UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2022~~2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 001-39439

ATI Physical Therapy, Inc.

(Exact name of registrant as specified in its charter)


Delaware						85-1408039
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

790 Remington Boulevard

Bolingbrook, IL 60440

(630) 296-2223

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Class A common stock, $0.0001 par value

ATIP

New York Stock Exchange

Redeemable Warrants, ~~each whole warrant~~ exercisable for ~~one share of~~ Class A common stock at an exercise price of ~~$11.50~~$575.00 per share

ATIP WS

~~New York Stock Exchange~~OTC Market

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒☐	Accelerated filer	☐☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of ~~November~~August 2, ~~2022,~~2023, there were approximately ~~207,252,179~~4,205,872 shares of the registrant's common stock legally outstanding.

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			Page
PART I - FINANCIAL INFORMATION - UNAUDITED
Item 1. Financial Statements			67
Condensed Consolidated Balance Sheets			78
Condensed Consolidated Statements of Operations			89
Condensed Consolidated Statements of Comprehensive Loss			910
Condensed Consolidated Statements of Changes in Stockholders' Equity			1011
Condensed Consolidated Statements of Cash Flows			1213
Notes to Condensed Consolidated Financial Statements			1415
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			4748
Item 3. Quantitative and Qualitative Disclosures About Market Risk			7577
Item 4. Controls and Procedures			7678






PART II - OTHER INFORMATION


Item 1. Legal Proceedings			7880
Item 1A. Risk Factors			7880
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			8084
Item 3. Defaults Upon Senior Securities			8084
Item 4. Mine Safety Disclosures			8084



Item 5. Other Information			80
~~Item 6. Exhibits~~			8184








Item 6. Exhibits




			85

Signatures			8186

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Form 10-Q that are not historical facts are forward-looking statements for purposes of the safe harbor provisions under the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of the words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “should,” “would,” “plan,” “project,” “forecast,” “predict,” “potential,” “seem,” “seek,” “future,” “outlook,” “target” or similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements include, but are not limited to, statements regarding the impact of physical therapist attrition and ability to achieve and maintain clinical staffing levels and clinician productivity, anticipated visit and referral volumes and other factors on the Company's overall profitability, and estimates and forecasts of other financial and performance metrics and projections of market opportunity. These statements are based on various assumptions, whether or not identified in this Form 10-Q, and on the current expectations of the Company’s management and are not predictions of actual performance. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied on by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. Many actual events and circumstances are beyond the control of the Company.

These forward-looking statements are subject to a number of risks and uncertainties, including:

•our liquidity position raises substantial doubt about our ability to continue as a going concern;

•risks associated with liquidity and capital markets, including the Company's ability to generate sufficient cash flows, together with cash on hand, to run its business, cover liquidity and capital requirements and resolve substantial doubt about the Company's ability to continue as a going concern;

•our ability to meet financial covenants as required by our 2022 Credit Agreement, as amended;

•risks related to outstanding indebtedness and preferred stock, rising interest rates and potential increases in borrowing costs, compliance with associated covenants and provisions and the potential need to seek additional or alternative debt or capital financing in the future;

•risks related to the Company's ability to access additional financing or alternative options when needed;

•our dependence upon governmental and third-party private payors for reimbursement and that decreases in reimbursement rates, renegotiation or termination of payor contracts or unfavorable changes in payor, state and service mix may adversely affect our financial results;

•federal and state governments’ continued efforts to contain growth in Medicaid expenditures, which could adversely affect the Company’s revenue and profitability;

•payments that we receive from Medicare and Medicaid being subject to potential retroactive reduction;

•~~further unfavorable shifts~~changes in ~~payor,~~Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status;

•compliance with federal and state laws and ~~service mix;~~regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;

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•risks associated with public health crises, including COVID-19 (and any existing and future variants) and its direct and indirect impacts or lingering effects on the business, which could lead to a decline in visit volumes and referrals;

•~~risks related to the impact on our workforce of mandatory COVID-19 vaccination of employees;~~

•our inability to compete effectively in a competitive industry, subject to rapid technological change and cost inflation, including competition that could impact the effectiveness of our strategies to improve patient referrals and our ability to identify, recruit, hire and retain skilled physical therapists;

•~~failure~~our inability to maintain high levels of ~~steps being taken to reduce attrition of physical therapists~~service and ~~increase hiring of physical therapists and the impact of unfavorable labor market dynamics and wage inflation;~~

•~~failure or ineffectiveness of our strategies to improve~~ patient ~~referrals;~~satisfaction;

•risks associated with ~~future acquisitions,~~the locations of our clinics, including the economies in which ~~may use significant resources, may be unsuccessful~~we operate, size and ~~could expose us~~expected growth of our addressable markets, and the potential need to ~~unforeseen liabilities;~~

•~~failure of third-party customer service~~close clinics and ~~technical support providers to adequately address customers’ requests;~~incur closure costs;

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•our dependence upon the cultivation and maintenance of relationships with customers, suppliers, physicians and other referral sources;

•the severity of climate change or the weather and natural disasters that can occur in the regions of the U.S. in which we operate, which could cause disruption to our business;

•risks associated with future acquisitions and other business initiatives, which may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities;

•failure of third-party vendors, including customer service, technical and IT support providers and other outsourced professional service providers to adequately address customers’ requests and meet Company requirements;

•risks associated with our reliance on IT infrastructure in critical areas of our operations including, but not limited to, cyber and other security threats;

•a security breach of our IT systems or our third-party vendors’ IT systems may subject us to potential legal action and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act;

•maintaining clients for which we perform management and other services, as a breach or termination of those contractual arrangements by such clients could cause operating results to be less than expected;

•our failure to maintain financial controls and processes over billing and collections or disputes with third-parties could have a significant negative impact on our financial condition and results of operations;

•our operations are subject to extensive regulation and macroeconomic uncertainty;

•our ability to meet revenue and earnings expectations;

•risks associated with applicable state laws regarding fee-splitting and professional corporation laws;

•inspections, reviews, audits and investigations under federal and state government programs and payor contracts that could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation;

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•changes in or our failure to comply with existing federal and state laws or regulations or the inability to comply with new government regulations on a timely basis;

•maintaining necessary insurance coverage at competitive rates;

•the outcome of any legal and regulatory matters, proceedings or investigations instituted against us or any of our directors or officers, and whether insurance coverage will be available and/or adequate to cover such matters or proceedings;

•~~inspections, reviews, audits~~general economic conditions, including but not limited to inflationary and ~~investigations under federal~~recessionary periods;

•changes in political environment and ~~state government programs and payor contracts~~events involving financial volatility, defaults or other adverse developments that ~~could~~affect the U.S. or global markets, resulting in liquidity problems which may have a material adverse ~~findings that may negatively affect our business, including~~effect on our results of ~~operations, liquidity, financial condition and reputation;~~

•~~our ability to attract and retain talented executives and employees;~~operations;

•our facilities face competition for experienced physical therapists and other clinical providers that may increase labor costs, result in elevated levels of contract labor and reduce profitability;

•risks associated with our ~~reliance on IT infrastructure~~ability to attract and retain talented executives and employees amidst the impact of unfavorable labor market dynamics, wage inflation and recent reduction in ~~critical areas~~value of our ~~operations~~share-based compensation incentives, including ~~but not limited~~potential failure of steps being taken to ~~cyber~~reduce attrition of physical therapists and ~~other security threats;~~increase hiring of physical therapists;

•~~risk~~risks resulting from the 2L Notes, IPO Warrants, Earnout Shares and Vesting Shares being accounted for as ~~liabilities;~~liabilities at fair value and the changes in fair value affecting our financial results;

•further impairments of goodwill and other intangible assets, which represent a significant portion of our total assets, especially in view of the Company’s recent market valuation;

•our inability to remediate the material weaknesses in internal control over financial reporting related to income taxes and to maintain effective internal control over financial reporting;

•risks related to ~~outstanding indebtedness, rising interest rates~~dilution of Common Stock ownership interests and ~~potential increases in borrowing costs, compliance with associated covenants and the potential need to incur additional debt in the future;~~

•risks associated with liquidity and capital markets, including the Company's ability to generate sufficient cash flows, together with cash on hand, to run its business, cover liquidity and capital requirements and continue to operatevoting interests as a ~~going concern;~~result of the issuance of 2L Notes and Series B Preferred Stock;

•costs related to operating as a public ~~company~~company; and

•risks associated with our efforts and ability to ~~maintain~~regain and sustain compliance with the listing requirements of our securities on the New York Stock Exchange ("NYSE").

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If any of these risks materialize or our assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements.

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These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Form 10-Q are more fully described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 16, 2023 and ~~elsewhere~~ in this Form 10-Q. The risks described under the heading “Item 1A. Risk Factors” are not exhaustive. Other sections of this Form 10-Q describe additional factors that could adversely affect the business, financial condition or results of operations of the Company. New risk factors emerge from time to time and it is not possible to predict all such risk factors, nor can the Company assess the impact of all such risk factors on the business of the Company or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. Readers should not place undue reliance on forward-looking statements. The Company undertakes no obligations to publicly update or revise ~~publicly~~ any forward-looking statements after the date they are made or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or otherwise, except as required by law.

In addition, statements of belief and similar statements reflect the beliefs and opinions of the Company on the relevant subject. These statements are based upon information available to the Company, as applicable, as of the date of this Form 10-Q, and while the Company believes such information forms a reasonable basis for such statements, such information may be limited or incomplete, and statements should not be read to indicate that the Company has conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

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PART I - FINANCIAL INFORMATION - UNAUDITED

Item 1. Financial Statements

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ATI Physical Therapy, Inc.

Condensed Consolidated Balance Sheets

($ in thousands, except share and per share data)

(unaudited)


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Assets:	Assets:					Assets:
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	48,569	$	48,616	Cash and cash equivalents	$	37,679	$	83,139
Accounts receivable (net of allowance for doubtful accounts of $50,910 and $53,533 at September 30, 2022 and December 31, 2021, respectively)		82,323		82,455
Accounts receivable (net of allowance for doubtful accounts of $52,162 and $47,620 at June 30, 2023 and December 31, 2022, respectively)						Accounts receivable (net of allowance for doubtful accounts of $52,162 and $47,620 at June 30, 2023 and December 31, 2022, respectively)	80,779		80,673
Prepaid expenses	Prepaid expenses	12,470		9,303		Prepaid expenses	14,303		13,526
Other current assets	Other current assets	13,765		3,204		Other current assets	6,225		10,040
Assets held for sale						Assets held for sale	—		6,755
Total current assets	Total current assets	157,127		143,578		Total current assets	138,986		194,133

Property and equipment, net	Property and equipment, net	129,761		139,730		Property and equipment, net	114,787		123,690
Operating lease right-of-use assets	Operating lease right-of-use assets	238,476		256,646		Operating lease right-of-use assets	218,775		226,092
Goodwill, net	Goodwill, net	338,011		608,811		Goodwill, net	289,650		286,458
Trade name and other intangible assets, net	Trade name and other intangible assets, net	291,767		411,696		Trade name and other intangible assets, net	246,213		246,582
Other non-current assets	Other non-current assets	2,068		2,233		Other non-current assets	1,862		2,030
Total assets	Total assets	$	1,157,210	$	1,562,694	Total assets	$	1,010,273	$	1,078,985

Liabilities, Mezzanine Equity and Stockholders' Equity:	Liabilities, Mezzanine Equity and Stockholders' Equity:					Liabilities, Mezzanine Equity and Stockholders' Equity:
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	11,099	$	15,146	Accounts payable	$	12,535	$	12,559
Accrued expenses and other liabilities	Accrued expenses and other liabilities	52,511		64,584		Accrued expenses and other liabilities	61,727		53,672
Current portion of operating lease liabilities	Current portion of operating lease liabilities	52,366		49,433		Current portion of operating lease liabilities	52,194		47,676
Current portion of long-term debt		—		8,167

Liabilities held for sale						Liabilities held for sale	—		2,614
Total current liabilities	Total current liabilities	115,976		137,330		Total current liabilities	126,456		116,521

Long-term debt, net		479,906		543,799
Long-term debt, net(1)						Long-term debt, net(1)	415,068		531,600
2L Notes due to related parties, at fair value						2L Notes due to related parties, at fair value	96,933		—
Warrant liability	Warrant liability	690		4,341		Warrant liability	98		98
Contingent common shares liability	Contingent common shares liability	12,600		45,360		Contingent common shares liability	1,334		2,835
Deferred income tax liabilities	Deferred income tax liabilities	23,927		67,459		Deferred income tax liabilities	19,037		18,886
Operating lease liabilities	Operating lease liabilities	229,460		250,597		Operating lease liabilities	209,024		218,424
Other non-current liabilities	Other non-current liabilities	1,944		2,301		Other non-current liabilities	1,644		1,834
Total liabilities	Total liabilities	864,503		1,051,187		Total liabilities	869,594		890,198
Commitments and contingencies (Note 17)
Commitments and contingencies (Note 16)						Commitments and contingencies (Note 16)
Mezzanine equity:	Mezzanine equity:					Mezzanine equity:
Series A Senior Preferred Stock, $0.0001 par value; 1.0 million shares authorized; $1,074.32 stated value per share and 0.2 million shares issued and outstanding at September 30, 2022; none issued and outstanding at December 31, 2021		140,340		—
Series A Senior Preferred Stock, $0.0001 par value; 1.0 million shares authorized; 0.2 million shares issued and outstanding; $1,175.08 stated value per share at June 30, 2023; $1,108.34 stated value per share at December 31, 2022						Series A Senior Preferred Stock, $0.0001 par value; 1.0 million shares authorized; 0.2 million shares issued and outstanding; $1,175.08 stated value per share at June 30, 2023; $1,108.34 stated value per share at December 31, 2022	213,924		140,340
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Class A common stock, $0.0001 par value; 470.0 million shares authorized; 207.3 million shares issued, 198.1 million shares outstanding at September 30, 2022; 207.4 million shares issued, 197.4 million shares outstanding at December 31, 2021		20		20
Treasury stock, at cost, 0.06 million shares and 0.03 million shares at September 30, 2022 and December 31, 2021, respectively		(136)		(95)
Class A common stock, $0.0001 par value; 470.0 million shares authorized; 4.2 million shares issued, 4.0 million shares outstanding at June 30, 2023; 4.1 million shares issued, 4.0 million shares outstanding at December 31, 2022						Class A common stock, $0.0001 par value; 470.0 million shares authorized; 4.2 million shares issued, 4.0 million shares outstanding at June 30, 2023; 4.1 million shares issued, 4.0 million shares outstanding at December 31, 2022	—		—
Treasury stock, at cost, 0.006 million shares and 0.002 million shares at June 30, 2023 and December 31, 2022, respectively						Treasury stock, at cost, 0.006 million shares and 0.002 million shares at June 30, 2023 and December 31, 2022, respectively	(212)		(146)
Additional paid-in capital	Additional paid-in capital	1,377,152		1,351,597		Additional paid-in capital	1,310,030		1,378,716
Accumulated other comprehensive income	Accumulated other comprehensive income	7,143		28		Accumulated other comprehensive income	593		4,899
Accumulated deficit	Accumulated deficit	(1,236,746)		(847,132)		Accumulated deficit	(1,388,486)		(1,339,511)
Total ATI Physical Therapy, Inc. equity	Total ATI Physical Therapy, Inc. equity	147,433		504,418		Total ATI Physical Therapy, Inc. equity	(78,075)		43,958
Non-controlling interests	Non-controlling interests	4,934		7,089		Non-controlling interests	4,830		4,489
Total stockholders' equity	Total stockholders' equity	152,367		511,507		Total stockholders' equity	(73,245)		48,447
Total liabilities, mezzanine equity and stockholders' equity	Total liabilities, mezzanine equity and stockholders' equity	$	1,157,210	$	1,562,694	Total liabilities, mezzanine equity and stockholders' equity	$	1,010,273	$	1,078,985

~~The accompanying notes~~(1)Includes $16.3 million of principal amount of debt due to ~~the condensed consolidated financial statements are an integral part~~related party as of ~~these statements.~~

~~Table of Contents~~June 30, 2023.

~~ATI Physical Therapy, Inc.~~

~~Condensed Consolidated Statements of Operations~~

~~(in thousands, except per share data)~~

~~(unaudited)~~

Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Net patient revenue $ 142,313 $ 141,855 $ 429,744 $ 420,805
Other revenue 14,479 17,158 44,163 51,303
Net operating revenue 156,792 159,013 473,907 472,108
Cost of services:
Salaries and related costs 90,309 86,838 267,330 248,409
Rent, clinic supplies, contract labor and other 51,417 45,765 153,437 133,140
Provision for doubtful accounts 2,797 3,514 11,408 14,270
Total cost of services 144,523 136,117 432,175 395,819
Selling, general and administrative expenses 25,263 30,795 87,095 81,912
Goodwill and intangible asset impairment charges 106,663 508,972 390,224 962,303
Operating loss (119,657) (516,871) (435,587) (967,926)
Change in fair value of warrant liability (Note 12) (790) (15,885) (3,651) (20,424)
Change in fair value of contingent common shares liability (Note 13) (6,930) (146,317) (32,760) (167,265)
Loss on settlement of redeemable preferred stock — — — 14,037
Interest expense, net 11,780 7,386 31,815 39,105
Interest expense on redeemable preferred stock — — — 10,087
Other expense, net 195 52 3,181 5,831
Loss before taxes (123,912) (362,107) (434,172) (849,297)
Income tax benefit (7,218) (35,333) (43,532) (65,579)
Net loss (116,694) (326,774) (390,640) (783,718)
Net loss attributable to non-controlling interests (376) (2,109) (1,026) (4,569)
Net loss attributable to ATI Physical Therapy, Inc. $ (116,318) $ (324,665) $ (389,614) $ (779,149)
Loss per share of Class A common stock:
Basic $ (0.60) $ (1.65) $ (1.98) $ (5.02)
Diluted $ (0.60) $ (1.65) $ (1.98) $ (5.02)
Weighted average shares outstanding:
Basic and diluted 204,282 196,996 202,708 155,197

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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ATI Physical Therapy, Inc.

Condensed Consolidated Statements of ~~Comprehensive Loss~~Operations

($ in ~~thousands)~~thousands, except per share data)

(unaudited)

Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Net loss $ (116,694) $ (326,774) $ (390,640) $ (783,718)
Other comprehensive income:
Unrealized gain on interest rate cap 655 181 7,115 1,378
Comprehensive loss $ (116,039) $ (326,593) $ (383,525) $ (782,340)
Net loss attributable to non-controlling interests (376) (2,109) (1,026) (4,569)
Comprehensive loss attributable to ATI Physical Therapy, Inc. $ (115,663) $ (324,484) $ (382,499) $ (777,771)


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

Net patient revenue	$	156,938	$	148,506	$	307,692	$	287,431
Other revenue	15,399		14,787		31,577		29,684
Net revenue	172,337		163,293		339,269		317,115

Cost of services:
Salaries and related costs	95,327		89,606		186,030		177,021
Rent, clinic supplies, contract labor and other	50,437		50,405		103,315		102,020
Provision for doubtful accounts	2,360		3,506		6,485		8,611
Total cost of services	148,124		143,517		295,830		287,652
Selling, general and administrative expenses	36,573		31,808		67,168		61,832
Goodwill, intangible and other asset impairment charges	—		127,820		—		283,561
Operating loss	(12,360)		(139,852)		(23,729)		(315,930)
Change in fair value of 2L Notes	(7,010)		—		(7,010)		—
Change in fair value of warrant liability	(198)		(1,184)		—		(2,861)
Change in fair value of contingent common shares liability	(792)		(1,496)		(1,501)		(25,830)

Interest expense, net	16,682		11,379		30,618		20,035

Other expense, net	618		205		972		2,986
Loss before taxes	(21,660)		(148,756)		(46,808)		(310,260)
Income tax expense (benefit)	89		(13,033)		151		(36,314)
Net loss	(21,749)		(135,723)		(46,959)		(273,946)
Net income (loss) attributable to non-controlling interests	956		(177)		2,016		(650)
Net loss attributable to ATI Physical Therapy, Inc.	(22,705)		(135,546)		(48,975)		(273,296)
Less: Series A Senior Preferred Stock redemption value adjustments	44,696		—		44,696		—
Less: Series A Senior Preferred Stock cumulative dividend	5,709		5,063		11,012		6,988
Net loss available to common stockholders	$	(73,110)	$	(140,609)	$	(104,683)	$	(280,284)

Loss per share of Class A common stock:
Basic	$	(17.74)	$	(34.49)	$	(25.47)	$	(69.41)
Diluted	$	(17.74)	$	(34.49)	$	(25.47)	$	(69.41)
Weighted average shares outstanding:
Basic and diluted	4,122		4,077		4,110		4,038

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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ATI Physical Therapy, Inc.

Condensed Consolidated Statements of ~~Changes in Stockholders' Equity~~Comprehensive Loss

($ in ~~thousands, except share data)~~thousands)

(unaudited)

Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other
Comprehensive Income Accumulated Deficit Non-Controlling Interests Total Stockholders' Equity
Shares Amount Shares Amount
Balance at January 1, 2022 197,409,964 $ 20 29,791 $ (95) $ 1,351,597 $ 28 $ (847,132) $ 7,089 $ 511,507
Issuance of 2022 Warrants — — — — 19,725 — — — 19,725
Vesting of restricted shares distributed to holders of ICUs 75,497 — — — — — — — —
Issuance of common stock upon vesting of restricted stock awards 40,613 — — — — — — — —
Tax withholdings related to net share settlement of restricted stock awards (12,824) — 12,824 (22) — — — — (22)
Non-cash share-based compensation — — — — 1,960 — — — 1,960
Other comprehensive income (1)
— — — — — 3,752 — — 3,752
Distribution to non-controlling interest holders — — — — — — — (473) (473)
Net loss attributable to non-controlling interests — — — — — — — (473) (473)
Net loss attributable to ATI Physical Therapy, Inc. — — — — — — (137,750) — (137,750)
Balance at March 31, 2022 197,513,250 $ 20 42,615 $ (117) $ 1,373,282 $ 3,780 $ (984,882) $ 6,143 $ 398,226
Vesting of restricted shares distributed to holders of ICUs 118,857 — — — — — — — —
Issuance of common stock upon vesting of restricted stock units and awards 330,418 — — — — — — — —
Tax withholdings related to net share settlement of restricted stock units and awards (6,607) — 6,607 (12) — — — — (12)
Non-cash share-based compensation — — — — 1,959 — — — 1,959
Other comprehensive income (1)
— — — — — 2,708 — — 2,708
Distribution to non-controlling interest holders — — — — — — — (139) (139)
Net loss attributable to non-controlling interests — — — — — — (177) (177)
Net loss attributable to ATI Physical Therapy, Inc. — — — — — — (135,546) — (135,546)
Balance at June 30, 2022 197,955,918 $ 20 49,222 $ (129) $ 1,375,241 $ 6,488 $ (1,120,428) $ 5,827 $ 267,019
Vesting of restricted shares distributed to holders of ICUs 58,795 — — — — — —
Issuance of common stock upon vesting of restricted stock units and awards 109,518 — — — — — — — —
Tax withholdings related to net share settlement of restricted stock units and awards (6,268) — 6,268 (7) — — — — (7)
Non-cash share-based compensation — — — — 1,911 — — — 1,911
Other comprehensive income (1)
— — — — — 655 — — 655
Distribution to non-controlling interest holders — — — — — — — (517) (517)
Net loss attributable to non-controlling interests — — — — — — — (376) (376)
Net loss attributable to ATI Physical Therapy, Inc. — — — — — — (116,318) — (116,318)
Balance at September 30, 2022 198,117,963 $ 20 55,490 $ (136) $ 1,377,152 $ 7,143 $ (1,236,746) $ 4,934 $ 152,367

~~(1)Other comprehensive income related to unrealized gain on interest rate cap~~


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

Net loss	$	(21,749)	$	(135,723)	$	(46,959)	$	(273,946)
Other comprehensive (loss) income:
Cash flow hedges	(850)		2,708		(4,306)		6,460
Comprehensive loss	(22,599)		(133,015)		(51,265)		(267,486)
Net income (loss) attributable to non-controlling interests	956		(177)		2,016		(650)
Comprehensive loss attributable to ATI Physical Therapy, Inc.	$	(23,555)	$	(132,838)	$	(53,281)	$	(266,836)

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity

($ in thousands, except share data)

(unaudited)


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Non-Controlling Interests		Total Stockholders' Equity
	Shares	Amount		Shares	Amount


























Balance at January 1, 2023	3,967,146	$	—	1,540	$	(146)	$	1,378,716	$	4,899	$	(1,339,511)	$	4,489	$	48,447

Vesting of restricted shares distributed to holders of ICUs	751	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units and awards	25,387	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(3,163)	—		3,163	(51)		—		—		—		—		(51)
Non-cash share-based compensation	—	—		—	—		1,454		—		—		—		1,454
Other comprehensive loss	—	—		—	—		—		(3,456)		—		—		(3,456)
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(710)		(710)
Net income attributable to non-controlling interests	—	—		—	—		—		—		—		1,060		1,060
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(26,270)		—		(26,270)
Balance at March 31, 2023	3,990,121	$	—	4,703	$	(197)	$	1,380,170	$	1,443	$	(1,365,781)	$	4,839	$	20,474
Series A Senior Preferred Stock dividends and redemption value adjustments	—	—		—	—		(73,584)		—		—		—		(73,584)
Capital contribution from recognition of delayed draw right asset	—	—		—	—		690		—		—		—		690
Vesting of restricted shares distributed to holders of ICUs	737	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units and awards	10,824	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(1,206)	—		1,206	(15)		—		—		—		—		(15)
Issuance of common stock for fractional adjustments related to Reverse Stock Split	26,346	—		—	—		—		—		—		—		—
Non-cash share-based compensation	—	—		—	—		2,754		—		—		—		2,754
Other comprehensive loss	—	—		—	—		—		(850)		—		—		(850)
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(965)		(965)
Net income attributable to non-controlling interests	—	—		—	—		—		—		—		956		956
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(22,705)		—		(22,705)
Balance at June 30, 2023	4,026,822	$	—	5,909	$	(212)	$	1,310,030	$	593	$	(1,388,486)	$	4,830	$	(73,245)

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Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive (Loss) Income Accumulated Deficit Non-Controlling Interests Total Stockholders' Equity
Shares Amount Shares Amount
Balance at January 1, 2021 938,557 $ 9 — $ — $ 954,732 $ (1,907) $ (68,804) $ 17,087 $ 901,117
Retrospective application of reverse recapitalization 127,346,957 4 — — (4) — — — —
Adjusted balance at January 1, 2021 128,285,514 $ 13 — $ — $ 954,728 $ (1,907) $ (68,804) $ 17,087 $ 901,117
Non-cash share-based compensation — — — — 504 — — — 504
Other comprehensive income (1)
— — — — — 561 — — 561
Distribution to non-controlling interest holders — — — — — — — (3,575) (3,575)
Net income attributable to non-controlling interests — — — — — — — 1,309 1,309
Net loss attributable to ATI Physical Therapy, Inc. — — — — — — (19,127) — (19,127)
Balance at March 31, 2021 128,285,514 $ 13 — $ — $ 955,232 $ (1,346) $ (87,931) $ 14,821 $ 880,789
Net proceeds from FAII in Business Combination 25,512,254 3 — — 210,102 — — — 210,105
Shares issued through PIPE investment 30,000,000 3 — — 299,997 — — — 300,000
Shares issued to Wilco Holdco Series A Preferred stockholders 12,845,282 1 — — 128,452 — — — 128,453
Warrant liability recognized upon the closing of the Business Combination — — — — (26,936) — — — (26,936)
Contingent common shares liability recognized upon the closing of the Business Combination — — — — (220,500) — — — (220,500)
Non-cash share-based compensation — — — — 3,112 — — — 3,112
Other comprehensive income (1)
— — — — — 636 — — 636
Distribution to non-controlling interest holders — — — — — — — (920) (920)
Net loss attributable to non-controlling interests — — — — — — — (3,769) (3,769)
Net loss attributable to ATI Physical Therapy, Inc. — — — — — — (435,357) — (435,357)
Balance at June 30, 2021 196,643,050 $ 20 — $ — $ 1,349,459 $ (710) $ (523,288) $ 10,132 $ 835,613
Vesting of restricted shares distributed to holders of ICUs 611,356 — — — — — — — —
Non-cash share-based compensation — — — — 1,248 — — — 1,248
Other comprehensive income (1)
— — — — — 181 — — 181
Distribution to non-controlling interest holders — — — — — — — (1,120) (1,120)
Net loss attributable to non-controlling interests — — — — — — — (2,109) (2,109)
Net loss attributable to ATI Physical Therapy, Inc. — — — — — — (324,665) — (324,665)
Balance at September 30, 2021 197,254,406 $ 20 — $ — $ 1,350,707 $ (529) $ (847,953) $ 6,903 $ 509,148

~~(1)Other comprehensive income related to unrealized gain on interest rate cap~~


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Non-Controlling Interests		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance at January 1, 2022	3,948,199	$	—	596	$	(95)	$	1,351,617	$	28	$	(847,132)	$	7,089	$	511,507
Issuance of 2022 Warrants	—	—		—	—		19,725		—		—		—		19,725
Vesting of restricted shares distributed to holders of ICUs	1,510	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock awards	812	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock awards	(256)	—		256	(22)		—		—		—		—		(22)
Non-cash share-based compensation	—	—		—	—		1,960		—		—		—		1,960
Other comprehensive income	—	—		—	—		—		3,752		—		—		3,752
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(473)		(473)
Net loss attributable to non-controlling interests	—	—		—	—		—		—		—		(473)		(473)
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(137,750)		—		(137,750)
Balance at March 31, 2022	3,950,265	$	—	852	$	(117)	$	1,373,302	$	3,780	$	(984,882)	$	6,143	$	398,226





