The Company accounts for its outstanding Public Warrants and Private Placement Warrants in accordance with the guidance contained in Accounting Standards Codification 815-40, "Derivatives“Derivatives and Hedging —- Contracts on an Entity'sEntity’s Own Equity" ("Equity” (“ASC 815-40"815-40”) and determined that the Warrants do not meet the criteria for equity treatment thereunder. As such, each warrantWarrant must be recorded as a liability and is subject to re-measurement at each balance sheet date and any date. Changes in fair value are recognized in change in fair value is recordedof warrant liability in the Company’s condensed consolidated statementstatements of operations.
The exercise price and number of Class A common stock issuable upon exercise of the Warrants may be adjusted in certain circumstances including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation. If
Preferred stock—The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share. As of March 31, 2021 and December 31, 2020, respectively, there were 0 preferred stock issued and outstanding.
7.Note 14. Fair Value Measurements
The Company determines fair value measurements used in its condensed 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.
The following table presents information about the Company’s assets and liabilities•Level 2: Observable inputs other than Level 1 inputs, such as quoted prices in markets that are measured on a recurring basisnot 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 March 31,September 30, 2021 and December 31, 2020 and indicates the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value. Transfers to/from Levels 1, 2 and 3 are recognized at the end of the reporting period. There were no transfers between levels for the three months ended March 31, 2021.
| | | | | | | | | | | | | | | | | |
| Fair Value | | |
| March 31, 2021 | | December 31, 2020 | | Valuation Method |
Assets | | | | | |
Investments held in Trust Account | $ | 345,007,390 | | | $ | 345,018,957 | | | Level 1 - Quoted prices in active markets for identical assets |
Liabilities | | | | | |
Public Warrant liability | $ | 10,902,000 | | | $ | 16,974,000 | | | Level 1 - Quoted prices in active markets for identical liabilities |
Private Placement Warrant liability | $ | 9,896,345 | | | $ | 16,660,340 | | | Level 3 - Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing liabilities |
As of March 31, 2021 and December 31, 2020,, respectively, the recorded values of cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses and franchise tax payabledeferred revenue approximate their fair values due to the short-term nature of these instruments.items.
The Company’s term loan and revolving line of credit are Level 2 fair value measures which have variable interest rates and, therefore, the recorded amounts approximate fair value. The Company utilizes the market approach valuation technique based on interest rates that are currently available to the Company for issuance of debt with similar terms and 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 vesting 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.
FORTRESS VALUE ACQUISITION CORP. II
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Investments held in Trust Account
The key inputs into the Monte Carlo option pricing model were as follows
Investments held in Trust Account are invested in a U.S. Treasury Securities Money Market Fund as of March 31,the Closing Date and September 30, 2021 and December 31, 2020, respectively. None offor the balance in the Trust Account was held in cash as of March 31, 2021 and December 31, 2020, respectively.respective Level 3 instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Earnout Shares | | Vesting Shares |
| | | June 16, 2021 | | September 30, 2021 | | June 16, 2021 | | September 30, 2021 |
Risk-free interest rate | | | 1.56% | | 1.52% | | 1.56% | | 1.52% |
Volatility | | | 39.03% | | 43.28% | | 39.03% | | 43.28% |
Dividend yield | | | —% | | —% | | —% | | —% |
Expected term (years) | | | 10.0 | | 9.7 | | 10.0 | | 9.7 |
Share price | | | $10.28 | | $3.80 | | $10.28 | | $3.80 |
Warrant liabilities
The following table presents the changes in the fair value for the respective Level 3 instruments, since the Closing Date of warrant liabilities:the Business Combination, that is recognized in change in fair value of contingent common shares liability in the condensed consolidated statements of operations for the respective periods (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Private Placement Warrants | | Public Warrants | | Warrant Liabilities |
Fair value as of December 31, 2020 | $ | 16,660,340 | | | $ | 16,974,000 | | | $ | 33,634,340 | |
Change in valuation(1) | (6,763,995) | | | (6,072,000) | | | (12,835,995) | |
Fair value as of March 31, 2021(2) | $ | 9,896,345 | | | $ | 10,902,000 | | | $ | 20,798,345 | |
___________________________ | | | | | |
(1) | Changes in valuation are recognized as a change in fair value of warrant liabilities in the condensed consolidated statement of operations. |
(2) | The key inputs into the modified Black-Scholes option pricing model for the Private Placement Warrants were as follows as of March 31, 2021: |
| | | | | | | | | | | | | | |
| | | Earnout Shares Liability | | Vesting Shares Liability | |
Fair value as of Business Combination, June 16, 2021 | | | $ | 140,000 | | | $ | 80,500 | | |
Changes in fair value | | | (13,300) | | | (7,648) | | |
Fair value as of June 30, 2021 | | | $ | 126,700 | | | $ | 72,852 | | |
Changes in fair value | | | (92,900) | | | (53,417) | | |
Fair value as of September 30, 2021 | | | $ | 33,800 | | | $ | 19,435 | | |
| | | | | | | | |
Input | | March 31, 2021 |
Risk-free interest rate | | 0.92 | % |
Volatility | | 23.1 | % |
Dividend yield | | 0.0 | % |
Expected term (years) | | 6 years |
Exercise price | | $11.50 |
Note 15. Income Taxes
The risk-free interesteffective tax rate isand income tax benefit for the three months ended September 30, 2021 were 7.8% and $28.3 million, compared to an effective tax rate and income tax expense of 69.4% and $2.3 million for the three months ended September 30, 2020. The effective tax rate and income tax benefit for the nine months ended September 30, 2021 were 6.9% and $58.5 million, compared to an effective tax rate and income tax expense of 254.5% and $4.1 million for the nine months ended September 30, 2020.
The effective tax rate for the three and nine months ended September 30, 2021 was estimated based on full-year 2021 forecast. The estimated effective tax rate was different than the U.S. Treasury yield curvestatutory rate primarily due to nondeductible transaction costs and interest expense on redeemable preferred stock. In addition, there was no basis in effecta significant component of the goodwill impaired for tax purposes. Therefore, a portion of the book impairment charge will never create a deduction for tax purposes in any period. As a result, this permanent difference has a substantial impact on the date of valuation equaleffective tax rate. The estimated effective tax rate applicable to year-to-date losses, in addition to the remaining expected lifetax-effect of nondeductible impairment charges, nondeductible loss on settlement of redeemable preferred stock and fair value adjustments related to liability-classified share-based instruments, partially offset by increases in valuation allowances, resulted in a tax benefit of $28.3 million for the Private Placement Warrants. Volatility is based onthree months ended September 30, 2021, and a tax benefit of $58.5 million for the implied volatility of the Company's Public Warrants as of the valuation date. The dividend yield percentage is 0 because the Company does not currently pay dividends, nor does it intend to do so during the expected term of the Private Placement Warrants.
8. Income Tax
The Company’s net deferred tax assets are as follows:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Deferred tax asset | | | |
Organizational costs and net operating loss | $ | 1,390,500 | | | $ | 333,614 | |
Total deferred tax asset | 1,390,500 | | | 333,614 | |
Valuation allowance | (1,390,500) | | | (333,614) | |
Deferred tax asset, net of allowance | $ | 0 | | | $ | 0 | |
nine months ended September 30, 2021.
FORTRESS VALUE ACQUISITION CORP. II
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The effective tax rate for the three and nine months ended September 30, 2020 was estimated based on full-year 2020 forecast. The effective tax rate was different than the statutory rate primarily due to nondeductible interest expense on redeemable preferred stock. The estimated effective tax rate applicable to year-to-date losses exclusive of discrete income, in addition to the tax-effect of income related to general distribution payments recognized under the Provider Relief Fund of the CARES Act, resulted in tax expense of $2.3 million for the three months ended September 30, 2020, and tax expense of $4.1 million for the nine months ended September 30, 2020.
In evaluating the Company's ability to recover deferred income tax provision consists of the following:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Federal: | | | |
Current | $ | 0 | | | $ | 0 | |
Deferred | (1,056,886) | | | (333,614) | |
| | | |
State: | | | |
Current | $ | 0 | | | $ | 0 | |
Deferred | 0 | | | 0 | |
Change in valuation allowance | 1,056,886 | | | 333,614 | |
Income tax provision | $ | 0 | | | $ | 0 | |
In assessing the realization of the deferred tax assets, management considers whether itall available positive and negative evidence is more likely than not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers theconsidered, including scheduled reversal of deferred tax liabilities, projectedoperating results and forecasts of future taxable income and tax planning strategies in making this assessment. After consideration of alleach of the jurisdictions in which the Company operates. As of September 30, 2021, the Company determined that a significant portion of its federal and state net operating loss carryforwards with definite carryforward periods, state credits and certain deferred tax assets are not more likely than not to be realized based on the weight of available evidence. As a result, the Company recorded an increase of $19.1 million to its valuation allowance related to federal net operating loss carryforwards and an increase of $10.0 million to its valuation allowance related to state net operating loss carryforwards and certain deferred tax assets. These amounts were recorded during the three and nine months ended September 30, 2021 in income tax (benefit) expense in the condensed consolidated statement of operations.
For the year ended December 31, 2020, the Company had an uncertain tax position related to the tax treatment of tenant improvement allowances. We believe that it is probable that our gross unrecognized tax benefits will be reduced before the year ended December 31, 2021 by $3.0 million due to anticipated tax filings.
Note 16. 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. 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.
Lease costs are included as components of clinic operating costs and selling, general and administrative expenses on the condensed consolidated statements of operations. Lease costs incurred by lease type were as follows for the periods indicated below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Lease cost | | | | | | | |
Operating lease cost | $ | 16,096 | | | $ | 15,874 | | | $ | 47,822 | | | $ | 47,996 | |
Variable lease cost (1) | 4,425 | | | 4,537 | | | 14,361 | | | 13,519 | |
Total lease cost (2) | $ | 20,521 | | | $ | 20,411 | | | $ | 62,183 | | | $ | 61,515 | |
(1) Includes short term lease costs, which are not material.
(2) Sublease income was not material.
