in the agreement, not to exceed 7.00:1.00. The net leverage ratio covenant decreases in the third quarter of 2024 to 6.75:1.00 and further decreases in the first quarter of 2025 to 6.25:1.00, which remains applicable through maturity. The financial covenants are tested as of each fiscal quarter end for the respective periods. As of December 31, 2022, the Company has met its minimum liquidity financial covenant.
The 2022 Credit Facility contains customary representations and warranties, events of default, reporting and other affirmative covenants and negative covenants, including requirements related to the delivery of independent audit reports without certain going concern qualifications, limitations on indebtedness, liens, investments, negative pledges, dividends, junior debt payments, fundamental changes and asset sales and affiliate transactions. Failure to comply with the 2022 Credit Facility covenants and restrictions could result in an event of default under the 2022 Credit Facility, subject to customary cure periods. In such an event, all amounts outstanding under the 2022 Credit Facility, together with any accrued interest, could then be declared immediately due and payable.
Under the 2022 Credit Facility, the Company may be required to make certain mandatory prepayments upon the occurrence of certain events, including: an event of default, a Prepayment Asset Sale or receipt of Net Insurance Proceeds in excess of $15.0 million, or excess cash flows exceeding certain thresholds. A Prepayment Asset Sale includes dispositions at fair market value, and Net Insurance Proceeds is generally defined as insurance proceeds received on a covered loss or as a result of assets taken under the power of eminent domain, net of costs related to the matter.
The Company had letters of credit totaling $1.8 million and $1.2 million under the letter of credit sub-facility on the revolving credit facilities as of December 31, 2022 and December 31, 2021, respectively. The letters of credit auto-renew on an annual basis and are pledged to insurance carriers as collateral.
Aggregate maturities of long-term debt at December 31, 2022 are as follows (in thousands):
| | | | | |
2023 | $ | — | |
2024 | — | |
2025 | — | |
2026 | — | |
2027 | 48,200 | |
Thereafter | 503,481 | |
Total future maturities | 551,681 | |
Unamortized original issue discount and debt issuance costs | (20,081) | |
Total debt, net | $ | 531,600 | |
Note 9. Employee Benefit Plans
The Company maintains a defined contribution 401(k) retirement plan for its full-time employees. The plan allows all participants to make elective pretax contributions of up to 100% of their compensation, up to a maximum amount as limited by law. The Company makes matching contributions to the plan on behalf of the employee in the amount of 50% of the first 6% of the contributing participant’s elective deferral contribution. Matching contributions to the plan were $4.9 million, $4.6 million and $4.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The following table presents the Company’s matching contributions to the plan recorded in cost of services and selling, general and administrative expenses in the consolidated statements of operations for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| | | | | |
Salaries and related costs | $ | 4,374 | | | $ | 4,102 | | | $ | 4,206 | |
Selling, general and administrative expenses | 559 | | | 532 | | | 520 | |
Total | $ | 4,933 | | | $ | 4,634 | | | $ | 4,726 | |
Note 10. Share-Based Compensation
The Company recognizes compensation expense for all share-based compensation awarded to employees, net of forfeitures, using a fair value-based method. The grant-date fair value of each award is amortized to expense on a straight-line basis over the award’s vesting period. Compensation expense associated with share-based awards is included in salaries and related costs and selling, general and administrative expenses in the accompanying consolidated statements of operations, depending on whether the award recipient is a clinic-level or corporate employee, respectively. Share-based compensation expense is adjusted for forfeitures as incurred.
Wilco Acquisition, LP 2016 Equity Incentive Plan
Prior to the Business Combination, Wilco Acquisition, LP was the parent company of Wilco Holdco, Inc. and its subsidiaries. In 2016, the Company adopted the Wilco Acquisition, LP 2016 Equity Incentive Plan (the “2016 Plan”) under which, prior to the Business Combination, it granted profit interests of Wilco Acquisition, LP in the form of Incentive Common Units, to members of management, key employees and independent directors of Wilco Acquisition, LP and its subsidiaries.
Service-based vesting
Prior to the Business Combination, Wilco Acquisition, LP granted Incentive Common Units, subject to service-based vesting, to members of management, key employees and independent directors. Following the closing of the Business Combination, holders of service-based ICUs were entitled to a distribution of a number of Class A common shares of ATI Physical Therapy, Inc. based on the distribution priorities under the Wilco Acquisition, LP limited partnership agreement. The shares related to vested service-based ICUs were distributed as unrestricted Class A common shares of ATI. The shares related to unvested service-based ICUs were distributed as restricted Class A common shares of ATI eligible to vest over the shorter of: (a) the existing vesting schedule applicable to the underlying ICUs, or (b) in installments on each quarterly anniversary of the closing over three years post-closing, subject to the grantee's continued service through each vesting date.
Pursuant to the 2016 Plan, total share-based compensation expense related to service-based awards recognized in the years ended December 31, 2022, 2021 and 2020 was $0.8 million, $2.7 million and $1.9 million, respectively.
For the year ended December 31, 2022, 0.1 million shares distributed to holders of service-based ICUs vested, and forfeitures related to shares distributed to holders of service-based ICUs were immaterial. There were no service-based awards granted under the 2016 Plan during the year ended December 31, 2022.
As of December 31, 2022, the remaining unvested restricted shares distributed to holders of service-based ICUs totaled 0.1 million Class A common shares, with unrecognized compensation expense of $0.6 million to be recognized over a weighted-average period of 1.4 years.
Performance-based vesting
Prior to the Business Combination, Wilco Acquisition, LP granted Incentive Common Units, subject to performance-based vesting, to members of management, key employees and independent directors. Following the closing of the Business Combination, holders of performance-based ICUs were entitled to a distribution of a number of Class A common shares of ATI Physical Therapy, Inc. based on the distribution priorities under the Wilco Acquisition, LP limited partnership agreement. The shares related to performance-based ICUs were distributed to holders as restricted Class A common shares of ATI eligible to vest in installments on each quarterly anniversary of the closing over the shorter of: (a) the eight-year period from the original grant date of the underlying ICUs, or (b) three years post-closing, subject to the grantee’s continued service through each vesting date.
Based on the terms of the performance-based ICUs, the performance-based awards follow the treatment of an initial public offering ("IPO") as a result of the Business Combination and, therefore, converted to service-based vesting requirements. Prior to the Business Combination, no share-based compensation expense was recognized related to the performance-based awards, as a change-in-control or IPO cannot be assessed as probable prior to its occurrence. Following the closing of the Business Combination, the Company began recognizing share-based compensation expense associated with the performance-based awards. Recognition of such expense follows a straight-line expense allocation based on the original grant date and the shorter of (a) the eight-year period from the original grant date of the underlying ICUs, or (b) three years post-closing of the Business Combination. For the years ended December 31, 2022 and 2021, share-based compensation expense related to the performance-based awards was $0.3 million and $2.5 million, respectively.
For the year ended December 31, 2022, 0.2 million shares distributed to holders of performance-based ICUs vested, and 0.1 million shares distributed to holders of performance-based ICUs were forfeited. There were no performance-based awards granted under the 2016 Plan during the year ended December 31, 2022.
As of December 31, 2022, the remaining unvested restricted shares distributed to holders of performance-based ICUs totaled 0.1 million shares, with unrecognized compensation expense of $0.5 million to be recognized over a weighted-average period of 1.5 years.
ATI 2021 Equity Incentive Plan
The Company adopted the ATI Physical Therapy 2021 Equity Incentive Plan (the "2021 Plan") under which it may grant equity interests of ATI Physical Therapy, Inc., in the form of stock options, stock appreciation rights, restricted stock awards and restricted stock units, to members of management, key employees and independent directors of the Company and its subsidiaries. The Compensation Committee is authorized to make grants and to make various other decisions under the 2021 Plan. The maximum number of shares reserved for issuance under the 2021 Plan is approximately 21.3 million. As of December 31, 2022, approximately 10.9 million shares were available for future grant.
Stock options
The Company grants stock options to members of management, key employees and independent directors. Stock options typically vest in equal annual installments over a service period ranging from three to four years from the date of grant, depending on the terms of the agreement. All options have a maximum term of 10 years from the date of grant and may be exercised for one share of Class A common stock.