Vesting of restricted shares distributed to holders of ICUs	2,377	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units and awards	6,608	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(132)	—		132	(12)		—		—		—		—		(12)
Non-cash share-based compensation	—	—		—	—		1,959		—		—		—		1,959
Other comprehensive income	—	—		—	—		—		2,708		—		—		2,708
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(139)		(139)
Net loss attributable to non-controlling interests	—	—		—	—		—		—		—		(177)		(177)
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(135,546)		—		(135,546)
Balance at June 30, 2022	3,959,118	$	—	984	$	(129)	$	1,375,261	$	6,488	$	(1,120,428)	$	5,827	$	267,019

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Cash Flows

($ in thousands)

(unaudited)

Nine Months Ended
September 30, 2022 September 30, 2021
Operating activities:
Net loss $ (390,640) $ (783,718)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill and intangible asset impairment charges 390,224 962,303
Depreciation and amortization 30,477 27,990
Provision for doubtful accounts 11,408 14,270
Deferred income tax provision (43,532) (65,579)
Amortization of right-of-use assets 36,155 33,868
Non-cash share-based compensation 5,830 4,864
Amortization of debt issuance costs and original issue discount 1,934 2,644
Non-cash interest expense 889 —
Non-cash interest expense on redeemable preferred stock — 10,087
Loss on extinguishment of debt 2,809 5,534
Loss on settlement of redeemable preferred stock — 14,037
(Gain) loss on disposal and impairment of assets (42) 219
Change in fair value of warrant liability (3,651) (20,424)
Change in fair value of contingent common shares liability (32,760) (167,265)
Changes in:
Accounts receivable, net (11,276) (8,564)
Prepaid expenses and other current assets (5,507) (6,580)
Other non-current assets 52 (269)
Accounts payable (2,100) 151
Accrued expenses and other liabilities (702) (11,820)
Operating lease liabilities (36,431) (39,084)
Other non-current liabilities 52 824
Medicare Accelerated and Advance Payment Program Funds (12,269) (8,540)
Transaction-related amount due to former owners — (3,611)
Net cash used in operating activities (59,080) (38,663)
Investing activities:
Purchases of property and equipment (22,091) (27,701)
Purchases of intangible assets — (1,375)
Proceeds from sale of property and equipment 152 125
Proceeds from sale of clinics 77 248
Net cash used in investing activities (21,862) (28,703)


	Six Months Ended
	June 30, 2023		June 30, 2022
Operating activities:
Net loss	$	(46,959)	$	(273,946)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill, intangible and other asset impairment charges	—		283,561
Depreciation and amortization	19,041		20,369
Provision for doubtful accounts	6,485		8,611
Deferred income tax provision	151		(36,314)
Non-cash lease expense related to right-of-use assets	23,836		24,071
Non-cash share-based compensation	4,208		3,919
Amortization of debt issuance costs and original issue discount	1,554		1,407
Non-cash interest expense	4,318		—

Loss on extinguishment of debt	444		2,809

Loss (gain) on disposal and sale of assets	793		(163)

Change in fair value of 2L Notes	(7,010)		—
Change in fair value of warrant liability	—		(2,861)
Change in fair value of contingent common shares liability	(1,501)		(25,830)
Changes in:
Accounts receivable, net	(6,105)		(9,349)
Prepaid expenses and other current assets	1,834		(7,555)
Other non-current assets	89		22
Accounts payable	119		1,850
Accrued expenses and other liabilities	15,158		10,803
Operating lease liabilities	(21,830)		(23,427)
Other non-current liabilities	56		45
Medicare Accelerated and Advance Payment Program Funds	—		(10,759)


Net cash used in operating activities	(5,319)		(32,737)

Investing activities:
Purchases of property and equipment	(9,990)		(17,841)

Proceeds from sale of property and equipment	—		146
Proceeds from sale of clinics	355		77


Payment of holdback liabilities related to acquisitions	(490)		—
Net cash used in investing activities	(10,125)		(17,618)

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Financing activities:	Financing activities:					Financing activities:
Proceeds from long-term debt	Proceeds from long-term debt	500,000		—		Proceeds from long-term debt	—		500,000
Proceeds from 2L Notes from related parties						Proceeds from 2L Notes from related parties	3,243		—
Financing transaction costs						Financing transaction costs	(6,287)		—
Deferred financing costs	Deferred financing costs	(12,952)		—		Deferred financing costs	(84)		(12,952)
Original issue discount	Original issue discount	(10,000)		—		Original issue discount	—		(10,000)
Principal payments on long-term debt	Principal payments on long-term debt	(555,048)		(454,160)		Principal payments on long-term debt	—		(555,048)
Proceeds from issuance of Series A Senior Preferred Stock	Proceeds from issuance of Series A Senior Preferred Stock	144,667		—		Proceeds from issuance of Series A Senior Preferred Stock	—		144,667
Proceeds from issuance of 2022 Warrants	Proceeds from issuance of 2022 Warrants	20,333		—		Proceeds from issuance of 2022 Warrants	—		20,333

Payments on revolving line of credit						Payments on revolving line of credit	(24,750)		—

Cash inflow from Business Combination		—		229,338
Payments to Series A Preferred stockholders		—		(59,000)
Proceeds from shares issued through PIPE investment		—		300,000

Equity issuance costs and original issue discount	Equity issuance costs and original issue discount	(4,935)		(19,233)		Equity issuance costs and original issue discount	—		(4,935)

Payment of contingent consideration liabilities						Payment of contingent consideration liabilities	(397)		—
Taxes paid on behalf of employees for shares withheld	Taxes paid on behalf of employees for shares withheld	(41)		—		Taxes paid on behalf of employees for shares withheld	(66)		(34)
Distribution to non-controlling interest holders	Distribution to non-controlling interest holders	(1,129)		(5,615)		Distribution to non-controlling interest holders	(1,675)		(612)
Net cash provided by (used in) financing activities		80,895		(8,670)
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(30,016)		81,419

Changes in cash and cash equivalents:	Changes in cash and cash equivalents:					Changes in cash and cash equivalents:
Net decrease in cash and cash equivalents		(47)		(76,036)
Net (decrease) increase in cash and cash equivalents						Net (decrease) increase in cash and cash equivalents	(45,460)		31,064
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	48,616		142,128		Cash and cash equivalents at beginning of period	83,139		48,616
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	48,569	$	66,092	Cash and cash equivalents at end of period	$	37,679	$	79,680

Supplemental noncash disclosures:	Supplemental noncash disclosures:					Supplemental noncash disclosures:
Derivative changes in fair value		$	(7,115)	$	(1,378)
Derivative changes in fair value (1)						Derivative changes in fair value (1)	$	4,306	$	(6,460)
Purchases of property and equipment in accounts payable	Purchases of property and equipment in accounts payable	$	2,230	$	1,733	Purchases of property and equipment in accounts payable	$	1,495	$	1,550
Warrant liability recognized upon the closing of the Business Combination		$	—	$	(26,936)
Contingent common shares liability recognized upon the closing of the Business Combination		$	—	$	(220,500)
Shares issued to Wilco Holdco Series A Preferred stockholders		$	—	$	128,453
Exchange of Senior Secured Term Loan for related party 2L Notes						Exchange of Senior Secured Term Loan for related party 2L Notes	$	100,000	$	—
Debt discount on Senior Secured Term Loan						Debt discount on Senior Secured Term Loan	$	(1,797)	$	—
Capital contribution from recognition of delayed draw right asset						Capital contribution from recognition of delayed draw right asset	$	690	$	—
Series A Senior Preferred Stock dividends and redemption value adjustments						Series A Senior Preferred Stock dividends and redemption value adjustments	$	73,584	$	—

Other supplemental disclosures:	Other supplemental disclosures:					Other supplemental disclosures:
Cash paid for interest	Cash paid for interest	$	29,453	$	35,334	Cash paid for interest	$	24,698	$	17,822
Cash received from hedging activities	Cash received from hedging activities	$	1,080	$	—	Cash received from hedging activities	$	5,135	$	—
Cash paid for taxes	Cash paid for taxes	$	82	$	156	Cash paid for taxes	$	3	$	55

(1) Derivative changes in fair value related to unrealized loss (gain) on cash flow hedges, including the impact of reclassifications.

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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Note 1. Overview of the Company

ATI Physical Therapy, Inc., together with its subsidiaries (herein referred to as “we,” "our," “the Company,” “ATI Physical Therapy” and “ATI”), is a nationally recognized healthcare company, specializing in outpatient rehabilitation and adjacent healthcare services. The Company provides outpatient physical therapy services under the name ATI Physical Therapy and, as of ~~September~~June 30, ~~2022,~~2023, had ~~929~~911 clinics located in 24 states (as well as 2018 clinics under management service agreements) ~~located in 25 states.~~. The Company offers a variety of services within its clinics, including physical therapy to treat spine, shoulder, knee and neck injuries or pain; work injury rehabilitation services, including work conditioning and work hardening; hand therapy; and other specialized treatment services. The Company’s direct and indirect wholly-owned subsidiaries include, but are not limited to, Wilco Holdco, Inc., ATI Holdings Acquisition, Inc. and ATI Holdings, LLC.

~~The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles ("GAAP"). Under~~ this method of accounting, FAII is treated as the acquired company and Wilco Holdco is treated as the acquirer for financial statement reporting and accounting purposes. As a result, the historical operations of Wilco Holdco are deemed to be those of the Company. Therefore, the financial statements included in this report reflect (i) the historical operating results of Wilco Holdco prior to the Business Combination; (ii) the combined results of FAII and Wilco Holdco following the Business Combination on June 16, 2021; (iii) the assets and liabilities of Wilco Holdco at their historical cost; and (iv) the Company’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the Business Combination is reflected retroactively to the earliest period presented and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination consistent with the treatment of the transaction as a reverse recapitalization of Wilco Holdco, Inc. Refer to Note 3 - ~~Business Combinations and Divestiture~~ ~~for additional information.~~

Impact of COVID-19 and CARES Act

The coronavirus ("COVID-19") pandemic in the United States resulted in changes to our operating environment. WeAlthough the direct impact on our business has decreased since the peak impact in 2020, we continue to closely monitor the ~~impact~~remaining impacts from the pandemic including its direct or indirect effects on macroeconomic factors, the labor markets in which we operate, and the physical therapy and broader healthcare landscape. Throughout the duration of ~~COVID-19 on all aspects of our business,~~the pandemic and declared public health emergency, and continuing hereafter, our priorities ~~remain~~have been protecting the health and safety of employees and patients, maximizing the availability of services to satisfy patient needs and improving the operational and financial stability of our business. While we expect the disruption caused by COVID-19 and resulting impacts to diminish over time, we cannot predict the length of such impacts, and if such impacts continue for an extended period, it could have a continued effect on the Company’s results of operations, financial condition and cash flows, which could be material.

~~Table of Contents~~

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law providing reimbursement, grants, waivers and other funds to assist health care providers during the COVID-19 pandemic. The Company ~~has~~ realized benefits under the CARES Act including, but not limited to, the ~~following:~~

•~~The Company applied for and obtained approval to receive $26.7 million~~receipt of Medicare Accelerated and Advance Payment Program ("MAAPP") funds ~~during~~and deferral of depositing the ~~quarter~~employer portion of Social Security taxes, interest-free and penalty-free. During the year ended December 31, 2022, the remaining obligations related to these benefits were applied and repaid. During the six months ended June 30, ~~2020. During the nine months ended September 30,~~ 2022, ~~and 2021,~~ the Company applied ~~$12.3 million and $8.5~~$10.7 million in MAAPP funds against the outstanding liability respectively. During the quarter ended September 30, 2022, the Company met the required performance obligations and performed the remaining services related to the MAAPP funds. Therefore, the remaining funds were applied and repaid during the quarter ended September 30, 2022. As of September 30, 2022 and December 31, 2021, zero and $12.3 million of the funds are recorded in accrued expenses and other liabilities, respectively.

•The Company elected to defer depositing the employer portion of Social Security taxes for payments due from March 27, 2020 through December 31, 2020, interest-free and penalty-free. Related to these payments, as of September 30, 2022 and December 31, 2021, $5.9 million is included in accrued expenses and other liabilities.at that time.

Note 2. Basis of Presentation and Recent Accounting Standards

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of the Company were prepared in accordance with U.S. ~~GAAP~~generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

Management believes the unaudited condensed consolidated financial statements for interim periods presented contain all necessary adjustments to state fairly, in all material respects, the Company's financial position, results of operations and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature.

Table of Contents

Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results the Company expects for the entire year. In addition, the influence of seasonality, changes in payor contracts, changes in rate per visit, changes in referral and visit volumes, strategic transactions and initiatives, labor market dynamics and wage inflation, changes in laws and general economic conditions in the markets in which the Company operates and other factors impacting the Company's operations may result in any period not being comparable to the same period in previous years.

~~Table of Contents~~

~~Immaterial revisions to prior periods~~

~~As previously disclosed~~For further information regarding the Company's accounting policies and other information, the condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the ~~Company’s~~year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the SEC on March ~~1, 2022,~~16, 2023.

Reverse Stock Split

On June 14, 2023, the Company ~~identified immaterial prior period revisions with respect~~effected a one-for-fifty (1-for-50) reverse stock split of its Class A common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’s stockholders at the Company’s 2023 Annual Meeting of Stockholders held on June 13, 2023, and the final reverse split ratio was subsequently approved by the Company’s board of directors on June 14, 2023. The Company's common stock commenced trading on a reverse split-adjusted basis on June 15, 2023.

As a result of the Reverse Stock Split, every fifty (50) shares of common stock either issued and outstanding or held as treasury stock were combined into one new share of common stock. Any fractional shares of common stock resulting from the Reverse Stock Split were rounded up to the ~~amount~~nearest whole share. All outstanding securities entitling their holders to purchase or acquire shares of ~~income tax benefit recorded~~common stock, including stock options, warrants, Earnout Shares, Vesting Shares and shares of common stock subject to vesting were adjusted as a result of the Reverse Stock Split, as required by the terms of those securities. The Reverse Stock Split did not change the par value of the common stock or the number of shares authorized for ~~the three and nine months ended September 30, 2021. As previously disclosed, we evaluated the effects of~~issuance.

All information included in these ~~errors on our previously issued~~ condensed consolidated financial statements and ~~concluded that no prior period is materially misstated. The revision increased income tax benefit by $7.0 million for~~related notes has been adjusted, on a retrospective basis, to reflect the three and nine months ended September 30, 2021, from $28.3 million to $35.3 million and $58.5 million to $65.6 million, respectively. The revision decreased net loss by $7.0 million for the three and nine months ended September 30, 2021, from $333.8 million to $326.8 million and $790.8 million to $783.7 million, respectively. The revision decreased loss per share from $1.68 to $1.65, and $5.07 to $5.02 for the three and nine months ended September 30, 2021, respectively. The impacted prior periods have been revised in subsequent filings as applicable.Reverse Stock Split, unless otherwise stated.

Liquidity and going concern

~~In accordance with Accounting Standards Codification ("ASC") Topic 205-40,~~ ~~Going Concern~~, the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that these condensed consolidated financial statements are issued. This evaluation includes considerations related to the covenants contained in the Company’s 2022 Credit Agreement as well as the Company’s liquidity position overall.

~~As detailed in Note 8 -~~ ~~Borrowings~~, the Company’s 2022 Credit Agreement contains customary covenants and restrictions, including financial and nonfinancial covenants. The financial covenants require the Company to maintain $30.0 million of minimum liquidity, as defined in the agreement, at each test date through the first quarter of 2024. Additionally, beginning in the second quarter of 2024, the Company must maintain a Secured Net Leverage Ratio, as defined in the agreement, not to exceed 7.00:1.00. The net leverage ratio covenant decreases in the third quarter of 2024 to 6.75:1.00 and further decreases in the first quarter of 2025 to 6.25:1.00, which remains applicable through maturity. The financial covenants are tested as of each fiscal quarter end for the respective periods. Failure to comply with these covenants and restrictions would result in an event of default, subject to customary cure periods.

As of September 30, 2022, we had $48.6 million in cash and cash equivalents and $48.2 million of available capacity under our 2022 revolving credit facility, resulting in $96.8 million of liquidity. As measured based on the definitions in the Company’s 2022 Credit Agreement, liquidity was $99.6 million as of September 30, 2022.

The Company has negative operating cash flows, operating losses and net losses which will continue until operating results improve. For the nine months ended September 30, 2022, the Company had cash flow used in operating activities of $59.1 million, operating loss of $435.6 million and net loss of $390.6 million. In addition, as of September 30, 2022, the Company had an accumulated deficit of $1,236.7 million. These results are, in part, due to trends experienced by the Company including a tight labor market for available physical therapy and other providers in the workforce, visit volume softness, decreases in rate per visit and increases in interest costs.

Improving operating results and cash flow is dependent upon the Company’s ability to achieve its business plan to increase clinical staffing levels and clinician productivity, control costs and capital expenditures, increase patient visit volumes and referrals and stabilize rate per visit. However, there can be no assurance that it will be successful in any of these respects. If business results in the coming twelve months do not improve relative to the previous twelve months, the Company would be at risk of violating its $30.0 million minimum liquidity covenant under its 2022 Credit Agreement. As a result, there is substantial doubt about the Company’s ability to continue as a going concern within twelve months following the issuance date of the condensed consolidated financial statements as of and for the period ended September 30, 2022.

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If business results do not improve relative to the previous twelve months, the Company will need to consider other alternatives, such as pursuing an amendment to or waiver of the minimum liquidity covenant and other requirements under the 2022 Credit Agreement, raising funds from other sources, obtaining alternate financing, disposal of assets, or pursuing other strategic alternatives to improve its liquidity position and business results. There can be no assurance that the Company will be successful in accessing such alternative options or financing when needed. Failure to obtain such an amendment to or waiver of the minimum liquidity covenant, complete the other financings or execute on other strategic alternatives when needed would have a material adverse effect on the liquidity, financial condition and results of operations.

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business within twelve months after the date that these condensed consolidated financial statements are issued.

The Company has negative operating cash flows, operating losses and net losses. For the six months ended June 30, 2023, the Company had cash flows used in operating activities of $5.3 million, operating loss of $23.7 million and net loss of $47.0 million. These results are, in part, due to trends experienced by the Company in recent years including a tight labor market for available physical therapy and other healthcare providers in the workforce, visit volume softness, decreases in rate per visit and increases in interest costs.

As previously disclosed, these conditions and events raise substantial doubt about the Company's ability to continue as a going concern. In response to these conditions, management plans included refinancing the Company's debt under its 2022 Credit Agreement and improving operating results and cash flows.

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On June 15, 2023, the Company completed a debt restructuring transaction under its 2022 Credit Agreement (as defined in Note 8) including: (i) a delayed draw new money financing in an aggregate principal amount of $25.0 million, comprised of (A) second lien PIK convertible notes (the “2L Notes”) and (B) shares of Series B Preferred Stock (as defined in Note 8), which will provide the holder thereof with voting rights such that the holders thereof will have the right to vote on an as-converted basis, (ii) the exchange of $100.0 million of the aggregate principal amount of the term loans under the 2022 Credit Agreement held by certain of the holders of its Series A Senior Preferred Stock (the "Preferred Equityholders") for 2L Notes and Series B Preferred Stock and (iii) certain other changes to the terms of the 2022 Credit Agreement, including modifications of the financial covenants thereunder and relief from the requirements related to the delivery of independent audit reports without a going concern explanatory paragraph. Holders of the 2L Notes will also receive additional 2L Notes upon the in-kind payment of interest on any outstanding 2L Notes. The 2L Notes are convertible into shares of Class A common stock at a fixed conversion price.

Additionally, the Company experienced improvements in operations that resulted in reduced levels of cash outflows during the six months ended June 30, 2023 relative to the same period in the prior year. A continued improvement in business results is necessary as there remains a risk that the Company may fail to meet its minimum liquidity covenant or be unable to fund anticipated cash requirements and obligations as they become due in the future.

The Company's plan is to continue its efforts to improve its operating results and cash flow through increases to clinical staffing levels, improvements in clinician productivity, controlling costs and capital expenditures and increases in patient visit volumes, referrals and rate per visit. There can be no assurance that the Company's plan will be successful in any of these respects.

If the Company's plan does not result in improvement in these aspects in future periods that results in sufficient cash flow from operations, the Company will need to consider other alternatives, such as raising additional financing, obtaining funds from other sources, disposal of assets, or pursuing other strategic alternatives to improve its business, results of operations and financial condition. There can be no assurance that the Company will be successful in accessing such alternative options or financing if or when needed. Failure to do so could have a material adverse impact on our business, financial condition, results of operations and cash flows, and may lead to events including bankruptcy, reorganization or insolvency.

Management plans have not been fully implemented and, as a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Use of estimates

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The effect of any change in estimates will be recognized in the current period of the change.

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Segment reporting

The Company reports segment information based on the management approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. All of the Company’s operations are conducted within the United States. Our chief operating decision maker ~~(“CODM”)~~ is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making decisions, assessing financial performance and allocating resources. We operate our business as one operating segment and therefore we have one reportable segment.

~~For further information regarding~~Cash, cash equivalents and restricted cash

Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less when issued. Restricted cash consists of cash held as collateral in relation to the Company's ~~accounting policies~~corporate card agreement. Restricted cash included within cash and ~~other information, the~~cash equivalents as presented within our condensed consolidated ~~financial~~balance sheets as of June 30, 2023 and December 31, 2022, and our condensed consolidated statements ~~should be read in conjunction with our audited consolidated financial statements and notes thereto~~of cash flows for the ~~year~~six months ended ~~December 31, 2021 included~~June 30, 2023 was $0.8 million. There was no change in ~~our Annual Report~~restricted cash for the six months ended June 30, 2022.

2L Notes

The guidance in Accounting Standards Codification ("ASC") Topic 825, Financial Instruments, provides a fair value option that allows companies to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on ~~Form 10-K filed~~items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument-by-instrument basis, must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in the Company's condensed consolidated balance sheets from those instruments using another accounting method.

~~Table~~Second Lien Note Purchase Agreement. As such, the 2L Notes are initially recorded as a liability at estimated fair value and are subject to re-measurement at each balance sheet date with changes in fair value recognized in the line item change in fair value of ~~Contents~~2L Notes in the Company’s condensed consolidated statements of operations. Any changes in fair value related to changes in the Company's credit risk is recognized as a component of accumulated other comprehensive income (loss).

Recently adopted accounting guidance

In ~~March 2020,~~October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ~~2020-04,~~ ~~Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This standard was subsequently amended by ASU No. 2021-01, ~~Reference Rate Reform (Topic 848): Scope~~. This standard is optional and may be applied by entities after March 12, 2020, but no later than December 31, 2022. As of September 30, 2022, the Company has a derivative instrument for which the interest rate is indexed to the London InterBank Offered Rate (“LIBOR”). During the period ended March 31, 2022, the Company modified the reference rate index on its hedged items, which are future variable-rate cash payments, from LIBOR to the Secured Overnight Financing Rate ("SOFR"). The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivative, which is LIBOR. The guidance allows for different expedient elections to be made at different points in time. As of September 30, 2022, the Company continues to apply the hedge accounting expedients and does not anticipate that this guidance will have a material impact on its consolidated financial statements, however, the Company will continue to assess the potential impact on its future hedging relationships and expedient elections, as applicable.

~~Recent accounting pronouncements~~

~~In October 2021, the FASB issued ASU~~ 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers, which provides guidance to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice. This ASU is effective for the Company on January 1, 2023, with early adoption permitted, and shall be applied on a prospective basis to business combinations that occur on or after the adoption date. The Company ~~is evaluating the effect that the implementation of this standard may have on the Company's consolidated financial statements, but does not currently expect the impact to be material.~~

~~In November 2021, the FASB issued ASU 2021-10,~~ ~~Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance~~, which provides guidance to increase the transparency of government assistance transactions with business entities that are accounted for by applying a grant or contribution accounting model. This ASU is effective for the Company's annual financial statements to be issued for the year ended December 31, 2022, with early adoption permitted. The Company expects to adoptadopted this new accounting standard ~~in its Annual Report on Form 10-K for the year ended December 31, 2022, and does not expect the~~effective January 1, 2023. The adoption of this standard todid not have a material impact on the Company's condensed consolidated financial statements.

~~Note 3. Business Combinations and Divestiture~~

~~The Business Combination~~

~~As discussed in Note 1 -~~ ~~Overview of the Company, on~~ ~~June 16, 2021~~, a business combination between Wilco Holdco and FAII was consummated, which was accounted for as a reverse recapitalization of Wilco Holdco, Inc. At the time of the Business Combination, stockholders of Wilco Holdco, Inc. received ~~130.3 million~~ ~~shares of the Company’s Class A common stock, par value~~ ~~$0.0001~~ ~~per share (the “Common Stock”), for the outstanding shares of Wilco Holdco common stock, par value~~ ~~$0.01~~ per share, that such stockholders owned. Upon distribution of shares of Common Stock to holders of vested and unvested Incentive Common Units (“ICUs”) granted prior to the Business Combination under the Wilco Acquisition, LP 2016 Equity Incentive Plan, ~~2.0 million~~ ~~of these shares were restricted subject to vesting requirements, resulting in total unrestricted shares of~~ ~~128.3 million~~ ~~and an exchange ratio of~~ ~~136.7~~ ~~unrestricted shares of ATI Physical Therapy, Inc. for every previously outstanding Wilco Holdco share.~~

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~~Immediately following~~Note 3. Divestitures

Clinics held for sale

During the ~~Business Combination, there were 207.3 million~~ ~~shares issued and 196.6 million~~ ~~outstanding shares~~fourth quarter of ~~common stock of ATI Physical Therapy, Inc., consisting of the following (in thousands):~~


			~~Class A Common Shares~~
~~FAII Class A common stock prior to Business Combination~~			~~34,500~~
~~FAII Class F common stock prior to Business Combination(1)~~			~~8,625~~
~~Less: FAII Class A common stock redemptions~~			~~(8,988)~~
~~FAII common shares (Class A and Class F)~~			~~34,137~~
~~Add: Shares issued to Wilco Holdco stockholders(2, 3)~~			~~130,300~~
~~Add: Shares issued through PIPE investment~~			~~30,000~~
~~Add: Shares issued to Wilco Holdco Series A Preferred stockholders~~			~~12,845~~
~~Total shares issued as of the Closing Date of the Business Combination(4)~~			~~207,282~~
~~Less: Vesting Shares(1)~~			~~(8,625)~~
~~Less: Restricted shares(3)~~			~~(2,014)~~
~~Total shares outstanding as of the Closing Date of the Business Combination(4)~~			~~196,643~~

~~(1)~~ Per the Merger Agreement, as of the closing of the Business Combination, all Class F shares converted into the equivalent number of Class A common shares and became subject to certain vesting and forfeiture provisions ("Vesting Shares") as detailed in Note ~~13 -~~ ~~Contingent Common Shares Liability~~.

~~(2)~~ ~~Includes 1.2 million unrestricted shares upon distribution to holders of vested ICUs under the Wilco Acquisition, LP 2016 Equity Incentive Plan.~~

~~(3)Includes 2.0 million restricted shares upon distribution to holders of unvested ICUs under the Wilco Acquisition, LP 2016 Equity Incentive Plan.~~

(4) ~~Excludes~~ ~~15.0 million~~ ~~Earnout Shares, 6.9 million Public Warrants and 3.0 million Private Placement Warrants to purchase Class A common stock. Refer to Note 12 -~~ ~~IPO Warrant Liability~~ ~~and Note~~ ~~13 -~~ ~~Contingent Common Shares Liabilityfor further details.~~

~~PIPE investment~~

Concurrently with the closing of the Business Combination, pursuant to Subscription Agreements executed between FAII and certain investors, 30.0 million shares of Class A common stock (the “PIPE” investment) were newly issued in a private placement at a purchase price of $10.00 per share for an aggregate purchase price of $300.0 million. The initial PIPE investment included 7.5 million shares of Class A common stock newly issued to certain investment funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) at a purchase price of $10.00 per share for an aggregate purchase price of $75.0 million.

~~Wilco Holdco Series A Preferred Stock~~

Immediately following the Business Combination, all holders of the previously outstanding shares of Wilco Holdco Series A Preferred Stock received a proportionate share of $59.0 million and 12.8 million shares of ATI Physical Therapy, Inc. Class A common stock based on the terms of the Merger Agreement. Refer to Note 11 - ~~Wilco Holdco Redeemable Preferred Stock~~ ~~for further details.~~

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~~Earnout Shares~~

Subject to the terms and conditions of the Merger Agreement, certain stockholders of Wilco Holdco, Inc. were provided the contingent right to receive, in the aggregate, up to 15.0 million shares of Class A common stock that may be issued pursuant to an earnout arrangement if certain Class A common stock price targets are achieved between the Closing Date and the 10 year anniversary of the Closing Date (“Earnout Shares”). The Earnout Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Earnout Shares price target.

~~Refer to Note 13 -~~ ~~Contingent Common Shares Liabilityand Note~~ 14 - ~~Fair Value Measurements~~ ~~for~~ ~~further details.~~

~~Vesting Shares~~

Pursuant to the Sponsor Letter Agreement executed in connection with the Merger Agreement, 8.6 million shares of Class F common stock of FAII outstanding immediately prior to the Business Combination converted to potential Class A common shares and became subject to certain vesting and forfeiture provisions (“Vesting Shares”). The Vesting Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Vesting Shares price target.

~~Refer to Note 13 -~~ ~~Contingent Common Shares Liabilityand Note~~ 14 - ~~Fair Value Measurements~~ ~~for~~ ~~further details.~~

~~IPO Warrants~~

~~Immediately following the Business Combination,~~2022, the Company ~~had outstanding Public Warrants to purchase an aggregate~~classified the assets and liabilities of ~~6.9 million~~ ~~shares of the Company’s Class A common stock ("Public Warrants") and outstanding Private Placement Warrants to purchase an aggregate of~~ ~~3.0 million~~ ~~shares~~certain clinics as held for sale as a result of the Company's ~~Class A common stock ("Private Placement Warrants") (collectively,~~decision to sell the ~~“IPO Warrants”). In conjunction with~~clinics. The divestiture transactions were anticipated to be completed within twelve months. The clinics did not meet the B~~usiness Combination, 3.0 million Private Placement Warrants~~criteria to be classified as discontinued operations. During the first quarter of 2023, the Company completed a portion of its anticipated divestiture transactions, which were ~~transferred and surrendered for~~immaterial. During the second quarter of 2023, the Company concluded the remaining anticipated divestiture transactions were no ~~consideration based on terms of the Sponsor Letter Agreement.~~

~~Refer to Note~~ ~~12 -~~ ~~IPO Warrant Liability~~ ~~and Note~~ 14 - ~~Fair Value Measurementsfor further details.~~

~~The following table reflects the components of cash movement related~~longer probable due to the ~~Business Combination, PIPE investment~~Company's decision to retain the clinics. As a result, the assets and ~~debt repayments~~liabilities previously classified as held for sale were reclassified as held and used into the respective line items within the condensed consolidated balance sheet.