Other supplemental quantitative disclosures were as follows for the periods indicated below (in thousands):
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2021 | | September 30, 2020 |
Other information | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 48,918 | | | $ | 45,625 | |
Cash payments related to lease terminations | $ | 4,570 | | | $ | — | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 19,370 | | | $ | 11,416 | |
Average lease terms and discount rates as of September 30, 2021 and December 31, 2020 were as follows:
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Weighted-average remaining lease term: | | | |
Operating leases | 6.5 years | | 6.7 years |
Weighted-average discount rate: | | | |
Operating leases | 6.5% | | 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 September 30, 2021 were as follows (in thousands):
| | | | | |
Year | |
2021 (remainder of year after September 30, 2021) | $ | 15,639 | |
2022 | 66,396 | |
2023 | 61,723 | |
2024 | 54,841 | |
2025 | 46,081 | |
Thereafter | 124,184 | |
Total undiscounted future cash flows | $ | 368,864 | |
Less: Imputed Interest | (71,400) | |
Present value of future cash flows | $ | 297,464 | |
Presentation on Balance Sheet | |
Current | $ | 48,499 | |
Non-current | $ | 248,965 | |
Note 17. Commitments and Contingencies
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 or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require disclosure of the contingency and the possible range of loss. 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 position.
Shareholder complaints
On August 16, 2021, two purported ATI shareholders, 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”). The Burbige/Nie complaint asserts claims against: (i) the ATI Individual Defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”); and (ii) the ATI Individual Defendants and the FVAC Defendants under Section 14(a) of the Exchange Act. Plaintiffs Burbige and Nie purport to assert their claims on behalf of those ATI shareholders who purchased or otherwise acquired their ATI shares between April 1, 2021 and July 23, 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.
On October 7, 2021, another purported ATI shareholder, City of Melbourne Firefighters' Retirement System ("City of Melbourne"), filed a putative class action complaint in the U.S. District Court for the Northern District of Illinois against the ATI Individual Defendants and the FVAC Defendants. Like the Burbige/Nie complaint, the City of Melbourne complaint asserts claims against (i) the ATI Individual Defendants under Sections 10(b) and 20(a) of the Exchange Act; and (ii) the ATI Individual Defendants and the FVAC Defendants under Section 14(a) of the Exchange Act. City of Melbourne purports to assert its claims on behalf of those ATI shareholders who purchased or otherwise acquired their ATI shares between February 22, 2021 and July 23, 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 Burbige/Nie and City of Melbourne complaints generally allege 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. Plaintiffs seek money damages in an unspecified amount. Potential charges related to the complaints are not considered probable at this time.
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 available, management believesreferenced in the Company's July 26, 2021 Form 8-K and related matters. The Company is cooperating with the SEC in connection with this request.
Registration rights
The holders of the Vesting Shares and Private Placement Warrants (including any Class A common stock issuable upon the exercise of the Private Placement Warrants) are entitled to registration rights. The holders of these securities are entitled to make up to three demands, excluding short form demands, that significant uncertainty existsthe Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to future realizationregistration statements filed subsequent to the consummation of a Business Combination. However, the registration rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become effective until termination of the deferred tax assetsapplicable lock-up period. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Indemnifications
The Company has agreed to indemnify its 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 future amounts paid. The ultimate cost of 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 18. (Loss) Earnings per Share
Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. For the three and nine months ended September 30, 2020, preferred shares 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 preferred stockholders do not participate in losses, for any periods with a net loss, there is no allocation to participating securities in the period.
No undistributed earnings or losses were allocated to the preferred shares for the three and nine months ended September 30, 2021. As of the closing of the Business Combination, the Wilco Holdco Series A Preferred shares were no longer outstanding.
The calculation of both basic and diluted (loss) earnings per share for the periods indicated below was as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 |
| September 30, 2020 | | September 30, 2021 |
| September 30, 2020 |
Basic and diluted (loss) earnings per share: | | | | | | | |
Net (loss) income | $ | (333,820) | | | $ | 1,022 | | | $ | (790,764) | | | $ | (2,488) | |
Less: Net (loss) income attributable to non-controlling interest | (2,109) | | 901 | | (4,569) | | 4,086 |
Less: Income allocated to participating securities | — | | 12 | | — | | — |
(Loss) income available to common stockholders | $ | (331,711) | | $ | 109 | | $ | (786,195) | | $ | (6,574) |
| | | | | | | |
Weighted average shares outstanding(1) | 196,996 | | 128,286 | | 155,197 | | 128,286 |
| | | | | | | |
Basic and diluted (loss) earnings per share | $ | (1.68) | | $ | 0.00 | | $ | (5.07) | | $ | (0.05) |
(1) The weighted-average number of shares outstanding in periods presented prior to the closing of the Business Combination has thereforebeen retrospectively adjusted based on the exchange ratio established a full valuation allowance.through the transaction.
The Company files income tax returnsThere were no preferred or other dividends declared during any period presented.
For the periods presented, the following securities were not required to be included in the U.S. federal jurisdictioncomputation 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):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 |
| September 30, 2020 | | September 30, 2021 |
| September 30, 2020 |
Warrants | 9,867 | | — | | 9,867 | | — |
Restricted shares(1) | 1,403 | | — | | 1,403 | | — |
Total | 11,270 | | — | | 11,270 | | — |
(1) Represents a portion of the 2.0 million restricted shares upon conversion following the Business Combination from unvested Incentive Common Units under the Wilco Acquisition, LP 2016 Equity Incentive Plan. Refer to Note 9 - Share-Based Compensation for further details.
15.0 million Earnout Shares and is subject to examination by8.6 million Vesting Shares were excluded from the relevant taxing authority.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.
9.Note 19. Subsequent Events
On August 25, 2021, the Company entered into an agreement to divest its Home Health service line. On October 1, 2021, the transaction closed with a sale price of $7.3 million. The major classes of assets and liabilities associated with the Home Health service line consisted of predominantly accounts receivable, accrued expenses and other liabilities which were not material.
The notes to the condensed consolidated financial statements include a discussion of materialCompany evaluated events which have occurredand transactions occurring subsequent to March 31, 2021 (referred to as "subsequent events") through the date these condensed consolidated financial statements were issued. Management has evaluated theSeptember 30, 2021. Based on this evaluation, it was determined that no subsequent events throughother than the items noted above and elsewhere in this date and has concluded that no material subsequent events haveQuarterly Report occurred that require additional adjustmentrecognition or disclosure in the condensed consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations
The following discussion and analysis of ATI Physical Therapy, Inc. (herein referred to as “we”, ”us”, “the Company”, or “our Company”) should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report.
ReferencesWe make statements in this discussion that are forward-looking and involve risks and uncertainties. These statements contain forward-looking information relating to the “Company,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 “Risk Factors.” “our,” “us”
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 Quarterly 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 three and nine months ended September 30, 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 900 owned clinics (as well as 26 clinics under management service agreements) located in 24 states as of September 30, 2021. 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 “we” referpain; 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”), Home Health, 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. Home Health offers in-home rehabilitation (refer to Note 19 - Subsequent Events in the condensed consolidated financial statements for further details regarding the divestiture of Home Health). Sports Medicine arrangements provide certified healthcare professionals to various schools, universities and other institutions to perform on-site physical therapy and rehabilitation services.
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.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.”
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. Immediately following the Business Combination, there were 207.3 million issued shares of Class A common stock of ATI Physical Therapy, Inc.
As part of the Business Combination, the Company received cash of $345.0 million from cash in trust with FAII and $300.0 million of cash from the PIPE investment, net of $89.9 million of cash used for redemptions and Wilco Holdco and FAII transaction costs. The funds received by the Company were used for full repayment of the second lien term loan of $231.3 million, partial repayment of the first lien term loan of $216.7 million, cash payment to Wilco Holdco preferred stockholders of $59.0 million and Wilco Holdco transaction costs. Refer to Note 3 - Business Combination in the condensed consolidated financial statements for further details.
The Company had outstanding Public Warrants to purchase an aggregate of 6.9 million shares of the Company’s Class A common stock and outstanding Private Placement Warrants to purchase an aggregate of 3.0 million shares of the Company's Class A common stock immediately following the closing of the Business Combination. Refer to Note 12 - Warrant Liability in the condensed consolidated financial statements for further details.
In addition, certain stockholders may receive up to 15.0 million Earnout Shares and 8.6 million Vesting Shares if the price of Class A common stock trading on the New York Stock Exchange exceeds certain thresholds during the ten-year period following the completion of the Business Combination. Refer to Note 13 - Contingent Common Shares Liability in the condensed consolidated financial statements for further details.
Recent changes in company CEO and CHRO leadership
Effective July 23, 2021, Cedric Coco, Chief Human Resources Officer ("CHRO"), resigned from the Company. The Company and Mr. Coco entered into a mutual release pursuant to which Mr. Coco is eligible for the payments and benefits in accordance with Mr. Coco's employment agreement.
Effective August 7, 2021, Labeed Diab stepped down from his positions as Chief Executive Officer ("CEO") of the Company and as a member of the board of directors of the Company. The Company and Mr. Diab entered into a mutual release pursuant to which Mr. Diab is eligible for the payments and benefits in accordance with Mr. Diab's employment agreement.
Trends and Factors Affecting the Company’s Future Performance and Comparability of Results
As a result of developing trends in our business, we are expecting that our results for 2021 will be significantly adversely affected as compared to our prior expectations, including in respect of revenue, net (loss) income and Adjusted EBITDA. These trends are likely to continue to have adverse effects on us in future periods after 2021 as well.
We believe that these adverse effects are attributable to a combination of factors, which include:
•The attrition of our workforce during the second quarter and third quarter of 2021 caused, in part, by changes made during the COVID-19 pandemic related to compensation, staffing levels and support for clinicians. We have taken swift actions to offset those changes, but the Company expects the impact of attrition will impact overall profitability for the year.
•Labor market dynamics increased competition for the available physical therapy providers in the workforce, creating wage inflation and elevated employee attrition at ATI, negatively affecting our ability to capitalize on continued demand for physical therapy services.
•Decrease in rate per visit primarily driven by continuing less favorable payor and state mix when compared to pre-pandemic profile, with general shift from workers compensation and auto personal injury to commercial and government, and further impacted by mix-shift out of higher reimbursement states.
•Lower than expected patient visit volumes caused, in part, by volume softness in certain regions and states.
Our ability to achieve our business plan and revised expectations for the remainder of 2021 depends upon a number of factors, including the success of a number of continued steps being taken related to clinical staffing levels and improving visit volume growth.