Pursuant to the 2021 Plan, total share-based compensation expense related to stock options recognized in the years ended December 31, 2022 and 2021 was approximately $1.3 million and $0.1 million, respectively. No share-based compensation expense was recognized in the year ended December 31, 2020 related to stock options.
The following table summarizes the activity of stock options for the year ended December 31, 2022 (aggregate intrinsic value in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted-Average Exercise Price | | Weighted-Average Contractual Term (in years) | | Aggregate Intrinsic Value |
Outstanding, January 1, 2022 | 774,796 | | $ | 3.41 | | | 9.9 | | $ | 9 | |
Granted | 6,369,881 | | 1.69 | | N/A | | N/A |
Exercised | — | | — | | | N/A | | — | |
Forfeited/Cancelled | (1,831,938) | | 1.98 | | | N/A | | N/A |
Outstanding, December 31, 2022 | 5,312,739 | | $ | 1.84 | | | 9.1 | | $ | — | |
| | | | | | | |
Exercisable, December 31, 2022 | 202,337 | | $ | 3.40 | | | 6.9 | | $ | — | |
Expected to vest, December 31, 2022 | 5,110,402 | | $ | 1.78 | | | 9.2 | | $ | — | |
The fair values of each stock option granted was determined using the Black-Scholes option-pricing model. As the Company does not have sufficient historical share option exercise experience for such "plain-vanilla" awards, the expected option term was determined using the simplified method, which is the average of the option's vesting and contractual term. Volatility is measured using the historical volatility of certain comparable public companies, using daily log-returns of stock prices, as adjusted for the impact of financial leverage. The risk-free interest rate reflects the U.S. Treasury yield curve in effect at the time of the grant.
The following table summarizes the weighted-average grant-date fair value and assumptions used to develop the fair value estimates for the options granted in 2022 and 2021. No stock options were granted under the 2021 Plan during the year ended December 31, 2020:
| | | | | | | | | | | | | |
| 2022 | | 2021 | | |
Weighted-average grant-date fair value of options | $0.98 | | $1.69 | | |
Risk-free interest rate | 1.74% | | 1.45% | | |
Term (years) | 6.2 | | 6.0 | | |
Volatility | 61.19% | | 51.67% | | |
Expected dividend | —% | | —% | | |
As of December 31, 2022, the unrecognized compensation expense related to stock options was $4.1 million, to be recognized over a weighted-average period of 2.9 years.
Restricted stock units
The Company grants restricted stock units (“RSUs”) to members of management, key employees and independent directors. RSUs are time-based vesting awards and are subject to the continued service of the employee or non-employee director over the vesting period. RSUs typically vest in equal annual installments over one to three years from the date of grant, based on the terms of the agreement. The fair value of RSUs was based on the price of the Company’s common stock on the grant date.
Pursuant to the 2021 Plan, total share-based compensation expense related to RSUs recognized in the years ended December 31, 2022 and 2021 was approximately $4.4 million and $0.1 million, respectively. No share-based compensation expense was recognized in the year ended December 31, 2020 related to RSUs.
The following table summarizes the activity of unvested RSUs and the respective weighted-average grant date fair value per RSU for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | |
| 2022 | | | | |
| RSUs | | Weighted-Average Grant Date Fair Value | | | | | | | | |
Outstanding and unvested, beginning of year | 404,235 | | | $ | 3.41 | | | | | | | | | |
Granted (1) | 5,428,281 | | | 2.08 | | | | | | | | | |
Vested | (489,461) | | | 3.58 | | | | | | | | | |
Forfeited | (1,143,246) | | | 2.23 | | | | | | | | | |
Outstanding and unvested, end of year | 4,199,809 | | | $ | 1.99 | | | | | | | | | |
(1) The vesting start date for certain RSUs granted in 2022 is the Closing Date
During the year ended December 31, 2021, the Company granted approximately 0.4 million RSUs with a weighted-average grant date fair value of $3.41. No RSUs were granted or outstanding for the year ended December 31, 2020. During the year ended December 31, 2022, the fair value of vested RSUs was $1.8 million and no RSUs vested in 2021.
As of December 31, 2022, the unrecognized compensation expense related to RSUs was $5.6 million, to be recognized over a weighted-average period of 1.9 years.
Restricted stock awards
The Company grants restricted stock awards (“RSAs”) to members of management and key employees. RSAs are time-based vesting awards and are subject to the continued service of the employee over the vesting period. RSAs typically vest in equal quarterly installments over a service period of three years from the grant date. The vesting start date for the RSAs granted in 2021 is the Closing Date. The fair value of restricted stock was based on the price of the Company’s common stock on the grant date.
Pursuant to the 2021 Plan, total share-based compensation expense related to RSAs recognized in the years ended December 31, 2022 and 2021 was approximately $0.5 million and $0.4 million, respectively. No share-based compensation expense was recognized in the year ended December 31, 2020 related to RSAs.
The following table summarizes the activity of unvested RSAs and respective weighted-average grant date fair value per RSA for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | |
| 2022 | | | | |
| RSAs | | Weighted-Average Grant Date Fair Value | | | | | | | | |
Outstanding and unvested, beginning of year | 447,731 | | | $ | 3.42 | | | | | | | | | |
Granted | — | | | — | | | | | | | | | |
Vested | (144,795) | | | 3.42 | | | | | | | | | |
Forfeited | (128,227) | | | 3.42 | | | | | | | | | |
Outstanding and unvested, end of year | 174,709 | | | $ | 3.42 | | | | | | | | | |
During the year ended December 31, 2021, the Company granted approximately 0.6 million RSAs with a weighted-average grant date fair value of $3.42. No RSAs were granted or outstanding for the year ended December 31, 2020. During the years ended December 31, 2022 and 2021, the fair value of vested RSAs was $0.5 million and $0.4 million, respectively.
As of December 31, 2022, the unrecognized compensation expense related to RSAs was $0.6 million, to be recognized over a weighted-average period of 1.5 years.
Note 11. Mezzanine and Stockholders' Equity
ATI Physical Therapy, Inc. Series A Senior Preferred Stock
In connection with the 2022 Debt Refinancing, the Company issued 165,000 shares of non-convertible preferred stock (the "Series A Senior Preferred Stock") plus 5.2 million warrants to purchase shares of the Company's common stock at an exercise price of $3.00 per share (the "Series I Warrants") and warrants to purchase 6.3 million shares of the Company's common stock at an exercise price equal to $0.01 per share (the "Series II Warrants"). The shares of the Series A Senior Preferred Stock have a par value of $0.0001 per share and an initial stated value of $1,000 per share, for an aggregate initial stated value of $165.0 million. The Company is authorized to issue 1.0 million shares of preferred stock per the Certificate of Designation. As of December 31, 2022, there was 0.2 million shares of Series A Senior Preferred Stock issued and outstanding.
The gross proceeds received from the issuance of the Series A Senior Preferred Stock and the Series I and Series II Warrants were $165.0 million, which was allocated among the instruments based on the relative fair values of each instrument. Of the gross proceeds, $144.7 million was allocated to the Series A Senior Preferred Stock, $5.1 million to the Series I Warrants and $15.2 million to the Series II Warrants. The resulting discount on the Series A Senior Preferred Stock will be recognized as a deemed dividend when those shares are subsequently remeasured upon becoming redeemable or probable of becoming redeemable. The Company recognized $2.9 million in issuance costs and $1.4 million of original issue discount related to the Series A Senior Preferred Stock.
The following table reflects the components of proceeds related to the Series A Senior Preferred Stock (in thousands):
| | | | | |
Gross proceeds allocated to Series A Senior Preferred Stock | $ | 144,667 | |
Less: original issue discount | (1,447) | |
Less: issuance costs | (2,880) | |
Net proceeds received from issuance of Series A Senior Preferred Stock | $ | 140,340 | |
The Series A Senior Preferred Stock has priority over the Company's Class A common stock and all other junior equity securities of the Company, and is junior to the Company's existing or future indebtedness and other liabilities (including trade payables), with respect to payment of dividends, distribution of assets, and all other liquidation, winding up, dissolution, dividend and redemption rights.