There were no assets or liabilities classified as held for sale as of June 30, 2023. Major classes of assets and liabilities classified as held for sale as of December 31, 2022 were as follows (in thousands):

December 31, 2022

~~Cash in trust with FAII as of the Closing Date of the Business Combination~~Accounts receivable, net

~~345,036~~486

~~Cash used for redemptions of FAII Class A common stock~~

~~(89,877)~~Prepaid expenses

~~FAII transaction costs paid at closing~~

~~(25,821)~~23

~~Cash inflow from Business Combination~~Property and equipment, net

~~229,338~~1,113

~~Wilco Holdco, Inc. transaction costs offset against proceeds~~Operating lease right-of-use assets

~~(19,233)~~1,929

~~Net proceeds from FAII in Business Combination~~Goodwill, net

~~210,105~~3,192

~~Cash proceeds from PIPE investment~~Other non-current assets

~~300,000~~12

~~Repayment of second lien subordinated loan~~Total assets held for sale

~~(231,335)~~6,755

Accounts payable

~~Partial repayment of 2016 first lien term loan~~Accrued expenses and other liabilities

~~(216,700)~~201

~~Cash payment to Wilco Holdco Series A Preferred stockholders~~

~~(59,000)~~Current portion of operating lease liabilities

~~Wilco Holdco, Inc. transaction costs expensed during 2021~~

~~(5,543)~~685

~~Net decrease in cash related to Business Combination, PIPE investment and debt repayments~~Operating lease liabilities

1,706

Total liabilities held for sale

~~(2,473)~~2,614

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~~During 2021, the Company expensed~~ ~~$5.5 million~~ ~~in transaction costs related to the Business Combination, which were classified as selling, general and administrative expenses in the consolidated statement of operations. In addition,~~ ~~$19.2 million~~ of Wilco Holdco, Inc. transaction costs related to the Business Combination were offset against additional paid-in capital in the consolidated statements of changes in stockholders’ equity as these costs were determined to be directly attributable to the recapitalization.

~~Home Health divestiture~~

On 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 predominantly of accounts receivable, accrued expenses and other liabilities which were not material.

~~2021 acquisitions~~

During 2021, the Company completed 3 acquisitions consisting of 7 total clinics. The Company paid approximately $4.5 million in cash and $1.4 million in future payment consideration, subject to certain time or performance conditions set out in the purchase agreements, to complete the acquisitions. The acquisitions qualified for purchase accounting treatment under ASC Topic 805, ~~Business Combinations,~~ whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the respective acquisition dates. Of the total amount of consideration, $5.5 million was allocated to goodwill based on management's valuations, which were preliminary and subject to completion of the Company's valuation analysis through the 12 month measurement period. Management finalized its valuation analysis at March 31, 2022 and valuation adjustments to the assets acquired and liabilities assumed were not material. Goodwill represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized, such as assembled workforce, synergies, and location. The entire amount of goodwill recorded from these purchases will be deductible for income tax purposes. Acquisition-related costs to complete the transactions, net operating revenue and net income recognized in 2021 related to the acquisitions were not material, individually and in the aggregate. Unaudited proforma consolidated financial information for the acquisitions have not been included as the results are not material, individually and in the aggregate.

Note 4. Revenue from Contracts with Customers

The following table disaggregates net ~~operating~~ revenue by major service line for the periods indicated below (in thousands):


		Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021				June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Net patient revenue	Net patient revenue	$	142,313	$	141,855	$	429,744	$	420,805		Net patient revenue	$	156,938	$	148,506	$	307,692	$	287,431
ATI Worksite Solutions (1)	ATI Worksite Solutions (1)	9,053		8,626		26,429		25,830			ATI Worksite Solutions (1)	9,384		8,725		18,585		17,376
Management Service Agreements (1)	Management Service Agreements (1)	3,251		4,201		9,671		11,523			Management Service Agreements (1)	3,770		3,265		7,495		6,420
Other revenue (1)	Other revenue (1)	2,175		4,331		8,063		13,950			Other revenue (1)	2,245		2,797		5,497		5,888
		$	156,792	$	159,013	$	473,907	$	472,108			$	172,337	$	163,293	$	339,269	$	317,115

(1)ATI Worksite Solutions, Management Service Agreements and Other revenue are included within other revenue on the face of the condensed consolidated statements of operations.

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The following table disaggregates net patient revenue for each associated payor class as a percentage of total net patient revenue for the periods indicated below:


		Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021				June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Commercial	Commercial	57.7	%	56.3	%	57.2	%	56.0	%		Commercial	58.5	%	57.2	%	58.3	%	57.0	%
Government	Government	24.7	%	24.3	%	24.3	%	23.6	%		Government	23.6	%	24.5	%	23.6	%	24.1	%
Workers’ compensation	Workers’ compensation	12.0	%	13.7	%	12.7	%	14.8	%		Workers’ compensation	11.6	%	12.8	%	11.8	%	13.0	%
Other (1)	Other (1)	5.6	%	5.7	%	5.8	%	5.6	%		Other (1)	6.3	%	5.5	%	6.3	%	5.9	%
		100.0	%	100.0	%	100.0	%	100.0	%			100.0	%	100.0	%	100.0	%	100.0	%

(1) Other is primarily comprised of net patient revenue related to auto personal ~~injury.~~injury reimbursement.

Note 5. Goodwill, Trade Name and Other Intangible Assets

Changes in the carrying amount of goodwill during the current year consisted of the following (in thousands):


Goodwill at December 31, 2022 (1)	~~Total Goodwill~~$	286,458
Impairment charges (2)	—


~~Goodwill at December 31, 2021~~ ~~(1)~~	$	~~608,811~~
~~Impairment charges~~Reclassifications to held and used	~~(270,564)~~
~~Acquisitions~~ ~~(2)~~	~~(236)~~3,192
Goodwill at ~~September~~June 30, ~~2022~~2023	$	~~338,011~~289,650

(1) Net of accumulated impairment losses of ~~$726.8~~$1,045.7 million.

(2) ~~Represents final valuation adjustments related to 2021 acquisitions. Refer to Note 3 -~~ ~~Business Combinations and Divestiture~~ ~~for additional information.~~The Company did not note any triggering events during the six months ended June 30, 2023 that resulted in the recording of an impairment loss.

The table below summarizes the Company’s carrying amount of trade name and other intangible assets at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Gross intangible assets:	Gross intangible assets:					Gross intangible assets:
ATI trade name (1)	ATI trade name (1)	$	290,000	$	409,360	ATI trade name (1)	$	245,000	$	245,000
Non-compete agreements	Non-compete agreements	2,395		2,405		Non-compete agreements	2,395		2,395
Other intangible assets	Other intangible assets	640		640		Other intangible assets	640		640
Accumulated amortization:	Accumulated amortization:					Accumulated amortization:
Accumulated amortization – non-compete agreements	Accumulated amortization – non-compete agreements	(952)		(425)		Accumulated amortization – non-compete agreements	(1,473)		(1,126)
Accumulated amortization – other intangible assets	Accumulated amortization – other intangible assets	(316)		(284)		Accumulated amortization – other intangible assets	(349)		(327)
Total trade name and other intangible assets, net	Total trade name and other intangible assets, net	$	291,767	$	411,696	Total trade name and other intangible assets, net	$	246,213	$	246,582

(1) Not subject to amortization. ~~The Company recorded $119.4 million of impairment charges related to the trade name indefinite-lived intangible asset during the nine months ended September 30, 2022.~~

Amortization expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 was immaterial. The Company estimates that amortization expense related to intangible assets ~~is expected to~~will be immaterial over the next five fiscal years and thereafter.

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Interim impairment testing ~~as of March 31,~~during 2022

During the ~~quarter~~quarters ended March 31, 2022 and June 30, 2022, the Company identified an interim triggering ~~event~~events as a result of factors including potential changes in discount rates and ~~the recent decrease~~decreases in share price. The Company determined that the combination of these factors constituted an interim triggering event that required further analysis with respect to potential impairment to goodwill, trade name indefinite-lived intangible and other assets.

As it was determined that it was more likely than not that the fair value of our trade name indefinite-lived intangible asset was below its carrying value, the Company performed an interim quantitative impairment test as of the March 31, 2022 and June 30, 2022 balance sheet ~~date.~~dates. The Company utilized the relief from royalty method to estimate the fair value of the trade name indefinite-lived intangible asset. The key assumptions associated with determining the estimated fair value ~~include~~included projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate. As a result of the ~~analysis,~~analyses, during the six months ended June 30, 2022, the Company recognized ~~a $39.4~~$79.4 million in non-cash interim ~~impairment~~impairments in ~~the line item~~ goodwill, intangible and ~~intangible~~other asset impairment charges in its condensed consolidated statements of operations, which ~~represents~~represented the difference between the estimated fair value of the Company’s trade name indefinite-lived intangible asset and its carrying value.

The Company evaluated its long-lived asset groups, including operating lease right-of-use assets that were evaluated based on ~~clinic-level~~clinic-specific cash flows and clinic-specific market factors, noting no material impairment.

As it was determined that it was more likely than not that the fair value of our single reporting unit was below its carrying value, the Company performed an interim quantitative impairment ~~test.~~test with respect to goodwill. In order to determine the fair value of our single reporting unit, the Company utilized an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value ~~include~~included projected revenue growth rates, earnings before interest, taxes, depreciation and amortization ("EBITDA") margins, the terminal growth rate, the discount rate and relevant market multiples. As a result of the ~~analysis,~~analyses, during the six months ended June 30, 2022, the Company recognized ~~a $116.3~~$204.2 million in non-cash interim ~~impairment~~impairments in ~~the line item~~ goodwill, intangible and ~~intangible~~other asset impairment charges in its condensed consolidated statements of operations, which represented the difference between the estimated fair value of the Company’s single reporting unit and its carrying value.

~~Interim impairment testing as of June 30, 2022~~

As it was determined that it was more likely than not that the fair value of our trade name indefinite-lived intangible asset was below its carrying value, the Company performed an interim quantitative impairment test as of the June 30, 2022 balance sheet date. The Company utilized the relief from royalty method to estimate the fair value of the trade name indefinite-lived intangible asset. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate. As a result of the analysis, the Company recognized an approximate $40.0 million non-cash interim impairment in the line item goodwill and intangible asset impairment charges in its condensed consolidated statements of operations, which represents the difference between the estimated fair value of the Company’s trade name indefinite-lived intangible asset and its carrying value.

The Company evaluated its asset groups, including operating lease right-of-use assets that were evaluated based on clinic-level cash flows and clinic-specific market factors, noting no material impairment.

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As it was determined that it was more likely than not that the fair value of our single reporting unit was below its carrying value, the Company performed an interim quantitative impairment test. In order to determine the fair value of our single reporting unit, the Company utilized an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples. As a result of the analysis, the Company recognized an approximate $87.9 million non-cash interim impairment in the line item goodwill and intangible asset impairment charges in its condensed consolidated statements of operations, which represented the difference between the estimated fair value of the Company’s single reporting unit and its carrying value.

~~Interim impairment testing as of September 30, 2022~~

As it was determined that it was more likely than not that the fair value of our trade name indefinite-lived intangible asset was below its carrying value, the Company performed an interim quantitative impairment test as of the September 30, 2022 balance sheet date. The Company utilized the relief from royalty method to estimate the fair value of the trade name indefinite-lived intangible asset. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate. As a result of the analysis and primarily driven by an increase in the discount rate, the Company recognized a $40.0 million non-cash interim impairment in the line item goodwill and intangible asset impairment charges in its condensed consolidated statements of operations, which represents the difference between the estimated fair value of the Company’s trade name indefinite-lived intangible asset and its carrying value.

As it was determined that it was more likely than not that the fair value of our single reporting unit was below its carrying value, the Company performed an interim quantitative impairment test. In order to determine the fair value of our single reporting unit, the Company utilized an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples. As a result of the analysis and primarily driven by an increase in the discount rate and lower public company comparative multiples, the Company recognized an approximate $66.4 million non-cash interim impairment in the line item goodwill and intangible asset impairment charges in its condensed consolidated statements of operations, which represented the difference between the estimated fair value of the Company’s single reporting unit and its carrying value.

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Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of the Company’s reporting unit and the indefinite-lived intangible ~~assets~~asset requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include projected revenue growth rates, EBITDA margins, terminal growth rates, discount rates, relevant market multiples, royalty rates and other market factors. If current expectations of future growth rates,margins and cash flows are not met, or if market factors outside of our control change significantly, including discount rates, relevant market multiples, company share price and other market factors, then our reporting unit or the indefinite-lived intangible ~~assets~~asset might become impaired in the future, negatively impacting our operating results and financial position. As the carrying amounts of goodwill and the Company’s trade name indefinite-lived intangible asset ~~have been~~were impaired as of ~~March~~December 31, ~~2022, June 30, 2022 and September 30,~~ 2022 and written down to fair value, those amounts are more susceptible to an impairment risk if there are unfavorable changes in assumptions and estimates.

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Note 6. Property and Equipment

Property and equipment consisted of the following at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Equipment	Equipment	$	38,414	$	36,278	Equipment	$	38,957	$	38,102
Furniture and fixtures	Furniture and fixtures	17,392		17,141		Furniture and fixtures	17,804		17,215
Leasehold improvements	Leasehold improvements	193,198		183,542		Leasehold improvements	194,650		191,182
Automobiles	Automobiles	19		19		Automobiles	19		19
Computer equipment and software	Computer equipment and software	100,882		95,362		Computer equipment and software	105,447		102,651
Construction-in-progress	Construction-in-progress	3,012		3,793		Construction-in-progress	4,084		3,727
		352,917		336,135			360,961		352,896
Accumulated depreciation and amortization	Accumulated depreciation and amortization	(223,156)		(196,405)		Accumulated depreciation and amortization	(246,174)		(229,206)
Property and equipment, net(1)	Property and equipment, net(1)	$	129,761	$	139,730	Property and equipment, net(1)	$	114,787	$	123,690

(1) Excludes $1.1 million reclassified as held for sale as of December 31, 2022. Refer to Note 3 - Divestitures for additional information.

The following table presents the amount of depreciation and amortization expense related to property and equipment recorded in rent, clinic supplies, contract labor and other and selling, general and administrative expenses in the Company’s condensed consolidated statements of operations for the periods indicated below (in thousands):

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Rent, clinic supplies, contract labor and other $ 6,876 $ 6,512 $ 20,785 $ 19,492
Selling, general and administrative expenses 3,048 2,583 9,133 8,219
Total depreciation expense $ 9,924 $ 9,095 $ 29,918 $ 27,711


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Rent, clinic supplies, contract labor and other	$	6,351	$	6,823	$	12,809	$	13,909
Selling, general and administrative expenses	2,814		3,250		5,863		6,085
Total depreciation expense	$	9,165	$	10,073	$	18,672	$	19,994

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Note 7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Salaries and related costs	Salaries and related costs	$	17,910	$	27,257	Salaries and related costs	$	28,715	$	28,949
Credit balances due to patients and payors						Credit balances due to patients and payors	7,255		6,117
Accrued professional fees						Accrued professional fees	6,162		5,551
Accrued interest						Accrued interest	6,116		762
Accrued insurance premiums						Accrued insurance premiums	4,716		—
Accrued occupancy costs						Accrued occupancy costs	1,985		2,410
Accrued contract labor						Accrued contract labor	1,921		4,483

Accrued professional fees		6,039		5,998
CARES Act funds (1)		5,910		18,179
Credit balance due to patients and payors		5,084		4,240
Accrued legal settlement (2)		5,000		—
Accrued contract labor		4,725		2,057

Other payables and accrued expenses	Other payables and accrued expenses	7,843		6,853		Other payables and accrued expenses	4,857		5,400
Total	Total	$	52,511	$	64,584	Total	$	61,727	$	53,672

~~(1)~~ ~~Includes current portion~~Table of ~~MAAPP funds received and deferred employer Social Security tax payments.~~Contents

~~(2)~~ Represents estimated liability related to a probable settlement associated with a payor billing dispute. The liability is recorded gross of estimated insurance coverage of approximately $2.0 million, which has been recorded as a receivable in other current assets in the Company's condensed consolidated balance sheets. Refer to Note 17 - ~~Commitments and Contingencies~~ ~~for additional information.~~

Note 8. Borrowings

Long-term debt, net consisted of the following at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 (in thousands):


		September 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022
Senior Secured Term Loan (1, 2) (due February 24, 2028)	Senior Secured Term Loan (1, 2) (due February 24, 2028)	$	500,889	$	—	Senior Secured Term Loan (1, 2) (due February 24, 2028)	$	407,799	$	503,481
2016 first lien term loan (3)		—		555,048
Revolving Loans (3) (due February 24, 2027)						Revolving Loans (3) (due February 24, 2027)	23,450		48,200
Less: unamortized debt issuance costs	Less: unamortized debt issuance costs	(11,637)		(1,935)		Less: unamortized debt issuance costs	(8,021)		(11,137)
Less: unamortized original issue discount	Less: unamortized original issue discount	(9,346)		(1,147)		Less: unamortized original issue discount	(8,160)		(8,944)
Total debt, net	Total debt, net	479,906		551,966		Total debt, net	415,068		531,600
Less: current portion of long-term debt	Less: current portion of long-term debt	—		(8,167)		Less: current portion of long-term debt	—		—
Long-term debt, net	Long-term debt, net	$	479,906	$	543,799	Long-term debt, net	$	415,068	$	531,600

(1) Interest rate of ~~10.8%~~13.5% and 12.1% at ~~September~~June 30, 2023 and December 31, 2022, respectively, with interest payable in designated installments at a variable interest rate. The effective interest rate for the Senior Secured Term Loan was ~~11.4%~~13.6% and 13.1% at ~~September~~June 30, ~~2022.~~2023 and December 31, 2022, respectively.

(2)~~During the third quarter of 2022, the~~ The Company ~~elected to pay~~has paid a portion of its interest in-kind on its Senior Secured Term Loan by capitalizing and adding such interest to the principal amount of the debt. As of ~~September~~June 30, 2023 and December 31, 2022, the Company has recognized total paid in-kind interest in the amount of ~~$0.9 million.~~$7.8 million and $3.5 million, respectively.

(3) ~~Loan balance~~Interest rate of 10.1% and 8.3% at June 30, 2023 and December 31, 2022, respectively, with interest payable in designated installments at a variable interest rate.

2L Notes due to related parties, at fair value consisted of the following at June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
2L Notes due to related parties, at fair value	$	96,933	$	—

2023 Debt Restructuring Transaction

On June 15, 2023 (the "Closing Date"), the Company completed a debt restructuring transaction to improve the Company's liquidity (the "2023 Debt Restructuring"). On the Closing Date, certain previously executed agreements became effective, including (i) Amendment No. 2 to Credit Agreement, (ii) a Second Lien Note Purchase Agreement and (iii) certain other definitive agreements relating to the 2023 Debt Restructuring (such documents referred to collectively as the "Signing Date Definitive Documents").

As part of the 2023 Debt Restructuring, the Company exchanged a principal amount of $100.0 million of the $507.8 million then outstanding Senior Secured Term Loans for an equal amount of second lien paid in-kind ("PIK") convertible notes (the "2L Notes"), which are convertible into shares of the Company's common stock, stapled with a number of shares of Series B Preferred Stock (the "Series B Preferred Stock"), which represent voting interests only. The exchange was ~~repaid in its entirety on February 24, 2022.~~ consummated through the Intercreditor and Subordination Agreement and Second Lien Note Purchase Agreement dated April 17, 2023 (the "Signing Date").

The ~~effective interest rate~~Company accounted for the ~~2016 first lien term loan was 4.9% at December 31, 2021.~~

~~2016 first~~exchange as a debt extinguishment and ~~second lien credit agreements~~

~~In connection with the Business Combination on June 16, 2021, the Company paid down $216.7 million of its 2016 first lien term loan. The Company~~ recognized ~~$1.7~~$0.4 million in loss on debt extinguishment ~~related to~~during the three and six months ended June 30, 2023. The loss on debt extinguishment consisted of various offsetting components, including the derecognition of ~~the proportionate amount~~$4.3 million of ~~remaining~~ unamortized deferred financing costs and ~~unamortized~~ original issue discount ~~associated with~~on the ~~partial debt repayment.~~

~~Table~~Senior Secured Term Loans and the recognition of ~~Contents~~

~~In connection with~~$0.7 million of fair value premium at issuance on the ~~Business Combination on June 16, 2021,~~2L Notes, offset by the ~~Company paid $231.3 million to settle its second lien subordinated term loan. The Company recognized $3.8~~recognition of $2.8 million in ~~loss on debt extinguishment~~delayed draw right assets related to the ~~derecognition~~commitment provided by certain lenders and the recognition of ~~the remaining unamortized deferred financing costs in conjunction with the debt repayment.~~

~~On February 24, 2022, the Company paid $555.0~~$1.8 million to settle its existing term loan (the "2016 first lien term loan"). The Company accounted for the transaction as a debt extinguishment and recognized $2.8 million in loss on debt extinguishment related to the derecognition of ~~the remaining unamortized deferred financing costs and unamortized~~incremental original issue discount ~~in conjunction with~~on the ~~debt repayment.~~Senior Secured Term Loan. The loss on debt extinguishment associated with the ~~repayment of the 2016 first lien term loan~~2023 Debt Restructuring has been reflected in other expense, net in the condensed consolidated statements of operations.

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Amendment No. 2 to Credit Agreement

Pursuant to Amendment No. 2 to the Credit Agreement, the terms of the remaining unexchanged $407.8 million principal amount of the Senior Secured Term Loans were revised to: (i) increase the interest rate in the form of paid in-kind interest by 1.0% per annum until the achievement of certain financial metrics, (ii) reset the prepayment premiums with respect to any repayment of the Senior Secured Term Loans, and (iii) amended certain covenants. At the completion of the 2023 Debt Restructuring, $391.0 million principal of amended Senior Secured Term Loans is outstanding with HPS Investment Partners, LLC (“HPS”), $16.3 million principal is outstanding with Onex Credit Partners, LLC (“Onex”), $0.3 million principal is outstanding with Knighthead Capital Management, LLC (“Knighthead”), and the remaining $0.2 million principal is outstanding with Marathon Asset Management LP (“Marathon”). Additionally, the terms of the Company's Revolving Loans were revised to increase the cash interest rate by 1.0% until the achievement of certain financial metrics.

Amendment No. 2 to the Credit Agreement also provides, among other terms, (i) a reduction of the thresholds applicable to the minimum liquidity financial covenant under the 2022 Credit Agreement for certain periods, (ii) a waiver of the requirement to comply with the Secured Net Leverage Ratio financial covenant under the 2022 Credit Agreement for the fiscal quarters ending June 30, 2024, September 30, 2024 and December 31, 2024 and a modification of the levels and certain component definitions applicable thereto in the fiscal quarters ending after December 31, 2024, (iii) an extension of the minimum liquidity financial covenant for the fiscal quarters in which the Secured Net Leverage Ratio financial covenant was waived, (iv) a waiver of the requirement for the Company to deliver audited financial statements without a going concern explanatory paragraph for the years ended December 31, 2022, December 31, 2023, and December 31, 2024, and (v) board representation and observer rights and other changes to the governance of the Company.

Based on the results of the cash flow tests and requirements pursuant to ASC Topic 470, Debt, the Company accounted for the impacts of Amendment No. 2 to the Credit Agreement related to the amount held by HPS as a modification, and the impacts related to the amounts held by Onex, Knighthead, and Marathon as an extinguishment. As part of the 2023 Debt Restructuring, the Company recognized $1.8 million of incremental original issue discount on the Senior Secured Term Loan related to lenders treated under extinguishment accounting.

Second Lien Note Purchase Agreement and Designation of Series B Preferred Stock

Knighthead, Marathon, and Onex collectively exchanged a principal amount of $100.0 million of Senior Secured Term Loans for $100.0 million of 2L Notes stapled with a number of shares of Series B Preferred Stock. Of the $100.0 million of 2L Notes issued, approximately $50.8 million were issued to Knighthead, $40.4 million were issued to Marathon, and $8.8 million were issued to Onex. The 2L Notes are subordinated in right of payment and lien priority to the 2022 Credit Facility and mature on August 24, 2028, unless earlier converted, accrue interest at an annual rate of 8.0% payable in-kind on a quarterly basis in the form of additional 2L Notes, and are convertible into shares of Common Stock, at the holder’s option, at a fixed conversion price of $12.50, subject to certain adjustments in the agreement (the "Conversion Price"). Upon conversion of the 2L Notes, the Company shall deliver to the holder a number of shares of Common Stock equal to (i) the principal amount of such 2L Note plus any accrued and unpaid interest divided by (ii) the Conversion Price.

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The 2L Notes are effectively stapled with one share of the Company’s Series B Preferred Stock for every $1,000 principal amount of the 2L Notes (the "Series B Preferred Stock"). The Series B Preferred Stock represent voting rights only, with the number of votes being equal to the number of shares of Common Stock each share of Series B Preferred Stock is assumed convertible for at a conversion price of $12.87 per share (the "Voting Rights Conversion Price"). Additional voting rights accrue to the lenders through the deemed issuance of the annual 8.0% paid in-kind 2L Notes with stapled shares of Series B Preferred Stock. The Series B Preferred Stock does not have any dividend or redemption rights. Upon conversion of 2L Notes to Common Stock, the stapled shares of Series B Preferred Stock would be canceled in an amount commensurate with the portion of 2L Notes converted. Based on the voting rights associated with the Series B Preferred Stock attached to the 2L Notes as well as other terms to the 2023 Debt Restructuring, the Company determined that Knighthead, Marathon, and Onex became related parties on the Closing Date.

The following table presents approximate changes in outstanding shares of Series B Preferred Stock during the period and associated equivalent common stock voting rights at the end of the period (in thousands):


									June 30, 2023
Series B Preferred Stock, shares at Closing Date									103
Increase (decrease) in shares during period									—
Series B Preferred Stock, shares at end of period									103

Common Stock voting rights, as converted basis(1)									8,022

(1) Represents approximate shares of Series B Preferred Stock outstanding at end of period, times $1,000, divided by the contractual Voting Rights Conversion Price of $12.87 per share.

On or after the second anniversary of the Closing Date and subject to certain conditions, the Company may, at its option, elect to convert (a “Forced Conversion”) a portion of the outstanding 2L Notes into the number of shares of Common Stock based on the Conversion Price then in effect.

On the Closing Date, an additional $3.2 million of 2L Notes with stapled Series B Preferred Stock were issued as part of the First Amendment to the Second Lien Note Purchase Agreement. The terms of the issued 2L Notes and Series B Preferred Stock are the same as those that were subject to the exchange.

The 2L Notes are accounted for as a liability in the Company's condensed consolidated balance sheets. The Company has made an irrevocable election to account for the 2L Notes under the fair value option in accordance with ASC Topic 825, Financial Instruments, in lieu of bifurcating certain features in the Second Lien Note Purchase Agreement. As such, the 2L Notes are initially recorded as a liability at estimated fair value and are subject to re-measurement at each balance sheet date with changes in fair value recognized in the Company's statements of operations. As a result of applying the fair value option, direct costs and fees related to the 2L Notes were expensed as incurred. As of June 30, 2023, the principal amount and estimated fair value of the 2L Notes were approximately $103.2 million and $96.9 million, respectively. Refer to Note 13 - Fair Value Measurements for further details on the fair value of the 2L Notes. Additionally, as of June 30, 2023, the effective interest rate on the 2L Notes was 8.0%.

As of June 30, 2023, of the 2L Notes principal outstanding and due to related parties, approximately $52.4 million, $41.7 million and $9.1 million were outstanding with Knighthead, Marathon, and Onex, respectively.

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Delayed Draw Right

The Company also has the right to cause to be issued to Knighthead, Marathon and Caspian Capital L.P. ("Caspian") (collectively the "Delayed Draw Purchasers") an additional $25.0 million of aggregate principal in the form of 2L Notes under its delayed draw right ("Delayed Draw Right”), which is governed by the Second Lien Note Purchase Agreement. If drawn, the notes under the Delayed Draw Right will be subject to the same terms as the convertible 2L Notes with associated shares of Series B Preferred Stock allowing for voting rights on an as-converted basis prior to conversion. The right to draw will terminate approximately 18 months after the Closing Date. The Company may request two draws in an amount of $12.5 million each, separately or together, subject to, for each draw, (a) projected liquidity at any time during the 6-month period following the date of the relevant draw being below certain thresholds, and (b) the consent of the board of directors.

Upon issuance, the Company accounted the Delayed Draw Right as an asset at fair value, which represents the Company's option to draw funds subject to certain conditions. For Knighthead and Marathon's portion of the Delayed Draw Right, the asset was recognized as part of the calculation of loss on debt extinguishment. For Caspian, the Delayed Draw Right was recognized as a capital contribution as there was no previous lender relationship with the Company with respect to the Senior Secured Term Loan. At the Closing Date, the Company recognized approximately $3.5 million in Delayed Draw Right assets, which is included in other current assets on the Company's condensed consolidated balance sheets. Subsequently, the asset will be monitored for impairment.

2022 Credit Agreement

On February 24, 2022 (the "Refinancing Date"), the Company entered into various financing arrangements to refinance its ~~existing~~previous long-term debt (the "2022 Debt Refinancing"). As part of the 2022 Debt Refinancing, ATI Holdings Acquisition, Inc. (the "Borrower"), an indirect subsidiary of ATI Physical Therapy, Inc., entered into a credit agreement among the Borrower, Wilco Intermediate Holdings, Inc. ("Holdings"), as loan guarantor, Barclays Bank PLC, as administrative agent and issuing bank, and a syndicate of lenders (the "2022 Credit Agreement"). The 2022 Credit Agreement provides a $550.0 million credit facility (the "2022 Credit Facility") that is comprised of a $500.0 million senior secured term loan (the "Senior Secured Term Loan") which was fully funded at closing and a $50.0 million "super priority" senior secured revolver (the "Revolving Loans") with a $10.0 million letter of credit sublimit.