The Company determined that the revision to its forecast in late July 2021, including the factors related to the revision of its forecast, constituted an interim triggering event 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 and determined that the fair value amounts were below the respective carrying amounts. As a result, the Company recorded non-cash impairment charges of $433.2 million related to goodwill and $33.7 million related to the trade name indefinite-lived intangible asset as of the June 30, 2021 balance sheet date. These charges are non-cash in nature and do not affect our liquidity or debt covenants.
In October 2021, the Company reported a further revision to its forecast to reflect lower than expected patient visit volume. The Company determined that the factors related to the revision of its forecast that were present as of September 30, 2021 constituted an interim triggering event 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 and determined that the fair value amounts were below the respective carrying amounts. As a result, the Company recorded non-cash impairment charges of $307.4 million related to goodwill and $200.6 million related to the trade name indefinite-lived intangible asset as of the September 30, 2021 balance sheet date. These charges are non-cash in nature and do not affect our liquidity or debt covenants. Refer to Note 5 - Goodwill, Trade Name and Other Intangible Assets in the condensed 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. Since then, quarterly VPD was 18,159, 19,441, 19,520, 21,569 and 20,674 in the quarters ended September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021 and September 30, 2021, respectively, as local restrictions in certain markets, referral levels and individual routines evolved compared to prior periods.
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 increasing its clinical staffing levels by hiring more clinicians, and reducing levels of clinician attrition that have been elevated relative to historical standards. The elevated levels of attrition were 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 and other items in an effort to retain and attract therapists across our platform, which has increased our current and future expectations for labor costs. As we improve our staffing levels, we are working toward improving labor productivity as we onboard newly hired clinicians. In an effort to drive more volume and visits per day, in addition to integrating our new team members, we are working to strengthen relationships with our partner providers and other referral sources across our geographic footprint, increasing our investment in digital marketing campaigns, and entered into a strategic partnership with a national direct primary care provider to combine our respective services into an integrated offering and expand our reach in the market.
The chart below reflects the quarterly trend in VPD.
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 government, and the impact on our workforce of mandatory vaccination of employees, 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 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 of which $23.1 million and $67.4 million was recognized during the three and nine months ended September 30, 2020, respectively. These payments have been recognized as other income in the consolidated statements of operations throughout 2020 in a manner commensurate with the reporting and eligibility requirements issued by 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 following table summarizes the quarterly recognition of general distribution payments recognized in other expense (income), net in the Company's 2020 statements of operations (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | |
March 31, 2020 | | June 30, 2020 | | September 30, 2020 | | December 31, 2020 | | Total |
$ | — | | | $ | (44.3) | | | $ | (23.1) | | | $ | (24.1) | | | $ | (91.5) | |
•The Company applied for and attained approval to receive $26.7 million of Medicare Accelerated and Advance Payment Program ("MAAPP") funds during the quarter ended June 30, 2020. During the nine months ended September 30, 2021, the Company repaid $8.5 million in MAAPP funds, with remaining amounts required to be repaid by the quarter ending September 30, 2022. Because the Company has not yet met all required performance obligations or performed the services related to the remaining funds, as of September 30, 2021 and December 31, 2020, $18.2 million and $15.5 million of the funds are recorded in accrued expenses and other liabilities, respectively, and zero and $11.2 million of the funds are recorded in other non-current liabilities, respectively. The Company expects nearly all remaining advanced payments to be applied by the quarter ending June 30, 2022.
•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. Related to these payments, as of September 30, 2021 and December 31, 2020, $5.5 million is included in accrued expenses and other liabilities and $5.5 million is included in other non-current liabilities.
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 40% from 2016 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. Beginning in January 2021, the physical therapy industry observed a reduction of Medicare reimbursement rates of approximately 3% in accordance with the Medicare physician fee schedule for therapy services. A further reduction of 2% through sequestration relief has been postponed until December 31, 2021. The proposed 2022 budget, released by CMS in July 2021, calls for an approximate 3.5% further reduction in reimbursement rates as well as a 15% decrease in payments for services performed by physical therapy assistants. The sequestration relief expiring on December 31, 2021 will result in an incremental 2% reduction in reimbursement unless acted upon through a Congressional measure.
•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, Home Health 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 net operating revenue recorded during the period that may ultimately prove uncollectible based on historical write-off experience.
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 and intangible asset impairment charges. Goodwill and intangible asset impairment charges represent non-cash charges associated with the write-down of both goodwill and trade name indefinite-lived intangible assets.
Change in fair value of warrant liability. Represents non-cash amounts related to the change in the estimated fair value of Public Warrants and Private Placement 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 redeemable preferred stock liability 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.
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 Company’s redeemable preferred stock based on contract terms.
Other expense (income).Other expense (income) 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 operating 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 owned clinics open during the period.
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 900 owned and 26 managed clinic locations as of September 30, 2021. De novo clinics represent organic new clinics opened during the current period based on sophisticated site selection analytics. Acqui-novo clinics represent an existing clinic, 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. Same clinic revenue growth rate identifies revenue growth year over year on clinics that have been 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 period.
The following table presents selected operating and financial data that we believe are key indicators of our operating performance.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Number of clinics owned (end of period) | 900 | | 873 | | 900 | | 873 |
Number of clinics managed (end of period) | 26 | | 21 | | 26 | | 21 |
New clinics opened during the period | 18 | | 9 | | 38 | | 16 |
Business days | 65 | | 65 | | 192 | | 193 |
Average visits per day | 20,674 | | 18,159 | | 20,594 | | 17,887 |
Average visits per day per clinic | 23.1 | | 20.8 | | 23.2 | | 20.6 |
Total patient visits | 1,343,799 | | 1,180,326 | | 3,953,977 | | 3,452,253 |
Net patient revenue per visit | $ | 105.56 | | $ | 112.51 | | $ | 106.43 | | $ | 113.76 |
Same clinic revenue growth rate | 5.8 | % | | (26.7) | % | | 5.4 | % | | (27.3) | % |
The following table provides a rollforward of activity related to the number of clinics owned during the corresponding periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Number of clinics owned (beginning of period) | 889 | | 866 | | 875 | | 872 |
Add: New clinics opened during the period | 18 | | 9 | | 38 | | 16 |
Less: Clinics closed/sold during the period | 7 | | 2 | | 13 | | 15 |
Number of clinics owned (end of period) | 900 | | 873 | | 900 | | 873 |
| | | | | | | |
| | | | | | | |
Results of Operations
Three months ended September 30, 2021 compared to three months ended September 30, 2020
The following table summarizes the Company’s consolidated results of operations for the three months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2021 | | 2020 | | Increase/(Decrease) |
($ in thousands, except percentages) | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
Net patient revenue | | $ | 141,855 | | | 89.2 | % | | $ | 132,803 | | | 89.3 | % | | $ | 9,052 | | | 6.8 | % |
Other revenue | | 17,158 | | | 10.8 | % | | 15,852 | | | 10.7 | % | | 1,306 | | | 8.2 | % |
Net operating revenue | | 159,013 | | | 100.0 | % | | 148,655 | | | 100.0 | % | | 10,358 | | | 7.0 | % |
Clinic operating costs: | | | | | | | | | | | | |
Salaries and related costs | | 86,838 | | | 54.6 | % | | 78,039 | | | 52.5 | % | | 8,799 | | | 11.3 | % |
Rent, clinic supplies, contract labor and other | | 45,765 | | | 28.8 | % | | 39,183 | | | 26.4 | % | | 6,582 | | | 16.8 | % |
Provision for doubtful accounts | | 3,514 | | | 2.2 | % | | 2,938 | | | 2.0 | % | | 576 | | | 19.6 | % |
Total clinic operating costs | | 136,117 | | | 85.6 | % | | 120,160 | | | 80.9 | % | | 15,957 | | | 13.3 | % |
Selling, general and administrative expenses | | 30,795 | | | 19.4 | % | | 26,026 | | | 17.5 | % | | 4,769 | | | 18.3 | % |
Goodwill and intangible asset impairment charges | | 508,972 | | | 320.1 | % | | — | | | — | % | | 508,972 | | | n/m |
Operating (loss) income | | (516,871) | | | (325.0) | % | | 2,469 | | | 1.7 | % | | (519,340) | | | n/m |
Change in fair value of warrant liability | | (15,885) | | | (10.0) | % | | — | | | — | % | | (15,885) | | | n/m |
Change in fair value of contingent common shares liability | | (146,317) | | | (92.0) | % | | — | | | — | % | | (146,317) | | | n/m |
| | | | | | | | | | | | |
Interest expense, net | | 7,386 | | | 4.6 | % | | 17,346 | | | 11.7 | % | | (9,960) | | | (57.4) | % |
Interest expense on redeemable preferred stock | | — | | | — | % | | 4,896 | | | 3.3 | % | | (4,896) | | | n/m |
Other expense (income), net | | 52 | | | — | % | | (23,117) | | | (15.6) | % | | 23,169 | | | (100.2) | % |
(Loss) income before taxes | | (362,107) | | | (227.7) | % | | 3,344 | | | 2.2 | % | | (365,451) | | | n/m |
Income tax (benefit) expense | | (28,287) | | | (17.8) | % | | 2,322 | | | 1.6 | % | | (30,609) | | | n/m |
Net (loss) income | | $ | (333,820) | | | (209.9) | % | | $ | 1,022 | | | 0.7 | % | | $ | (334,842) | | | n/m |
Net patient revenue. Net patient revenue for the three months ended September 30, 2021 was $141.9 million compared to $132.8 million for the three months ended September 30, 2020, an increase of $9.1 million or 6.8%.
The increase in net patient revenue was primarily driven by increased visit volumes as a result of COVID-19 restrictions in local markets and referral levels evolving, partially offset by unfavorable net patient revenue per visit. Total patient visits increased by approximately 0.2 million visits, or 13.8%, driving an increase in average visits per day of 2,515, or 13.8%. Net patient revenue per visit decreased $6.95, or 6.2%, to $105.56 for the three months ended September 30, 2021. The decrease in net patient revenue per visit during the three months ended September 30, 2021 was primarily driven by unfavorable mix shifts related to payor classes, states and services.
The following chart reflects additional detail with respect to drivers of the change in net patient revenue (in millions).
Other revenue. Other revenue for the three months ended September 30, 2021 was $17.2 million compared to $15.9 million for the three months ended September 30, 2020, an increase of $1.3 million or 8.2%. The increase in other revenue was primarily driven by higher volumes in the Sports Medicine service line as a result of the evolution of COVID-19 restrictions, as well as higher volumes in the AWS service line as a result of the evolution of COVID-19 restrictions and expanded offerings in new locations.