The Series A Senior Preferred Stock carries an initial dividend rate of 12.0% per annum (the "Base Dividend Rate"), payable quarterly in arrears. Dividends will be paid in-kind and added to the stated value of the Series A Senior Preferred Stock. The Company may elect to pay dividends on the Series A Senior Preferred Stock in cash beginning on the third anniversary of the Refinancing Date and, with respect to any such dividends paid in cash, the dividend rate then in effect will be decreased by 1.0%.
The Base Dividend Rate is subject to certain adjustments, including an increase of 1.0% per annum on the first day following the fifth anniversary of the Refinancing Date and on each one-year anniversary thereafter, and 2.0% per annum upon the occurrence of either an Event of Noncompliance (as defined in the Certificate of Designation) or a failure by the Company to redeem in full all Series A Senior Preferred Stock upon a Mandatory Redemption Event, which includes a change of control, liquidation, bankruptcy or certain restructurings. The paid in-kind dividends related to the Series A Preferred Stock were $17.9 million for the year ended December 31, 2022. As of December 31, 2022, the accumulated paid in-kind dividends related to the Series A Preferred Stock were $17.9 million and the aggregate stated value was $182.9 million.
The following table presents the change in the aggregate stated value and stated value per share of the Series A Senior Preferred Stock since the Refinancing Date (in thousands, except per share data):
| | | | | | | | |
| | Series A Senior Preferred Stock |
Aggregate stated value as of February 24, 2022 | | $ | 165,000 | |
Accumulated paid in-kind dividends as of December 31, 2022 | | 17,876 | |
Aggregate stated value as of December 31, 2022 | | $ | 182,876 | |
| | |
Preferred shares issued and outstanding as of December 31, 2022 | | 165 |
| | |
Stated value per share as of December 31, 2022 | | $ | 1,108.34 |
The Company has the right to redeem the Series A Senior Preferred Stock, in whole or in part, at any time (subject to certain limitations on partial redemptions). The Redemption Price for each share of Series A Senior Preferred Stock is equal to the stated value subject to certain price adjustments depending on when such optional redemption takes place, if at all.
The Series A Senior Preferred Stock is perpetual and is not mandatorily redeemable at the option of the holders, except upon the occurrence of a Mandatory Redemption Event. Upon the occurrence of a Mandatory Redemption Event, to the extent not prohibited by law, the Company is required to redeem all Series A Senior Preferred Stock, in cash, at a price per share equal to the then applicable Redemption Price. Because the Series A Senior Preferred Stock is mandatorily redeemable contingent on certain events outside the Company’s control, such as a change in control, the Series A Senior Preferred Stock is classified as mezzanine equity in the Company's consolidated balance sheets. Based on the Company’s assessment of the conditions which would trigger the redemption of the Series A Senior Preferred Stock, the Company has determined that the Series A Senior Preferred Stock is neither currently redeemable nor probable of becoming redeemable. Because the Series A Senior Preferred Stock is classified as mezzanine equity and is not considered redeemable or probable of becoming redeemable, the paid in-kind dividends that are added to the stated value do not impact the carrying value of the Series A Senior Preferred Stock in the Company’s consolidated balance sheets. Should the Series A Senior Preferred Stock become probable of becoming redeemable, the Company will recognize changes in the redemption value of the Series A Senior Preferred Stock immediately as they occur and adjust the carrying amount accordingly at the end of each reporting period. As of December 31, 2022, the redemption value of the Series A Senior Preferred Stock was $182.9 million, which is the stated value.
If an Event of Noncompliance occurs, then the holders of a majority of the then outstanding shares of Series A Senior Preferred Stock (the “Majority Holders”) have the right to demand that the Company engage in a sale/refinancing process to consummate a Forced Transaction. A Forced Transaction includes a refinancing of the Series A Senior Preferred Stock or a sale of the Company. Upon consummation of any Forced Transaction, to the extent not prohibited by law, the Company is required to redeem all Series A Senior Preferred Stock, in cash, at a price per share equal to the then applicable Redemption Price.
Holders of shares of Series A Senior Preferred Stock have no voting rights with respect to the Series A Senior Preferred Stock except as set forth in the Certificate of Designation, other documents entered into in connection with the Purchase Agreement and the transactions contemplated thereby, or as otherwise required by law. For so long as any Series A Senior Preferred Stock is outstanding, the Company is prohibited from taking certain actions without the prior consent of the Majority Holders as set forth in the Certificate of Designation which include: issuing equity securities ranking senior to or pari passu with the Series A Senior Preferred Stock, incurring indebtedness or liens, engaging in affiliate transactions, making restricted payments, consummating certain investments or asset dispositions, consummating a change of control transaction unless the Series A Senior Preferred Stock is redeemed in full, altering the Company’s organizational documents, and making material changes to the nature of the Company’s business.
Holders of Series A Senior Preferred Stock, voting as a separate class, have the right to designate and elect one director to serve on the Company’s board of directors until such time after the Refinancing Date that (i) as of any applicable fiscal quarter end, the Company’s trailing 12-month Consolidated Adjusted EBITDA (as defined in the Certificate of Designation) exceeds $100 million, or (ii) the Lead Purchaser ceases to hold at least 50.1% of the Series A Senior Preferred Stock held by it as of the Refinancing Date.
2022 Warrants
In connection with the Preferred Stock Financing, the Company agreed to issue to the preferred stockholders the Series I Warrants entitling the holders thereof to purchase 5.2 million shares of the Company's common stock at an exercise price equal to $3.00 per share, exercisable for 5 years from the Refinancing Date; and the Series II Warrants entitling holders thereof to purchase 6.3 million shares of the Company's common stock, at an exercise price equal to $0.01 per share, exercisable for 5 years from the Refinancing Date (collectively, the "2022 Warrants"). Such number of shares of common stock purchasable pursuant to the 2022 Warrant Agreement (the "2022 Warrant Shares") and related exercise prices may be adjusted from time to time under certain scenarios as set forth in the 2022 Warrant Agreement, which relate to potential changes in the Company's capital structure.
The 2022 Warrants are classified as equity instruments and were initially recorded at an amount equal to the proceeds received from the Preferred Stock Financing allocated among the Series A Senior Preferred Stock, the Series I Warrants, and the Series II Warrants based upon their relative fair values. Of the gross proceeds, $5.1 million was allocated to the Series I Warrants and $15.2 million was allocated to the Series II Warrants. The Company recognized total issuance costs and original issue discount of approximately $0.2 million and $0.5 million related to the Series I Warrants and Series II Warrants, respectively.
The following table reflects the components of proceeds related to the 2022 Warrants (in thousands):
| | | | | | | | | | | | | | | | | |
| Series I Warrants | | Series II Warrants | | Total |
Gross proceeds allocated to 2022 Warrants | $ | 5,101 | | | $ | 15,232 | | | $ | 20,333 | |
Less: original issue discount | (51) | | | (152) | | | (203) | |
Less: issuance costs | (102) | | | (303) | | | (405) | |
Net proceeds received from issuance of 2022 Warrants | $ | 4,948 | | | $ | 14,777 | | | $ | 19,725 | |
Class A common stock
The Company is authorized to issue 470.0 million shares of Class A common stock with a par value of $0.0001 per share. Holders of the Company’s Class A common stock are entitled to one vote for each share on each matter on which they are entitled to vote. At December 31, 2022, there were 207.5 million shares of Class A common stock issued and 198.4 million shares outstanding.
As a result of the recapitalization associated with the Business Combination, shares are reflected as if they were issued and outstanding as of the earliest reported period to reflect the new capital structure. At the time of the Business Combination, stockholders of Wilco Holdco, Inc. received 130.3 million shares of the Company’s Class A common stock, par value $0.0001 per share, for the outstanding shares of Wilco Holdco common stock, par value $0.01 per share, that such stockholders owned. Upon distribution of shares to holders of unvested Incentive Common Units granted prior to the Business Combination under the Wilco Acquisition, LP 2016 Equity Incentive Plan, 2.0 million of these shares were restricted subject to vesting requirements, resulting in total unrestricted shares of 128.3 million and an exchange ratio of 136.7 unrestricted shares of ATI Physical Therapy, Inc. for every previously outstanding Wilco Holdco share.