The 2022 Credit Facility refinanced and replaced the Company's prior credit facility for which Barclays Bank PLC served as administrative agent for a syndicate of lenders. The Company paid $555.0 million to settle its previous term loan (the "2016 First Lien Term Loan"). The Company accounted for the transaction as a debt extinguishment and recognized $2.8 million in loss on debt extinguishment during the six months ended June 30, 2022 related to the derecognition of the remaining unamortized deferred financing costs and unamortized original issue discount in conjunction with the debt repayment. The loss on debt extinguishment associated with the repayment of the 2016 First Lien Term Loan has been reflected in other expense, net in the condensed consolidated statements of operations.

In connection with the 2022 Debt Refinancing, the Company also entered into a preferred stock purchase agreement, consisting of senior preferred stock with detachable warrants to purchase common stock for an aggregate stated value of $165.0 million (collectively, the “Preferred Stock Financing”). See Note 10 - Mezzanine and Stockholders' Equity for further information regarding the Preferred Stock Financing.

The Company capitalized debt issuance costs totaling $12.5 million related to the 2022 Credit Facility as well as an original issue discount of $10.0 million, which are amortized over the terms of the respective financing arrangements.

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Senior Secured Term Loan

The Senior Secured Term Loan matures on February 24, 2028 and bears interest, at the Company's election, at a base interest rate of the Alternate Base Rate ("ABR"), as defined in the agreement, plus an applicable credit spread, or the Adjusted Term ~~SOFR~~Secured Overnight Financing Rate ("SOFR"), as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio. The Company ~~may~~was able to elect to pay 2.0% interest in-kind at a 0.5% premium during the first year under the agreement. The Company elected to pay a portion of its interest in-kind ~~during~~beginning in the third quarter ~~ended September 30, 2022.~~of 2022 through the completion of the first year under the agreement. As of ~~September~~June 30, ~~2022,~~2023, borrowings on the Senior Secured Term Loan bear interest at ~~1-month~~13.5%, consisting of 3-month SOFR, subject to a 1.0% floor, plus a credit spread of 7.25% plus ~~the 0.5%~~an incremental 1.0% paid-in-kind interest ~~premium.~~added under the terms of the 2023 Debt Restructuring. As of June 30, 2023, the effective interest rate on the Senior Secured Term Loan was 13.6% and the outstanding principal amount was $407.8 million.

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Revolving Loans

The Revolving Loans are subject to a maximum borrowing capacity of $50.0 million and mature on February 24, 2027. Borrowings on the Revolving Loans bear interest, at the Company's election, at a base interest rate of the ABR, as defined in the agreement, plus an applicable credit spread, or the Adjusted Term SOFR Rate, as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio. ~~The~~In December 2022, the Company ~~capitalized issuance costs of $0.5~~drew $48.2 million ~~related to the~~in Revolving Loans. ~~Unamortized issuance costs~~During the second quarter of ~~$0.2~~2023, the Company repaid approximately $24.8 million ~~related to~~in Revolving Loans. As of June 30, 2023, $23.5 million in Revolving Loans were outstanding and bearing interest at 10.1%, consisting of 3-month SOFR plus a credit spread of 5.1%, which includes the ~~revolving loans~~incremental 1.0% added under the ~~2016 credit agreement were added to the balance of unamortized issuance costs to be amortized over the term~~terms of the ~~Revolving Loans pursuant to debt extinguishment accounting guidance.~~ 2023 Debt Restructuring.

Commitment fees on the Revolving Loans are payable quarterly at 0.5% per annum on the daily average undrawn portion for the quarter and are expensed as incurred. The balances of unamortized issuance costs related to the Revolving Loans ~~and the revolving loans under the 2016 credit agreement, respectively,~~ were ~~$0.6~~$0.5 million as of ~~September~~June 30, ~~2022,~~2023, and ~~$0.3~~$0.6 million as of December 31, ~~2021.~~2022.

The 2022 Credit Facility isand 2L Notes are guaranteed by certain of the Company’s subsidiaries and isare secured by substantially all of the assets of Holdings, the Borrower and the Borrower’s wholly owned subsidiaries, including a pledge of the stock of the Borrower, in each case, subject to customary exceptions. Pursuant to the terms of the Intercreditor and Subordination Agreement, the 2L Notes (and the guarantees thereof) will rank junior in right of payment to the obligations under the 2022 Credit Agreement, and the liens on the collateral securing the 2L Notes will rank junior to the liens on such collateral securing the obligations under the 2022 Credit Agreement.

The 2022 Credit Agreement contains customary covenants and restrictions, including financial and non-financial covenants. ~~The~~In accordance with Amendment No. 2 to the Credit Agreement, the financial covenants require the Company to maintain $30.0 million of minimum liquidity, as defined in the agreement, at each test date through the first quarter of 2023, $25.0 million of minimum liquidity for the second quarter of 2023, $15.0 million of minimum liquidity through the fourth quarter of 2023 and $10.0 million of minimum liquidity through the fourth quarter of 2024. Additionally, beginning in the ~~second~~first quarter of ~~2024,~~2025, the Company must maintain a Secured Net Leverage Ratio, as defined in the agreement, not to exceed ~~7.00:~~11.00:1.00. The net leverage ratio covenant decreases ineach subsequent quarter through the ~~third~~second quarter of ~~2024~~2026 to ~~6.75:1.00 and further decreases in the first quarter of 2025 to 6.25:~~7.00:1.00, which remains applicable through maturity. The financial covenants are tested as of each fiscal quarter end for the respective periods. As of June 30, 2023, the Company is in compliance with its minimum liquidity financial covenant.

Table of Contents

The 2022 Credit Facility contains customary representations and warranties, events of default, reporting and other affirmative covenants and negative covenants, including requirements related to ~~certain~~the delivery of independent audit reports without a going concern ~~independent audit reports,~~explanatory paragraph beginning with the report covering fiscal year 2025, limitations on indebtedness, liens, investments, negative pledges, dividends, junior debt payments, fundamental changes and asset sales and affiliate transactions. The Second Lien Note Purchase Agreement includes affirmative and negative covenants (other than financial covenants) that are substantially consistent with the 2022 Credit Agreement, as well as customary events of default. Failure to comply with the 2022 Credit Facility and Second Lien Note Purchase Agreement covenants and restrictions could result in an event of default under the ~~2022 Credit Facility,~~respective borrowing agreements, subject to customary cure periods. In such an event, all amounts outstanding under the 2022 Credit Facility and Second Lien Note Purchase Agreement, together with any accrued interest, could then be declared immediately due and payable.

Under the 2022 Credit Facility, the Company may be required to make certain mandatory prepayments upon the occurrence of certain events, including: an event of default, a ~~Prepayment Asset Sale~~prepayment asset sale or receipt of ~~Net Insurance Proceeds (as defined in the 2022 Credit Agreement)~~net insurance proceeds in excess of ~~$15.0~~$10.0 million, or excess cash flows exceeding certain ~~thresholds (as~~thresholds. A prepayment asset sale includes dispositions at fair market value, and net insurance proceeds is generally defined inas insurance proceeds received on a covered loss or as a result of assets taken under the ~~2022 Credit Agreement).~~power of eminent domain, net of costs related to the matter.

The Company had letters of credit totaling ~~$1.8~~$6.5 million and ~~$1.2~~$1.8 million under the letter of credit sub-facility on the revolving credit ~~facilities~~facility as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The letters of credit auto-renew on an annual basis and are pledged to insurance carriers as collateral.

~~Table of Contents~~

Aggregate maturities of ~~long-term debt~~the Company's borrowings at ~~September~~June 30, ~~2022~~2023 are as follows (in thousands):

~~2022 (remainder of year)~~


2023 (remainder of year)	$	—
2024	—
2025	—
2026	—
2027	23,450
2028	511,042

Total future maturities(1)	534,492
Unamortized original issue discount and debt issuance costs	(16,181)
2L Notes due to related parties, principal amount(1, 2)	(103,243)
Long-term debt, net(1)	$	415,068

(1) Excludes any contractual paid in-kind interest that may be accrued and added to the principal amounts between now and the respective maturity dates.

(2) The principal amount of the 2L Notes differs from the estimated fair value presented on the condensed consolidated balance sheet. Refer to Note 13 - Fair Value Measurements for further details on the fair value of the 2L Notes.

—

~~2023~~

—

~~2024~~

—

~~2025~~

—

~~2026~~

—

~~Thereafter~~

~~500,889~~

~~Total future maturities~~

~~500,889~~

~~Unamortized original issue discount and debt issuance costs~~

~~(20,983)~~

~~Total debt, net~~

~~479,906~~

Note 9. Share-Based Compensation

The Company recognizes compensation expense for all share-based compensation awarded to employees, net of forfeitures, using a fair value-based method. The grant-date fair value of each award is amortized to expense on a straight-line basis over the award’s vesting period. Compensation expense associated with share-based awards is included in salaries and related costs and selling, general and administrative expenses in the accompanying condensed consolidated statements of operations, depending on whether the award recipient is a clinic-level or corporate employee, respectively. Share-based compensation expense is adjusted for forfeitures as incurred.

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ATI 2021 Equity Incentive Plan

~~2022~~2023 grants

During the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, the Company granted ~~stock options and~~ restricted stock units ("RSUs") to certain employees and independent directors of the Company. For the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, approximately ~~6.4 million stock options and 5.4~~0.7 million RSUs were granted under the 2021 Plan. The ~~weighted average grant date~~weighted-average grant-date fair values related to the ~~2022 grants~~RSUs granted were ~~$0.98 and $2.08 for the stock options and RSUs, respectively.~~

~~Table of Contents~~

The fair values of each stock option granted was determined using the Black-Scholes option-pricing model. As the Company does not have sufficient historical share option exercise experience for such "plain-vanilla" awards, the expected option term was determined using the simplified method, which is the average of the option's vesting and contractual term. Volatility is measured using the historical volatility of certain comparable companies, using daily log-returns of stock prices, as adjusted for the impact of financial leverage. The risk-free interest rate reflects the U.S. Treasury yield curve in effect at the time of the grant. The following weighted-average assumptions were used for the options granted in 2022:


			~~2022~~
~~Weighted-average grant-date fair value of options~~			~~$0.98~~
~~Risk-free interest rate~~			~~1.74%~~
~~Term (years)~~			~~6.2~~
~~Volatility~~			~~61.19%~~
~~Expected dividend~~			—%

$17.00.

As of ~~September~~June 30, ~~2022,~~2023, the unrecognized compensation expense related to ~~stock options~~outstanding RSUs was ~~$5.5~~$14.6 million, to be recognized over a weighted-average period of ~~3.0 years, and the unrecognized compensation expense related to RSUs was $7.6 million, to be recognized over a weighted-average period of 2.1~~2.4 years.

Total non-cash share-based compensation expense recognized in the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was approximately ~~$1.9~~$2.8 million and ~~$5.8~~$4.2 million, respectively.

Note 10. Mezzanine and Stockholders' Equity

ATI Physical Therapy, Inc. Series A Senior Preferred Stock

In connection with the 2022 Debt Refinancing, the Company issued 165,000 shares of non-convertible preferred stock (the "Series A Senior Preferred Stock") plus ~~5.2 million~~ warrants to purchase 0.1 million shares of the Company's common stock at an exercise price of ~~$3.00~~$150.00 per share (the "Series I Warrants") and warrants to purchase ~~6.3~~0.1 million shares of the Company's common stock at an exercise price equal to ~~$0.01~~$0.50 per share (the "Series II Warrants"). The shares of the Series A Senior Preferred Stock have a par value of $0.0001 per share and an initial stated value of $1,000 per share, for an aggregate initial stated value of $165.0 million. The Company is authorized to issue 1.0 million shares of preferred stock per the Certificate of Designation. As of ~~September~~June 30, ~~2022,~~2023, there was 0.2 million shares of Series A Senior Preferred Stock issued and outstanding.

The gross proceeds received from the issuance of the Series A Senior Preferred Stock and the Series I and Series II Warrants were $165.0 million, which was allocated among the instruments based on the relative fair values of each instrument. Of the gross proceeds, $144.7 million was allocated to the Series A Senior Preferred Stock, $5.1 million to the Series I Warrants and $15.2 million to the Series II Warrants. The resulting discount on the Series A Senior Preferred Stock will be recognized as a deemed dividend when those shares are subsequently remeasured upon becoming redeemable or probable of becoming redeemable. The Company recognized $2.9 million in issuance costs and $1.4 million of original issue discount related to the Series A Senior Preferred Stock.

~~Table of Contents~~

The following table reflects the components of proceeds related to the Series A Senior Preferred Stock (in thousands):


Gross proceeds allocated to Series A Senior Preferred Stock	$	144,667
Less: original issue discount	(1,447)
Less: issuance costs	(2,880)
Net proceeds received from issuance of Series A Senior Preferred Stock	$	140,340

Table of Contents

The Series A Senior Preferred Stock has priority over the Company's Class A common stock and all other junior equity securities of the Company, and is junior to the Company's existing or future indebtedness and other liabilities (including trade payables), with respect to payment of dividends, distribution of assets, and all other liquidation, winding up, dissolution, dividend and redemption rights.

The Series A Senior Preferred Stock carries an initial dividend rate of 12.0% per annum (the "Base Dividend Rate"), payable quarterly in arrears. Dividends will be paid in-kind and added to the stated value of the Series A Senior Preferred Stock. The Company may elect to pay dividends on the Series A Senior Preferred Stock in cash beginning on the third anniversary of the Refinancing Date and, with respect to any such dividends paid in cash, the dividend rate then in effect will be decreased by 1.0%.

The Base Dividend Rate is subject to certain adjustments, including an increase of 1.0% per annum on the first day following the fifth anniversary of the Refinancing Date and on each one-year anniversary thereafter, and 2.0% per annum upon the occurrence of either an Event of Noncompliance (as defined in the Certificate of Designation) or a failure by the Company to redeem in full all Series A Senior Preferred Stock upon a Mandatory Redemption Event, which includes a change of control, liquidation, bankruptcy or certain restructurings. The paid in-kind dividends related to the Series A Preferred Stock were ~~$5.3~~$11.0 million and ~~$12.3~~$7.0 million for the ~~three and nine~~six months ended ~~September~~June 30, 2023 and 2022, respectively. As of ~~September~~June 30, ~~2022,~~2023, the accumulated paid in-kind dividends related to the Series A Preferred Stock were ~~$12.3~~$28.9 million and the aggregate stated value was ~~$177.3~~$193.9 million.

~~The following table presents the change~~Changes in the aggregate stated value and stated value per share of the Series A Senior Preferred Stock ~~since~~consisted of the ~~Refinancing Date~~following (in thousands, except per share data):

Series A Senior Preferred Stock
Aggregate stated value as of February 24, 2022 $ 165,000
Accumulated paid in-kind dividends as of September 30, 2022 12,263
Aggregate stated value as of September 30, 2022 $ 177,263
Preferred shares issued and outstanding as of September 30, 2022 165
Stated value per share as of September 30, 2022 $ 1,074.32


	June 30, 2023		December 31, 2022
Aggregate stated value, beginning of period	$	182,876	$	165,000
Paid in-kind dividends(1)	11,012		17,876
Aggregate stated value, end of period	$	193,888	$	182,876

Preferred shares issued and outstanding, end of period	165		165

Stated value per share, end of period	$	1,175.08	$	1,108.34

(1) Changes in the stated value for the year ended December 31, 2022 represent changes since the Refinancing Date, which is when the Series A Senior Preferred Stock was issued and established.

The Company has the right to redeem the Series A Senior Preferred Stock, in whole or in part, at any time (subject to certain limitations on partial redemptions). The Redemption Price ~~(as defined in the Certificate of Designation)~~ for each share of Series A Senior Preferred Stock ~~depends~~is equal to the stated value subject to certain price adjustments depending on when such optional redemption takes place, if at all.

~~Table of Contents~~

Table of the conditions which would trigger the redemption of the Series A Senior Preferred Stock, the Company has determined that the Series A Senior Preferred Stock is neither currently redeemable nor probable of becoming redeemable. Because the Series A Senior Preferred Stock is classified as mezzanine equity and is not considered redeemable or probable of becoming redeemable, the paid in-kind dividends that are added to the stated value do not impact the carrying value of the Series A Senior Preferred Stock in the Company’s condensed consolidated balance sheets. Should the Series A Senior Preferred Stock become probable of becoming redeemable, the Company will recognize changes in the redemption value of the Series A Senior Preferred Stock immediately as they occur and adjust the carrying amount accordingly at the end of each reporting period. As of September 30, 2022, the redemption value of the Series A Senior Preferred Stock was $177.3 million, which is the stated value.Contents

If an Event of Noncompliance occurs, then the holders of a majority of the then outstanding shares of Series A Senior Preferred Stock (the “Majority Holders”) have the right to demand that the Company engage in a sale/refinancing process to consummate a Forced ~~Transaction (as defined in the Certificate of Designation).~~Transaction. A Forced Transaction includes a refinancing of the Series A Senior Preferred Stock or a sale of the Company. Upon consummation of any Forced Transaction, to the extent not prohibited by law, the Company is required to redeem all Series A Senior Preferred Stock, in cash, at a price per share equal to the then applicable Redemption Price.

Holders of shares of Series A Senior Preferred Stock have no voting rights with respect to the Series A Senior Preferred Stock except as set forth in the Certificate of Designation, other documents entered into in connection with the Purchase Agreement and the transactions contemplated thereby, ~~(collectively, the “Transaction Documents”),~~ or as otherwise required by law. For so long as any Series A Senior Preferred Stock is outstanding, the Company is prohibited from taking certain actions without the prior consent of the Majority Holders as set forth in the Certificate of Designation which include: issuing equity securities ranking senior to or pari passu with the Series A Senior Preferred Stock, incurring indebtedness or liens, engaging in affiliate transactions, making restricted payments, consummating certain investments or asset dispositions, consummating a change of control transaction unless the Series A Senior Preferred Stock is redeemed in full, altering the Company’s organizational documents, and making material changes to the nature of the Company’s business.

~~Holders~~As part of ~~Series A Senior~~the 2022 Debt Refinancing, the Preferred ~~Stock,~~Equityholders, voting as a separate class, ~~have~~had the right to designate and elect one director to serve on the Company’s board of directors until such time after the Refinancing Date that (i) as of any applicable fiscal quarter end, the Company’s trailing 12-month Consolidated Adjusted EBITDA (as defined in the Certificate of Designation) exceeds $100 million, or (ii) the Lead Purchaser ceases to hold at least 50.1% of the Series A Senior Preferred Stock held by it as of the Refinancing Date. As part of the 2023 Debt Restructuring, (1) the Preferred Equityholders’ preexisting rights as holders of the Company’s Series A Senior Preferred Stock to designate and elect one director to the Company’s board of directors (the “Board”) was revised to provide that (a) the Preferred Equityholders have the right to appoint three additional directors to the Board (resulting in the right of the Preferred Equityholders to appoint a total of four directors to the Board) until such time after the Closing Date that the Lead Purchaser (as defined in certain of the transaction agreements entered into in connection with the original issuance of the Series A Preferred Stock) ceases to hold at least 50.1% of the Series A Preferred Stock held by it as of the Closing Date, one of whom must be unaffiliated with (and independent of) the Preferred Equityholders and who must meet the definition of “independent” under the listing standards of the New York Stock Exchange, and by the SEC; and (b) all such designee directors of the Preferred Equityholders will be subject to consideration by the Board (acting in good faith and consistent with their review of other Board candidates) and (2) the provision in the Certificate of Designation of the Company’s Series A Senior Preferred Stock that eliminated the Preferred Equityholders’ director designation rights upon the Company’s achievement of certain amounts of EBITDA was deleted.

Prior to the closing of the 2023 Debt Restructuring, because the Series A Senior Preferred Stock is classified as mezzanine equity and was not considered redeemable or probable of becoming redeemable, the paid in-kind dividends that were added to the stated value did not impact the carrying value of the Series A Senior Preferred Stock in the Company’s condensed consolidated balance sheets. Based on the voting rights associated with the Series B Preferred Stock attached to the 2L Notes issued as part of the 2023 Debt Restructuring, the Company determined that redemption of the Series A Preferred Stock is no longer solely within the control of the Company. As a result, the Company determined that the Series A Preferred Stock is probable of becoming redeemable based on the accounting guidance. Following the 2023 Debt Restructuring, since the Series A Senior Preferred Stock is probable of becoming redeemable, the Company will recognize changes in the redemption value of the Series A Senior Preferred Stock immediately as they occur and adjust the carrying amount as if redemption were to occur at the end of the reporting period. As of June 30, 2023, the redemption value of the Series A Senior Preferred Stock was $213.9 million, which includes the aggregate stated value at June 30, 2023, inclusive of paid in-kind dividends, and an incremental redemption value adjustment to reflect the carrying amount equal to what the redemption amount would be as if redemption were to occur at the end of the reporting period.

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Changes in the carrying value of the Series A Preferred Stock consisted of the following for the six months ended June 30, 2023 (in thousands). There were no changes in carrying value in 2022.


	June 30, 2023
Carrying value, beginning of period	$	140,340
Write off original issue discount	1,447
Write off issuance costs	2,880
Deemed dividend from discount on initial gross proceeds allocation	20,333
Paid in-kind dividends recognized to carrying value	28,888
Redemption value adjustment	20,036
Carrying value, end of period	$	213,924

2022 Warrants

In connection with the Preferred Stock Financing, the Company agreed to issue to the preferred stockholders the Series I Warrants entitling the holders thereof to purchase ~~5.2~~0.1 million shares of the Company's common stock at an exercise price equal to ~~$3.00~~$150.00 per share, exercisable for 5 years from the Refinancing Date; and the Series II Warrants entitling holders thereof to purchase ~~6.3~~0.1 million shares of the Company's common stock at an exercise price equal to ~~$0.01~~$0.50 per share, exercisable for 5 years from the Refinancing Date (collectively, the "2022 Warrants"). Such number of shares of common stock purchasable pursuant to the 2022 Warrant Agreement ~~(the "2022 Warrant Shares")~~and related exercise prices may be adjusted from time to time under certain scenarios as set forth in the 2022 Warrant ~~Agreement.~~Agreement, which relate to potential changes in the Company's capital structure.

The 2022 Warrants are classified as equity instruments and were initially recorded at an amount equal to the proceeds received from the Preferred Stock Financing allocated among the Series A Senior Preferred Stock, the Series I Warrants, and the Series II Warrants based upon their relative fair values. Of the gross proceeds, $5.1 million was allocated to the Series I Warrants and $15.2 million was allocated to the Series II Warrants. The Company recognized total issuance costs and original issue discount of approximately $0.2 million and $0.5 million related to the Series I Warrants and Series II Warrants, respectively.

The following table reflects the components of proceeds related to the 2022 Warrants (in thousands):


	Series I Warrants		Series II Warrants		Total
Gross proceeds allocated to 2022 Warrants	$	5,101	$	15,232	$	20,333
Less: original issue discount	(51)		(152)		(203)
Less: issuance costs	(102)		(303)		(405)
Net proceeds received from issuance of 2022 Warrants	$	4,948	$	14,777	$	19,725

Class A common stock

The Company is authorized to issue 470.0 million shares of Class A common stock with a par value of $0.0001 per share. Holders of the Company’s Class A common stock are entitled to one vote for each share on each matter on which they are entitled to vote. At ~~September~~June 30, ~~2022,~~2023, there were ~~207.3~~4.2 million shares of Class A common stock issued and ~~198.1~~4.0 million shares outstanding.

As a result of the recapitalization associated with the Business Combination, shares are reflected as if they were issued and outstanding as of the earliest reported period to reflect the new capital structure. At the time of the Business Combination, stockholders of Wilco Holdco, Inc. received 130.3 million shares of the Company’s Class A common stock, par value $0.0001 per share, for the outstanding shares of Wilco Holdco common stock, par value $0.01 per share, that such stockholders owned. Upon distribution of shares to holders of unvested Incentive Common Units granted prior to the Business Combination under the Wilco Acquisition, LP 2016 Equity Incentive Plan, 2.0 million of these shares were restricted subject to vesting requirements, resulting in total unrestricted shares of 128.3 million and an exchange ratio of 136.7 unrestricted shares of ATI Physical Therapy, Inc. for every previously outstanding Wilco Holdco share.

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As of ~~September~~June 30, ~~2022,~~2023, shares of Class A common stock reserved for potential future issuance, on an as-if converted basis, were as follows (in thousands):


			~~September~~June 30, ~~2022~~2023
2L Notes(1)			8,259
Shares available for grant under the 2021 Plan			~~9,154~~242
2021 Plan share-based awards outstanding			~~11,549~~872
Earnout Shares reserved			~~15,000~~300
2022 ~~Warrants outstanding~~Warrant shares reserved			~~11,498~~230
IPO ~~Warrants outstanding~~Warrant shares reserved			~~9,867~~197
Vesting Shares reserved~~(1)~~(2)			~~8,625~~173
Restricted shares~~(1,2)~~(2)			~~509~~7
Total shares of common stock reserved			~~66,202~~10,280

(1)Calculated based on the principal amount of 2L Notes and Conversion Price of $12.50 per share. This figure differs from the contractual Voting Rights Conversion Price of $12.87 as outlined in Note 8 - Borrowings.

(2) Represents shares of Class A common stock legally issued, but not outstanding, as of ~~September~~June 30, ~~2022.~~

~~(2)~~ Represents a portion of the 2.0 million restricted shares distributed following the Business Combination to holders of unvested Incentive Common Units under the Wilco Acquisition, LP 2016 Equity Incentive Plan.2023.

Treasury stock

During the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, the Company net settled ~~0.03 million~~4,369 shares of its Class A common stock related to employee tax withholding obligations associated with the Company's share-based compensation program. These shares are reflected at cost as treasury stock in the condensed consolidated financial statements. As of ~~September~~June 30, ~~2022,~~2023, there were ~~0.06 million~~5,909 shares of treasury stock totaling ~~$0.1~~$0.2 million recognized in the condensed consolidated balance sheets.

~~Note 11. Wilco Holdco Redeemable Preferred Stock~~

On May 10, 2016, Wilco Holdco, Inc. issued shares of Series A Preferred Stock (the “Wilco Holdco preferred stock”) for a total consideration value of $98.0 million. Prior to the Business Combination, the Wilco Holdco preferred stock was a class of equity that had priority over the Common Stock with respect to distribution rights, liquidation rights and dividend rights.

The Wilco Holdco preferred stockholders, from and after issuance, were entitled to cumulative preferred dividends at an annual rate per share equal to 10.25% of the original issue price. The dividend rate of the Wilco Holdco preferred stock increased by 0.25% at the end of each fiscal quarter beginning after the second anniversary of the issuance of the Wilco Holdco preferred stock.

Based on the terms of the Wilco Holdco preferred stockholder agreement, Wilco Holdco, Inc. was required to redeem all outstanding shares of preferred stock upon the occurrence of certain events, such as those related to full repayment of the 2016 first and second lien credit agreements or a deemed liquidating event.~~Based on these redemption requirements, the Wilco Holdco preferred stock was classified as debt (redeemable preferred stock) in the Company’s historical consolidated balance sheets.~~

Cumulative dividends related to the Wilco Holdco preferred stock were accrued as preferred dividends that increased the balance of the redeemable preferred stock on the Company’s consolidated balance sheets and were recognized as interest expense on redeemable preferred stock in the Company’s consolidated statements of operations. ~~For the~~ ~~three and nine months ended September 30, 2021,~~ ~~the Company incurred cumulative preferred dividends related to the preferred stock of~~ ~~zero and $10.1 million, respectively. No dividends were paid related to the preferred stock.~~

~~Table of Contents~~

~~In connection with the Business Combination, holders of the outstanding shares of Wilco Holdco Series A Preferred Stock received a proportionate share of $59.0 million and~~ ~~12.8 million~~ shares of Class A common stock based on the settlement terms in the Merger Agreement. During 2021, the Company recorded a loss on settlement of redeemable preferred stock in the condensed consolidated statement of operations of $14.0 million based on the value of the cash and equity provided to preferred stockholders in relation to the outstanding redeemable preferred stock liability. As a result of the Business Combination, the balance of redeemable preferred stock was fully settled.

Note ~~12.~~11. IPO Warrant Liability

The Company has outstanding ~~Public Warrants~~public warrants to purchase an aggregate of ~~6.9~~approximately 0.1 million shares of the Company’s Class A common stock at an exercise price of ~~$11.50~~$575.00 per share ("Public Warrants") and outstanding ~~Private Placement Warrants~~private placement warrants to purchase an aggregate of ~~3.0~~approximately 0.1 million shares of the Company's Class A common stock at an exercise price of ~~$11.50~~$575.00 per ~~share.~~share ("Private Placement Warrants") (collectively, the "IPO Warrants"). As of June 30, 2023, the Public Warrants were delisted from the New York Stock Exchange ("NYSE") and are traded in the over-the-counter market. There were no IPO Warrants exercised during the ~~three and nine~~six months ended ~~September~~June 30, ~~2022~~2023.

The Company accounts for its outstanding IPO Warrants in accordance with the guidance contained in ~~Accounting Standards Codification~~ASC 815-40, Derivatives and Hedging - Contracts on an Entity’s Own Equity, and determined that the IPO Warrants do not meet the criteria for equity treatment thereunder. As such, each IPO Warrant must be recorded as a liability and is subject to re-measurement at each balance sheet date. Refer to Note 1413 - Fair Value Measurements for further details. Changes in fair value are recognized in change in fair value of warrant liability in the Company’s condensed consolidated statements of operations.