Salaries and related costs. Salaries and related costs for the three months ended September 30, 2021 were $86.8 million compared to $78.0 million for the three months ended September 30, 2020, an increase of $8.8 million or 11.3%. Salaries and related costs as a percentage of net operating revenue was 54.6% and 52.5% for the three months ended September 30, 2021 and 2020, respectively. The increase of $8.8 million was primarily due to higher level of wages and benefits as the Company increased its labor supply as a result of higher visit volumes. The increase as a percentage of net operating revenue was primarily driven by higher compensation for clinic labor during the three months ended September 30, 2021 and lower clinic labor productivity.
Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the three months ended September 30, 2021 were $45.8 million compared to $39.2 million for the three months ended September 30, 2020, an increase of $6.6 million or 16.8%. Rent, clinic supplies, contract labor and other costs as a percentage of net operating revenue was 28.8% and 26.4% for the three months ended September 30, 2021 and 2020, respectively. The increase of $6.6 million and increase as a percentage of net operating revenue was primarily driven by a higher clinic count and higher contract labor costs for the three months ended September 30, 2021.
Provision for doubtful accounts. Provision for doubtful accounts for the three months ended September 30, 2021 was $3.5 million compared to $2.9 million for the three months ended September 30, 2020, an increase of $0.6 million or 19.6%. Provision for doubtful accounts as a percentage of net operating revenue for the three months ended September 30, 2021 and 2020 remained relatively consistent year over year at 2.2% and 2.0%, respectively. The increase of $0.6 million was primarily driven by higher revenue associated with higher visit volumes during the three months ended September 30, 2021.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended September 30, 2021 were $30.8 million compared to $26.0 million for the three months ended September 30, 2020, an increase of $4.8 million or 18.3%. Selling, general and administrative expenses as a percentage of net operating revenue was 19.4% and 17.5% for the three months ended September 30, 2021 and 2020, respectively. The increase of $4.8 million and increase as a percentage of revenue was primarily due to higher transaction costs and public company operating costs, partially offset by lower business optimization, reorganization and severance costs during the three months ended September 30, 2021.
Goodwill and intangible asset impairment charges. Goodwill and intangible asset impairment charges for the three months ended September 30, 2021 was $509.0 million. The amount relates to the non-cash write-down of both goodwill and trade name indefinite-lived intangible assets resulting from updating forecasts for lower than expected patient visit volumes. Refer to Note 5 - Goodwill, Trade Name and Other Intangible Assets in the condensed consolidated financial statements for further details.
Change in fair value of warrant liability. Change in fair value of warrant liability for the three months ended September 30, 2021 was $15.9 million. The amount relates to the change in the estimated fair value of the Company’s Private Placement Warrants and Public Warrants during the three months ended September 30, 2021.
Change in fair value of contingent common shares liability. Change in fair value of contingent common shares liability for the three months ended September 30, 2021 was $146.3 million. The amount relates to the change in the estimated fair value of the Company’s Earnout Shares and Vesting Shares during the three months ended September 30, 2021.
Interest expense, net. Interest expense, net for the three months ended September 30, 2021 was $7.4 million compared to $17.3 million for the three months ended September 30, 2020, a decrease of approximately $10.0 million or 57.4%. The decrease in interest expense was primarily driven by lower outstanding principal balances and lower effective interest rates under the Company’s first and second lien credit agreements during the three months ended September 30, 2021.
Interest expense on redeemable preferred stock. Interest expense on redeemable preferred stock for the three months ended September 30, 2021 was zero compared to $4.9 million for the three months ended September 30, 2020, a decrease of $4.9 million. The decrease was driven by the settlement of the redeemable preferred stock prior to the third quarter of 2021.
Other expense (income), net. Other expense, net for the three months ended September 30, 2021 was $0.1 million compared to $23.1 million of income for the three months ended September 30, 2020, a change of $23.2 million. The change was driven by $23.1 million of income related to general distribution payments under the Provider Relief Fund of the CARES Act in the three months ended September 30, 2020 that did not recur in 2021.
Income tax (benefit) expense.Income tax benefit for the three months ended September 30, 2021 was $28.3 million compared to $2.3 million of expense for the three months ended September 30, 2020, a change of $30.6 million. The change was primarily driven by the difference in estimated annual effective tax rate applied to (loss) income before taxes for the respective periods. The effective tax rate was different between the respective periods primarily due to nondeductible impairment charges, nondeductible transaction costs fair value adjustments related to liability-classified share-based instruments and increases in valuation allowances for the three months ended September 30, 2021, and the tax-effect of income related to general distribution payments recognized under the Provider Relief Fund of the CARES Act for the three months ended September 30, 2020.
Net (loss) income.Net loss for the three months ended September 30, 2021 was $333.8 million compared to net income of $1.0 million for the three months ended September 30, 2020, a change of $334.8 million. The change was primarily driven by goodwill and intangible asset impairment charges, partially offset by the change in fair value of warrant liability and change in fair value of contingent common shares liability for the three months ended September 30, 2021.
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
The following table summarizes the Company’s consolidated results of operations for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2021 | | 2020 | | Increase/(Decrease) |
($ in thousands, except percentages) | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
Net patient revenue | | $ | 420,805 | | | 89.1 | % | | $ | 392,745 | | | 89.4 | % | | $ | 28,060 | | | 7.1 | % |
Other revenue | | 51,303 | | | 10.9 | % | | 46,402 | | | 10.6 | % | | 4,901 | | | 10.6 | % |
Net operating revenue | | 472,108 | | | 100.0 | % | | 439,147 | | | 100.0 | % | | 32,961 | | | 7.5 | % |
Clinic operating costs: | | | | | | | | | | | | |
Salaries and related costs | | 248,409 | | | 52.6 | % | | 227,354 | | | 51.8 | % | | 21,055 | | | 9.3 | % |
Rent, clinic supplies, contract labor and other | | 133,140 | | | 28.2 | % | | 123,320 | | | 28.1 | % | | 9,820 | | | 8.0 | % |
Provision for doubtful accounts | | 14,270 | | | 3.0 | % | | 12,899 | | | 2.9 | % | | 1,371 | | | 10.6 | % |
Total clinic operating costs | | 395,819 | | | 83.8 | % | | 363,573 | | | 82.8 | % | | 32,246 | | | 8.9 | % |
Selling, general and administrative expenses | | 81,912 | | | 17.4 | % | | 74,288 | | | 16.9 | % | | 7,624 | | | 10.3 | % |
Goodwill and intangible asset impairment charges | | 962,303 | | | 203.8 | % | | — | | | — | % | | 962,303 | | | n/m |
Operating (loss) income | | (967,926) | | | (205.0) | % | | 1,286 | | | 0.3 | % | | (969,212) | | | n/m |
Change in fair value of warrant liability | | (20,424) | | | (4.3) | % | | — | | | — | % | | (20,424) | | | n/m |
Change in fair value of contingent common shares liability | | (167,265) | | | (35.4) | % | | — | | | — | % | | (167,265) | | | n/m |
Loss on settlement of redeemable preferred stock | | 14,037 | | | 3.0 | % | | — | | | — | % | | 14,037 | | | n/m |
Interest expense, net | | 39,105 | | | 8.3 | % | | 52,887 | | | 12.0 | % | | (13,782) | | | (26.1) | % |
Interest expense on redeemable preferred stock | | 10,087 | | | 2.1 | % | | 13,877 | | | 3.2 | % | | (3,790) | | | (27.3) | % |
Other expense (income), net | | 5,831 | | | 1.2 | % | | (67,088) | | | (15.3) | % | | 72,919 | | | (108.7) | % |
(Loss) income before taxes | | (849,297) | | | (179.9) | % | | 1,610 | | | 0.4 | % | | (850,907) | | | n/m |
Income tax (benefit) expense | | (58,533) | | | (12.4) | % | | 4,098 | | | 0.9 | % | | (62,631) | | | n/m |
Net loss | | (790,764) | | | (167.5) | % | | (2,488) | | | (0.6) | % | | (788,276) | | | n/m |
Net patient revenue. Net patient revenue for the nine months ended September 30, 2021 was $420.8 million compared to $392.7 million for the nine months ended September 30, 2020, an increase of $28.1 million or 7.1%.
The increase in net patient revenue was primarily driven by increased visit volumes as a result of COVID-19 restrictions in local markets and referral levels evolving, partially offset by unfavorable net patient revenue per visit and one less business day in the current period. Total patient visits increased by approximately 0.5 million visits, or 14.5%, driving an increase in average visits per day of 2,707, or 15.1%. Net patient revenue per visit decreased $7.33, or 6.4%, to $106.43 for the nine months ended September 30, 2021. The decrease in net patient revenue per visit during the nine months ended September 30, 2021 was primarily driven by unfavorable mix shifts related to payor classes, states and services.
The following chart reflects additional detail with respect to drivers of the change in net patient revenue (in millions).
Other revenue. Other revenue for the nine months ended September 30, 2021 was $51.3 million compared to $46.4 million for the nine months ended September 30, 2020, an increase of $4.9 million or 10.6%. The increase in other revenue was primarily driven by higher volumes in the Sports Medicine service line as a result of the evolution of COVID-19 related restrictions, as well as higher volumes in the AWS service line as a result of the evolution of COVID-19 related restrictions and expanded offerings in new locations.
Salaries and related costs. Salaries and related costs for the nine months ended September 30, 2021 were $248.4 million compared to $227.4 million for the nine months ended September 30, 2020, an increase of $21.1 million or 9.3%. Salaries and related costs as a percentage of net operating revenue was 52.6% and 51.8% for the nine months ended September 30, 2021 and 2020, respectively. The increase of $21.1 million was primarily due to the higher level of wages and benefits as the Company increased its labor supply as a result of higher visit volumes. The increase as a percentage of net operating revenue was primarily driven by higher compensation for clinic labor during the nine months ended September 30, 2021.
Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the nine months ended September 30, 2021 were $133.1 million compared to $123.3 million for the nine months ended September 30, 2020, an increase of $9.8 million or 8.0%. Rent, clinic supplies, contract labor and other costs as a percentage of net operating revenue was 28.2% and 28.1% for the nine months ended September 30, 2021 and 2020, respectively. The $9.8 million increase was primarily driven by higher clinic count and higher contract labor costs during the nine months ended September 30, 2021. Total rent, clinic supplies, contract labor and other costs as a percentage of net operating revenue was relatively consistent year over year.