As of December 31, 2022, shares of Class A common stock reserved for potential future issuance, on an as-if converted basis, were as follows (in thousands):
| | | | | |
| December 31, 2022 |
Shares available for grant under the 2021 Plan | 10,862 | |
2021 Plan share-based awards outstanding | 9,687 | |
Earnout Shares reserved | 15,000 | |
2022 Warrants outstanding | 11,498 | |
IPO Warrants outstanding | 9,867 | |
Vesting Shares reserved(1) | 8,625 | |
Restricted shares(1,2) | 402 | |
Total shares of common stock reserved | 65,941 | |
(1) Represents shares of Class A common stock legally issued, but not outstanding, as of December 31, 2022.
(2) Represents a portion of the 2.0 million restricted shares distributed following the Business Combination to holders of unvested Incentive Common Units under the Wilco Acquisition, LP 2016 Equity Incentive Plan.
Treasury stock
During the year ended December 31, 2022, the Company net settled 0.05 million shares of its Class A common stock related to employee tax withholding obligations associated with the Company's share-based compensation program. These shares are reflected at cost as treasury stock in the consolidated financial statements. As of December 31, 2022, there were 0.08 million shares of treasury stock totaling $0.1 million recognized in the consolidated balance sheets.
Note 12. Wilco Holdco Redeemable Preferred Stock
On May 10, 2016, Wilco Holdco, Inc. issued shares of Series A Preferred Stock (the “Wilco Holdco preferred stock”) for a total consideration value of $98.0 million. Prior to the Business Combination, the Wilco Holdco preferred stock was a class of equity that had priority over the Common Stock with respect to distribution rights, liquidation rights and dividend rights.
The Wilco Holdco preferred stockholders, from and after issuance, were entitled to cumulative preferred dividends at an annual rate per share equal to 10.25% of the original issue price. The dividend rate of the Wilco Holdco preferred stock increased by 0.25% at the end of each fiscal quarter beginning after the second anniversary of the issuance of the Wilco Holdco preferred stock.
Based on the terms of the Wilco Holdco preferred stockholder agreement, Wilco Holdco, Inc. was required to redeem all outstanding shares of preferred stock upon the occurrence of certain events, such as those related to full repayment of the 2016 first and second lien credit agreements or a deemed liquidating event. Based on these redemption requirements, the Wilco Holdco preferred stock was classified as debt (redeemable preferred stock) in the Company’s historical consolidated balance sheets.
Cumulative dividends related to the Wilco Holdco preferred stock were accrued as preferred dividends that increased the balance of the redeemable preferred stock on the Company’s consolidated balance sheets and were recognized as interest expense on redeemable preferred stock in the Company’s consolidated statements of operations. For the years ended December 31, 2021 and 2020, the Company incurred cumulative preferred dividends related to the preferred stock of $10.1 million and $19.0 million, respectively. No dividends were paid related to the preferred stock.
In connection with the Business Combination, holders of the outstanding shares of Wilco Holdco Series A Preferred Stock received a proportionate share of $59.0 million and 12.8 million shares of Class A common stock based on the settlement terms in the Merger Agreement. During 2021, the Company recorded a loss on settlement of redeemable preferred stock in the consolidated statements of operations of $14.0 million based on the value of the cash and equity provided to preferred stockholders in relation to the outstanding redeemable preferred stock liability. As a result of the Business Combination, the balance of redeemable preferred stock was fully settled.
Note 13. IPO Warrant Liability
The Company has outstanding Public Warrants to purchase an aggregate of 6.9 million shares of the Company’s Class A common stock at an exercise price of $11.50 per share and outstanding Private Placement Warrants to purchase an aggregate of 3.0 million shares of the Company's Class A common stock at an exercise price of $11.50 per share. There were no IPO Warrants exercised during the year ended December 31, 2022.
The Company accounts for its outstanding IPO Warrants in accordance with the guidance contained in ASC 815-40, Derivatives and Hedging - Contracts on an Entity’s Own Equity, and determined that the IPO Warrants do not meet the criteria for equity treatment thereunder. As such, each IPO Warrant must be recorded as a liability and is subject to re-measurement at each balance sheet date. Refer to Note 15 - Fair Value Measurements for further details. Changes in fair value are recognized in change in fair value of warrant liability in the Company’s consolidated statements of operations.
The following table presents the change in the fair value of Private Placement Warrants that is recognized in change in fair value of warrant liability in the consolidated statements of operations for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | |
Fair value, beginning of period(1) | | | | | $ | 1,305 | | | $ | 8,099 | | | |
Changes in fair value(1) | | | | | (1,276) | | | (6,794) | | | |
Fair value, end of period | | | | | $ | 29 | | | $ | 1,305 | | | |
(1) The year ended December 31, 2021 represents changes in fair value from the Closing Date of the Business Combination, which is when the liabilities were established.
The following table presents the changes in the fair value of the Public Warrants that is recognized in change in fair value of warrant liability in the consolidated statements of operations for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | |
Fair value, beginning of period(1) | | | | | $ | 3,036 | | | $ | 18,837 | | | |
Changes in fair value(1) | | | | | (2,967) | | | (15,801) | | | |
Fair value, end of period | | | | | $ | 69 | | | $ | 3,036 | | | |
(1) The year ended December 31, 2021 represents changes in fair value from the Closing Date of the Business Combination, which is when the liabilities were established.
Each Public Warrant entitles the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share, subject to adjustment. The Public Warrants became exercisable 30 days after the completion of the Business Combination, subject to certain conditions, including that the Company maintains an effective registration statement under the Securities Act covering the Class A common stock issuable upon exercise of the Public Warrants. The Public Warrants will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation. The Company may call the Public Warrants for redemption for cash or for Class A common stock under certain circumstances.
The Private Placement Warrants are identical to the Public Warrants, except that (i) the Private Placement Warrants and the Class A common stock issuable upon exercise of the Private Placement Warrants were not transferable, assignable or salable until 30 days after the completion of the Business Combination, subject to certain limited exceptions, (ii) the Private Placement Warrants are non-redeemable (except under certain circumstances) so long as they are held by the initial purchasers or such purchasers’ permitted transferees, (iii) the Private Placement Warrants may be exercised by the holders on a cashless basis, and (iv) the Private Placement Warrants and the Class A common stock issuable upon exercise of the Private Placement Warrants are entitled to registration rights. If the Private Placement Warrants are held by someone other than the initial stockholders or their permitted transferees, the Private Placement Warrants will be redeemable by the Company in all redemption scenarios and exercisable by such holders on the same basis as the Public Warrants.
The exercise price and number of Class A common stock issuable upon exercise of the IPO Warrants may be adjusted in certain circumstances including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation.
Note 14. Contingent Common Shares Liability
Earnout Shares
Subject to the terms and conditions of the Merger Agreement, certain stockholders of Wilco Holdco, Inc. were provided the contingent right to receive, in the aggregate, up to 15.0 million shares of Class A common stock if, from the closing of the Business Combination until the 10th anniversary thereof, the dollar volume-weighted average price (“VWAP”) of Class A common stock exceeds certain thresholds:
–The first issuance of 5.0 million Earnout Shares will occur if the VWAP exceeds $12.00 for any 5 trading days within any consecutive 10 trading day period.
–The second issuance of 5.0 million Earnout Shares will occur if the VWAP exceeds $14.00 for any 5 trading days within any consecutive 10 trading day period.
–The third issuance of 5.0 million Earnout Shares will occur if the VWAP exceeds $16.00 for any 5 trading days within any consecutive 10 trading day period.
The Earnout Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Earnout Shares price target.
The Company accounts for the potential Earnout Shares as a liability in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in the Company’s consolidated statements of operations. As of December 31, 2022, no Earnout Shares have been issued as none of the corresponding share price thresholds have been met.
The following table presents the changes in the fair value of the Earnout Shares that is recognized in change in fair value of contingent common shares liability in the consolidated statements of operations for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | |
Fair value, beginning of period(1) | | | | | $ | 28,800 | | | $ | 140,000 | | | |
Changes in fair value(1) | | | | | (27,000) | | | (111,200) | | | |
Fair value, end of period | | | | | $ | 1,800 | | | $ | 28,800 | | | |
(1) The year ended December 31, 2021 represents changes in fair value from the Closing Date of the Business Combination, which is when the liabilities were established.