Table of Contents

The following table presents the change in the fair value of Private Placement Warrants that is recognized in change in fair value of warrant liability in the condensed consolidated ~~statement~~statements of operations for the periods indicated below (in thousands):


		Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021				June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Fair value, beginning of period~~(1)~~	Fair value, beginning of period~~(1)~~	$	445	$	6,734	$	1,305	$	8,099		Fair value, beginning of period~~(1)~~	$	89	$	801	$	29	$	1,305
Changes in fair value		(238)		(4,776)		(1,098)		(6,141)
Decrease in fair value											Decrease in fair value	(60)		(356)		—		(860)
Fair value, end of period	Fair value, end of period	$	207	$	1,958	$	207	$	1,958		Fair value, end of period	$	29	$	445	$	29	$	445

~~(1)~~ ~~The nine months ended September 30, 2021 represents changes in fair value from the Closing Date of the Business Combination, which is when the liabilities were established.~~

The following table presents the changes in the fair value of the Public Warrants that is recognized in change in fair value of warrant liability in the condensed consolidated statements of operations for the periods indicated below (in thousands):

Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Fair value, beginning of period(1)
$ 1,035 $ 15,663 $ 3,036 $ 18,837
Changes in fair value (552) (11,109) (2,553) (14,283)
Fair value, end of period $ 483 $ 4,554 $ 483 $ 4,554

~~(1)~~ ~~The nine months ended September 30, 2021 represents changes in fair value from the Closing Date of the Business Combination, which is when the liabilities were established.~~


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Fair value, beginning of period	$	207	$	1,863	$	69	$	3,036
Decrease in fair value	(138)		(828)		—		(2,001)
Fair value, end of period	$	69	$	1,035	$	69	$	1,035

~~Table of Contents~~

Note ~~13.~~12. Contingent Common Shares Liability

Earnout Shares

Subject to the terms and conditions of the ~~Merger Agreement,~~merger agreement between Wilco Holdco, Inc. and Fortress Value Acquisition Corp. II (herein referred to as "FAII" and "FVAC"), certain stockholders of Wilco Holdco, Inc. were provided the contingent right to receive, in the aggregate, up to ~~15.0~~0.3 million shares of Class A common stock if, from the closing of the ~~Business Combination~~Company's business combination with FAII until the 10th anniversary thereof, the dollar volume-weighted average price (“VWAP”) of Class A common stock exceeds certain ~~thresholds.~~thresholds (the "Earnout Shares"). The Earnout Shares vest in three equal tranches of ~~5.0~~0.1 million shares each if the VWAP of Class A common stock exceeds ~~$12.00, $14.00~~$600.00, $700.00 and ~~$16.00~~ $800.00 per share, respectively, over the designated period of time.

The Earnout Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Earnout Shares price target. The Company accounts for the potential Earnout Shares as a liability in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in the Company’s condensed consolidated statements of operations. As of ~~September~~June 30, ~~2022,~~2023, no Earnout Shares have been issued as none of the corresponding share price thresholds have been met.

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The following table presents the changes in the fair value of the Earnout Shares that is recognized in change in fair value of contingent common shares liability in the condensed consolidated statements of operations for the periods indicated below (in thousands):

Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Fair value, beginning of period(1)
$ 12,400 $ 126,700 $ 28,800 $ 140,000
Changes in fair value (4,400) (92,900) (20,800) (106,200)
Fair value, end of period $ 8,000 $ 33,800 $ 8,000 $ 33,800

~~(1)~~ ~~The nine months ended September 30, 2021 represents changes in fair value from the Closing Date of the Business Combination, which is when the liabilities were established.~~


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Fair value, beginning of period	$	1,350	$	13,350	$	1,800	$	28,800
Decrease in fair value	(503)		(950)		(953)		(16,400)
Fair value, end of period	$	847	$	12,400	$	847	$	12,400

Refer to Note 1413 - Fair Value Measurements for further details.

Vesting Shares

Subject to the terms and conditions of the ~~Sponsor Letter Agreement~~sponsor letter agreement that was executed in connection with the ~~Merger Agreement,~~ ~~8.6~~merger agreement between Wilco Holdco, Inc. and FAII, approximately 0.2 million shares of Class F common stock of FAII outstanding immediately prior to the ~~Business Combination~~Company's business combination with FAII converted to potential Class A common shares and became subject to vesting and forfeiture ~~provisions.~~provisions (the "Vesting Shares"). The Vesting Shares vest in three equal tranches of ~~2.9~~approximately 0.1 million shares each if the VWAP of Class A common stock exceeds ~~$12.00, $14.00~~$600.00, $700.00 and ~~$16.00 per~~$800.00 per share, respectively, over the designated period of time. The Vesting Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Vesting Shares price target.

The Company accounts for the Vesting Shares as a liability in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in the Company’s condensed consolidated statements of operations.As of ~~September~~June 30, ~~2022,~~2023, no Vesting Shares are outstanding as none of the corresponding share price thresholds have been met.

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The following table presents the changes in the fair value of the Vesting Shares that is recognized in change in fair value of contingent common shares liability in the condensed consolidated statements of operations for the periods indicated below (in thousands):

Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Fair value, beginning of period(1)
$ 7,130 $ 72,852 $ 16,560 $ 80,500
Changes in fair value (2,530) (53,417) (11,960) (61,065)
Fair value, end of period $ 4,600 $ 19,435 $ 4,600 $ 19,435

~~(1)~~ ~~The nine months ended September 30, 2021 represents changes in fair value from the Closing Date of the Business Combination, which is when the liabilities were established.~~


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Fair value, beginning of period	$	776	$	7,676	$	1,035	$	16,560
Decrease in fair value	(289)		(546)		(548)		(9,430)
Fair value, end of period	$	487	$	7,130	$	487	$	7,130

Refer to Note 1413 - Fair Value Measurements for further details.

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Note ~~14.~~13. 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.

•Level 2: Observable inputs other than Level 1 inputs, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instruments.

•Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, respectively, the recorded values of cash, ~~and~~ cash equivalents and restricted cash, accounts receivable, other current assets, accounts payable, accrued expenses and deferred revenue approximate their fair values due to the short-term nature of these items. Money market funds categorized in Level 1 of the fair value hierarchy are measured at fair value based on quoted market prices. As of June 30, 2023 and December 31, 2022, respectively, the fair value of money market fund investments included in cash and cash equivalents was zero and $30.0 million.

Fair value measurement of debt

The Company's ~~Senior Secured Term Loan and~~ Revolving Loans are Level 2 fair value measures which have a variable interest ~~rates~~rate structure that resets on a frequent short-term basis and, asas of ~~September~~June 30, ~~2022,~~2023, the recorded amounts approximate fair value. Prior to the 2023 Debt Restructuring, the Company's Senior Secured Term Loan was a Level 2 fair value measure. The Company utilizes ~~the~~ market approach valuation ~~technique~~techniques based on interest rates and credit data that are currently available to the Company for issuance of debt with similar terms or maturities.

In connection with the 2023 Debt Restructuring, the Company estimated the fair value of a portion of its Senior Secured Term Loan using a Black-Derman-Toy Lattice Bond Pricing Model. The valuation model utilizes observable and unobservable Level 3 inputs, such as SOFR forward rates and an estimated yield. As of June 30, 2023, the carrying amount and estimated fair value of the Senior Secured Term Loan was approximately $391.6 million and $364.2 million, respectively.

As discussed in Note 8 - Borrowings, the Company has made an irrevocable election to account for the 2L Notes under the fair value option in accordance with ASC Topic 825, Financial Instruments. As such, the 2L Notes are initially recorded as a liability at estimated fair value and are subject to re-measurement at each balance sheet date with changes in fair value recognized in the Company's statements of operations.

The Company determined the fair value of the 2L Notes using Level 3 inputs. The fair value of the 2L Notes was estimated using a Goldman Sachs convertible bond valuation model to consider the impacts of the conversion feature. Changes in the assumptions of the unobservable inputs may materially affect the estimated fair value of the 2L Notes.

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The key inputs into the convertible bond valuation model were as follows as of the Closing Date. As of June 30, 2023, the most significant change in the below inputs that impacted the valuation was share price, which was $9.15:


																								2L Notes
																								June 15, 2023
Risk-free interest rate																								3.90%
Volatility																								50.00%
Selected yield																								20.00%
Expected term (years)																								5.3
Share price																								$10.21

The following table presents the changes in the fair value of the 2L Notes that is recognized in change in fair value of 2L Notes in the condensed consolidated statements of operations for the periods indicated below (in thousands). None of the change in fair value is attributable to instrument-specific credit risk:


	Three Months Ended		Six Months Ended
	June 30, 2023			June 30, 2023
Fair value, beginning of period(1)	$	103,943		$	103,943
Decrease in fair value(1)	(7,010)			(7,010)
Fair value, end of period	$	96,933		$	96,933

(1) Represents changes in fair value from the Closing Date, which is when the 2L Notes were issued.

Fair value measurement of share-based financial liabilities

~~The~~Prior to June 30, 2023, the Company determined the fair value of the Public Warrant liability using Level 1 ~~inputs.~~

~~The Company~~inputs, and determined the fair value of the Private Placement Warrant liability using the price of the Public Warrants as a Level 2 input.

~~Table~~ As of ~~Contents~~

~~The~~June 30, 2023, the Company determined the fair value of the IPO Warrant liability using Level 3 inputs as its Public Warrants were delisted from the NYSE.

As of June 30, 2023, the Company determined the fair value of the IPO Warrant liability, Earnout Shares liability and Vesting Shares liability using Level 3 inputs. The warrants would be deemed exercisable or redeemable if the Company's common stock price over a specified measurement period was trading at certain thresholds. 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 warrants are exercised or redeemed, and the shares are earned, a Monte-Carlo simulation was used to estimate the fair value of the ~~liability.~~liabilities. 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 warrants are exercised or redeemed, or the shares vest. In iterations where the stock price corresponded to warrants being exercised or redeemed, or shares vesting, the future value of the ~~vesting~~warrants or contingent common shares ~~was~~were discounted back to present value. The fair value of the ~~liability was~~liabilities were estimated based on the average of all iterations of the simulation.

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Inherent in a ~~Monte Carlo~~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 well as the Company's historical volatility over the available look-back period as of the valuation date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the ~~grant~~valuation date for a maturity similar to the expected term of the IPO Warrants, 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 IPO Warrants, Earnout Shares or Vesting Shares.

The key inputs into the ~~Monte Carlo~~Monte-Carlo option pricing model were as follows as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 for the respective Level 3 ~~instruments~~:instruments:


		Earnout Shares		Vesting Shares			IPO Warrants		Earnout Shares and Vesting Shares
		September 30, 2022	December 31, 2021	September 30, 2022	December 31, 2021		June 30, 2023	December 31, 2022	June 30, 2023	December 31, 2022
Risk-free interest rate	Risk-free interest rate	3.85%	1.50%	3.85%	1.50%	Risk-free interest rate	4.45%	N/A	3.88%	3.88%
Volatility	Volatility	66.20%	44.86%	66.20%	44.86%	Volatility	91.30%	N/A	77.80%	74.60%
Dividend yield	Dividend yield	—%	—%	—%	—%	Dividend yield	—%	N/A	—%	—%
Expected term (years)	Expected term (years)	8.7	9.5	8.7	9.5	Expected term (years)	3.0	N/A	8.0	8.5
Share price	Share price	$1.00	$3.39	$1.00	$3.39	Share price	$9.15	N/A	$9.15	$15.50

Refer to Note 1311 - IPO Warrant Liability andNote 12 - Contingent Common Shares Liability for further details on the change in fair value of the IPO Warrants and change in fair value of the Earnout Shares and Vesting ~~Shares.~~Shares, respectively.

Fair value measurement of interest rate derivative instruments

The Company is exposed to interest rate variability with regard to its existing variable-rate debt instrument, which exposure primarily relates to movements in various interest rates, such as SOFR. The Company utilizes interest rate cap derivative instruments for purposes of hedging exposures related to such variable-rate cash payments. The Company's interest rate caps are designated as cash flow hedging instruments.

The Company records derivatives on the balance sheet at fair value, which represents the estimated amounts it would receive or pay upon termination of the derivative prior to the scheduled expiration date. The fair value is derived from model-driven information based on observable Level 2 inputs, such as ~~LIBOR or~~ SOFR forward rates. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings.

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~~As discussed in Note 2 –~~ ~~Basis of Presentation and Recent Accounting Standards~~, the Company has a derivative instrument for which the interest rate is indexed to LIBOR. During the period ended March 31, 2022, the Company modified the reference rate index on its hedged items from LIBOR to SOFR. The Company elected to apply the hedge accounting expedients under ASC Topic 848, ~~Reference Rate Reform~~, related to probability and the assessments of effectiveness for future cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivative, which is LIBOR. As of ~~September 30, 2022, the Company continues to apply the hedge accounting expedients and does not anticipate this guidance will have a material impact on its consolidated financial statements.~~

The following table presents the activity of cash flow hedges included in accumulated other comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~ June 30, ~~2022~~2023 and ~~2021,~~2022, respectively (in thousands)~~. Amounts reclassified into interest expense were~~ ~~immaterial~~ ~~for the periods presented:~~:


	Cash Flow Hedges
Balance as of December 31, 2022	$	4,899
Unrealized loss recognized in other comprehensive income before reclassifications	(99)
Reclassification to interest expense, net	(3,357)
Balance as of March 31, 2023	1,443
Unrealized gain recognized in other comprehensive income before reclassifications	798
Reclassification to interest expense, net	(1,648)
Balance as of June 30, 2023	$	593

Balance as of December 31, 2021	$	28
Unrealized gain recognized in other comprehensive income before reclassifications	~~3,752~~3,681
Reclassification to interest expense, net	71
Balance as of March 31, 2022	3,780
Unrealized gain recognized in other comprehensive income before reclassifications	~~2,708~~2,642
~~Balance as of June 30, 2022~~Reclassification to interest expense, net	~~6,488~~
~~Unrealized gain recognized in other comprehensive income~~	~~655~~66
Balance as of ~~September~~June 30, 2022	$	~~7,143~~

~~Balance as of December 31, 2020~~	$	~~(1,907)~~
~~Unrealized gain recognized in other comprehensive income~~	~~561~~
~~Balance as of March 31, 2021~~	~~(1,346)~~
~~Unrealized gain recognized in other comprehensive income~~	~~636~~
~~Balance as of June 30, 2021~~	~~(710)~~
~~Unrealized gain recognized in other comprehensive income~~	~~181~~
~~Balance as of September 30, 2021~~	$	~~(529)~~6,488

The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 (in thousands):


		September 30, 2022				December 31, 2021				June 30, 2023				December 31, 2022
		Assets		Liabilities		Assets		Liabilities				Assets		Liabilities	Assets		Liabilities
Derivatives designated as cash flow hedging instruments:	Derivatives designated as cash flow hedging instruments:										Derivatives designated as cash flow hedging instruments:
Other current assets	Other current assets	$	7,157	$	—	$	—	$	—		Other current assets	$	511	—	$	5,028	—
Other non-current assets	Other non-current assets	84		—		277		—			Other non-current assets	$	83	—	—		—
Accrued expenses and other liabilities	Accrued expenses and other liabilities	—		42		—		288			Accrued expenses and other liabilities	—		—	—		—

Other non-current liabilities											Other non-current liabilities	—		—	—		$	73

Note ~~15.~~14. Income Taxes

The effective tax rate and income tax ~~benefit~~expense for the three months ended ~~September~~June 30, ~~2022~~2023 were ~~5.8%~~(0.4)% and ~~$7.2~~$0.1 million, compared to an effective tax rate and income tax benefit of ~~9.8%~~8.8% and ~~$35.3~~$13.0 million for the three months ended ~~September~~June 30, ~~2021.~~2022. The effective tax rate and income tax ~~benefit~~expense for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were ~~10.0%~~(0.3)% and ~~$43.5~~$0.2 million, compared to an effective tax rate and income tax benefit of ~~7.7%~~11.7% and ~~$65.6~~$36.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

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The effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, 2023 was estimated based on full-year 2023 forecast. The estimated effective tax rate was different than the statutory rate primarily due to the recognition of valuation allowances against federal and state net operating losses and other tax attributes, such as interest disallowances, for which future realization is uncertain. The estimated effective tax rate applicable to year-to-date losses as adjusted for discrete items including nontaxable fair value adjustments related to liability-classified share-based instruments, resulted in a tax expense of $0.1 million for the three months ended June 30, 2023, and a tax expense of $0.2 million for the six months ended June 30, 2023.

The effective tax rate for the three and six months ended June 30, 2022 was estimated based on full-year 2022 forecast. The estimated effective tax rate was different than the statutory rate primarily due to attributes in federal and state jurisdictions for which no benefit can be recognized and book impairment of goodwill. There was no tax basis established in a significant component of the goodwill impaired. As a result, the impairment had a substantial permanent impact on the effective tax rate. The estimated effective tax rate applicable to year-to-date losses as adjusted for discrete items ~~including nontaxable fair value adjustments related to liability-classified share-based instruments,~~ resulted in a tax benefit of ~~$7.2~~$13.0 million for the three months ended ~~September~~June 30, 2022, and a tax benefit of ~~$43.5~~$36.3 million for the ~~nine~~six months ended ~~September~~June 30, 2022.

The effective tax rate for the three and nine months ended September 30, 2021 was estimated based on full-year 2021 forecast. The effective tax rate was different than the statutory rate primarily due to book impairment of goodwill, nondeductible transactions costs and interest expense on redeemable preferred stock. The estimated effective tax rate applicable to year-to-date losses as adjusted for discrete items including the tax-effect of nondeductible impairment charges, nondeductible loss on settlement of redeemable preferred stock and fair value adjustments related to liability-classified share-based instruments, resulted in a tax benefit of $35.3 million for the three months ended September 30, 2021, and a tax benefit of $65.6 million for the nine months ended September 30, 2021.

In evaluating the Company's ability to recover deferred income tax assets, all available positive and negative evidence is considered, including scheduled reversal of deferred tax liabilities, operating results and forecasts of future taxable income in each of the jurisdictions in which the Company operates. As of ~~September~~June 30, ~~2022,~~2023, the Company ~~continues to maintain a valuation allowance related to~~determined that a significant portion of its federal and state net operating loss carryforwards with definite and certain indefinite carryforward periods and certain deferred tax assets ~~that~~ are not more likely than not to be realized based on the weight of available evidence. As a result, the Company recorded valuation allowances against tax benefits related to its current year losses.

Note ~~16.~~15. Leases

The Company leases various facilities and office equipment for its physical therapy operations and administrative support functions under operating leases. The Company’s initial operating lease terms are generally between 7 and 10 years, and typically contain options to renew for varying terms. Right-of-use ("ROU") assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The amortization of operating lease ROU assets and the accretion of operating lease liabilities are reported together as fixed lease expense. The fixed lease expense is recognized on a straight-line basis over the life of the lease. If the ROU asset has been impaired, lease expense is no longer recognized on a straight-line basis. The lease liability continues to amortize using the effective interest method, while the ROU asset is subsequently amortized on a straight-line basis.

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Lease costs are included as components of cost of services and selling, general and administrative expenses on the condensed consolidated statements of operations. Lease charges related to ROU asset impairments are included in goodwill, intangible and other asset impairment charges on the condensed consolidated statements of operations. The components of the Company's lease costs incurred ~~by lease type~~ were as follows for the periods indicated below (in thousands):


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021			June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Lease cost	Lease cost									Lease cost
Operating lease cost	Operating lease cost	$	16,826	$	16,096	$	50,313	$	47,822	Operating lease cost	$	16,674	$	16,784	$	33,363	$	33,487
Variable lease cost (1)	Variable lease cost (1)	5,198		4,425		15,734		14,361		Variable lease cost (1)	5,468		5,331		10,830		10,536
Total lease cost (2)	Total lease cost (2)	$	22,024	$	20,521	$	66,047	$	62,183	Total lease cost (2)	$	22,142	$	22,115	$	44,193	$	44,023

(1) Includes short term lease costs, which are ~~immaterial .~~immaterial.

(2) Sublease income was ~~immaterial .~~immaterial.

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During the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, the Company modified the lease terms for a significant number of its real estate leases, primarily related to lease term extensions and renewals in the normal course of business. Modifications during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 resulted in an increase to the Company’s operating lease ROU assets and operating lease liabilities of approximately ~~$11.0~~$8.8 million and ~~$13.2~~$7.5 million, respectively.

Other supplemental quantitative disclosures were as follows for the periods indicated below (in thousands):


		Nine Months Ended					Six Months Ended
		September 30, 2022		September 30, 2021			June 30, 2023		June 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:					Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	50,641	$	48,918	Operating cash flows from operating leases	$	31,110	$	32,893
Cash payments related to lease terminations		$	—	$	4,570

Right-of-use assets obtained in exchange for new operating lease liabilities	Right-of-use assets obtained in exchange for new operating lease liabilities	$	8,404	$	19,370	Right-of-use assets obtained in exchange for new operating lease liabilities	$	6,831	$	6,900

Average lease terms and discount rates as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 were as follows:

September 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Weighted-average remaining lease term:

Operating leases

6.0 years

6.4 years

Operating leases

5.7 years

5.9 years

Weighted-average discount rate:

Operating leases

6.8%

6.5%

Operating leases

7.2%

6.9%

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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~~June 30, ~~2022~~2023 were as follows (in thousands):

Year
2022 (remainder of year after September 30, 2022) $ 16,886
2023 68,962
2024 61,479
2025 51,983
2026 45,643
Thereafter 101,471
Total undiscounted future cash flows 346,424
Less: Imputed Interest (64,598)
Present value of future cash flows $ 281,826
Presentation on Balance Sheet
Current $ 52,366
Non-current $ 229,460


Year	Amount
2023 (remainder of year)	$	34,311
2024	66,189
2025	56,311
2026	49,463
2027	38,178

Thereafter	77,069
Total undiscounted future cash flows	321,521
Less: Imputed Interest	(60,303)
Present value of future cash flows	$	261,218
Presentation on Balance Sheet:
Current	$	52,194
Non-current	$	209,024

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Note ~~17.~~16. Commitments and Contingencies

The Company has contractual commitments that are not required to be recognized in the condensed consolidated financial statements related to cloud computing and telecommunication services agreements. As of June 30, 2023, minimum amounts due under these agreements are approximately $13.8 million through January of 2026 subject to customary business terms and conditions.

From time to time, the Company is a party to legal proceedings, governmental audits and investigations that arise in the ordinary course of business. Management is not aware of any legal proceedings, governmental audits and investigations of which the outcome is probable to have a material adverse effect on the Company’s results of operations, cash flows or financial condition. The outcome of any litigation and claims against the Company cannot be predicted with certainty, and the resolution of current or future claims could materially affect our future results of operations, cash flows or financial condition.

~~The~~During 2022, the Company ~~has~~ engaged in ~~recent~~ discussions with a payor regarding a billing dispute related to certain historical claims. Management ~~believes,~~believed, based on discussions with its legal counsel, that the Company ~~has~~had meritorious defenses against such unasserted claim. However, based on the progress of settlement discussions to avoid the cost of potential litigation, the Company recorded ~~an estimated~~a charge for a ~~probable~~ net settlement liability related to the billing dispute of $3.0 million, which is included in selling, general and administrative expenses in its condensed consolidated ~~statement~~statements of ~~operations.~~operations for the three and six months ended June 30, 2022. As of December 31, 2022, the liability has been fully settled.

~~Shareholder~~Stockholder class action complaints

On August 16, 2021, two purported ATI ~~shareholders,~~stockholders, Kevin Burbige and Ziyang Nie, filed a putative class action complaint in the U.S. District Court for the Northern District of Illinois against ~~ATI;~~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 asserted claims against: (i) ATI and the ATI Individual Defendants under Section 10(b)~~

Table of the Securities Exchange Act of 1934 (the “Exchange Act”); (ii) the ATI Individual Defendants under Section 20(a) of the Exchange Act; and (iii) all defendants under Section 14(a) of the Exchange Act. Plaintiffs Burbige and Nie purported 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.Contents

On October 7, 2021, another purported ATI ~~shareholder,~~stockholder, City of Melbourne Firefighters' Retirement System ("City of Melbourne"), filed a nearly identical putative class action complaint in the U.S. District Court for the Northern District of Illinois against ATI, the ATI Individual Defendants, and the FVAC Defendants. Like the Burbige/Nie complaint, the City of Melbourne complaint asserted claims against (i) ATI and the ATI Individual Defendants under Section 10(b) of the Exchange Act; (ii) the ATI Individual Defendants under Section 20(a) of the Exchange Act; and (iii) all defendants under Section 14(a) of the Exchange Act. City of Melbourne purported 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.

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On November 18, 2021, the court consolidated the cases and appointed The Phoenix Insurance Company Ltd. and The Phoenix Pension & Provident Funds as ~~Lead Plaintiffs (“Lead~~lead plaintiffs (together, “Lead Plaintiffs”) ~~and Pomerantz LLP as Lead Counsel.~~ .

On February 8, 2022, Lead Plaintiffs filed a consolidated amended complaint against ATI, the ATI Individual Defendants, and the FVAC Defendants, which asserts claims against (i) ATI and the ATI Individual Defendants under Section 10(b) of the Exchange Act; (ii) the ATI Individual Defendants under Section 20(a) of the Exchange Act (in connection with the Section 10(b) claim); (iii) all defendants under Section 14(a) of the Exchange Act; and (iv) the ATI Individual Defendants and the FVAC Defendants under Section 20(a) of the Exchange Act (in connection with the Section 14(a) claim). Lead Plaintiffs purport to assert these claims on behalf of those ATI ~~shareholders~~stockholders who purchased or otherwise acquired their ATI shares between February 22, 2021 and October 19, 2021, inclusive, and/or held FVAC Class A common shares as of May 24, 2021 and were eligible to vote at FVAC’s June 15, 2021 special meeting. The consolidated amended complaint ~~like the predecessor Burbige/Nie and City of Melbourne complaints,~~ generally alleges that the proxy materials for the FVAC/ATI merger, as well as other ATI disclosures (including the press release announcing ATI’s financial results for the first quarter of 2021), were false and misleading (and, thus, in violation of Sections 10(b) and 14(a) of the Exchange Act) because they failed to disclose that: (i) ATI was experiencing attrition among its physical therapists; (ii) ATI faced increasing competition for clinicians in the labor market; (iii) as a result, ATI faced difficulty retaining therapists and incurred increased labor costs; (iv) also as a result, ATI would open fewer new clinics; and (v) also as a result, the defendants’ positive statements about ATI’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis. Lead Plaintiffs, on behalf of themselves and the putative class, seek money damages in an unspecified amount and costs and expenses, including attorneys’ and experts’ fees. On April 11, 2022, defendants filed motions to dismiss the consolidated amended complaint, which were fully briefed onas of July 25, 2022 and remain pending. The Company has determined that potential liabilities related to the consolidated amended complaint are not considered probable or reasonably estimable at this time.

~~Shareholder~~On February 7, 2023, another purported ATI stockholder, Wendell Robinson, filed a putative class action complaint in the Court of Chancery of the State of Delaware against Fortress Acquisition Sponsor II, LLC, Andrew A. McKnight, Joshua A. Pack, Marc Furstein, Leslee Cowen, Aaron F. Hood, Carmen A. Policy, Rakefet Russak-Aminoach, Sunil Gulati, Daniel N. Bass, Micah B. Kaplan and Labeed Diab (the "Robinson Action"). The complaint asserts claims against: (i) Fortress Acquisition Sponsor II, LLC, Andrew A. McKnight, Joshua A. Pack, Marc Furstein, Leslee Cowen, Aaron F. Hood, Carmen A. Policy, Rafeket Russak-Aminoach, Sunil Gulati, Daniel N. Bass and Micah B. Kaplan for breach of fiduciary duty; and (ii) Labeed Diab for aiding and abetting breach of fiduciary duty. Plaintiff's allegations generally mirror those asserted in the federal stockholder class action described above, and Plaintiff further alleges that the alleged misrepresentations and omissions in the proxy materials for the FVAC/ATI merger prevented stockholders from making a fully informed decision on whether to approve the merger or have their shares redeemed. Defendants filed motions to dismiss on April 28, 2023, which were fully briefed as of June 23, 2023 and remain pending. A hearing on the motions has been scheduled for December 1, 2023. The Company has determined that potential liabilities related to this complaint are not considered probable or reasonably estimable at this time.

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On June 1, 2023, another purported ATI stockholder, Phillip Goldstein, filed a putative class action and derivative complaint in the Court of Chancery of the State of Delaware against Labeed Diab, Joseph Jordan, Cedric Coco, Ray Wahl, John L. Larsen, John Maldonado, Carmine Petrone, Joanne M. Burns, Christopher Krubert, James E. Parisi, Joshua A. Pack, Andrew A. McKnight, Marc Furstein, Aaron F. Hood, Carmen A. Policy, Sunil Gulati, Leslee Cowen, and Rakefet Russak-Aminoach. The complaint asserts direct and/or derivative claims against: (i) Labeed Diab, Joseph Jordan, Cedric Coco, Ray Wahl, John Larsen, John Maldonado, Carmine Petrone, Joanne Burns, Christopher Krubert, and James Parisi for tortious interference with redemption rights, aiding and abetting breach of fiduciary duty, and fraud; and (ii) Joshua A. Pack, Andrew A. McKnight, Marc Furstein, Aaron F. Hood, Carmen A. Policy, Sunil Gulati, Leslee Cowen, and Rakefet Russak-Aminoach for breach of fiduciary duty. Plaintiff’s allegations generally mirror those asserted in the Robinson Action referenced above. Defendants have not yet responded to the complaint. The Company has determined that potential liabilities related to this complaint are not considered probable or reasonably estimable at this time.