Provision for doubtful accounts. Provision for doubtful accounts for the nine months ended September 30, 2021 was $14.3 million compared to $12.9 million for the nine months ended September 30, 2020, an increase of $1.4 million or 10.6%. Provision for doubtful accounts as a percentage of net operating revenue for the nine months ended September 30, 2021 and 2020 remained relatively consistent year over year at approximately 3.0%. The increase of $1.4 million was primarily driven by higher revenue associated with higher visit volumes during the nine months ended September 30, 2021.
Selling, general and administrative expenses. Selling, general and administrative expenses for the nine months ended September 30, 2021 were $81.9 million compared to $74.3 million for the nine months ended September 30, 2020, an increase of $7.6 million or 10.3%. Selling, general and administrative expenses as a percentage of net operating revenue was 17.4% and 16.9% for the nine months ended September 30, 2021 and 2020, respectively. The increase of $7.6 million was primarily due to higher transaction costs, share-based compensation and public company operating costs, partially offset by lower business optimization, reorganization and severance costs during the nine months ended September 30, 2021. Selling, general and administrative expenses as a percentage of net operating revenue was relatively consistent year over year.
Goodwill and intangible asset impairment charges. Goodwill and intangible asset impairment charges for the nine months ended September 30, 2021 was $962.3 million. The amount relates to the non-cash write-down of both goodwill and trade name indefinite-lived intangible assets resulting from updating forecasts for lower than expected patient visit volumes, the acceleration of clinician attrition, competition for clinicians in the current labor market and net patient revenue per visit decreases primarily driven by unfavorable payor, state and service mix shifts. Refer to Note 5 - Goodwill, Trade Name and Other Intangible Assets in the condensed consolidated financial statements for further details.
Change in fair value of warrant liability. Change in fair value of warrant liability for the nine months ended September 30, 2021 was $20.4 million. The amount relates to the change in the estimated fair value of the Company’s Private Placement Warrants and Public Warrants between June 16, 2021, the date that the liabilities were established in connection with the closing of the Business Combination, and September 30, 2021.
Change in fair value of contingent common shares liability. Change in fair value of contingent common shares liability for the nine months ended September 30, 2021 was $167.3 million. The amount relates to the change in the estimated fair value of the Company’s Earnout Shares and Vesting Shares between June 16, 2021, the date that the liabilities were established in connection with the closing of the Business Combination, and September 30, 2021.
Loss on settlement of redeemable preferred stock. Loss on settlement of redeemable preferred stock for the nine months ended September 30, 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 redeemable preferred stock liability at the time of the closing of the Business Combination.
Interest expense, net. Interest expense, net for the nine months ended September 30, 2021 was $39.1 million compared to $52.9 million for the nine months ended September 30, 2020, a decrease of $13.8 million or 26.1%. The decrease in interest expense was primarily driven by lower outstanding principal balances and lower effective interest rates under the Company’s first and second lien credit agreements during the nine months ended September 30, 2021.
Interest expense on redeemable preferred stock. Interest expense on redeemable preferred stock for the nine months ended September 30, 2021 was $10.1 million compared to $13.9 million for the nine months ended September 30, 2020, an decrease of $3.8 million or 27.3%. The decrease was driven by the settlement of the redeemable preferred stock prior to the third quarter of 2021.
Other expense (income), net. Other expense, net for the nine months ended September 30, 2021 was $5.8 million compared to $67.1 million of income for the nine months ended September 30, 2020, a change of $72.9 million. The change was driven by $67.4 million of income related to general distribution payments under the Provider Relief Fund of the CARES Act in the nine months ended September 30, 2020 that did not recur in 2021. In addition, during the nine months ended September 30, 2021, the Company recorded $5.5 million of charges related to the loss on debt extinguishment associated with the partial and full repayment of the first and second lien term loans.
Income tax (benefit) expense.Income tax benefit for the nine months ended September 30, 2021 was $58.5 million compared to $4.1 million of expense for the nine months ended September 30, 2020, a change of $62.6 million. The change was primarily driven by the difference in estimated annual effective tax rate applied to (loss) income before taxes for the respective periods. The effective tax rate was different between the respective periods primarily due to nondeductible impairment charges, nondeductible transaction costs, nondeductible loss on settlement of redeemable preferred stock, fair value adjustments related to liability-classified share-based instruments and increases in valuation allowances for the nine months ended September 30, 2021, and the tax-effect of income related to general distribution payments recognized under the Provider Relief Fund of the CARES Act for the nine months ended September 30, 2020.
Net loss.Net loss for the nine months ended September 30, 2021 was $790.8 million compared to $2.5 million for the nine months ended September 30, 2020, an increase in loss of $788.3 million. The comparatively higher loss was primarily driven by goodwill and intangible asset impairment charges, partially offset by the change in fair value of warrant liability and change in fair value of contingent common shares liability for the nine months ended September 30, 2021.
Non-GAAP Financial Measures
The following table reconciles the supplemental non-GAAP financial measures, as defined under the rules of the 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 and intangible asset impairment charges, changes in fair value of warrant liability and contingent common shares liability, loss on debt extinguishment, loss on settlement of redeemable preferred stock, business optimization costs, reorganization and severance costs, transaction and integration costs, charges related to lease terminations, share-based compensation, pre-opening de novo costs and non-ordinary legal and regulatory matters (“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 income (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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
($ in thousands) | September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Net (loss) income | $ | (333,820) | | | $ | 1,022 | | | $ | (790,764) | | | $ | (2,488) | |
Plus (minus): | | | | | | | |
Net loss (income) attributable to non-controlling interest | 2,109 | | | (901) | | | 4,569 | | | (4,086) | |
Interest expense, net | 7,386 | | | 17,346 | | | 39,105 | | | 52,887 | |
Interest expense on redeemable preferred stock | — | | | 4,896 | | | 10,087 | | | 13,877 | |
Income tax (benefit) expense | (28,287) | | | 2,322 | | | (58,533) | | | 4,098 | |
Depreciation and amortization expense | 9,222 | | | 9,880 | | | 27,990 | | | 29,628 | |
EBITDA | $ | (343,390) | | | $ | 34,565 | | | $ | (767,546) | | | $ | 93,916 | |
Goodwill and intangible asset impairment charges(1) | 508,972 | | | — | | | 962,303 | | | — | |
Goodwill and intangible asset impairment charges attributable to non-controlling interest(1) | (2,928) | | | — | | | (7,949) | | | — | |
Changes in fair value of warrant liability and contingent common shares liability(2) | (162,202) | | | — | | | (187,689) | | | — | |
Reorganization and severance costs(3) | 3,551 | | | 4,436 | | | 3,913 | | | 6,833 | |
Transaction and integration costs(4) | 2,335 | | | 75 | | | 8,833 | | | 1,043 | |
Share-based compensation | 1,248 | | | 473 | | | 4,864 | | | 1,433 | |
Pre-opening de novo costs(5) | 511 | | | 368 | | | 1,386 | | | 1,230 | |
Non-ordinary legal and regulatory matters(6) | 442 | | | — | | | 442 | | | — | |
Loss on debt extinguishment(7) | — | | | — | | | 5,534 | | | — | |
Loss on settlement of redeemable preferred stock(8) | — | | | — | | | 14,037 | | | — | |
Business optimization costs(9) | — | | | 519 | | | — | | | 7,927 | |
Adjusted EBITDA | $ | 8,539 | | | $ | 40,436 | | | $ | 38,128 | | | $ | 112,382 | |
| | | | | | | |
| | | | | | | |
(1)Represents non-cash charges related to the write-down of goodwill and trade name indefinite-lived intangible assets. Refer to Note 5 of the accompanying condensed consolidated financial statements for further details.
(2)Represents non-cash amounts related to the change in the estimated fair value of Warrants, Earnout Shares and Vesting Shares. Refer to Notes 3, 12 and 13 of the accompanying condensed consolidated financial statements for further details.
(3)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.
(4)Represents costs related to the Business Combination, clinic acquisitions and acquisition-related integration and consulting and planning costs related to preparation to operate as a public company.
(5)Represents expenses associated with renovation, equipment and marketing costs relating to the start-up and launch of new locations incurred prior to opening.
(6)Represents non-ordinary course legal costs related to the previously-disclosed ATIP shareholder class action complaint. Refer to Note 17 of the accompanying condensed consolidated financial statements for further details.
(7)Represents charges related to the derecognition of the proportionate amount of remaining unamortized deferred financing costs and original issuance discount associated with the partial repayment of the first lien term loan and derecognition of the unamortized original issuance discount associated with the full repayment of the subordinated second lien term loan. Refer to Note 8 of the accompanying condensed consolidated financial statements for further details.
(8)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.
(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.
Liquidity and Capital Resources
Our principal sources of liquidity are operating cash flows, borrowings under our credit agreements and proceeds from equity issuances. We have used these funds to meet our short-term and long-term capital uses, which include salaries, benefits and other employee-related expenses, rent, clinical supplies, outside services, capital expenditures, acquisitions, de novos and acqui-novos and debt service. Our capital expenditure spend will depend on many factors, including the targeted number of new clinic openings, patient volumes, revenue growth rates and level of operating cash flows.
As a result of our debt maturity dates, we will be required to modify our facilities prior to expiration which may include new debt, amended agreements or restructured facilities. With respect to modified financing from outside sources, there is inherent risk that we may not be able to raise it on acceptable terms or at all, and the cost or availability of future financing may be impacted by financial market conditions, including future developments related to the COVID-19 pandemic. 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 material effect on the Company’s liquidity and financial condition. If additional capital is unavailable when desired, our business, results of operations and financial condition would be materially and adversely affected. We believe our operating cash flow, combined with our existing cash, cash equivalents and credit facility, will continue to be sufficient to fund our operations for at least the next 12 months.
As of September 30, 2021 and December 31, 2020, we had $66.1 million and $142.1 million in cash and cash equivalents, respectively, and $70.0 million available under our revolving credit facility, less $1.2 million of outstanding letters of credit. For the nine months ended September 30, 2021, we had operating cash outflows of $38.7 million driven by items including expenses related to activity associated with the Business Combination, payments on credit balances due to patients and payors, payment of transaction-related amount due to former owners and partial repayment of MAAPP funds. Our ability to generate future operating cash flows depends on many factors, including patient volumes and revenue growth rates.