Refer to Note 15 - Fair Value Measurements for further details.
Vesting Shares
Subject to the terms and conditions of the Sponsor Letter Agreement that was executed in connection with the Merger Agreement, 8.6 million shares of Class F common stock of FAII outstanding immediately prior to the Business Combination converted to potential Class A common shares and became subject to vesting and forfeiture provisions. The Vesting Shares vest in three equal tranches of 2.9 million shares each if the VWAP of Class A common stock exceeds certain thresholds within 10 years of the Closing Date:
–The first issuance of 2.9 million Vesting Shares will occur if the VWAP exceeds $12.00 for any 5 trading days within any consecutive 10 trading day period.
–The second issuance of 2.9 million Vesting Shares will occur if the VWAP exceeds $14.00 for any 5 trading days within any consecutive 10 trading day period.
–The third issuance of 2.9 million Vesting Shares will occur if the VWAP exceeds $16.00 for any 5 trading days within any consecutive 10 trading day period.
The Vesting Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Vesting Shares price target.
The Company accounts for the Vesting Shares as a liability in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in the Company’s consolidated statements of operations. As of December 31, 2022, no Vesting Shares are outstanding as none of the corresponding share price thresholds have been met.
The following table presents the changes in the fair value of the Vesting Shares that is recognized in change in fair value of contingent common shares liability in the consolidated statements of operations for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | |
Fair value, beginning of period(1) | | | | | $ | 16,560 | | | $ | 80,500 | | | |
Changes in fair value(1) | | | | | (15,525) | | | (63,940) | | | |
Fair value, end of period | | | | | $ | 1,035 | | | $ | 16,560 | | | |
(1) The year ended December 31, 2021 represents changes in fair value from the Closing Date of the Business Combination, which is when the liabilities were established.
Refer to Note 15 - Fair Value Measurements for further details.
Note 15. Fair Value Measurements
The Company determines fair value measurements used in its consolidated financial statements based upon the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels, with Level 1 having the highest priority and Level 3 having the lowest.
•Level 1: Observable inputs, which include unadjusted quoted prices in active markets for identical instruments.
•Level 2: Observable inputs other than Level 1 inputs, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instruments.
•Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
As of December 31, 2022 and December 31, 2021, respectively, the recorded values of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and deferred revenue approximate their fair values due to the short-term nature of these items. Money market funds categorized in Level 1 of the fair value hierarchy are measured at fair value based on quoted market prices. As of December 31, 2022, the fair value of money market fund investments included in cash and cash equivalents was $30.0 million.
The Company's Senior Secured Term Loan and Revolving Loans are Level 2 fair value measures which have variable interest rates and, as of December 31, 2022, the recorded amounts approximate fair value. The Company utilizes the market approach valuation technique based on interest rates and credit data that are currently available to the Company for issuance of debt with similar terms or maturities.
Fair value measurement of share-based financial liabilities
The Company determined the fair value of the Public Warrant liability using Level 1 inputs.
The Company determined the fair value of the Private Placement Warrant liability using the price of the Public Warrants as a Level 2 input.
The Company determined the fair value of the Earnout Shares liability and Vesting Shares liability using Level 3 inputs. The contingent common shares contain specific market conditions to determine whether the shares vest based on the Company’s common stock price over a specified measurement period. Given the path-dependent nature of the requirement in which the shares are earned, a Monte-Carlo simulation was used to estimate the fair value of the liability. The Company’s common stock price was simulated to each measurement period based on the above methodology. In each iteration, the simulated stock price was compared to the conditions under which the shares vest. In iterations where the stock price corresponded to shares vesting, the future value of the contingent common shares was discounted back to present value. The fair value of the liability was estimated based on the average of all iterations of the simulation.
Inherent in a Monte-Carlo valuation model are assumptions related to expected stock-price volatility, expected term, risk-free interest rate and dividend yield. The Company estimates the volatility based on the historical volatility of certain guideline companies as of the valuation date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected term of the Earnout Shares and Vesting Shares. The dividend yield percentage is zero based on the Company's current expectations related to the payment of dividends during the expected term of the Earnout Shares or Vesting Shares.
The key inputs into the Monte-Carlo option pricing model were as follows as of December 31, 2022 and December 31, 2021 for the respective Level 3 instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Earnout Shares | | Vesting Shares |
| | December 31, 2022 | | December 31, 2021 | | December 31, 2022 | | December 31, 2021 |
Risk-free interest rate | | 3.88% | | 1.50% | | 3.88% | | 1.50% |
Volatility | | 74.60% | | 44.86% | | 74.60% | | 44.86% |
Dividend yield | | —% | | —% | | —% | | —% |
Expected term (years) | | 8.5 | | 9.5 | | 8.5 | | 9.5 |
Share price | | $0.31 | | $3.39 | | $0.31 | | $3.39 |
Refer to Note 14 - Contingent Common Shares Liability for further details on the change in fair value of the Earnout Shares and Vesting Shares.
Fair value measurement of interest rate derivative instruments
The Company is exposed to interest rate variability with regard to its existing variable-rate debt instrument, which exposure primarily relates to movements in various interest rates, such as SOFR. The Company utilizes interest rate cap derivative instruments for purposes of hedging exposures related to such variable-rate cash payments. The Company's interest rate caps are designated as cash flow hedging instruments.
The Company records derivatives on the balance sheet at fair value, which represents the estimated amounts it would receive or pay upon termination of the derivative prior to the scheduled expiration date. The fair value is derived from model-driven information based on observable Level 2 inputs, such as LIBOR or SOFR forward rates. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings.
As discussed in Note 2 – Basis of Presentation and Summary of Significant Accounting Policies, the Company has a derivative instrument for which the interest rate is indexed to LIBOR. During the period ended March 31, 2022, the Company modified the reference rate index on its hedged items from LIBOR to SOFR. The Company elected to apply the hedge accounting expedients under ASC Topic 848, Reference Rate Reform, related to probability and the assessments of effectiveness for future cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivative, which is LIBOR. As of December 31, 2022, the Company continues to apply the hedge accounting expedients and does not anticipate this guidance will have a material impact on its consolidated financial statements.