Stockholder derivative complaint

OnBetween December 1, 2021 ~~another~~and September 22, 2022, five purported ATI ~~shareholder, Hamza Ghaith,~~stockholders filed afour derivative ~~action (the "Ghaith Action"),~~actions, purportedly on behalf of ATI, in the U.S. District Court for the Northern District of ~~Illinois~~Illinois. On November 21, 2022, four of these stockholder plaintiffs, Vinay Kumar, Brendan Reginbald, Ziyang Nie and Julia Chang, filed a consolidated amended complaint against Labeed Diab, Joe Jordan, John Larsen, John Maldonado, Carmine Petrone, Christopher Krubert, Joanne Burns ~~Christopher Krubert,~~and James Parisi Drew McKnight, Joshua Pack, Aaron Hood, Carmen Policy, Marc Furstein, Leslee Cowen, Rafeket Russak-Aminoach, and Sunil Gulati (collectively, the “Ghaith Individual Defendants”). The Ghaith complaint asserts claims on behalf of ATI against: (i) the Ghaith Individual Defendants for breach of fiduciary duty; (ii) Labeed Diab, Joe Jordan, and Drew McKnight for contribution under Sections 10(b) and 21(d) of the Exchange Act; and (iii) Drew McKnight, Joshua Pack, Aaron Hood, Carmen Policy, Marc Furstein, Leslee Cowen, Rafeket Russak-Aminoach, and Sunil Gulati under Section 14(a) of the Exchange Act. Plaintiff Ghaith’s allegations generally mirror those asserted in the securities complaints described above, and the Ghaith complaint seeks damages in an unspecified amount, certain corporate governance reforms, restitution from the Ghaith Individual Defendants and disgorgement of all of their compensation, and costs and expenses, including attorneys’ and experts’ fees.

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On May 10, 2022, another purported ATI shareholder, Vinay Kumar, filed a derivative action (the “Kumar Action”), purportedly on behalf of ATI, in the U.S. District Court for the Northern District of Illinois against Labeed Diab, Joe Jordan, John Larsen, John Maldonado, Carmine Petrone, Joanne Burns, Teresa Sparks, James Parisi, Drew McKnight, Joshua Pack, Aaron Hood, Carmen Policy, Marc Furstein, Leslee Cowen, Rafeket Russak-Aminoach, and Sunil Gulati (collectively, the “Kumar Individual Defendants”). The Kumar complaint asserts claims on behalf of ATI against: (i) the Kumar Individual Defendants for breach of fiduciary duty; (ii) Labeed Diab, Joe Jordan, and Drew McKnight for contribution under Section 21D of the Exchange Act; (iii) Drew McKnight, Joshua Pack, Aaron Hood, Carmen Policy, Marc Furstein, Leslee Cowen, Rafeket Russak-Aminoach, and Sunil Gulati under Section 14(a) of the Exchange Act; (iv) Labeed Diab, Joe Jordan, Carmine Petrone, Joanne Burns, Teresa Sparks, James Parisi, and Drew McKnight for unjust enrichment; (v) the Kumar Individual Defendants for waste; and (vi) the Kumar Individual Defendants for contribution and indemnification under Delaware law. Plaintiff Kumar’s allegations generally mirror those asserted in the securities complaints described above, and the Kumar complaint also seeks damages in an unspecified amount, certain corporate governance reforms, restitution from the Kumar Individual Defendants and disgorgement of all of their compensation, and costs and expenses, including attorneys’ and experts’ fees. On June 9, 2022, the Ghaith Action and the Kumar Action were consolidated (the "Initial Consolidated Derivative Action"). On June 30, 2022, Judge Edmond E. Chang, before whom the consolidated securities action described above is pending, accepted reassignment of the Initial Consolidated Derivative Action, which the Executive Committee of the District Court for the Northern District of Illinois approved and entered on July 1, 2022. The initial consolidated amended derivative complaint in the Initial Consolidated Derivative Action was filed on August 5, 2022.

On September 22, 2022, another purported ATI shareholder, Brendan Reginbald, filed a derivative action (the “Reginbald Action”), purportedly on behalf of ATI, in the U.S. District Court for the Northern District of Illinois against Fortress Acquisition Sponsor II LLC and Fortress Investment Group LLC (the “Fortress Entity Defendants”), as well as against Labeed Diab, Joe Jordan, John Larsen, John Maldonado, Carmine Petrone, Joanne Burns, James Parisi, Drew McKnight (collectively, the “Legacy ATI Defendants”) ~~and~~, Drew McKnight, Joshua Pack, Aaron Hood, Carmen Policy, Marc Furstein, Leslee Cowen, Rafeket Russak-Aminoach, and Sunil Gulati (collectively, the “FVACII Individual Defendants”), and Fortress Acquisition Sponsor II, LLC and Fortress Investment Group LLC (together, the "Fortress Entity Defendants,”" and together with the ~~Fortress Entity~~FVACII Individual Defendants, the “FVACII Defendants”). The ~~Reginbald~~consolidated amended complaint asserts claims on behalf of ATI against: (i) the FVACII Defendants for breach of fiduciary duty; (ii) Fortress Acquisition Sponsor II, LLC and the Legacy ATI Defendants for aiding and abetting breach of fiduciary duty; (iii) Labeed Diab, Joe Jordan, and Drew McKnight for contribution under Section 21D of the Exchange Act; (iv) the FVACII Defendants under Section 14(a) of the Exchange Act; (v) the Legacy ATI Defendants for unjust enrichment; and (vi) all ~~the~~ defendants for contribution and indemnification under Delaware law. ~~Plaintiff Reginbald’s~~Plaintiffs' allegations generally mirror those asserted in the ~~securities complaints and the derivative complaints~~stockholder class action described ~~above, and the Reginbald complaint also seeks damages in an unspecified amount, certain corporate governance reforms, restitution from the~~above. On January 20, 2023, defendants ~~and disgorgement of all of their profits, benefits, and compensation, and costs and expenses, including attorneys’ and experts’ fees. On October 12, 2022, Judge Chang, before whom both~~filed motions to dismiss the consolidated ~~securities action~~amended complaint, which remain pending. On March 3, 2023, in lieu of filing a response to defendants' motions to dismiss, Plaintiffs filed a motion for leave to file an amended complaint, which was fully briefed as of April 7, 2023 and Initial Consolidated Derivative Action described above are pending, accepted reassignment of the Reginbald Action, which the Executive Committee of the District Court for the Northern District of Illinois approved and entered on October 13, 2022. On October 12, 2022, the Reginbald Action was consolidated with the pending consolidated derivative action (the “Consolidated Derivative Action”). An operative complaint is due in the Consolidated Derivative Action on or before November 21, 2022.remains pending. The Company has determined that potential liabilities related to the ~~Ghaith complaint, the Kumar complaint, the Reginbald complaint and the initial~~ consolidated amended ~~derivative compliant~~complaint are not considered probable or reasonably estimable at this time.

Insurance coverage complaint

On March 8, 2023, the Company filed a complaint against Federal Insurance Company, U.S. Specialty Insurance Company and other insurers titled ATI Physical Therapy, Inc. v. Federal Insurance Company et. al., Case No. N23C-03-074, in the Superior Court of the State of Delaware related to a coverage dispute and those certain insurers’ denial of coverage for the stockholder class action complaints, the stockholder derivative complaint, and the SEC requests discussed in this section. The complaint asserts claims against Federal Insurance Company for breach of contract and bad faith, and claims for declaratory judgment as to Federal Insurance Company, U.S. Specialty Insurance Company, XL Specialty Insurance Company and the Company’s excess insurance carriers, seeking coverage for the stockholder class action complaints, the stockholder derivative complaint, and the SEC requests. On June 26, 2023, the Company filed an amended complaint asserting the same claims and seeking the same relief. On July 18, 2023, the defendants filed their answers to the amended complaint.

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Regulatory matters

On November 5, 2021, the Company received from the SEC a voluntary request for the production of documents relating to the earnings forecast and financial information referenced in the Company's July 26, 2021 Form 8-K and related matters. The Company has subsequently received from the SEC additional requests for documents and information related to the same matters, and is cooperating with the ~~SEC in connection with this request.~~SEC's review and investigation of those matters.

Indemnifications

The Company has agreed to indemnify its current and former directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding to which any of them are, or are threatened to be, made a party by reason of their service as a director or officer. The Company maintains director and officer insurance coverage that would generally enable it to recover a portion of any amounts paid. The ultimate cost of current or potential future litigation may exceed the Company’s current insurance coverages and may have a material adverse impact on our results of operations, cash flows and financial condition. The Company also may be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.

Note ~~18.~~17. Loss per Share

Basic loss per share is computed by dividing ~~net~~ loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the impact of securities that would have a dilutive effect on basic loss per share, if any. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2023 and 2022, shares of ~~Wilco Holdco preferred stock~~Series A Senior Preferred Stock are treated as participating securities and therefore are included in computing earnings per common share using the two-class method. The two-class method is an earnings allocation formula that calculates basic and diluted net earnings per common share for each class of common stock separately based on dividends declared and participation rights in undistributed earnings as if the earnings for the year had been distributed. As the Wilco Holdco preferred stockholders do not participate in losses, for any periods with a net loss, there is no allocation to participating securities in the period. As of the closing of the Business Combination, the Wilco Holdco preferred stock is no longer outstanding.

For the three and ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, the income (loss) available to common ~~shareholders~~stockholders is reduced (increased) by the amount of the cumulative dividend and any redemption value adjustments for the Series A Senior Preferred Stock that was issued as part of the 2022 Debt Refinancing. As discussed in Note 8 - Borrowings, the Series B Preferred Stock are non-economic and represent voting rights only and, therefore, are not considered in the calculation of basic or diluted loss per share.

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The calculation of both basic and diluted loss per share for the periods indicated below was as follows (in thousands, except per share data):


		Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021				June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Basic and diluted loss per share:	Basic and diluted loss per share:										Basic and diluted loss per share:
Net loss	Net loss	$	(116,694)	$	(326,774)	$	(390,640)	$	(783,718)		Net loss	$	(21,749)	$	(135,723)	$	(46,959)	$	(273,946)
Less: Net loss attributable to non-controlling interests		(376)		(2,109)		(1,026)		(4,569)

Less: Net income (loss) attributable to non-controlling interests											Less: Net income (loss) attributable to non-controlling interests	956		(177)		2,016		(650)
Less: Series A Senior Preferred redemption value adjustments(1)											Less: Series A Senior Preferred redemption value adjustments(1)	44,696		—		44,696		—
Less: Series A Senior Preferred cumulative dividend	Less: Series A Senior Preferred cumulative dividend	5,274		—		12,263		—			Less: Series A Senior Preferred cumulative dividend	5,709		5,063		11,012		6,988
Loss available to common stockholders	Loss available to common stockholders	$	(121,592)	$	(324,665)	$	(401,877)	$	(779,149)		Loss available to common stockholders	$	(73,110)	$	(140,609)	$	(104,683)	$	(280,284)

Weighted average shares outstanding(1,2)		204,282		196,996		202,708		155,197
Weighted average shares outstanding(2)											Weighted average shares outstanding(2)	4,122		4,077		4,110		4,038

Basic and diluted loss per share	Basic and diluted loss per share	$	(0.60)	$	(1.65)	$	(1.98)	$	(5.02)		Basic and diluted loss per share	$	(17.74)	$	(34.49)	$	(25.47)	$	(69.41)

(1) ~~The weighted-average number of shares outstanding in periods presented prior~~For the three and six months ended June 30, 2023, the Series A Senior Preferred Stock was remeasured to ~~the closing~~its redemption value. This adjustment consisted of the ~~Business Combination has been retrospectively adjusted based on~~recognition of a deemed dividend primarily from the ~~exchange ratio established through~~original issue discount and an incremental redemption value adjustment to reflect the ~~transaction.~~carrying amount equal to what the redemption amount would be as if redemption were to occur at the end of the reporting period. Refer to Note 10 - Mezzanine and Stockholders' Equity for additional information.

(2) Included within weighted average shares outstanding following the 2022 Debt Refinancing are common shares issuable upon the exercise of the Series II Warrants, as the Series II Warrants are exercisable at any time for nominal consideration. As such, the shares are considered to be outstanding for the purpose of calculating basic and diluted loss per share.

For the periods presented, ~~the~~basic and diluted loss per share were equal. The following number of shares issuable related to outstanding securities ~~were not required to be included~~could potentially dilute earnings per share in the ~~computation of diluted shares outstanding, as their impact would have been anti-dilutive. Figures presented are~~future (in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2023	June 30, 2022	June 30, 2023	June 30, 2022
2L Notes(1)	8,259	—	8,259	—
Series I Warrants	105	105	105	105
IPO Warrants	197	197	197	197
Restricted shares(2)	7	11	7	11
Stock options	103	129	103	129
RSUs	767	97	767	97
RSAs	2	6	2	6
Total	9,440	545	9,440	545

(1) Potential dilution is reflected on an if-converted basis based on the ~~number~~principal amount of ~~underlying~~2L Notes and conversion price of $12.50 per share.

(2) Represents certain shares of Class A common ~~shares following the Business Combination (in thousands):~~

Three Months Ended Nine Months Ended
September 30, 2022

September 30, 2021 September 30, 2022

September 30, 2021
Series I Warrants 5,226 — 5,226 —
IPO Warrants 9,867 9,867 9,867 9,867
Restricted shares(1)
509 1,403 509 1,403
Stock options 6,400 — 6,400 —
RSUs 4,889 — 4,889 —
RSAs 260 — 260 —
Total 27,151 11,270 27,151 11,270

~~(1)~~ ~~Represents a portion~~stock legally issued, but not outstanding, as of the ~~2.0 million restricted shares distributed following the Business Combination to holders~~respective periods.

Table of ~~unvested Incentive Common Units under the Wilco Acquisition, LP 2016 Equity Incentive Plan.~~Contents

~~15.0 million Earnout Shares and 8.6 million Vesting Shares were excluded from the calculation of basic and diluted per share calculations as~~As the vesting thresholds have not yet been met as of the end of the reporting period, 0.3 million Earnout Shares and approximately 0.2 million Vesting Shares were excluded from the ~~reporting period.~~basic and diluted shares outstanding calculations.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of ATI Physical Therapy, Inc. and its subsidiaries (herein referred to as “we,” ”us,” “the Company,” “our Company,” "ATI," or ~~"ATI"~~"ATIP") should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report.

We make statements in this discussion that are forward-looking and involve risks and uncertainties. These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of the Company. The forward-looking statements are based on our current views and assumptions, and actual results could differ materially from those anticipated in such forward-looking statements due to factors including, but not limited to, those discussed under “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A. “Risk Factors.”

Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Our forward-looking statements represent our estimates and assumptions only as of the date of this 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~~six months ended ~~September~~June 30, ~~2022,~~2023 and ~~2021~~2022.

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 ~~929 owned~~911 clinics located in 24 states (as well as 2018 clinics under management service agreements) ~~located in 25 states~~ as of ~~September~~June 30, ~~2022.~~2023. We operate with a commitment to providing our patients, medical provider partners, payors and employers with evidence-based, patient-centric care.

We offer a variety of services within our clinics, including physical therapy to treat spine, shoulder, knee and neck injuries or pain; work injury rehabilitation services, including work conditioning and work hardening; hand therapy; and other specialized treatment services. Our Company’s team of professionals is dedicated to helping return patients to optimal physical health.

Physical therapy patients receive team-based care, ~~leading-edge~~standardized 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.

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In addition to providing services to physical therapy patients at outpatient rehabilitation clinics, we provide services through our ATI Worksite Solutions (“AWS”) program, Management Service Agreements (“MSA”) and Sports Medicine arrangements. AWS provides an on-site team of healthcare professionals at employer worksites to promote work-related injury prevention, facilitate expedient and appropriate return-to-work follow-up and maintain the health and well-being of the workforce. Our MSA arrangements typically include the Company providing management and physical therapy-related services to physician-owned physical therapy clinics. Sports Medicine arrangements provide certified healthcare professionals to various schools, universities and other institutions to perform on-site physical therapy and rehabilitation services.

~~Appointment of Chief Executive Officer~~2023 Debt Restructuring Transaction

On June 15, 2023 (the "Closing Date"), the Company completed a transaction to improve the Company's liquidity (the "2023 Debt Restructuring"). On the Closing Date, certain previously executed agreements became effective, including (i) Amendment No. 2 to Credit Agreement, (ii) a Second Lien Note Purchase Agreement and (iii) certain other definitive agreements relating to the 2023 Debt Restructuring (such documents referred to collectively as the "Signing Date Definitive Documents"). Refer to Note 8 - Borrowings in the condensed consolidated financial statements for further details.

Reverse Stock Split

On ~~April 28, 2022,~~June 14, 2023, the Company ~~appointed Sharon Vitti~~effected a one-for-fifty (1-for-50) reverse stock split of its Class A common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’s stockholders at the Company’s 2023 Annual Meeting of Stockholders held on June 13, 2023, and the final reverse split ratio was subsequently approved by the Company’s board of directors on June 14, 2023. The Company's common stock commenced trading on a reverse split-adjusted basis on June 15, 2023.

As a result of the Reverse Stock Split, every fifty (50) shares of common stock either issued and outstanding or held as ~~its Chief Executive Officer and~~treasury stock were combined into one new share of common stock. Any fractional shares of common stock resulting from the Reverse Stock Split were rounded up to the ~~Board~~nearest whole share. All outstanding securities entitling their holders to purchase or acquire shares of ~~Directors. Ms. Vitti has 30 years~~common stock, including stock options, warrants, Earnout Shares, Vesting Shares and shares of ~~healthcare experience, including nearly two decades of executive leadership in clinical and consumer-focused healthcare companies.~~

~~In connection with Ms. Vitti’s appointment, John (Jack) Larsen stepped down~~common stock subject to vesting were adjusted as ~~Executive Chairman~~a result of the ~~Company, effective April 28, 2022 and will continue in his role~~Reverse Stock Split, as ~~Chairman~~required by the terms of those securities. The Reverse Stock Split did not change the par value of the ~~Board~~common stock or the number of the Company. Mr. Larsen was appointed Executive Chairman of the Company on August 9, 2021. In addition, effective April 28, 2022, John (Jack) Larsen, Joseph Jordan, the Company’s Chief Financial Officer, and Ray Wahl, the Company’s Chief Operating Officer, no longer fulfill the role of Principal Executive Officer.shares authorized for issuance.

2022 Debt Refinancing and Preferred Stock Financing

On February 24, 2022, the Company entered into various financing arrangements to refinance its existing long-term debt (the "2022 Debt Refinancing"). The Company entered into ~~a new~~the 2022 Credit Agreement which is comprised of a senior secured term loan which matures on February 24, 2028, and a "super priority" senior secured revolver, which matures on February 24, 2027. Refer to Note 8 - Borrowings in the condensed consolidated financial statements for further details.

In connection with the 2022 Debt Refinancing, the Company issued shares of non-convertible preferred stock and warrants to purchase shares of the Company's common ~~stock.~~stock (the "Preferred Stock Financing"). Refer to Note 10 - Mezzanine and Stockholders' Equity in the condensed consolidated financial statements for further details.

~~The Business Combination~~

On June 16, 2021 (the “Closing Date”), a Business Combination transaction (the “Business Combination”) was finalized pursuant to the Agreement and Plan of Merger ("Merger Agreement"), dated February 21, 2021 between the operating company, Wilco Holdco, Inc. (“Wilco Holdco”), and Fortress Value Acquisition Corp. II (herein referred to as "FAII" and "FVAC"), a special purpose acquisition company. In connection with the closing of the Business Combination, the Company changed its name from Fortress Value Acquisition Corp. II to ATI Physical Therapy, Inc. ~~The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles ("GAAP").~~ ~~The Company’s common stock is listed on the New York Stock Exchange ("NYSE") under the symbol “ATIP.”~~ ~~Refer to Note 3 -~~ ~~Business Combinations and Divestiture~~ ~~in the condensed consolidated financial statements for further details.~~

~~Home Health divestiture~~

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~~2021 acquisitions~~

During the fourth quarter of 2021, the Company completed 3 acquisitions consisting of 7 total clinics. The Company paid approximately $4.5 million in cash and $1.4 million in future payment consideration, subject to certain time or performance conditions set out in the purchase agreements, to complete the acquisitions.

Trends and Factors Affecting the Company’s Future Performance and Comparability of Results

Through the ~~third~~second quarter of ~~2022,~~2023, we observed the following trends in our ~~business:~~operations:

•Improved ~~referral and~~ patient visit volumes relative to ~~the comparative periods in 2021 and relative to volume softness experienced during the beginning of~~ 2022, ~~which was~~primarily driven by ~~an increase in COVID-19 cases due to the outbreak of additional variants.~~higher clinician productivity.

•A continued tight labor market for available physical therapy and other healthcare providers in the workforce, contributing to competition in hiring, attrition, ~~clinician~~clinical staffing level challenges, continued use of contract labor and ~~continued~~ wage inflation in the physical therapy industry and at ATI.

•~~Decrease~~Stabilization in rate per visit relative to the comparative year-to-date period in 2022 primarily driven by favorable service mix shifts, partially offset by rate headwinds including unfavorable payor and state mix shifts and Medicare rate cuts that became effective on January 1, ~~2022, Medicare sequestration reductions that began after March 31, 2022 and June 30, 2022 and less favorable payor and state mix when compared to prior periods.~~2023.

Our ability to achieve our business plan depends upon a number of factors, including, but not limited to, the success of a number of continued steps being taken ~~related~~in an effort to ~~increasing~~increase clinical staffing levels, ~~increasing~~improve and sustain higher clinician productivity, ~~controlling~~control costs and capital expenditures, ~~increasing~~increase visit volumes and referrals and ~~stabilizing~~stabilize and improve rate per visit.

During the quarter ended March 31, 2022, the Company identified an interim triggering event as a result of factors including potential changes in discount rates and the recent decrease in share price. The Company determined that the combination of these factors 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 $116.3 million related to goodwill and $39.4 million related to the trade name indefinite-lived intangible asset during the period ended March 31, 2022.

During the quarter ended June 30, 2022, the Company identified an interim triggering event as a result of factors primarily driven by potential changes in discount rates. The Company determined that these factors 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 approximately $87.9 million related to goodwill and $40.0 million related to the trade name indefinite-lived intangible asset during the period ended June 30, 2022.

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During the quarter ended September 30, 2022, the Company identified an interim triggering event as a result of factors primarily driven by potential changes in discount rates. The Company determined that these factors 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 approximately $66.4 million related to goodwill and $40.0 million related to the trade name indefinite-lived intangible asset during the period ended September 30, 2022, which was primarily driven by an increase in the discount rate and lower public company comparative multiples. 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. WeAlthough the direct impact on our business has decreased since the peak impact in 2020, we continue to closely monitor the ~~impact~~remaining impacts from the pandemic, including its direct or indirect effects on macroeconomic factors, the labor markets in which we operate, and the physical therapy and broader healthcare landscape. Throughout the duration of ~~COVID-19 on all aspects of our business,~~the pandemic and declared public health emergency, and continuing hereafter, our priorities ~~remain~~have been protecting the health and safety of employees and patients, maximizing the availability of services to satisfy patient needs, and improving the operational and financial stability of our business.

As a result of the COVID-19 pandemic, visits per day ("VPD") decreased to a low point of 12,643 during the quarter ended June 30, 2020. The Company has experienced relative increases in quarterly VPD following the low point, as local restrictions in certain markets, referral levels and individual routines evolved compared to prior periods. During the ~~fourth quarter~~beginning of ~~2021,~~2022, we observed volume softness caused, in part, by an increase in COVID-19 cases due to the outbreak of additional ~~variants, which continued to impact visit volumes in the beginning of 2022.~~variants. Through the remainder of the first ~~quarter of 2022 and the second quarter~~half of 2022, we experienced increases in visit volumes relative to the beginning of 2022. Additionally, while we observed volume softness during the third quarter of 2022 due, in part, to seasonality, we experienced increases in quarterly VPD through the ~~third~~fourth quarter of 2022 ~~relative to the comparative quarters in 2021.~~

~~The chart below reflects the quarterly trend in VPD.~~

which has continued into 2023.

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The chart below reflects the quarterly trend in VPD:

As demand for physical therapy services has increased in the market since its low point during the quarter ended June 30, 2020, the Company has focused on attempting to increase its clinical staffing levels by hiring clinicians, optimizing clinician hours based on available workforce and attempting to reduce levels of clinician attrition that have been elevated relative to historical levels. The elevated levels of attrition were initially caused, in part, by changes made during the COVID-19 pandemic related to compensation, staffing levels and support for clinicians. We have implemented a range of actions related to compensation, staffing levels, clinical and professional development and other initiatives in an effort to retain and attract therapists across our platform, which has increased our ~~current and future~~ expectations for labor costs. While the Company has observed improvement in hiring and attrition levels in certain periods since implementing these actions, ~~attrition remains above historical~~hiring trends remain below targeted levels due to a continued tight labor market for available physical therapy and other healthcare providers in the workforce which may impede our progress toward increasing visit volumes. In an effort to drive more volume and visits per day, in addition to focusing on clinical staffing levels and clinician productivity, we are working to establish relationships with new referral sources and strengthen relationships with our partner providers and existing referral sources across our geographic footprint.

~~The~~Despite the World Health Organization declaring an end to the global health emergency associated with the COVID-19 pandemic ~~is still evolving and~~in May 2023, the full extent of its future impact remains unknown and difficult to predict. The future impact of the COVID-19 pandemic and any direct or indirect resulting impacts on our performance will depend on certain developments, including the duration and spread of the virus and its newly identified strains, effectiveness and adoption rates of vaccines and other therapeutic remedies, the potential for continued or reinstated restrictive policies enforced by federal, state and local governments, and the impact of the virus ~~and vaccination requirements~~ on our workforce, all of which create uncertainty and cannot be predicted. While we expect the disruption caused by COVID-19 and resulting impacts to diminish over time, we cannot predict the length of such impacts, and if such impacts continue for an extended period, it could have a continued effect on the Company’s results of operations, financial condition and cash flows, which could be material.

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CARES Act

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act") was signed into law providing reimbursement, grants, waivers and other funds to assist health care providers during the COVID-19 pandemic. The Company has realized benefits under the CARES Act including, but not limited to, the ~~following:~~

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at that time.

Market and industry trends and factors

•Outpatient physical therapy services growth. Outpatient physical therapy continues to play a key role in treating musculoskeletal conditions for patients. According to the Centers for Medicare & Medicaid Services ("CMS"), musculoskeletal conditions impact individuals of all ages and include some of the most common health issues in the U.S. As healthcare trends in the U.S. continue to evolve, with a growing focus on value-based care emphasizing up-front, conservative care to deliver better outcomes, quality healthcare services addressing such conditions in lower cost outpatient settings may continue increasing in prevalence.

•U.S. population demographics. The population of adults aged 65 and older in the U.S. is expected to continue to grow and thus expand the Company’s market opportunity. According to the U.S. Census Bureau, the population of adults over the age of 65 is expected to grow 30% from 2020 through 2030. As a significant portion of our net patient revenue is derived from governmental third-party payors, including Medicare, our patient base of adults aged 65 and older may increase in the coming years.

•Federal funding for Medicare and Medicaid. Federal and state funding of Medicare and Medicaid and the terms of access to these reimbursement programs affect demand for physical therapy services. In ~~December 2021,~~recent years, through legislative and regulatory actions, the ~~Protecting~~federal government has made substantial changes to various payment systems under the Medicare and American Farmers from Sequester Cuts Act was signed into law. As a result, the reimbursement rate reduction beginning in January 2022 was approximately 0.75%. The Act did not address a previously proposed 15% decrease in payments for services performed by physical therapy assistants, which began on January 1, 2022. Additionally, a further reduction through resuming sequestration was postponed. Sequestration reductions resumed at 1% after March 31, 2022, and by an additional 1% after June 30, 2022, which resulted in an overall reduction of 2% in reimbursement rates related to sequestration after June 30, 2022.program. In July 2022, the CMS released its proposed 2023 Medicare Physician Fee ~~Schedule. The proposed fee schedule calls~~Schedule which called for an approximate 4.5% reduction in the calendar year 2023 conversion factor. In December 2022, the Consolidated Appropriations Act (2023) was signed into law. The Consolidated Appropriations Act (2023) provides partial relief related to Medicare cuts including 2.5% relief in 2023 and 1.25% relief in 2024. As a result, the reimbursement rate reduction beginning in January 2023 was approximately 2.0%. In July 2023, the CMS released its proposed 2024 Medicare Physician Fee Schedule. The proposed fee schedule calls for an approximate 3.34% reduction in the calendar year 2024 conversion factor which would lead to further reductions in reimbursement rates 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.

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Key Components of Operating Results

Net patient revenue. Net patient revenues are recorded for physical therapy services that the Company provides to patients including physical therapy, work conditioning, hand therapy, aquatic therapy and functional capacity assessment. Net patient revenue is recognized based on contracted amounts with payors or other established rates, adjusted for the estimated effects of any variable consideration, such as contractual allowances and implicit price concessions. Visit volume is primarily driven by conversion of physician referrals and marketing efforts.

Other revenue. Other revenue consists of revenue generated by our AWS, MSA and Sports Medicine service lines.

Salaries and related costs. Salaries and related costs consist primarily of wages and benefits for our healthcare professionals engaged directly and indirectly in providing services to patients.

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Rent, clinic supplies, contract labor and other. Comprised of non-salary, clinic related expenses consisting of rent, clinic supplies, contract labor and other costs including travel expenses and depreciation at our clinics.

Provision for doubtful accounts. Provision for doubtful accounts represents the Company’s estimate of accounts receivable recorded during the period that may ultimately prove uncollectible based upon several factors, including the age of outstanding receivables, the historical experience of collections, the impact of economic conditions and, in some cases, the specific customer account's ability to pay.

Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of wages and benefits for corporate personnel, corporate outside services, marketing costs, depreciation of corporate fixed assets, amortization of intangible assets and certain corporate level professional fees, including those related to legal, accounting and payroll.

Goodwill, intangible and ~~intangible~~other asset impairment charges. Goodwill, intangible and ~~intangible~~other asset impairment charges represent non-cash charges associated with the write-down of ~~both~~ goodwill, ~~and~~ trade name indefinite-lived intangible and other assets.

Change in fair value of 2L Notes. Represents non-cash amounts related to the change in the estimated fair value of the 2L Notes.

Change in fair value of warrant liability. Represents non-cash amounts related to the change in the estimated fair value of the IPO Warrants.

Change in fair value of contingent common shares liability. Represents non-cash amounts related to the change in the estimated fair value of Earnout Shares and Vesting Shares.

~~Loss on settlement of redeemable preferred stock.~~ Represents the loss on settlement of the Wilco Holdco redeemable preferred stock liability based on the value of cash and equity provided to preferred stockholders in relation to the outstanding Wilco Holdco redeemable preferred stock liability at the time of the closing of the Business Combination.