As part of the Business Combination, the Company received cash of $345.0 million from cash in trust with FAII and $300.0 million of cash from the PIPE investment, net of $89.9 million of cash used for redemptions and Wilco Holdco and FAII transaction costs. The funds received by the Company were used for full repayment of the second lien term loan of $231.3 million, partial repayment of the first lien term loan of $216.7 million, cash payment to Wilco Holdco preferred stockholders of $59.0 million and Wilco Holdco transaction costs. Refer to Note 3 - Business Combination in the condensed consolidated financial statements for further details.
As of September 30, 2021 and December 31, 2020, the Company had $18.2 million and $26.7 million of MAAPP funds contributing to the balance of cash and cash equivalents, respectively. In addition, as of September 30, 2021 and December 31, 2020, the Company had $11.0 million of deferred Social Security taxes contributing to 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 quarter of 2021. The MAAPP funds and deferred employer Social Security taxes are required to be repaid prior to the end of 2022. As noted previously, during the year ended December 31, 2020, the Company received approximately $91.5 million of general distribution payments under the Provider Relief Fund of the CARES Act.
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.
2016 first and second lien credit agreements
On May 10, 2016, ATI Holdings Acquisition, Inc. (the “Borrower”) entered into (a) a First Lien Credit Agreement (the “First Lien Credit Agreement”) with, among others, the lenders party thereto and Barclays Bank PLC, as administrative agent, and (b) a Second Lien Credit Agreement (the “Second Lien Credit Agreement” and, together with the First Lien Credit Agreement, the “Credit Agreements” and each, a “Credit Agreement”) with, among others, the lenders party thereto and Wilmington Trust, National Association, as administrative agent.
In connection with the Business Combination on June 16, 2021, the Company paid down $216.7 million under its first lien term loan and paid $231.3 million to settle its second lien subordinated term loan.
The aggregate outstanding principal amount under the First Lien Credit Agreement was $553.5 million as of September 30, 2021 and the aggregate outstanding principal under the Credit Agreements was $999.6 million as of December 31, 2020. The term loan under the First Lien Credit Agreement is payable in quarterly installments and matures on May 10, 2023.
The First Lien Credit Agreement includes a revolving credit facility with a maximum borrowing capacity of $70.0 million, including $15.0 million sub-limit for swingline loans and amounts available for letters of credit. The issuance of such letters of credit and the making of swingline loans reduces the amount available under the applicable revolving credit facility. The Borrower may make draws under the revolving credit facility to make or purchase additional investments and for general working capital purposes until the maturity date of the revolving credit facility.
The revolving facility under the First Lien Credit Agreement matures on May 10, 2023 unless (a) as of February 9, 2023 (the “Springing Maturity Date”), either (i) more than $100.0 million of first lien term loans remain outstanding on the Springing Maturity Date or (ii) the debt incurred to refinance any portion of the first lien term loans in excess of $100.0 million does not satisfy specified parameters, in which case the first lien revolving facility will mature on February 9, 2023, or (b) the Borrower makes certain prohibited restricted payments, in which case the first lien revolving facility will mature on the date of such restricted payment.
The 2016 first lien credit arrangement is guaranteed by Wilco Intermediate Holdings, Inc. and its domestic subsidiaries, subject to customary exceptions (collectively, the “Guarantors”) and secured by substantially all of the assets of the Borrower and Guarantors.
The borrowings under the Credit Agreement bear interest, at the Borrower’s election, at a base interest rate of the Alternate Base Rate (“ABR”) or London InterBank Offered Rate (“LIBOR”) plus an interest rate spread, as defined in the Credit Agreement. The ABR is the highest of (i) the federal funds rate plus 0.50%, (ii) one-month LIBOR plus 1.00%, and (iii) the prime rate. The LIBOR term may be one, two, three, or six months (or, to the extent available, 12 months or a shorter period).
The per annum interest rate spread for revolving and swingline loans are based on a pricing grid with applicable margin determined by the first lien leverage ratio. As of September 30, 2021, the applicable interest rate spreads were 3.00% for ABR revolving loans and 4.00% for LIBOR revolving loans. In addition to the stated interest rate on borrowings under the revolving credit facility, we are required to pay a commitment fee of between 0.25% and 0.50% per annum on any unused portion of the revolving credit facility based on the pricing grid and our first lien leverage ratio.
The per annum interest rate spread for first lien term loan is (a) 2.50% for ABR loans and (b) 3.50% for LIBOR loans. As of September 30, 2021 and December 31, 2020, the effective interest rate for the first lien term loan was 4.9%.
The Credit Agreement contains covenants with which the Borrower must comply. For the First Lien Credit Agreement, the Borrower must maintain, as of the last day of each fiscal quarter when the sum of the outstanding balance of revolving loans, swingline loans and certain letters of credit exceeds 30% of the total revolving credit facility commitment, a ratio of consolidated first lien net debt to consolidated adjusted EBITDA, as defined in the Credit Agreement, not to exceed 6.25:1.00. Depending on future performance over the next twelve months, we expect the ratio may exceed 6.25:1.00. If the ratio exceeds 6.25:1.00 as of the last day of a fiscal quarter, then the sum of the outstanding balance of revolving loans, swingline loans and certain letters of credit would effectively be limited to 30%, or approximately $21.0 million, of the total revolving credit facility commitment. As of September 30, 2021 and December 31, 2020, the Borrower was in compliance with the financial covenant contained in the First Lien Credit Agreement.
Consolidated Cash Flows
The following table presents selected data from our condensed consolidated statements of cash flows:
| | | | | | | | | | | |
| Nine Months Ended |
($ in thousands) | September 30, 2021 | | September 30, 2020 |
| | | |
Net cash (used in) provided by operating activities | (38,663) | | | 139,133 | |
Net cash used in investing activities | (28,703) | | | (15,693) | |
Net cash used in financing activities | (8,670) | | | (7,678) | |
Net (decrease) increase in cash and cash equivalents | (76,036) | | | 115,762 | |
Cash and cash equivalents at beginning of period | 142,128 | | | 38,303 | |
Cash and cash equivalents at end of period | $ | 66,092 | | | $ | 154,065 | |
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
Net cash used in operating activities for the nine months ended September 30, 2021 was $38.7 million compared to $139.1 million provided by operating activities for the nine months ended September 30, 2020 a change of $177.8 million. The change was primarily the result of higher cash outflows from expenses related to activity associated with the Business Combination, $6.9 million in payments on credit balances due to patients and payors, a $3.6 million payment of transaction-related amount due to former owners, $8.5 million of partial repayments of MAAPP funds, $17.6 million in year-over-year collection of accounts receivable, the 2020 inflow of $26.7 million of MAAPP funds not recurring in 2021, and the 2020 inflow of $91.5 million of general distribution payments under the Provider Relief Fund of the CARES Act not recurring in 2021.
Net cash used in investing activities for the nine months ended September 30, 2021 was $28.7 million compared to $15.7 million for the nine months ended September 30, 2020, an increase of $13.0 million. The increase is primarily driven by $13.3 million of higher capital expenditures during the nine months ended September 30, 2021 as a result of a higher number of new clinics in the current period.
Net cash used in financing activities for the nine months ended September 30, 2021 was $8.7 million compared to $7.7 million of cash used in financing activities for the nine months ended September 30, 2020, an increase of $1.0 million. The increase was primarily driven by net cash inflows related to the Business Combination offset by higher distributions to non-controlling interest during the nine months ended September 30, 2021.
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. As of September 30, 2021, the Company was not party to any material pending legal proceedings, except those described in Note 17 - Commitments and Contingencies, and did not record any accruals related to the outcomes of those matters. Refer to Note 17 to our condensed consolidated financial statements included elsewhere in this Quarterly 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 16 to our condensed consolidated financial statements included elsewhere in this Quarterly Report for further information.
Off-Balance Sheet Arrangements
As of September 30, 2021 and December 31, 2020, 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 should be read in conjunction withis based upon the unauditedCompany’s condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of the Company’s condensed consolidated financial statements requires its management to make estimates and judgments that affect the notes thereto contained elsewhere in this report. Certain information containedreported 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 discussion and analysis set forth below includes forward-lookingpreparation of the Company’s condensed consolidated financial statements that involve risks and uncertainties. Ourwhich, in turn, could change the results from those reported. In addition, actual results may differ materially from these estimates and such differences could be material to the Company’s financial position and results of operations.
Critical accounting estimates are those anticipated in these forward-looking statementsthat 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 many factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewherethe need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting estimates in this Quarterly Report on Form 10-Q.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes, and oral statements made from timerelation to time by representatives of the Company may include, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Suchits condensed consolidated financial statements include but are not limited to, possible business combinations and the financing thereof, andthose related matters, as well as all other statements other than statements of historical fact included in this Form 10-Q. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other Securities and Exchange Commission (“SEC”) filings. Forward-looking statements in this Quarterly Report may include, for example, statements about:to:
•our ability to select an appropriate target business or businesses;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 ability to completeaudited consolidated financial statements included in our initial business combination;amended S-1 registration statement filed with the SEC on July 28, 2021.
•Patient revenue recognition and allowance for doubtful accounts
Net patient revenue
We provide an array of services to our expectations aroundpatients including physical therapy, work conditioning, hand therapy, aquatic therapy, functional capacity assessment, sports medicine, wellness programs and home health. 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 prospective target businesscontract 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 businesses;
•our success in retaining or recruiting, or changes required in, our officers, key employees or directors following our initial business combination;
•our officersnot 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 directors allocating theirrecorded 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 to other businesses and potentially having conflicts of interest with our business or in approving our initial business combination;
•our potential ability to obtain additional financing to complete our initial business combination;recognition. Any subsequent impairment of the related receivable is recorded as provision for doubtful accounts.
•our pool of prospective target businesses;
•our ability to consummate an initial business combination dueFor non-contracted payors, the Company determines the transaction price by applying established rates to the uncertainty resultingservices 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 payorsand government entities, which are often subject to interpretation, the Company may receive reimbursement for healthcare services that is different from the recent COVID-19 pandemic;estimates, and such differences could be material.