The following table presents the activity of cash flow hedges included in accumulated other comprehensive income (loss) for the years ended December 31, 2022 and 2021, respectively (in thousands):
| | | | | | | | | | | |
| | | Cash Flow Hedges |
Balance as of December 31, 2021 | | | $ | 28 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Unrealized gain recognized in other comprehensive income before reclassifications | | | 8,310 | |
Reclassification to interest expense, net | | | (3,439) | |
Balance as of December 31, 2022 | | | $ | 4,899 | |
| | | |
Balance as of December 31, 2020 | | | $ | (1,907) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Unrealized gain recognized in other comprehensive income before reclassifications | | | 490 | |
Reclassification to interest expense, net | | | 1,445 | |
Balance as of December 31, 2021 | | | $ | 28 | |
The following table presents the fair value of derivative assets and liabilities within the consolidated balance sheets as of December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Assets | | Liabilities | | Assets | | Liabilities | | |
Derivatives designated as cash flow hedging instruments: | | | | | | | | | |
Other current assets | $ | 5,028 | | | $ | — | | | $ | — | | | $ | — | | | |
Other non-current assets | — | | | — | | | 277 | | | — | | | |
Accrued expenses and other liabilities | — | | | — | | | — | | | 288 | | | |
Other non-current liabilities | — | | | 73 | | | — | | | — | | | |
Note 16. Income Taxes
The Company's (loss) income before taxes consists of only domestic operations. The details of the Company's income tax (benefit) expense for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal | $ | 6 | | | $ | — | | | $ | — | |
State | 37 | | | 128 | | | 251 | |
Total current | 43 | | | 128 | | | 251 | |
Deferred: | | | | | |
Federal | (37,634) | | | (60,002) | | | 3,514 | |
State | (10,939) | | | (11,086) | | | (1,700) | |
Total deferred | (48,573) | | | (71,088) | | | 1,814 | |
Total income tax (benefit) expense | $ | (48,530) | | | $ | (70,960) | | | $ | 2,065 | |
The effective tax rate for the years ended December 31, 2022, 2021 and 2020 was 9.0%, 8.3% and (62.5)%, respectively. The Company's effective income tax rate varies from the federal statutory rate due to various items, such as state income taxes, valuation allowances and nondeductible items such as interest expense on redeemable preferred stock, fair value adjustments related to liability-classified share-based instruments and impairment charges. The differences between the federal tax rate and the Company's effective tax rate for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Federal income tax benefit at statutory rate | $ | (113,731) | | 21.0 | % | | $ | (179,128) | | 21.0 | % | | $ | (694) | | 21.0 | % |
State income tax (benefit) expense, net of federal tax benefit | (16,827) | | 3.1 | % | | (25,814) | | 3.0 | % | | 1,248 | | (37.8) | % |
Change in state tax rate | 5 | | — | % | | 34 | | — | % | | (2,551) | | 77.1 | % |
Prior period adjustments and other | 167 | | — | % | | 1,515 | | (0.2) | % | | (105) | | 3.2 | % |
Valuation allowance | 31,595 | | (5.8) | % | | 35,731 | | (4.2) | % | | (981) | | 29.7 | % |
Interest expense on redeemable preferred stock | — | | — | % | | 2,118 | | (0.2) | % | | 3,997 | | (120.9) | % |
Changes in fair value of warrant liability and contingent common shares liability | (9,821) | | 1.8 | % | | (41,524) | | 4.9 | % | | — | | — | % |
Goodwill impairment charges | 59,893 | | (11.1) | % | | 132,447 | | (15.5) | % | | — | | — | % |
Other permanent differences, net | 189 | | — | % | | 3,661 | | (0.5) | % | | 1,151 | | (34.8) | % |
Total income tax (benefit) expense | $ | (48,530) | | 9.0 | % | | $ | (70,960) | | 8.3 | % | | $ | 2,065 | | (62.5) | % |
Deferred income taxes have been provided on temporary differences, which consist of the following at December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Deferred income tax assets: | | | |
Accrued liabilities | $ | 7,112 | | | $ | 10,420 | |
Provision for bad debt | 11,828 | | | 12,530 | |
Operating lease liabilities | 64,288 | | | 74,115 | |
Acquisition and transaction costs | 3,186 | | | 3,770 | |
Net operating losses | 104,419 | | | 82,304 | |
Interest expense | 43,323 | | | 33,163 | |
Other deferred tax assets | 6,335 | | | 4,798 | |
Total gross deferred income tax assets | 240,491 | | | 221,100 | |
Valuation allowance | (89,907) | | | (58,312) | |
Total gross deferred income tax assets, net of valuation allowance | 150,584 | | | 162,788 | |
Deferred income tax liabilities: | | | |
Goodwill | 26,251 | | | 26,563 | |
Trade name/trademark | 66,445 | | | 114,451 | |
Operating lease right-of-use assets | 54,360 | | | 63,252 | |
Depreciation | 20,039 | | | 22,089 | |
Other deferred tax liabilities | 2,375 | | | 3,892 | |
Total gross deferred income tax liabilities | 169,470 | | | 230,247 | |
Net deferred income tax liabilities | $ | 18,886 | | | $ | 67,459 | |
Deferred tax assets include federal net operating losses of $68.9 million and $49.8 million at December 31, 2022 and 2021, respectively, and state net operating losses of $35.5 million and $32.5 million at December 31, 2022 and 2021, respectively. Deferred tax assets are expected to be used in the reduction of taxable earnings of future tax years unless it is determined they are not more likely than not to be realized based on the weight of available evidence. The earliest net operating loss will expire by statute in 2023 for state net operating losses, and in 2036 for federal net operating losses.
In evaluating the Company's ability to recover deferred income tax assets, all available positive and negative evidence is considered, including scheduled reversal of deferred tax liabilities, operating results and forecasts of future taxable income in each of the jurisdictions in which the Company operates. As of December 31, 2022, the Company determined that a significant portion of its federal and state net operating loss carryforwards with definite and certain indefinite carryforward periods and certain deferred tax assets were not more likely than not to be realized based on the weight of available evidence. As a result, the Company recorded an increase of $25.8 million to its valuation allowance related to federal net operating loss and interest expense carryforwards and an increase of $5.8 million to its valuation allowance related to state net operating loss carryforwards and certain deferred tax assets. These amounts were recorded during the year ended December 31, 2022 in income tax (benefit) expense in the consolidated statements of operations.
As of December 31, 2021, the Company determined that a significant portion of its federal and state net operating loss carryforwards with definite carryforward periods and certain deferred tax assets were not more likely than not to be realized based on the weight of available evidence. As a result, the Company recorded an increase of $22.5 million to its valuation allowance related to federal net operating loss carryforwards and an increase of $13.3 million to its valuation allowance related to state net operating loss carryforwards and certain deferred tax assets. These amounts were recorded during the year ended December 31, 2021 in income tax (benefit) expense in the consolidated statements of operations.
For the year ended December 31, 2020, the Company reached the conclusion that it was more likely than not that the Company’s federal and certain state deferred income tax assets were expected to be realized, and the Company maintained a valuation allowance mainly related to certain state net operating losses.
The Company is routinely audited by the tax authorities in various U.S. states and is currently not subject to examination. The statute remains open for most state jurisdictions for periods beginning in 2018. For federal tax purposes, tax years through 2018 are closed for examination by the Internal Revenue Service. Any interest and penalties related to the tax uncertainties are recorded in income tax (benefit) expense.
As reflected in the following table (in thousands), the Company had an uncertain tax position related to the tax treatment of tenant improvement allowances. Due to the Company's net operating loss position, there were no accrued interest and penalties related to the unrecognized tax benefits in any year. Our gross unrecognized tax benefits were reduced by $3.0 million during the year ended December 31, 2021 due to tax filings. Of the gross unrecognized tax benefits, none were recognized as liabilities in the consolidated balance sheets in any year due to tax attribute carryforwards available to offset a potential tax liability.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Balance at beginning of period | $ | — | | | $ | 3,027 | | | $ | 2,341 | |
Increases for positions taken during the year | — | | | — | | | 686 | |
Decreases for positions taken in prior years | — | | | (3,027) | | | — | |
Balance at end of period | $ | — | | | $ | — | | | $ | 3,027 | |
Note 17. Leases
The Company leases various facilities and office equipment for its physical therapy operations and administrative support functions under operating leases. The Company’s initial operating lease terms are generally between 7 and 10 years, and typically contain options to renew for varying terms. Right-of-use ("ROU") assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The amortization of operating lease ROU assets and the accretion of operating lease liabilities are reported together as fixed lease expense. The fixed lease expense is recognized on a straight-line basis over the life of the lease. If the ROU asset has been impaired, lease expense is no longer recognized on a straight-line basis. The lease liability continues to amortize using the effective interest method, while the ROU asset is subsequently amortized on a straight-line basis. Refer to Note 2 - Basis of Presentation and Summary of Significant Accounting Policies for more information about the Company's lease accounting policies and ASC 842 adoption.
Lease costs are included as components of cost of services and selling, general and administrative expenses on the consolidated statements of operations. Lease charges related to ROU asset impairments are included in goodwill, intangible and other asset impairment charges on the consolidated statements of operations. Lease costs incurred by lease type were as follows for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Lease cost | | | | | | | | | |
Operating lease cost (1) | | | | | $ | 69,533 | | | $ | 65,555 | | | $ | 67,279 | |
Variable lease cost (2) | | | | | 20,951 | | | 20,045 | | | 18,689 | |
Total lease cost (3) | | | | | $ | 90,484 | | | $ | 85,600 | | | $ | 85,968 | |
(1) Includes ROU asset impairment charges of $2.6 million and $1.2 million for the years ended December 31, 2022 and 2021, respectively.
(2) Includes short term lease costs, which are immaterial .
(3) Sublease income was immaterial .
During the year ended December 31, 2020, the Company terminated certain lease agreements primarily related to corporate facilities no longer in use. These terminations resulted in net charges of $4.3 million, comprised of $3.9 million in loss on lease terminations and $0.4 million in other costs associated with the terminations. The charges are recorded in selling, general and administrative expenses in the Company's consolidated statements of operations. The Company paid approximately $4.6 million related to these terminations during the year ended December 31, 2021.