Interest expense, net. Interest expense includes the cost of borrowing under the Company’s ~~credit facility~~2022 Credit Facility and amortization of deferred financing ~~costs.~~

~~Interest expense on redeemable preferred stock.~~ ~~Represents interest expense related to accruing dividends on the Wilco Holdco redeemable preferred stock based on contract terms.~~costs and original issue discount.

Other expense, net. Other expense, net is comprised of income statement activity not related to the core operations of the Company.

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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 (loss), 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.~~period (excluding clinics under management service agreements).

Net patient revenue ("NPR") per visit

The Company calculates net patient revenue per visit, its most significant reimbursement metric, by dividing net patient revenue in a period by total patient visits in the same period.

Clinics

To better understand geographical and location-based trends, the Company evaluates metrics based on the ~~929 owned~~911 clinics (excluding clinics under management service agreements) and 2018 managed clinic locations as of ~~September~~June 30, ~~2022.~~2023. De novo clinics represent organic new clinics opened during the current period based on sophisticated site selection analytics. Acqui-novo clinics represent new clinics opened during the current period, that were existing ~~clinics~~clinic operations not previously owned by the Company, in a target geography that provides the Company with an immediate presence, available staff and referral relationships of the former owner within the surrounding areas. Acquired clinics represent new clinics from purchases of physical therapy practices. Same clinic revenue growth rate identifies revenue growth year over year on clinics that have been owned and operating for over one year. This metric is determined by isolating the population of clinics that have been open for at least 12 months and calculating the percentage change in revenue of this population between the current and prior ~~period.~~comparable periods.

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						Three Months Ended					Six Months Ended
		September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021					June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Number of clinics owned (end of period)		929			900			929			900
Number of clinics (end of period)															Number of clinics (end of period)	911			926			911			926
Number of clinics managed (end of period)	Number of clinics managed (end of period)	20			26			20			26				Number of clinics managed (end of period)	18			20			18			20
New clinics during the period	New clinics during the period	11			18			33			38				New clinics during the period	6			10			10			22
Business days	Business days	64			65			192			192				Business days	64			64			128			128
Average visits per day	Average visits per day	21,493			20,674			21,653			20,594				Average visits per day	23,412			22,403			23,056			21,733
Average visits per day per clinic	Average visits per day per clinic	23.2			23.1			23.4			23.2				Average visits per day per clinic	25.7			24.2			25.5			23.8
Total patient visits	Total patient visits	1,375,567			1,343,799			4,157,360			3,953,977				Total patient visits	1,498,369			1,433,815			2,951,217			2,781,793
Net patient revenue per visit	Net patient revenue per visit	$	103.46		$	105.56		$	103.37		$	106.43			Net patient revenue per visit	$	104.74		$	103.57		$	104.26		$	103.33
Same clinic revenue growth rate	Same clinic revenue growth rate	(0.7)		%	5.8		%	1.2		%	5.4		%		Same clinic revenue growth rate	6.4		%	—		%	7.5		%	2.1		%

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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		Three Months Ended			Six Months Ended
		September 30, 2022	September 30, 2021	September 30, 2022	September 30, 2021			June 30, 2023	June 30, 2022	June 30, 2023	June 30, 2022
Number of clinics owned (beginning of period)		926	889	910	875
Number of clinics (beginning of period)							Number of clinics (beginning of period)	909	922	923	910
Add: New clinics opened during the period	Add: New clinics opened during the period	11	18	33	38		Add: New clinics opened during the period	6	10	10	22

Less: Clinics closed/sold during the period	Less: Clinics closed/sold during the period	8	7	14	13		Less: Clinics closed/sold during the period	4	6	22	6
Number of clinics owned (end of period)		929	900	929	900
Number of clinics (end of period)							Number of clinics (end of period)	911	926	911	926

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Results of Operations

Three months ended ~~September~~June 30, ~~2022~~2023 compared to three months ended ~~September~~June 30, ~~2021~~2022

The following table summarizes the Company’s consolidated results of operations for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:


		Three Months Ended September 30,													Three Months Ended June 30,
		2022				2021				Increase/(Decrease)					2023				2022				Increase/(Decrease)
($ in thousands, except percentages)	($ in thousands, except percentages)	$		% of Revenue		$		% of Revenue		$		%		($ in thousands, except percentages)	$		% of Revenue		$		% of Revenue		$		%
Net patient revenue	Net patient revenue	$	142,313	90.8	%	$	141,855	89.2	%	$	458	0.3	%	Net patient revenue	$	156,938	91.1	%	$	148,506	90.9	%	$	8,432	5.7	%
Other revenue	Other revenue	14,479		9.2	%	17,158		10.8	%	(2,679)		(15.6)	%	Other revenue	15,399		8.9	%	14,787		9.1	%	612		4.1	%
Net operating revenue		156,792		100.0	%	159,013		100.0	%	(2,221)		(1.4)	%
Net revenue														Net revenue	172,337		100.0	%	163,293		100.0	%	9,044		5.5	%
Cost of services:	Cost of services:													Cost of services:
Salaries and related costs	Salaries and related costs	90,309		57.6	%	86,838		54.6	%	3,471		4.0	%	Salaries and related costs	95,327		55.3	%	89,606		54.9	%	5,721		6.4	%
Rent, clinic supplies, contract labor and other	Rent, clinic supplies, contract labor and other	51,417		32.8	%	45,765		28.8	%	5,652		12.4	%	Rent, clinic supplies, contract labor and other	50,437		29.3	%	50,405		30.9	%	32		0.1	%
Provision for doubtful accounts	Provision for doubtful accounts	2,797		1.8	%	3,514		2.2	%	(717)		(20.4)	%	Provision for doubtful accounts	2,360		1.4	%	3,506		2.1	%	(1,146)		(32.7)	%
Total cost of services	Total cost of services	144,523		92.2	%	136,117		85.6	%	8,406		6.2	%	Total cost of services	148,124		86.0	%	143,517		87.9	%	4,607		3.2	%
Selling, general and administrative expenses	Selling, general and administrative expenses	25,263		16.1	%	30,795		19.4	%	(5,532)		(18.0)	%	Selling, general and administrative expenses	36,573		21.2	%	31,808		19.5	%	4,765		15.0	%
Goodwill and intangible asset impairment charges		106,663		68.0	%	508,972		320.1	%	(402,309)		n/m
Goodwill, intangible and other asset impairment charges														Goodwill, intangible and other asset impairment charges	—		—	%	127,820		78.3	%	(127,820)		n/m
Operating loss	Operating loss	(119,657)		(76.3)	%	(516,871)		(325.0)	%	397,214		n/m		Operating loss	(12,360)		(7.2)	%	(139,852)		(85.6)	%	127,492		n/m
Change in fair value of 2L Notes														Change in fair value of 2L Notes	(7,010)		(4.1)	%	—		—	%	(7,010)		n/m
Change in fair value of warrant liability	Change in fair value of warrant liability	(790)		(0.5)	%	(15,885)		(10.0)	%	15,095		n/m		Change in fair value of warrant liability	(198)		(0.1)	%	(1,184)		(0.7)	%	986		(83.3)	%
Change in fair value of contingent common shares liability	Change in fair value of contingent common shares liability	(6,930)		(4.4)	%	(146,317)		(92.0)	%	139,387		n/m		Change in fair value of contingent common shares liability	(792)		(0.5)	%	(1,496)		(0.9)	%	704		(47.1)	%

Interest expense, net	Interest expense, net	11,780		7.5	%	7,386		4.6	%	4,394		59.5	%	Interest expense, net	16,682		9.7	%	11,379		7.0	%	5,303		46.6	%

Other expense, net	Other expense, net	195		0.1	%	52		—	%	143		n/m		Other expense, net	618		0.4	%	205		0.1	%	413		201.5	%
Loss before taxes	Loss before taxes	(123,912)		(79.0)	%	(362,107)		(227.7)	%	238,195		n/m		Loss before taxes	(21,660)		(12.6)	%	(148,756)		(91.1)	%	127,096		(85.4)	%
Income tax benefit		(7,218)		(4.6)	%	(35,333)		(22.2)	%	28,115		n/m
Income tax expense (benefit)														Income tax expense (benefit)	89		0.1	%	(13,033)		(8.0)	%	13,122		(100.7)	%
Net loss	Net loss	$	(116,694)	(74.4)	%	$	(326,774)	(205.5)	%	$	210,080	n/m		Net loss	$	(21,749)	(12.6)	%	$	(135,723)	(83.1)	%	$	113,974	(84.0)	%

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Net patient revenue. Net patient revenue for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$142.3~~$156.9 million compared to ~~$141.9~~$148.5 million for the three months ended ~~September~~June 30, ~~2021,~~2022, an increase of approximately ~~$0.5~~$8.4 million or ~~0.3%~~5.7%.

The increase in net patient revenue was primarily driven by increased visit volumes as a result of higher clinician ~~staffing and higher clinic count~~productivity in the current period, ~~partially offset by unfavorable~~as well as favorable net patient revenue per visit ~~and one less business day~~ in the current period. Total patient visits increased by approximately ~~0.03 million~~65 thousand visits, ~~despite one less business day,~~ or ~~2.4%~~4.5%, driving an increase in average visits per day of ~~819,~~1,009, or ~~4.0%~~4.5%. Net patient revenue per visit ~~decreased $2.10,~~increased $1.17, or ~~2.0%~~1.1%, to ~~$103.46~~$104.74 for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$105.56~~$103.57 for the three months ended ~~September~~June 30, ~~2021.~~2022. The ~~decrease~~increase in net patient revenue per visit during the three months ended ~~September~~June 30, ~~2022~~2023 compared to the three months ended ~~September~~June 30, ~~2021~~2022 was primarily driven by favorable service mix shift and lower denials experience, partially offset by unfavorable mix shifts related to payor classes and ~~states and Medicare rate cuts, partially offset by favorable service mix shift.~~states.

The following chart reflects additional detail with respect to drivers of the change in quarter-to-date net patient revenue (in millions).:

Other revenue. Other revenue for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$14.5~~$15.4 million compared to ~~$17.2~~$14.8 million for the three months ended ~~September~~June 30, ~~2021, a decrease~~2022, an increase of ~~$2.7~~$0.6 million or ~~15.6%~~4.1%. The ~~decrease~~increase in other revenue was primarily driven by ~~the absence of Home Health service line revenue for the three months ended September 30, 2022 as a result of its divestiture on October 1, 2021.~~higher AWS and MSA revenues.

Salaries and related costs. Salaries and related costs for the three months ended ~~September~~June 30, ~~2022~~2023 were ~~$90.3~~$95.3 million compared to ~~$86.8~~$89.6 million for the three months ended ~~September~~June 30, ~~2021,~~2022, an increase of ~~$3.5~~$5.7 million or ~~4.0%~~6.4%. Salaries and related costs as a percentage of net ~~operating~~ revenue was ~~57.6%~~55.3% and ~~54.6%~~54.9% for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The increase of ~~$3.5~~$5.7 million was primarily driven by higher compensation due to higher support staffing and wage inflation for clinic labor and ~~by higher wages as the Company increased its clinician and~~ support ~~staff due to higher visit volumes.~~staff. The increase as a percentage of net ~~operating~~ revenue was primarily driven by higher compensation, ~~due to wage inflation for clinic labor,~~partially offset by higher ~~share-based compensation for clinical employees, lower clinic labor~~clinician productivity and ~~lower~~higher net patient revenue per visit during the three months ended ~~September~~June 30, ~~2022.~~2023.

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Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the three months ended ~~September~~June 30, ~~2022~~2023 were ~~$51.4~~$50.4 million compared to ~~$45.8~~$50.4 million for the three months ended ~~September~~June 30, ~~2021, an increase of approximately $5.7 million or 12.4%.~~2022, which was relatively consistent year over year. Rent, clinic supplies, contract labor and other costs as a percentage of net ~~operating~~ revenue was ~~32.8%~~29.3% and ~~28.8%~~30.9% for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~increase of $5.7 million and increase~~decrease as a percentage of net ~~operating~~ revenue was primarily driven by higher net revenue and a ~~higher~~lower clinic count, ~~and~~partially offset by higher contract labor costs for the three months ended ~~September~~June 30, ~~2022.~~2023.

Provision for doubtful accounts. Provision for doubtful accounts for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$2.8~~$2.4 million compared to $3.5 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$0.7~~$1.1 million or ~~20.4%~~32.7%. Provision for doubtful accounts as a percentage of net revenue was 1.4% and 2.1% for the three months ended June 30, 2023 and 2022, respectively. The decrease of ~~$0.7~~$1.1 million and decrease as a percentage of net ~~operating~~ revenue was primarily driven by favorable cash collections during the three months ended ~~September~~June 30, ~~2022.~~2023.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended ~~September~~June 30, ~~2022~~2023 were ~~$25.3~~$36.6 million compared to ~~$30.8~~$31.8 million for the three months ended ~~September~~June 30, ~~2021, a decrease~~2022, an increase of ~~$5.5~~$4.8 million or ~~18.0%~~15.0%. Selling, general and administrative expenses as a percentage of net ~~operating~~ revenue was ~~16.1%~~21.2% and ~~19.4%~~19.5% for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~decrease~~increase of ~~$5.5~~$4.8 million ~~and decrease as a percentage of revenue~~ was primarily ~~due to~~driven by higher transaction costs and employee incentive awards, partially offset by lower ~~reorganization~~legal settlement and severance costs ~~and lower transaction costs incurred~~ during the three months ended ~~September~~June 30, ~~2022~~2023 relative to the three months ended ~~September~~June 30, ~~2021.~~2022. The increase as a percentage of net revenue was primarily due to higher transaction costs and employee incentive awards, partially offset by lower legal settlement and severance costs as well as the impact of higher net revenue during the three months ended June 30, 2023.

Goodwill, intangible and ~~intangible~~other asset impairment charges. Goodwill, intangible and ~~intangible~~other asset impairment charges for the three months ended ~~September~~June 30, 2022 was ~~$106.7 million compared to $509.0 million for three months ended September 30, 2021.~~$127.8 million. The amount primarily relates to the non-cash write-down of ~~both~~ goodwill and the trade name indefinite-lived intangible ~~assets~~asset as a result of factors including an increase in discount rates during the three months ended June 30, 2022. There were no goodwill, intangible and ~~lower public company comparative multiples~~other asset impairment charges during the three months ended June 30, 2023.

Change in ~~2022, and revised forecasts reflecting lower than expected patient visit volumes~~fair value of 2L Notes. Change in ~~2021. Refer~~fair value of 2L Notes for the three months ended June 30, 2023 was a gain of $7.0 million. The gain relates to ~~Note 5 -~~ ~~Goodwill, Trade Name and Other Intangible Assets~~the decrease in the ~~condensed consolidated financial statements for further details.~~estimated fair value of the Company's 2L Notes, primarily driven by decreases in the Company's share price between June 15, 2023, the date that the 2L Notes were issued, and June 30, 2023.

Change in fair value of warrant liability. Change in fair value of warrant liability for the three months ended ~~September~~June 30, ~~2022~~2023 was a gain of ~~$0.8~~$0.2 million compared to a gain of ~~$15.9~~$1.2 million for the three months ended ~~September~~June 30, ~~2021.~~2022. The gain in each period relates to the decrease in the estimated fair value of the Company’s IPO Warrants, primarily driven by decreases in the Company's share price during the three months ended June 30, 2023 and by decreases in price of the Company's Public Warrants during the three months ended ~~September~~June 30, 2022, ~~and 2021,~~ respectively.

Change in fair value of contingent common shares liability. Change in fair value of contingent common shares liability for the three months ended ~~September~~June 30, ~~2022~~2023 was a gain of ~~$6.9~~$0.8 million compared to a gain of ~~$146.3~~$1.5 million for the three months ended ~~September~~June 30, ~~2021.~~2022. The gain in each period relates to the decrease in the estimated fair value of the Company’s Earnout Shares and Vesting Shares, primarily driven by decreases in the Company's share price during the three months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively.

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Interest expense, net. Interest expense, net for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$11.8~~$16.7 million compared to ~~$7.4~~$11.4 million for the three months ended ~~September~~June 30, ~~2021,~~2022, an increase of approximately ~~$4.4~~$5.3 million or ~~59.5%~~46.6%. The increase in interest expense was primarily driven by higher interest rates under the Company’s ~~credit agreement~~2022 Credit Agreement and interest on outstanding Revolving Loans balances, partially offset by higher cash flow hedge benefits recognized during the three months ended ~~September~~June 30, ~~2022.~~2023.

Other expense, net. Other expense, net for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$0.2~~$0.6 million compared to ~~$0.1~~$0.2 million for the three months ended ~~September~~June 30, ~~2021,~~2022, an increase of ~~$0.1~~$0.4 million. ~~Amounts~~The increase was driven by $0.4 million in ~~other~~loss on debt extinguishment related to the 2023 Debt Restructuring during the three months ended June 30, 2023.

Income tax expense ~~net were immaterial~~(benefit).Income tax expense for the three months ended ~~September~~June 30, ~~2022 and 2021.~~

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~~Income tax benefit.Income tax benefit for the three months ended September 30, 2022~~2023 was ~~$7.2~~$0.1 million compared to ~~$35.3~~a benefit of $13.0 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease in benefit of approximately ~~$28.1~~$13.1 million. The decrease was primarily driven by the difference in the effective tax rate for the respective periods. The effective tax rate was different between the respective periods primarily due to ~~higher nondeductible impairment charges, nondeductible transaction costs~~the recognition of valuation allowances against the federal and ~~fair value adjustments related to liability-classified share-based instruments~~state net operating losses and other tax attributes, such as interest disallowances, for which future realization is uncertain during the three months ended ~~September~~June 30, ~~2021.~~2023.

Net loss. Net loss for the three months ended ~~September~~June 30, ~~2022~~2023 was ~~$116.7~~$21.7 million compared to ~~$326.8~~$135.7 million for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease in loss of ~~$210.1~~$114.0 million. The comparatively lower loss was primarily driven by ~~lower~~margin on higher revenues and the absence of goodwill, intangible and ~~intangible~~other asset impairment charges, partially offset by lower net gains related to changes in fair value of 2L Notes, warrant liability and contingent common shares liability, higher interest expense and lower income tax benefit during the three months ended ~~September~~June 30, ~~2022~~2023 as compared to the three months ended ~~September~~June 30, ~~2021.~~2022.

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~~Nine~~Six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022

The following table summarizes the Company’s consolidated results of operations for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:


		Nine Months Ended September 30,													Six Months Ended June 30,
		2022				2021				Increase/(Decrease)					2023				2022				Increase/(Decrease)
($ in thousands, except percentages)	($ in thousands, except percentages)	$		% of Revenue		$		% of Revenue		$		%		($ in thousands, except percentages)	$		% of Revenue		$		% of Revenue		$		%
Net patient revenue	Net patient revenue	$	429,744	90.7	%	$	420,805	89.1	%	$	8,939	2.1	%	Net patient revenue	$	307,692	90.7	%	$	287,431	90.6	%	$	20,261	7.0	%
Other revenue	Other revenue	44,163		9.3	%	51,303		10.9	%	(7,140)		(13.9)	%	Other revenue	31,577		9.3	%	29,684		9.4	%	1,893		6.4	%
Net operating revenue		473,907		100.0	%	472,108		100.0	%	1,799		0.4	%
Net revenue														Net revenue	339,269		100.0	%	317,115		100.0	%	22,154		7.0	%
Cost of services:	Cost of services:													Cost of services:
Salaries and related costs	Salaries and related costs	267,330		56.4	%	248,409		52.6	%	18,921		7.6	%	Salaries and related costs	186,030		54.8	%	177,021		55.8	%	9,009		5.1	%
Rent, clinic supplies, contract labor and other	Rent, clinic supplies, contract labor and other	153,437		32.4	%	133,140		28.2	%	20,297		15.2	%	Rent, clinic supplies, contract labor and other	103,315		30.5	%	102,020		32.2	%	1,295		1.3	%
Provision for doubtful accounts	Provision for doubtful accounts	11,408		2.4	%	14,270		3.0	%	(2,862)		(20.1)	%	Provision for doubtful accounts	6,485		1.9	%	8,611		2.7	%	(2,126)		(24.7)	%
Total cost of services	Total cost of services	432,175		91.2	%	395,819		83.8	%	36,356		9.2	%	Total cost of services	295,830		87.2	%	287,652		90.7	%	8,178		2.8	%
Selling, general and administrative expenses	Selling, general and administrative expenses	87,095		18.4	%	81,912		17.4	%	5,183		6.3	%	Selling, general and administrative expenses	67,168		19.8	%	61,832		19.5	%	5,336		8.6	%
Goodwill and intangible asset impairment charges		390,224		82.3	%	962,303		203.8	%	(572,079)		n/m
Goodwill, intangible and other asset impairment charges														Goodwill, intangible and other asset impairment charges	—		—	%	283,561		89.4	%	(283,561)		n/m
Operating loss	Operating loss	(435,587)		(91.9)	%	(967,926)		(205.0)	%	532,339		n/m		Operating loss	(23,729)		(7.0)	%	(315,930)		(99.6)	%	292,201		n/m
Change in fair value of 2L Notes														Change in fair value of 2L Notes	(7,010)		(2.1)	%	—		—	%	(7,010)		n/m
Change in fair value of warrant liability	Change in fair value of warrant liability	(3,651)		(0.8)	%	(20,424)		(4.3)	%	16,773		n/m		Change in fair value of warrant liability	—		—	%	(2,861)		(0.9)	%	2,861		(100.0)	%
Change in fair value of contingent common shares liability	Change in fair value of contingent common shares liability	(32,760)		(6.9)	%	(167,265)		(35.4)	%	134,505		n/m		Change in fair value of contingent common shares liability	(1,501)		(0.4)	%	(25,830)		(8.1)	%	24,329		(94.2)	%
Loss on settlement of redeemable preferred stock		—		—	%	14,037		3.0	%	(14,037)		n/m

Interest expense, net	Interest expense, net	31,815		6.7	%	39,105		8.3	%	(7,290)		(18.6)	%	Interest expense, net	30,618		9.0	%	20,035		6.3	%	10,583		52.8	%
Interest expense on redeemable preferred stock		—		—	%	10,087		2.1	%	(10,087)		n/m

Other expense, net	Other expense, net	3,181		0.7	%	5,831		1.2	%	(2,650)		(45.4)	%	Other expense, net	972		0.3	%	2,986		0.9	%	(2,014)		(67.4)	%
Loss before taxes	Loss before taxes	(434,172)		(91.6)	%	(849,297)		(179.9)	%	415,125		n/m		Loss before taxes	(46,808)		(13.8)	%	(310,260)		(97.8)	%	263,452		(84.9)	%
Income tax benefit		(43,532)		(9.2)	%	(65,579)		(13.9)	%	22,047		n/m
Income tax expense (benefit)														Income tax expense (benefit)	151		—	%	(36,314)		(11.5)	%	36,465		(100.4)	%
Net loss	Net loss	$	(390,640)	(82.4)	%	$	(783,718)	(166.0)	%	$	393,078	n/m		Net loss	$	(46,959)	(13.8)	%	$	(273,946)	(86.4)	%	$	226,987	(82.9)	%

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Net patient revenue. Net patient revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$429.7~~$307.7 million compared to ~~$420.8~~$287.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, an increase of ~~$8.9~~approximately $20.3 million or ~~2.1%~~7.0%.

The increase in net patient revenue was primarily driven by increased visit volumes as a result of higher clinician ~~staffing and higher clinic count~~productivity in the current period, ~~partially offset by unfavorable~~as well as favorable net patient revenue per visit in the current period. In addition, visit volumes during the six months ended June 30, 2022 were negatively impacted by an increase in COVID-19 cases due to the outbreak of additional variants in the beginning of 2022. Total patient visits increased by approximately ~~0.2 million~~169 thousand visits, or ~~5.1%~~6.1%, driving an increase in average visits per day of ~~1,059,~~1,323, or ~~5.1%~~6.1%. Net patient revenue per visit ~~decreased $3.06,~~increased $0.93, or ~~2.9%~~0.9%, to ~~$103.37~~$104.26 for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$106.43~~$103.33 for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The ~~decrease~~increase in net patient revenue per visit during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was primarily driven by favorable service mix shift and lower denials experience, partially offset by unfavorable mix shifts related to payor classes and ~~states and Medicare rate cuts.~~states.

The following chart reflects additional detail with respect to drivers of the change in year-to-date net patient revenue (in millions):

Other revenue. Other revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$44.2~~$31.6 million compared to ~~$51.3~~$29.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, a decrease~~2022, an increase of ~~$7.1~~$1.9 million or ~~13.9%~~6.4%. The ~~decrease~~increase in other revenue was primarily driven by ~~the absence of Home Health service line revenue for the nine months ended September 30, 2022 as a result of its divestiture on October 1, 2021.~~higher AWS and MSA revenues.

Salaries and related costs. Salaries and related costs for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were ~~$267.3~~$186.0 million compared to ~~$248.4~~$177.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, an increase of approximately ~~$18.9~~$9.0 million or ~~7.6%~~5.1%. Salaries and related costs as a percentage of net ~~operating~~ revenue was ~~56.4%~~54.8% and ~~52.6%~~55.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The increase of ~~$18.9~~$9.0 million was primarily driven by higher compensation due to higher support staffing and wage inflation for clinic labor and ~~by higher wages as the Company increased its clinician and~~ support ~~staff due to higher visit volumes.~~staff. The ~~increase~~decrease as a percentage of net ~~operating~~ revenue was primarily driven by ~~higher compensation~~lower cost per visit due to ~~wage inflation for clinic labor,~~ higher ~~share-based compensation for clinical employees, lower clinic labor~~clinician productivity and ~~lower~~higher net patient revenue per visit, partially offset by higher compensation during the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2023.

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Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were ~~$153.4~~$103.3 million compared to ~~$133.1~~$102.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, an increase of ~~$20.3~~approximately $1.3 million or ~~15.2%~~1.3%. Rent, clinic supplies, contract labor and other costs as a percentage of net ~~operating~~ revenue was ~~32.4%~~30.5% and ~~28.2%~~32.2% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The increase of ~~$20.3~~$1.3 million was primarily driven by higher employee relations costs related to ATI's National Leadership Event held during the six months ended June 30, 2023, and ~~increase~~the decrease as a percentage of net ~~operating~~ revenue was primarily driven by higher net revenue and a ~~higher~~lower clinic count ~~and higher contract labor costs~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2023.

Provision for doubtful accounts. Provision for doubtful accounts for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$11.4~~$6.5 million compared to ~~$14.3~~$8.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$2.9~~$2.1 million or ~~20.1%~~24.7%. Provision for doubtful accounts as a percentage of net ~~operating~~ revenue was ~~2.4%~~1.9% and ~~3.0%~~2.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The decrease of ~~$2.9~~$2.1 million and decrease as a percentage of net ~~operating~~ revenue was primarily driven by favorable cash collections during the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2023.

Selling, general and administrative expenses. Selling, general and administrative expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 were ~~$87.1~~$67.2 million compared to ~~$81.9~~$61.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, an increase of ~~$5.2~~$5.3 million or ~~6.3%~~8.6%. Selling, general and administrative expenses as a percentage of net ~~operating~~ revenue was ~~18.4%~~19.8% and ~~17.4%~~19.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The increase of ~~$5.2~~$5.3 million was primarily due to higher transaction costs and employee incentive awards, partially offset by lower legal settlement and severance costs, lower non-ordinary legal and regulatory costs and lower professional fees during the six months ended June 30, 2023. The increase as a percentage of net ~~operating~~ revenue was primarily ~~due to a loss on~~driven by higher transaction costs and employee incentive awards, partially offset by lower legal settlement ~~higher public company operating~~and severance costs, ~~and~~lower non-ordinary legal and regulatory costs and lower professional fees as well as the impact of higher net revenue during the ~~nine~~six months ended ~~September~~June 30, ~~2022, partially offset by lower reorganization and severance costs and lower transaction costs incurred relative to the nine months ended September 30, 2021.~~2023.

Goodwill, intangible and ~~intangible~~other asset impairment charges. Goodwill, intangible and ~~intangible~~other asset impairment charges for the ~~nine~~six months ended ~~September~~June 30, 2022 was ~~$390.2 million compared to $962.3 million for the nine months ended September 30, 2021.~~$283.6 million. The amount primarily relates to the non-cash write-down of ~~both~~ goodwill and the trade name indefinite-lived intangible ~~assets~~asset as a result of factors including ~~increase~~increases in discount rates and lower public company comparative multiples during the six months ended June 30, 2022. There were no goodwill, intangible and other asset impairment charges during the six months ended June 30, 2023.

Change in ~~2022, and revised forecasts reflecting lower than expected patient visit volumes,~~fair value of 2L Notes. Change in fair value of 2L Notes for the ~~acceleration~~six months ended June 30, 2023 was a gain of ~~clinician attrition, competition for clinicians~~$7.0 million. The gain relates to the decrease in the ~~labor market and net patient revenue per visit decreases~~estimated fair value of the Company's 2L Notes, primarily driven by ~~unfavorable payor, state and service mix shifts in 2021. Refer to Note 5 -~~ ~~Goodwill, Trade Name and Other Intangible Assets~~decreases in the ~~condensed consolidated financial statements for further details.~~Company's share price between June 15, 2023, the date that the 2L Notes were issued, and June 30, 2023.

Change in fair value of warrant liability. Change in fair value of warrant liability for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~a gain of $3.7 million~~zero compared to a gain of ~~$20.4~~$2.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The gain ~~in each period~~ relates to the decrease in the estimated fair value of the ~~Company’s~~Company's IPO Warrants, primarily driven by decreases in price of the Company's Public Warrants during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2022. There was no net change in fair value of warrant liability when considering movements in the price of the Company's Public Warrants and ~~2021, respectively.~~the Company's share price during the six months ended June 30, 2023.

Change in fair value of contingent common shares liability. Change in fair value of contingent common shares liability for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was a gain of ~~$32.8~~$1.5 million compared to a gain of ~~$167.3~~$25.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The gain in each period relates to the decrease in the estimated fair value of the Company’s Earnout Shares and Vesting Shares, primarily driven by decreases in the Company's share price during the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively.