•In its evaluation of the abilityrevenue transaction price, management assesses historical collection experience in relation to contracted rates, or for non-contracted payors, established rates. The practice of our officersapplying historical collection experience to determine the revenue transaction price for current transactions involves significant judgment and directorsestimation. 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, the impact to generate a number of potential business combination opportunities;
•our public securities’ potential liquidity and trading;
•the lack of a market for our securities;
•the use of proceeds not heldannual net patient revenue would be approximately $5.3 million. Management believes subsequent changes in the Trust Account (as defined below) or available to us from interest income on the Trust Account balance;
•the Trust Account not being subject to claims of third parties;
•our financial performance; and
•the other risks and uncertainties discussed in "Risk Factors".
The forward-looking statements contained in this Quarterly Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Item 1A. Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whetherestimate as a result of new information, future events or otherwise, except as may be required under applicable securities laws.maturity of claims with dates of service in 2018, 2019 and 2020 have not been material to the consolidated statements of operations.
Overview
We are a blank check company incorporated on June 10, 2020 as a Delaware corporation formedThe following table disaggregates net patient revenue for each associated payor class for the purposethree and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
Commercial | 56.3 | % | | 54.3 | % | | 56.0 | % | | 52.4 | % |
Government | 24.3 | % | | 22.2 | % | | 23.6 | % | | 21.9 | % |
Workers’ Compensation | 13.7 | % | | 16.8 | % | | 14.8 | % | | 18.3 | % |
Other (1) | 5.7 | % | | 6.7 | % | | 5.6 | % | | 7.4 | % |
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(1) Other is primarily comprised of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses ("Business Combination"). Although wenet patient revenue related to auto personal injury which by its nature may pursue an acquisition in any industry or geography, we intendhave longer-term collection characteristics relative to capitalize on the ability of our management team and the broader Fortress platform to identify, acquire and operate a business that may provide opportunities for attractive risk-adjusted returns. Our Sponsor is Fortress Acquisition Sponsor II LLC (the "Sponsor"). We are an emerging growth company and, as such, we are subject to all of the risks associated with emerging growth companies.other payor classes.
Our registration statementThe following table disaggregates accounts receivable, net associated with net patient revenue for the initial public offering (the "Initial Public Offering") was declared effective on August 11, 2020. On August 14, 2020, we consummated the Initial Public Offering of 34,500,000 units (“Units"), including the issuance of 4,500,000 Unitseach associated payor class as a result of the underwriters’ exercise of their over-allotment option in full, at $10.00 per Unit, generating gross proceeds of $345.0 million and incurring offering costs of approximately $19.4 million, inclusive of approximately $12.1 million in deferred underwriting commissions.of:
Substantially concurrently | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 | |
Commercial | 42.8 | % | | 42.8 | % | |
Government | 11.8 | % | | 11.2 | % | |
Workers’ Compensation | 17.6 | % | | 18.6 | % | |
Other (1) | 27.8 | % | | 27.4 | % | |
| 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 closingservice, 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 Initial Public Offering, we consummatedoutstanding 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 clinic operating costs in the condensed consolidated statements of operations. When it is determined that a private placement (“Private Placement”) of 5,933,333 warrants (the “Private Placement Warrants”), at a price of $1.50 per private placement warrant, with our Sponsor, generating gross proceeds of $8.9 million.customer account is uncollectible, that balance is written off against the existing allowance.
UponRealization 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 closingfuture 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 Initial Public Offering and Private Placement, $345.0 million ($10.00 per Unit) of the aggregate net cash proceeds of the sale of the Units in the Initial Public Offering and the Private Placement was placed in a U.S.-based Trust Account (“Trust Account”) at J.P. Morgan Chase Bank, N.A., maintained by Continental Stock Transfer & Trust Company, acting as trustee. The cash proceeds held in the Trust Account have been invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less or in any open-ended investment company that holds itself out as a money market fund selected by us meeting certain conditions of Rule 2a-7 of the Investment Company Act, as determined by us, until the earlier of: (i) the completion of a Business Combination and (ii) the distribution of the funds held in the Trust account as described below.
In the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be only $10.00 per share initially held in the Trust Account (or less than that in certain circumstances). In order to protect the amounts held in the Trust Account, the Sponsor has agreed to be liable to the Company, if and to the extent any claims by a third party for services rendered or products sold to the Company, or a prospective target business with which the Company has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account. This liability will not apply with respect to any claims by a third party who executed a waiver of any right, title, interest or claim of any kind in or to any monies held in the Trust Account or to any claims under the Company’s indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Moreover, in the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsordeferred tax asset will not be responsiblerealized. Among the factors used to assess the extentlikelihood 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 liabilitypoint 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 such third-party claims.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 will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all third parties, service providers (other than the Company’s independent registered public accounting firm)accounts for goodwill and indefinite-lived intangible assets under ASC Topic 350, Intangibles – Goodwill and Other, prospective target businesses or other entities with which requires the Company does business, execute agreements with the Company waiving any right, title, interestto test goodwill and other indefinite-lived assets for impairment annually or claim of any kind inwhenever events or to monies held in the Trust Account.
circumstances indicate that impairment may exist.
On September 29, 2020,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 Company announced that, commencing October 2, 2020, the holdersremaining estimated useful lives of the Company’s Units may elect to separately trade the Class A common stock and Public Warrants comprising the Units. No fractional warrants will be issued upon separationassets. The excess of the Units and only whole warrants will trade. Those Units not separated will continue to trade on the New York Stock Exchange under the symbol “FAII.U,” and each of the shares of Class A common stock and Public Warrants that are separated will trade on the New York Stock Exchange under the symbols “FAII” and “FAII WS,” respectively.
Results of Operations
Since the Initial Public Offering, our activity has been limited to the search for a prospective initial Business Combination and since finding a prospective initial Business Combination, incurring expenses related to the transaction, and we will not be generating any operating revenues until the closing and completion of our initial Business Combination. We expect to incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses in connection with completing a Business Combination.
For the three months ended March 31, 2021, we had net income of $7,803,204, which consisted of $16,333 in interest income and a non-cash $12,835,995 decrease inpurchase price over the fair value of warrantidentifiable assets acquired, net of liabilities partially offset by $4,999,809 in generalassumed, is recorded as goodwill.
Goodwill and administrative expenses and $49,315 in franchise tax expense. General and administrative expensesintangible 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 $4,999,809 was primarily comprised of professional fees.
Liquidity and Capital Resources
As indicatedan intangible asset exceeds its fair value, then an impairment loss should be recognized in the accompanying unauditedconsolidated 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 annual impairment analysis of goodwill as of October 1, 2020 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 future revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples. The Company completed the annual impairment analysis of indefinite lived intangible assets as of October 1, 2020 using the relief from royalty approach. The key assumptions associated with determining the estimated fair value include projected revenue growth, the royalty rate and the discount rate.
The Company has one reporting unit for purposes of the Company’s annual goodwill impairment test. The Company concluded that no goodwill impairment occurred during the years ended December 31, 2020, 2019 and 2018.
In July 2021, the Company determined that the revision to its forecast, including factors related to the revision to its forecast, constituted an interim triggering event 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 and determined that the fair value amounts were below the respective carrying amounts. As a result, the Company recorded non-cash impairment charges of $433.2 million related to goodwill and $33.7 million related to the trade name indefinite-lived intangible asset during the period ended June 30, 2021.
In October 2021, the Company reported a further revision to its forecast to reflect lower than expected patient visit volume. The Company determined that the factors related to the revision to its forecast constituted an interim triggering event 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 and determined that the fair value amounts were below the respective carrying amounts. As a result, the Company recorded non-cash impairment charges of $307.4 million related to goodwill and $200.6 million related to the trade name indefinite-lived intangible asset during the period ended September 30, 2021. Refer to Note 5 - Goodwill, Trade Name and Other Intangible Assets in the condensed consolidated financial statements as of March 31, 2021, we had $162,532 in our operating bank account and working capital deficit of $5,046,915.
Through our Initial Public Offering, our liquidity needs have been satisfied through receipt of a $25,000 capital contribution from our Sponsor in exchange for the issuance of the Founder Shares to our Sponsor, up to $300,000 in loans from our Sponsor and the proceeds not held in the Trust Account, which resulted from the consummation of the Initial Public Offering and the sale of Private Placement Warrants to the Sponsor. Following the closing of the Initial Public Offering, the exercise of the over-allotment option, and the sale of Private Placement Warrants, which resulted in $345.0 million ($10.00 per Unit) being placed into a Trust Account and payment of expenses, we had $162,532 of cash held outside of the Trust Account as of March 31, 2021, which we intend to use for working capital purposes.
In addition, in order to finance transaction costs in connection with a business combination, the Sponsor or an affiliate of the Sponsor, or certain of our officers and directors may, but are not obligated to, loan us funds as may be required (“Working Capital Loans”).
further details.
In connection withFair 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 assessmentreporting unit and indefinite-lived intangible assets 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 future revenue growth rates, EBITDA margins, terminal growth rates, discount rates, relevant market multiples, royalty rates and other market factors. If current expectations of going concern considerationsfuture growth rates, margins and cash flows are not met, or if market factors outside of our control change significantly, then our reporting unit or indefinite-lived intangible assets might become impaired in accordance with ASU 2014-15, “Disclosuresthe future, negatively impacting our operating results and financial position. As the carrying amounts of Uncertainties about an Entity’s Ability to Continue as a Going Concern,”goodwill and the Company’s trade name indefinite-lived intangible asset were impaired as of March 31,June 30, 2021 and September 30, 2021 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 Company does not have sufficient liquidityfuture are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to meet its current obligations. However, management has determined that the Company has access to funds from the Sponsor, and the Sponsor has the financial wherewithal to fund the Company, that are sufficient to fund the working capital needsimpairment risk if business operating results or market conditions deteriorate.
To further illustrate sensitivity of the Company untilvaluation models, if we had changed the earlierassumptions 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 consummationreporting 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 | | 50 basis points | | 100 basis points | | 50 basis points |
| Increase | | Decrease | | Increase | | Decrease | | Increase | | Decrease | | Increase | | Decrease |
Goodwill | $(50,000) | | $60,000 | | $30,000 | | $(20,000) | | $70,000 | | $(70,000) | | | | |
Trade name | $(30,000) | | $30,000 | | | | | | | | | | $50,000 | | $(50,000) |
(1) An increase of 100 basis points to our assumed non-terminal revenue growth rates would result in approximately $60 million of an estimated increase to the Business Combinationfair value of our goodwill reporting unit, whereas, a 100 basis point decrease would result in approximately $100 million of an estimated decrease to the fair value of our goodwill reporting unit.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer toNote2, “Basis of Presentation and a minimum one year fromRecent Accounting Standards" to the date of issuance of theseaccompanying condensed consolidated financial statements. Over this time period, we will be using these funds for paying existing accounts payable and transaction expenses related to the Company's proposed Business Combination.