During the years ended December 31, 2022 and 2021, the Company modified the lease terms for a significant number of its real estate leases, primarily related to lease term extensions and renewals in the normal course of business. Modifications during the years ended December 31, 2022 and 2021 resulted in an increase to the Company’s operating lease ROU assets and operating lease liabilities of approximately $13.7 million and $18.4 million, respectively.
Other supplemental quantitative disclosures were as follows for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 72,440 | | | $ | 65,678 | | | $ | 61,993 | |
Cash payments related to lease terminations | $ | — | | | $ | 4,570 | | | $ | — | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 9,688 | | | $ | 28,759 | | | $ | 14,067 | |
Average lease terms and discount rates as of December 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Weighted-average remaining lease term: | | | |
Operating leases | 5.9 years | | 6.4 years |
Weighted-average discount rate: | | | |
Operating leases | 6.9% | | 6.5% |
Estimated undiscounted future lease payments under non-cancellable operating leases, along with a reconciliation of the undiscounted cash flows to operating lease liabilities, respectively, at December 31, 2022 were as follows (in thousands):
| | | | | |
Year | Amount(1) |
2023 | $ | 64,066 | |
2024 | 61,885 | |
2025 | 52,459 | |
2026 | 46,069 | |
2027 | 35,108 | |
Thereafter | 68,006 | |
Total undiscounted future cash flows | 327,593 | |
Less: Imputed Interest | (61,493) | |
Present value of future cash flows | $ | 266,100 | |
Presentation on Balance Sheet | |
Current | $ | 47,676 | |
Non-current | $ | 218,424 | |
(1) Excludes $0.7 million of current portion of operating lease liabilities and $1.7 million of operating lease liabilities, respectively, reclassified as held for sale as of December 31, 2022. Refer to Note 3 - Business Combinations and Divestitures for additional information.
Note 18. Commitments and Contingencies
The Company has contractual commitments that are not required to be recognized in the consolidated financial statements related to cloud computing and telecommunication services agreements. As of December 31, 2022, minimum amounts due under these agreements are approximately $7.2 million through December of 2024 subject to customary business terms and conditions.
From time to time, the Company is a party to legal proceedings, governmental audits and investigations that arise in the ordinary course of business. Management is not aware of any legal proceedings, governmental audits and investigations of which the outcome is probable to have a material adverse effect on the Company’s results of operations, cash flows or financial condition. The outcome of any litigation and claims against the Company cannot be predicted with certainty, and the resolution of current or future claims could materially affect our future results of operations, cash flows or financial condition.
During 2022, the Company engaged in discussions with a payor regarding a billing dispute related to certain historical claims. Management believed, based on discussions with its legal counsel, that the Company had meritorious defenses against such unasserted claim. However, based on the progress of settlement discussions to avoid the cost of potential litigation, the Company recorded a charge for a net settlement liability related to the billing dispute of $3.0 million, which is included in selling, general and administrative expenses in its consolidated statements of operations. As of December 31, 2022, the liability has been fully settled.
Section 205 proceeding
On March 2, 2023, we filed a petition in the Delaware Court of Chancery (the "Court of Chancery") pursuant to Section 205 of the Delaware General Corporation Law ("DGCL"), seeking validation of an amendment to our certificate of incorporation increasing the authorized shares of our Class A Common Stock (as further described below) and the shares issued pursuant thereto.
At a special meeting of the stockholders of the Company held on June 15, 2021 (the “Special Meeting”), a majority of the then-outstanding shares of the Company’s Class A Common Stock and Class F Common Stock, voting together as a single class, voted to approve the Company’s Second Amended and Restated Certificate of Incorporation, which, among other things, increased the authorized shares of the Company’s Class A Common Stock from 200,000,000 shares to 450,000,000 shares (the “Class A Increase Amendment”). Notwithstanding the fact that the proxy statement relating to the Special Meeting did not disclose that a separate vote of the Class A Common Stock was required, a majority of the then-outstanding shares of Class A Common Stock voted in favor of the Class A Increase Amendment.
A recent decision of the Court of Chancery has created uncertainty regarding the validity of the Class A Increase Amendment and whether a separate vote of the majority of the then-outstanding shares of Class A Common Stock would have been required under Section 242(b)(2) of the DGCL.
The Company continues to believe that a separate vote of Class A Common Stock was not required to approve the Class A Increase Amendment. However, in light of the recent Court of Chancery decision, the Company filed a petition in the Court of Chancery pursuant to Section 205 of the DGCL seeking validation of the Class A Increase Amendment and the shares issued pursuant thereto to resolve any uncertainty with respect to those matters. Section 205 of the DGCL permits the Court of Chancery, in its discretion, to validate potentially defective corporate acts and stock after considering a variety of factors.
While the Company believes that a separate vote of Class A Common Stock was not required to approve the Class A Increase Amendment at the Special Meeting, and therefore that all of the currently outstanding shares of Class A Common Stock of the Company are validly issued, if the Company is not successful in the Section 205 proceeding, the uncertainty with respect to the Company’s capitalization resulting from the Court of Chancery’s decision referenced above could have a material adverse effect on the Company, including its ability to complete financing transactions, until the underlying issues are definitively resolved.
On March 3, 2023, the Court of Chancery granted the motion to expedite and set a hearing date for the petition to be heard. The hearing has been set for March 17, 2023.
Stockholder class action complaints
On August 16, 2021, two purported ATI stockholders, Kevin Burbige and Ziyang Nie, filed a putative class action complaint in the U.S. District Court for the Northern District of Illinois against ATI, Labeed Diab, Joe Jordan, and Drew McKnight (collectively, the “ATI Individual Defendants”), and Joshua Pack, Marc Furstein, Leslee Cowen, Aaron Hood, Carmen Policy, Rakefet Russak-Aminoach, and Sunil Gulati (collectively, the “FVAC Defendants”).
On October 7, 2021, another purported ATI stockholder, City of Melbourne Firefighters' Retirement System ("City of Melbourne"), filed a nearly identical putative class action complaint in the U.S. District Court for the Northern District of Illinois against ATI, the ATI Individual Defendants, and the FVAC Defendants. On November 18, 2021, the court consolidated the cases and appointed The Phoenix Insurance Company Ltd. and The Phoenix Pension & Provident Funds as lead plaintiffs (together, “Lead Plaintiffs”).
On February 8, 2022, Lead Plaintiffs filed a consolidated amended complaint against ATI, the ATI Individual Defendants, and the FVAC Defendants, which asserts claims against (i) ATI and the ATI Individual Defendants under Section 10(b) of the Exchange Act; (ii) the ATI Individual Defendants under Section 20(a) of the Exchange Act (in connection with the Section 10(b) claim); (iii) all defendants under Section 14(a) of the Exchange Act; and (iv) the ATI Individual Defendants and the FVAC Defendants under Section 20(a) of the Exchange Act (in connection with the Section 14(a) claim). Lead Plaintiffs purport to assert these claims on behalf of those ATI stockholders who purchased or otherwise acquired their ATI shares between February 22, 2021 and October 19, 2021, inclusive, and/or held FVAC Class A common shares as of May 24, 2021 and were eligible to vote at FVAC’s June 15, 2021 special meeting. The consolidated amended complaint generally alleges that the proxy materials for the FVAC/ATI merger, as well as other ATI disclosures (including the press release announcing ATI’s financial results for the first quarter of 2021), were false and misleading (and, thus, in violation of Sections 10(b) and 14(a) of the Exchange Act) because they failed to disclose that: (i) ATI was experiencing attrition among its physical therapists; (ii) ATI faced increasing competition for clinicians in the labor market; (iii) as a result, ATI faced difficulty retaining therapists and incurred increased labor costs; (iv) also as a result, ATI would open fewer new clinics; and (v) also as a result, the defendants’ positive statements about ATI’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis. Lead Plaintiffs, on behalf of themselves and the putative class, seek money damages in an unspecified amount and costs and expenses, including attorneys’ and experts’ fees. On April 11, 2022, defendants filed motions to dismiss the consolidated amended complaint, which were fully briefed as of July 25, 2022 and remain pending. The Company has determined that potential liabilities related to the consolidated amended complaint are not considered probable or reasonably estimable at this time.