If our estimates of the costs of undertaking in-depth due diligence and negotiating our initial Business Combination is less than the actual amount necessary to do so, or the amount of interest available to us from the Trust Account is less than we expect as a result of the current interest rate environment, we may have insufficient funds available to operate our business prior to our initial Business Combination. Moreover, we may need to obtain additional financing either to consummate our initial Business Combination or because we become obligated to redeem a significant number of our Public Shares upon consummation of our initial Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination. Subject to compliance with applicable securities laws, we would only consummate such financing simultaneously with the consummation of our initial Business Combination. Following our initial Business Combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations.
Critical Accounting Policies and Estimates
Class A common stock subject to possible redemption
We account for our Class A common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Class A common stock subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. Conditionally redeemable Class A common stock (including Class A common stock that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) are classified as temporary equity. At all other times, Class A common stock is classified as stockholders’ equity. Our Class A common stock feature certain redemption rights that are considered to be outside of our control and subject to the occurrence of uncertain future events. Accordingly, as of March 31, 2021 and December 31, 2020, respectively, 30,208,712 and 29,428,392 shares of Class A common stock subject to possible redemption at the redemption amount are presented as temporary equity, outside of the stockholders’ equity section of our condensed consolidated balance sheet.
Net income (loss) per common share
The Company complies with accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share”. The Company’s condensed consolidated statement of operations includes a presentation of net income (loss) per share for common stock subject to redemption in a manner similar to the two-class method of net income (loss) per common share.
Net income (loss) per common share, basic and diluted for Class A common stock for the three months ended March 31, 2021 were calculated by dividing (i) the interest income earned on the Trust Account less funds available to be withdrawn from the Trust Account for taxes which resulted in no net income by (ii) the weighted average number of Class A common stock outstanding for the period.
Net income (loss) per common share, basic and diluted for Class F common stock for the three months ended March 31, 2021 were calculated by dividing (i) the net income (loss) less net income attributable to Class A common stock by (ii) the weighted average number of Class F common stock outstanding for the period.
The Company has not considered the effect of the Warrants sold in the Initial Public Offering (including the consummation of the over-allotment) and Private Placement to purchase an aggregate of 12,833,333 shares of Class A common stock in the calculation of diluted income per share, since the exercise of the Warrants into Class A common shares is contingent upon the occurrence of future events. For the three months ended March 31, 2021, the average market price of the Company's Class A common stock was below the Warrants' $11.50 exercise price.
Warrant liabilities
The Company accounts for its outstanding Public Warrants and Private Placement Warrants in accordance with the guidance contained in Accounting Standards Codification 815-40, "Derivatives and Hedging — Contracts on an Entity's Own Equity" ("ASC 815-40") and determined that the Warrants do not meet the criteria for equity treatment thereunder. As such, each warrant must be recorded as a liability and is subject to re-measurement at each balance sheet date and any change in fair value is recorded in the Company’s condensed consolidated statement of operations.
Recent accounting pronouncements
Our management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
As of March 31, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We will qualify as an “emerging growth company” and under the JOBS Act will be allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As such, our condensed consolidated financial statements may not be comparable to companies that comply with public company effective dates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.Risk
We are a smaller reporting companyThe Company is exposed to interest rate variability with regard to existing variable-rate debt instruments, which exposure primarily relates to movements in various interest rates, such as defined by Rule 12b-2prime and LIBOR. The Company utilizes derivative instruments such as interest rate swaps for purposes of hedging exposures related to such variability. Management believes that the result of its interest rate swap reduces the risk of interest rate variability to an immaterial amount. As of September 30, 2021 and December 31, 2020, the fair value of the Exchange ActCompany’s derivative instrument was a liability of $0.6 million and are not required to provide the information otherwise required under this item.$2.1 million, respectively.
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. The amendments in this update provide 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 is optional and may be applied by entities after March 12, 2020, but no later than December 31, 2022. The Company has certain debt instruments for which the interest rates are indexed to LIBOR, and as a result, is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports filed or submitted under the Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to our management including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
UnderAs required by Rules 13a-15 and 15d-15 under the supervisionExchange Act, our leadership team fulfilling the role of Principal Executive Officer (the Executive Chairman, the Chief Operating Officer, and with the participation ofChief Financial Officer) and our management, including our principal executive officer and principal financial and accounting officer, we conductedPrincipal Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal quarter ended March 31, 2021, as such term isSeptember 30, 2021. Based upon their evaluation, they concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, and in light of the material weakness in internal controls described below, our Chief Executive Officer and Chief Financial Officer have concludedAct) were effective.
We do not expect that during the period covered by this report, our disclosure controls and procedures werewill prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not effective.
Our internal control over financial reporting did not result inabsolute, assurance that the proper accounting classification of certainobjectives of the Warrantsdisclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we issuedhave detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in August 2020 which, due toachieving its impact on our financial statements, we determined to be a material weakness. This mistake in classification was brought to our attention only when the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) dated April 12, 2021 (the “SEC Statement”). The SEC Statement addresses certain accounting and reporting considerations related to warrants of a kind similar to those we issued at the time of our initial public offering in August 2020.
stated goals under all potential future conditions.Changes in Internal Control over Financial Reporting
There washave been no changechanges in our internal control over financial reporting that occurred during the quarter ended March 31, 2021period covered by this Quarterly Report on Form 10-Qreport that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting, with the exception of the below.
The Chief Executive Officer and Chief Financial Officer performed additional accounting and financial analyses and other post-closing procedures including consulting with subject matter experts related to the accounting for the Public Warrants and Private Placement Warrants. The Company’s management has expended, and will continue to expend, a substantial amount of effort and resources for the remediation and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we have expanded and will continue to improve these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards.
PART II. OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.Proceedings
From time to time, the Company may be involved in legal proceedings or subject to claims. The outcome of any litigation and claims against the Company cannot be predicted with certainty, and the resolution of these matters could materially affect our future results of operations, cash flows, or financial position. Refer to Note 17 -
None.
Commitments and Contingencies in the condensed consolidated financial statements for further details.
Item 1A. Risk Factors.Factors
As of the date of this Quarterly Report on Form 10-Q,Other than as described below, there have been no material changes tofrom the risk factorsRisk Factors previously disclosed in our 2020 Annual Report on Form 10-K/Aamended S-1 registration statement filed with the SEC on MayJuly 28, 2021 (the "Amended S-1").
The following risk factor is added:
On November 5, 2021.2021, the CMS issued an Interim Final Rule (“IFR”) mandating COVID-19 vaccines for all applicable staff of health care providers receiving reimbursement from the Medicare or Medicaid programs. Under the IFR, all applicable staff must be fully vaccinated by January 4, 2022 unless they qualify for a medical or religious exemption. Additionally, on November 5, 2021, the Occupational Health and Safety Administration (“OSHA”) issued an Emergency Temporary Standard (“ETS”) requiring all businesses with 100 or more employees to have all employees fully vaccinated by January 4, 2022. Employees not fully vaccinated by January 4, 2022 must provide evidence of a negative COVID-19 test on a weekly basis and wear a face mask at all times in the workplace. At this time, it is not possible to predict the impact of these proposed regulations on the Company or its workforce. The proposed new regulations, or similar mandatory vaccination or testing requirements that may become applicable to our employees, may result in employee attrition and could have a material adverse effect on our business, including future revenue, costs and results of operations. Legal challenges have been made to the ETS and other challenges to these rules may be made in the future, and we cannot predict the outcome of any such legal challenges. It is also not possible to predict the impact of these rules on the Company or its workforce. The IFR and ETS, and similar mandatory vaccination or testing requirements that may become applicable to our employees, may result in employee attrition and could have a material adverse effect on our business, including future revenue, costs and results of operations.
Investing in our securities involves a high degree of risk. Investors should carefully consider the risks described in the Amended S-1 and all of the other information set forth in this Form 10-Q, including our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our Common Stock. If any of the events or developments described in our Amended S-1 or herein occur, our business, financial condition, or results of operations could be materially or adversely affected. As a result, the market price of our Common Stock could decline, and investors could lose all or part of their investment. The risks and uncertainties described in our Amended S-1 and in this Form 10-Q are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. The risks discussed also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Notes Regarding Forward-Looking Statements.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Proceeds
None.
Item 3. Defaults Upon Senior Securities.Securities
None.Not applicable.
Item 4. Mine Safety Disclosures.Disclosures
None.Not applicable.
Item 5. Other Information.Information
None.
None.
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q
Exhibit Index
| | | | | | | | | | | |
Exhibit
Number | | Description | |
| | Mutual Release, dated as of July 25, 2021 by and between ATI Physical Therapy, Inc. and Cedric Coco | |
| | |
| | |
| | |
| | |
10.2 | | |
| | |
10.3 | | |
| | |
10.4 | | |
| | |
10.5 | | |
| | |
10.6 | | |
| | |
31.1* | | | |
| | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15(d)-14(a) under the Securities Exchange Act of 1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | |
| | |
| | |
| | |
32.2**101.INS* | | |
| | |
101101.SCH* | | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statement of Operations; (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity; (iv) Condensed Statement of Cash Flows; and (v) Notes to Condensed Consolidated Financial Statements
|
| XBRL Taxonomy Extension Schema Document | |
104101.CAL* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)Taxonomy Extension Calculation Linkbase Document |
| | | |
*101.DEF* | | Filed herewithXBRL Taxonomy Extension Definition Linkbase Document | |
**101.LAB* | | Furnished herewithXBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | |
* Filed or furnished herewith
† Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsour behalf by the undersigned thereunto duly authorized.
ATI PHYSICAL THERAPY, INC.
Date:November 16, 2021
| | | | | | | | |
| Fortress Value Acquisition Corp. II |
| | |
| By: | /s/ Daniel N. BassJOSEPH JORDAN |
| | Daniel N. BassJoseph Jordan |
| | Chief Financial Officer |
| | (Duly Authorized Officer and Principal Financial Officer) |
Date: May 17, 2021 | | |