On February 7, 2023, another purported ATI stockholder, Wendell Robinson, filed a putative class action complaint in the Court of Chancery of the State of Delaware against Fortress Acquisition Sponsor II, LLC, Andrew A. McKnight, Joshua A. Pack, Marc Furstein, Leslee Cowen, Aaron F. Hood, Carmen A. Policy, Rakefet Russak-Aminoach, Sunil Gulati, Daniel N. Bass, Micah B. Kaplan and Labeed Diab. The complaint asserts claims against: (i) Fortress Acquisition Sponsor II, LLC, Andrew A. McKnight, Joshua A. Pack, Marc Furstein, Leslee Cowen, Aaron F. Hood, Carmen A. Policy, Rafeket Russak-Aminoach, Sunil Gulati, Daniel N. Bass and Micah B. Kaplan for breach of fiduciary duty; and (ii) Labeed Diab for aiding and abetting breach of fiduciary duty. Plaintiff's allegations generally mirror those asserted in the federal stockholder class action described above, and Plaintiff further alleges that the alleged misrepresentations and omissions in the proxy materials for the FVAC/ATI merger prevented stockholders from making a fully informed decision on whether to approve the merger or have their shares redeemed. Defendants have not yet responded to the complaint.
Stockholder derivative complaint
Between December 1, 2021 and September 22, 2022, five purported ATI stockholders filed four derivative actions, purportedly on behalf of ATI, in the U.S. District Court for the Northern District of Illinois. On November 21, 2022, four of these stockholder plaintiffs, Vinay Kumar, Brendan Reginbald, Ziyang Nie and Julia Chang, filed a consolidated amended complaint against Labeed Diab, Joe Jordan, John Larsen, John Maldonado, Carmine Petrone, Christopher Krubert, Joanne Burns and James Parisi (collectively, the “Legacy ATI Defendants”), Drew McKnight, Joshua Pack, Aaron Hood, Carmen Policy, Marc Furstein, Leslee Cowen, Rafeket Russak-Aminoach, and Sunil Gulati (collectively, the “FVACII Individual Defendants”), and Fortress Acquisition Sponsor II, LLC and Fortress Investment Group LLC (together, the "Fortress Entity Defendants," and together with the FVACII Individual Defendants, the “FVACII Defendants”). The consolidated amended complaint asserts claims on behalf of ATI against: (i) the FVACII Defendants for breach of fiduciary duty; (ii) Fortress Acquisition Sponsor II, LLC and the Legacy ATI Defendants for aiding and abetting breach of fiduciary duty; (iii) Labeed Diab, Joe Jordan, and Drew McKnight for contribution under Section 21D of the Exchange Act; (iv) the FVACII Defendants under Section 14(a) of the Exchange Act; (v) the Legacy ATI Defendants for unjust enrichment; and (vi) all defendants for contribution and indemnification under Delaware law. Plaintiffs' allegations generally mirror those asserted in the stockholder class action described above. On January 20, 2023, defendants filed motions to dismiss the consolidated amended complaint, which remain pending. The Company has determined that potential liabilities related to the consolidated amended complaint are not considered probable or reasonably estimable at this time.
Insurance coverage complaint
On March 8, 2023, the Company filed a complaint against Federal Insurance Company, U.S. Specialty Insurance Company and other insurers titled ATI Physical Therapy, Inc. v. Federal Insurance Company et. al., Case No. N23C-03-074, in the Superior Court of the State of Delaware related to a coverage dispute and those certain insurers’ denial of coverage for the stockholder class action complaints and stockholder derivative complaint discussed above. The complaint asserts claims against Federal Insurance Company for breach of contract and bad faith, and claims for declaratory judgment as to Federal Insurance Company, U.S. Specialty Insurance Company, XL Specialty Insurance Company and the Company’s excess insurance carriers, seeking coverage for the stockholder class action complaints and stockholder derivative complaint.
Regulatory matters
On November 5, 2021, the Company received from the SEC a voluntary request for the production of documents relating to the earnings forecast and financial information referenced in the Company's July 26, 2021 Form 8-K and related matters. The Company received a subsequent request from the SEC for the production of additional documents related to the same matter on February 17, 2023. The Company is cooperating with the SEC in connection with this request.
Indemnifications
The Company has agreed to indemnify its current and former directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding to which any of them are, or are threatened to be, made a party by reason of their service as a director or officer. The Company maintains director and officer insurance coverage that would generally enable it to recover a portion of any amounts paid. The ultimate cost of current or potential future litigation may exceed the Company’s current insurance coverages and may have a material adverse impact on our results of operations, cash flows and financial condition. The Company also may be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
Note 19. Loss per Share
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. For the years ended December 31, 2021 and 2020, shares of Wilco Holdco preferred stock are treated as participating securities and therefore are included in computing earnings per common share using the two-class method. The two-class method is an earnings allocation formula that calculates basic and diluted net earnings per common share for each class of common stock separately based on dividends declared and participation rights in undistributed earnings as if the earnings for the year had been distributed. As the Wilco Holdco preferred stockholders do not participate in losses, for any periods with a net loss, there is no allocation to participating securities in the period. As such, no undistributed earnings or losses were allocated to the Wilco Holdco preferred shares for the years ended December 31, 2021 and 2020. As of the closing of the Business Combination, the Wilco Holdco preferred stock is no longer outstanding.
For the year ended December 31, 2022, the income available to common stockholders is reduced by the amount of the cumulative dividend for the Series A Senior Preferred Stock that was issued as part of the 2022 Debt Refinancing.
The calculation of both basic and diluted loss per share for the periods indicated below was as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 |
| December 31, 2021 | | December 31, 2020 |
Basic and diluted loss per share: | | | | | | | | | |
Net loss | | | | | $ | (493,047) | | | $ | (782,028) | | | $ | (298) | |
Less: Net (loss) income attributable to non-controlling interests | | | | | (668) | | (3,700) | | 5,073 |
| | | | | | | | | |
Less: Series A Senior Preferred cumulative dividend | | | | | 17,876 | | — | | — |
Loss available to common stockholders | | | | | $ | (510,255) | | $ | (778,328) | | $ | (5,371) |
| | | | | | | | | |
Weighted average shares outstanding(1,2) | | | | | 203,150 | | 165,805 | | 128,286 |
| | | | | | | | | |
Basic and diluted loss per share | | | | | $ | (2.51) | | $ | (4.69) | | $ | (0.04) |
(1) The weighted-average number of shares outstanding in periods presented prior to the closing of the Business Combination has been retrospectively adjusted based on the exchange ratio established through the transaction.
(2) Included within weighted average shares outstanding following the 2022 Debt Refinancing are common shares issuable upon the exercise of the Series II Warrants, as the Series II Warrants are exercisable at any time for nominal consideration. As such, the shares are considered to be outstanding for the purpose of calculating basic and diluted loss per share.
For the periods presented, the following securities were not required to be included in the computation of diluted shares outstanding, as their impact would have been anti-dilutive. Figures presented are based on the number of underlying Class A common shares following the Business Combination (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 |
| December 31, 2021 | | December 31, 2020 |
Series I Warrants | | | | | 5,226 | | — | | — |
IPO Warrants | | | | | 9,867 | | 9,867 | | — |
Restricted shares(1) | | | | | 402 | | 1,323 | | — |
Stock options | | | | | 5,313 | | 775 | | — |
RSUs | | | | | 4,200 | | 404 | | — |
RSAs | | | | | 175 | | 448 | | — |
Total | | | | | 25,183 | | 12,817 | | — |
(1) Represents a portion of the 2.0 million restricted shares distributed following the Business Combination to holders of unvested Incentive Common Units under the Wilco Acquisition, LP 2016 Equity Incentive Plan. Refer to Note 10 - Share-Based Compensation for further details.
15.0 million Earnout Shares and 8.6 million Vesting Shares were excluded from the calculation of basic and diluted per share calculations as the vesting thresholds have not yet been met as of the end of the reporting period.