~~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 Wilco Holdco redeemable preferred stock liability at the time of the closing of the Business Combination.

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Interest expense, net. Interest expense, net for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$31.8~~$30.6 million compared to ~~$39.1~~$20.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, a decrease~~2022, an increase of ~~$7.3~~approximately $10.6 million or ~~18.6%~~52.8%. The ~~decrease~~increase in interest expense was primarily driven by ~~lower outstanding principal balances under the Company's credit agreement during the nine months ended September 30, 2022, partially offset by~~ higher interest rates under the ~~Company’s credit agreement~~Company's 2022 Credit Agreement and interest on outstanding Revolving Loans balances, partially offset by higher cash flow hedge benefits recognized during the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~

~~Interest expense on redeemable preferred stock.~~ Interest expense on redeemable preferred stock for the nine months ended September 30, 2021 was $10.1 million. The redeemable preferred stock was fully settled in June 2021 and no longer accrued interest following the Business Combination.2023.

Other expense, net. Other expense, net for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$3.2~~$1.0 million compared to ~~$5.8~~$3.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a decrease of approximately ~~$2.7~~$2.0 million. The decrease was driven by $5.5 million in loss on debt extinguishment related to the derecognition of the unamortized deferred financing costs and original issue discount associated with the partial and full repayment of the 2016 first and second lien term loans during the nine months ended September 30, 2021, compared to $2.8 million in loss on debt extinguishment related to the derecognition of the unamortized deferred financing costs and original issuance discount associated with the full repayment of the 2016 ~~first lien term loan~~First Lien Term Loan during the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2022, partially offset by $0.4 million in loss on debt extinguishment related to the 2023 Debt Restructuring during the six months ended June 30, 2023.

Income tax ~~benefit.~~expense (benefit). Income tax ~~benefit~~expense for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$43.5~~approximately $0.2 million compared to ~~$65.6~~income tax benefit of $36.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a decrease in benefit of approximately ~~$22.0~~$36.5 million. The decrease was primarily driven by the difference in the effective tax rate for the respective periods. The effective tax rate was different between the respective periods primarily due to ~~higher nondeductible impairment charges, nondeductible transaction costs, nondeductible loss on settlement~~the recognition of ~~redeemable preferred stock,~~valuation allowances against federal and state net operating losses and other tax attributes, such as interest ~~expense on redeemable preferred stock and fair value adjustments related to liability-classified share-based instruments~~disallowances, for which future realization is uncertain during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2023.

Net loss. Net loss for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$390.6~~$47.0 million compared to ~~$783.7~~$273.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a decrease in loss of approximately ~~$393.1~~$227.0 million. The comparatively lower loss was primarily driven by ~~lower~~margin on higher revenues and the absence of goodwill, intangible and ~~intangible~~other asset impairment charges, partially offset by lower net gains related to changes in fair value of 2L Notes, warrant liability and contingent common shares liability, higher interest expense and lower income tax benefit during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

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Non-GAAP Financial Measures

The following table reconciles the supplemental non-GAAP financial measures, as defined under the rules of the U.S. Securities and Exchange Commission ("SEC"), presented herein to the most directly comparable financial measures calculated and presented in accordance with ~~GAAP.~~U.S. generally accepted accounting principles ("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 (loss) from continuing operations calculated in accordance with GAAP, less net income attributable to non-controlling interests, plus the sum of income tax expense, interest expense, net, depreciation and amortization (“EBITDA”) and further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, goodwill, intangible and ~~intangible~~other asset impairment charges, change in fair value of 2L Notes, changes in fair value of warrant liability and contingent common shares liability, ~~loss on debt extinguishment, loss on legal settlement,~~transaction and integration costs, share-based compensation, non-ordinary legal and regulatory matters, loss on debt extinguishment, pre-opening de novo costs, ~~transaction~~loss on legal settlement, business optimization costs, reorganization and ~~integration~~severance costs, and gain on sale of Home Health service line ~~loss on settlement of redeemable preferred stock and reorganization and severance costs~~ (“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.

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EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)

The following is a reconciliation of net loss, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA (each of which is a non-GAAP financial measure) for each of the periods indicated. For additional information on these non-GAAP financial measures, see “Non-GAAP Financial Measures” above.

Three Months Ended Nine Months Ended
($ in thousands) September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Net loss $ (116,694) $ (326,774) $ (390,640) $ (783,718)
Plus (minus):
Net loss attributable to non-controlling interests 376 2,109 1,026 4,569
Interest expense, net 11,780 7,386 31,815 39,105
Interest expense on redeemable preferred stock — — — 10,087
Income tax benefit (7,218) (35,333) (43,532) (65,579)
Depreciation and amortization expense 9,907 9,222 29,862 27,990
EBITDA $ (101,849) $ (343,390) $ (371,469) $ (767,546)
Goodwill and intangible asset impairment charges(1)
106,663 508,972 390,224 962,303
Goodwill and intangible asset impairment charges attributable to non-controlling interests(1)
(457) (2,928) (2,051) (7,949)
Changes in fair value of warrant liability and contingent common shares liability(2)
(7,720) (162,202) (36,411) (187,689)
Loss on debt extinguishment(3)
— — 2,809 5,534
Loss on legal settlement(4)
— — 3,000 —
Share-based compensation 1,920 1,248 5,888 4,864
Non-ordinary legal and regulatory matters(5)
772 442 5,471 442
Pre-opening de novo costs(6)
224 511 891 1,386
Transaction and integration costs(7)
55 2,335 2,196 8,833
Gain on sale of Home Health service line, net — — (199) —
Loss on settlement of redeemable preferred stock — — — 14,037
Reorganization and severance costs(8)
— 3,551 — 3,913
Adjusted EBITDA $ (392) $ 8,539 $ 349 $ 38,128


	Three Months Ended				Six Months Ended
($ in thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Net loss	$	(21,749)	$	(135,723)	$	(46,959)	$	(273,946)
Plus (minus):
Net (income) loss attributable to non-controlling interests	(956)		177		(2,016)		650
Interest expense, net	16,682		11,379		30,618		20,035

Income tax expense (benefit)	89		(13,033)		151		(36,314)
Depreciation and amortization expense	9,211		10,055		18,775		19,955
EBITDA	$	3,277	$	(127,145)	$	569	$	(269,620)
Goodwill, intangible and other asset impairment charges(1)	—		127,820		—		283,561
Goodwill, intangible and other asset impairment charges attributable to non-controlling interests(1)	—		(654)		—		(1,594)
Change in fair value of 2L Notes(2)	(7,010)		—		(7,010)		—
Changes in fair value of warrant liability and contingent common shares liability(3)	(990)		(2,680)		(1,501)		(28,691)
Transaction and integration costs(4)	8,714		603		14,122		2,141
Share-based compensation	2,755		2,004		4,233		3,968
Non-ordinary legal and regulatory matters(5)	2,001		2,202		3,524		4,699
Loss on debt extinguishment(6)	444		—		444		2,809
Pre-opening de novo costs(7)	147		286		319		667
Loss on legal settlement(8)	—		3,000		—		3,000
Business optimization costs(9)	—		—		(702)		—
Reorganization and severance costs(10)	—		—		130		—
Gain on sale of Home Health service line, net	—		—		—		(199)


Adjusted EBITDA	$	9,338	$	5,436	$	14,128	$	741

(1)Represents non-cash charges related to the write-down of goodwill, ~~and~~ trade name indefinite-lived intangible and other assets.

(2)Represents non-cash amounts related to the change in the estimated fair value of the 2L Notes. Refer to ~~Note 5~~Notes 8 and 13 of the accompanying condensed consolidated financial statements for further details.

~~(2)~~(3)Represents non-cash amounts related to the change in the estimated fair value of IPO Warrants, Earnout Shares and Vesting Shares. Refer to Notes 3,11 and 12 of the accompanying condensed consolidated financial statements for further details.

(4)Represents non-capitalizable debt and 13capital transaction costs.

(5)Represents non-ordinary course legal costs related to the previously disclosed ATIP stockholder class action complaints, derivative complaint and SEC matter. Refer to Note 16 of the accompanying condensed consolidated financial statements for further details.

(6)Represents charges related to the loss on debt extinguishment recognized as part of the 2023 Debt Restructuring, and the derecognition of the unamortized deferred financing costs and original issuance discount associated with the full repayment of the 2016 First Lien Term Loan in 2022. Refer to Note 8 of the accompanying condensed consolidated financial statements for further details.

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~~(3)~~Represents charges related to the derecognition of the unamortized deferred financing costs and original issuance discount associated with the full repayment of the 2016 first lien term loan and the partial and full repayment of the 2016 first and second lien term loans, respectively. Refer to Note 8 of the accompanying condensed consolidated financial statements for further details.

~~(4)Represents estimated charge for probable net settlement liability related to billing dispute. Refer to Note 17 of the accompanying condensed consolidated financial statements for further details.~~

~~(5)~~Represents non-ordinary course legal costs related to the previously disclosed ATIP shareholder class action complaints, derivative complaint and SEC inquiry. Refer to Note 17 of the accompanying condensed consolidated financial statements for further details.

~~(6)~~(7)Represents expenses associated with renovation, equipment and marketing costs relating to the start-up and launch of new locations incurred prior to opening.

~~(7)Represents costs related to the Business Combination, non-capitalizable debt transaction costs and consulting and planning costs related to preparation to operate as a public company.~~

(8)Represents ~~severance, consulting~~charge for net settlement liability related to billing dispute. Refer to Note 16 of the accompanying condensed consolidated financial statements for further details.

(9)Represents realized benefit of labor related CARES Act credit that was not previously considered probable and ~~other~~relates to prior years.

(10)Represents severance costs related to discrete initiatives focused on reorganization and delayering of the Company’s labor model, management structure and support functions.

Liquidity and Capital Resources

Our principal sources of liquidity are ~~historical operating cash flows,~~ borrowings under our ~~credit agreement~~2022 Credit Agreement and Second Lien Note Purchase Agreement, and proceeds from equity issuances. We have used these funds for our short-term and long-term capital ~~uses,~~needs, which include salaries, benefits and other employee-related expenses, rent, clinical supplies, outside services, capital expenditures, acquisitions, de novos, acqui-novos and debt service. Our capital expenditure, acquisition, de novo and acqui-novo spend will depend on many factors, including, but not limited to, the targeted number of new clinic openings, patient volumes, clinician labor market, revenue growth rates, ~~and~~ level of operating cash ~~flows.~~flows and overall liquidity position.

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, we had ~~$48.6~~$37.7 million and $83.1 million in cash and cash ~~equivalents.~~equivalents, respectively. As of ~~September~~June 30, ~~2022,~~2023, we had ~~$50.0~~$20.0 million available capacity under our ~~2022~~ revolving credit ~~facility, less $1.8~~facility.

The Company also has the right to cause to be issued an additional $25.0 million of ~~outstanding letters~~aggregate principal in the form of ~~credit.~~2L Notes under its delayed draw right ("Delayed Draw Right”), which is governed by the Second Lien Note Purchase Agreement. If drawn, the notes under the Delayed Draw Right will be subject to the same terms as the convertible 2L Notes with associated shares of Series B Preferred Stock allowing for voting rights on an as-converted basis prior to conversion. The right to draw will terminate approximately 18 months after the Closing Date. The Company may request two draws in an amount of $12.5 million each, separately or together, subject to, for each draw, (a) projected liquidity at any time during the 6-month period following the date of the relevant draw being below certain thresholds, and (b) the consent of the board of directors.

For the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, we had operating cash outflows of ~~$59.1~~$5.3 million driven by items including net losses and ~~the application~~payments related to interest expense, operating lease liabilities, accounts payable, accrued expenses and ~~repayment of MAAPP funds.~~other liabilities. Our ability to generate future operating cash flows depends on many factors, including clinical staffing levels and productivity, costs and capital expenditures, patient volumes, referrals and revenue growth rates.

~~As of~~ ~~September 30, 2022~~ ~~and~~ ~~December 31, 2021,~~ ~~the Company had~~ ~~zero~~ ~~and~~ ~~$12.3 million~~ ~~of MAAPP funds included in the balance of cash and cash equivalents, respectively. In addition, as of~~ ~~September 30, 2022~~ ~~and~~ ~~December 31, 2021, the Company had~~ ~~$5.9 million~~ ~~of deferred Social Security taxes included in the balance of cash and cash equivalents. The Company began applying MAAPP funds to Medicare billings in the second quarter of 2021 and~~ remitted payments on its deferred employer Social Security taxes in the third and fourth quarters of 2021. The remaining MAAPP funds have been applied and repaid, and the deferred employer Social Security taxes are required to be applied or repaid prior to the end of 2022. The repayment of CARES Act funds, together with other operational activity, is expected to result in a net operating cash outflow for 2022.

We make reasonable and appropriate efforts to collect accounts receivable, including payor amounts and applicable patient deductibles, co-payments and co-insurance, in a consistent manner for all payor types. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect.

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Liquidity and going concern

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As of June 30, 2023, the Company had $37.7 million in cash and cash equivalents and $20.0 million available capacity under its revolving credit facility. The Company was in compliance with its minimum liquidity covenant under the 2022 Credit Agreement as of June 30, 2023.

On June 15, 2023, the Company completed a debt restructuring transaction under its 2022 Credit Agreement (as defined in Note 8) including: (i) a delayed draw new money financing in an aggregate principal amount of $25.0 million, comprised of (A) second lien PIK convertible notes (the “2L Notes”) and (B) shares of Series B Preferred Stock (as defined in Note 8), which will provide the holder thereof with voting rights such that the holders thereof will have the right to vote on an as-converted basis, (ii) the exchange of $100.0 million of the aggregate principal amount of the term loans under the 2022 Credit Agreement held by certain of the holders of its Series A Senior Preferred Stock (the "Preferred Equityholders") for 2L Notes and Series B preferred Stock and (iii) certain other changes to the terms of the 2022 Credit Agreement, including modifications of the financial covenants thereunder and relief from the requirements related to the delivery of independent audit reports without a going concern explanatory paragraph. Holders of the 2L Notes will also receive additional 2L Notes upon the in-kind payment of interest on any outstanding 2L Notes. The 2L Notes are convertible into shares of Class A common stock at a fixed conversion price.

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2023 Debt Restructuring Transaction

As part of the 2023 Debt Restructuring, the Company exchanged a principal amount of $100.0 million of the $507.8 million then outstanding Senior Secured Term Loans for an equal amount of second lien paid in-kind ("PIK") convertible notes (the "2L Notes"), which are convertible into shares of the Company's common stock, stapled with a number of shares of Series B Preferred Stock (the "Series B Preferred Stock"), which represent voting interests only. The exchange was consummated through the Intercreditor and Subordination Agreement and Second Lien Note Purchase Agreement dated April 17, 2023 (the "Signing Date").

The Company accounted for the exchange as a debt extinguishment and recognized $0.4 million in loss on debt extinguishment during the three and six months ended June 30, 2023. The loss on debt extinguishment consisted of various offsetting components, including the derecognition of $4.3 million of unamortized deferred financing costs and original issue discount on the Senior Secured Term Loans and the recognition of $0.7 million of fair value premium at issuance on the 2L Notes, offset by the recognition of $2.8 million in delayed draw right assets related to the commitment provided by certain lenders and the recognition of $1.8 million of incremental original issue discount on the Senior Secured Term Loan. The loss on debt extinguishment associated with the 2023 Debt Restructuring has been reflected in other expense, net in the condensed consolidated statements of operations.

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Amendment No. 2 to Credit Agreement

Second Lien Note Purchase Agreement and Designation of Series B Preferred Stock

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									June 30, 2023
Series B Preferred Stock, shares at Closing Date									103
Increase (decrease) in shares during period									—
Series B Preferred Stock, shares at end of period									103

Common Stock voting rights, as converted basis(1)									8,022

(1) Represents approximate shares of Series B Preferred Stock outstanding at end of period, times $1,000, divided by the contractual Voting Rights Conversion Price of $12.87 per share.

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Delayed Draw Right

2022 Credit Agreement

On February 24, 2022 (the "Refinancing Date"), the Company entered into various financing arrangements to refinance its ~~existing~~previous long-term debt ~~which consisted of $555.0 million in principal under the Company's existing term loan~~ (the ~~"2016 first lien term loan"~~"2022 Debt Refinancing")~~, which was repaid in full on the Refinancing Date.~~. As part of the 2022 Debt Refinancing, ATI Holdings Acquisition, Inc. (the "Borrower"), an indirect subsidiary of ATI Physical Therapy, Inc., entered into a credit agreement among the Borrower, Wilco Intermediate Holdings, Inc. ("Holdings"), as loan guarantor, Barclays Bank PLC, as administrative agent and issuing bank, and a syndicate of lenders (the "2022 Credit Agreement"). The 2022 Credit Agreement provides a $550.0 million credit facility (the "2022 Credit Facility") that is comprised of a $500.0 million senior secured term loan (the "Senior Secured Term Loan") which was fully funded at closing and a $50.0 million "super priority" senior secured revolver (the "Revolving Loans") with a $10.0 million letter of credit sublimit.

The 2022 Credit Facility refinanced and replaced the Company's prior credit facility for which Barclays Bank PLC served as administrative agent for a syndicate of lenders.

The Company paid $555.0 million to settle its previous term loan (the "2016 First Lien Term Loan"). The Company accounted for the transaction as a debt extinguishment and recognized $2.8 million in loss on debt extinguishment during the six months ended June 30, 2022 related to the derecognition of the remaining unamortized deferred financing costs and unamortized original issue discount in conjunction with the debt repayment. The loss on debt extinguishment associated with the repayment of the 2016 ~~first lien term loan.~~ First Lien Term Loan has been reflected in other expense, net in the condensed consolidated statements of operations.

The Company capitalized debt issuance costs totaling $12.5 million related to the 2022 Credit Facility as well as an original issue discount of $10.0 ~~million. The Company capitalized issuance costs~~million, which are amortized over the terms of ~~$0.5 million related to~~ the ~~Revolving Loans.~~respective financing arrangements.

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Senior Secured Term Loan

The Senior Secured Term Loan matures on February 24, 2028 and bears interest, at the Company's election, at a base interest rate of the Alternate Base Rate ("ABR"), as defined in the agreement, plus an applicable credit spread, or the Adjusted Term Secured Overnight Financing Rate ("SOFR"), as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio. The Company ~~may~~was able to elect to pay 2.0% interest in-kind at a 0.5% premium during the first year under the agreement. The Company elected to pay a portion of its interest in-kind ~~during~~beginning in the third quarter ~~ended September 30, 2022.~~of 2022 through the completion of the first year under the agreement. As of ~~September~~June 30, ~~2022,~~2023, borrowings on the Senior Secured Term Loan bear interest at ~~1-month~~13.5%, consisting of 3-month SOFR, subject to a 1.0% floor, plus a credit spread of 7.25% plus ~~the 0.5%~~an incremental 1.0% paid-in-kind interest ~~premium.~~added under the terms of the 2023 Debt Restructuring. As of ~~September~~June 30, ~~2022,~~2023, the effective interest rate on the Senior Secured Term ~~loan~~Loan was ~~10.8%~~13.6% and ~~the effective interest rate was 11.4%. As of September 30, 2022,~~ the outstanding principal amount ~~under the Senior Secured Term Loan~~ was ~~$500.9~~$407.8 million.

Revolving Loans

The Revolving Loans are subject to a maximum borrowing capacity of $50.0 million and mature on February 24, 2027. Borrowings on the Revolving Loans bear interest, at the Company's election, at a base interest rate of the ABR, as defined in the agreement, plus an applicable credit spread, or the Adjusted Term SOFR Rate, as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio. In December 2022, the Company drew $48.2 million in Revolving Loans. During the second quarter of 2023, the Company repaid approximately $24.8 million in Revolving Loans. As of June 30, 2023, $23.5 million in Revolving Loans were outstanding and bearing interest at 10.1%, consisting of 3-month SOFR plus a credit spread of 5.1%, which includes the incremental 1.0% added under the terms of the 2023 Debt Restructuring.

Commitment fees on the Revolving Loans are payable quarterly at 0.5% per annum on the daily average undrawn portion for the quarter and are expensed as incurred. The balances of unamortized issuance costs related to the Revolving Loans were $0.5 million as of June 30, 2023, and $0.6 million as of December 31, 2022.

~~Table~~ Pursuant to the terms of ~~Contents~~

the Intercreditor and Subordination Agreement, the 2L Notes (and the guarantees thereof) will rank junior in right of payment to the obligations under the 2022 Credit Agreement, and the liens on the collateral securing the 2L Notes will rank junior to the liens on such collateral securing the obligations under the 2022 Credit Agreement.

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Preferred Stock Financing

In connection with the 2022 Debt Refinancing, the Company issued 165,000 shares of non-convertible preferred stock (the "Series A Senior Preferred Stock") plus ~~5.2 million~~ warrants to purchase 0.1 million shares of the Company's common stock at an exercise price of ~~$3.00~~$150.00 per share (the "Series I Warrants") and warrants to purchase ~~6.3~~0.1 million shares of the Company's common stock at an exercise price equal to ~~$0.01~~$0.50 per share (the "Series II Warrants"). The shares of the Series A Senior Preferred Stock have a par value of $0.0001 per share and an initial stated value of $1,000 per share, for an aggregate initial stated value of $165.0 million. The Series I and Series II Warrants are exercisable for 5 years from the Refinancing ~~Date~~Date.

As a result of the 2022 Debt Refinancing and the Preferred Stock Financing, the Company added approximately $77.3 million of cash to its balance sheet.

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The Series A Senior Preferred Stock is perpetual and is not mandatorily redeemable at the option of the holders, except upon the occurrence of a Mandatory Redemption ~~Event (as defined in the Certificate of Designation).~~Event. Upon the occurrence of a Mandatory Redemption Event, to the extent not prohibited by law, the Company is required to redeem all Series A Senior Preferred Stock, in cash, at a price per share equal to the then applicable Redemption Price. ~~Based on the Company’s assessment of the conditions which would trigger the redemption of the Series A Senior Preferred Stock, the Company has determined that~~Because the Series A Senior Preferred Stock is ~~neither~~mandatorily redeemable contingent on certain events outside the Company’s control, such as a change in control, and since such events are not currently ~~redeemable nor probable of becoming redeemable. Because~~deemed certain to occur, the Series A Senior Preferred Stock is classified as mezzanine equity and is not considered redeemable or probable of becoming redeemable, the paid in-kind dividends that are added to the stated value do not impact the carrying value of the Series A Senior Preferred Stock in the ~~Company’s~~Company's condensed consolidated balance sheets. Should the Series A Senior Preferred Stock become probable of becoming redeemable, the Company will recognize changes in the redemption value of the Series A Senior Preferred Stock immediately as they occur and adjust the carrying amount accordingly at the end of each reporting period. As of September 30, 2022, the redemption value of the Series A Senior Preferred Stock was $177.3 million, which is the stated value.

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Prior to the closing of the 2023 Debt Restructuring, because the Series A Senior Preferred Stock is classified as mezzanine equity and was not considered redeemable or probable of becoming redeemable, the paid in-kind dividends that were added to the stated value did not impact the carrying value of the Series A Senior Preferred Stock in the Company’s condensed consolidated balance sheets. Based on the voting rights associated with the Series B Preferred Stock attached to the 2L Notes issued as part of the 2023 Debt Restructuring, the Company determined that redemption of the Series A Preferred Stock is no longer solely within the control of the Company. As a result, the Company determined that the Series A Preferred Stock is probable of becoming redeemable based on the accounting guidance. Following the 2023 Debt Restructuring, since the Series A Senior Preferred Stock is probable of becoming redeemable, the Company will recognize changes in the redemption value of the ~~2022 Debt Refinancing and the~~Series A Senior Preferred Stock ~~Financing,~~immediately as they occur and adjust the ~~Company added approximately $77.3~~carrying amount as if redemption were to occur at the end of the reporting period. As of June 30, 2023, the redemption value of the Series A Senior Preferred Stock was $213.9 million, which includes the aggregate stated value at June 30, 2023, inclusive of ~~cash~~paid in-kind dividends, and an incremental redemption value adjustment to ~~its balance sheet.~~reflect the carrying amount equal to what the redemption amount would be as if redemption were to occur at the end of the reporting period.

Changes in the carrying value of the Series A Preferred Stock consisted of the following for the six months ended June 30, 2023 (in thousands). There were no changes in carrying value in 2022.


	June 30, 2023
Carrying value, beginning of period	$	140,340
Write off original issue discount	1,447
Write off issuance costs	2,880
Deemed dividend from discount on initial gross proceeds allocation	20,333
Paid in-kind dividends recognized to carrying value	28,888
Redemption value adjustment	20,036
Carrying value, end of period	$	213,924

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Consolidated Cash Flows

The following table presents selected data from our condensed consolidated statements of cash flows:


		Nine Months Ended					Six Months Ended
($ in thousands)	($ in thousands)	September 30, 2022		September 30, 2021		($ in thousands)	June 30, 2023		June 30, 2022

Net cash used in operating activities	Net cash used in operating activities	$	(59,080)	$	(38,663)	Net cash used in operating activities	$	(5,319)	$	(32,737)
Net cash used in investing activities	Net cash used in investing activities	(21,862)		(28,703)		Net cash used in investing activities	(10,125)		(17,618)
Net cash provided by (used in) financing activities		80,895		(8,670)
Net decrease in cash and cash equivalents		(47)		(76,036)
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(30,016)		81,419
Net (decrease) increase in cash and cash equivalents						Net (decrease) increase in cash and cash equivalents	(45,460)		31,064
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	48,616		142,128		Cash and cash equivalents at beginning of period	83,139		48,616
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	48,569	$	66,092	Cash and cash equivalents at end of period	$	37,679	$	79,680

~~Nine~~Six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022

Net cash used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$59.1~~$5.3 million compared to ~~$38.7~~$32.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021 an increase~~2022, a decrease in cash used of ~~$20.4~~$27.4 million. The ~~change~~decrease was primarily the result of ~~$3.7~~margin on higher revenue with approximately $6.7 million ~~higher application of MAAPP funds and approximately $29.7 million higher~~lower net losses as adjusted for non-cash items such as goodwill, intangible and other asset impairment charges and changes in fair value of 2L Notes, warrant liability and contingent common shares liability during the ~~nine~~six months ended ~~September~~June 30, ~~2022, partially offset by $4.6~~2023, $1.8 million oflower cash outflows from operating leases during the six months ended June 30, 2023, $9.4 million lower cash outflows related to ~~lease terminations, a $3.6~~prepaid expenses and other current assets during the six months ended June 30, 2023 and $10.8 million ~~payment~~ of ~~transaction-related amount due to former owners and approximately $5.5 million in cash outflows from expenses related to activity associated with~~partial application of MAAPP funds during the ~~Business Combination~~six months ended June 30, 2022 not recurring in ~~2022.~~2023.

Net cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$21.9~~$10.1 million compared to ~~$28.7~~$17.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$6.8~~approximately $7.5 million. The decrease was ~~primarily~~ driven by ~~cash outflows related to purchases of acqui-novo clinics during the nine months ended September 30, 2021 not recurring in 2022 and~~ lower capital expenditures during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 primarily due to fewer clinic openings.

Net cash used in financing activities for the six months ended June 30, 2023 was $30.0 million compared to $81.4 million of cash provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, 2022, ~~was $80.9 million compared to $8.7 million of cash used in financing activities for the nine months ended September 30, 2021, an increase~~a decrease in cash provided of ~~$89.6~~approximately $111.4 million. The change was primarily driven by payments made on Revolving Loans during the six months ended June 30, 2023 and net cash inflows related to the 2022 Debt Refinancing and Preferred Stock Financing (refer to Note 8 - Borrowings for further details) ~~and a lower distribution to non-controlling interest holders~~ during the ~~nine~~six months ended ~~September~~June 30, 2022.

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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~~June 30, ~~2022,~~2023, the Company ~~has recorded~~did not record any accruals related to the outcomes of ~~certain~~the legal matters described in Note 1716 - Commitments and Contingencies. Refer to Note 1716 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 15 to our condensed consolidated financial statements included elsewhere in this Quarterly Report for further information. Additionally, the Company has contractual commitments related to cloud computing and telecommunication service agreements. Refer to Note 16 to our condensed consolidated financial statements included elsewhere in this Quarterly Report for further information.

~~As noted previously, we have commitments related to MAAPP funds and deferred Social Security taxes which are required to be applied or repaid prior to the end~~Table of ~~2022.~~Contents

Off-Balance Sheet Arrangements

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company did not have any off-balance sheet arrangements.

Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with USU.S. GAAP. The preparation of the Company’s condensed consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. The Company’s management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company’s condensed consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company’s financial position and results of operations.

Critical accounting estimates are those that the Company’s management considers the most important to the portrayal of the Company’s financial condition and results of operations because they require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting estimates in relation to its condensed consolidated financial statements include those related to:

•Patient revenue recognition and allowance for doubtful accounts

•Realization of deferred tax assets

•Goodwill and intangible assets

Additional information related to our critical accounting estimates can be found in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies of our audited consolidated financial statements and Part II, Item 7 included in our Annual Report on Form 10-K filed with the SEC on March ~~1, 2022. Other than as described below, there have been no material changes to our critical accounting estimates since our Annual Report on Form 10-K for the year ended December 31, 2021.~~

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~~Goodwill and intangible assets~~

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill and indefinite-lived intangible assets under ASC Topic 350, ~~Intangibles – Goodwill and Other, which requires the Company to test goodwill and other indefinite-lived assets for impairment annually or whenever events or circumstances indicate that impairment may exist.~~

The cost of acquired businesses is allocated first to its identifiable assets, both tangible and intangible, based on estimated fair values. Costs allocated to finite-lived identifiable intangible assets are generally amortized on a straight-line basis over the remaining estimated useful lives of the assets. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill.

Goodwill and intangible assets with indefinite lives are not amortized but must be reviewed at least annually for impairment. If the impairment test indicates that the carrying value of an intangible asset exceeds its fair value, then an impairment loss should be recognized in the condensed consolidated statements of operations in an amount equal to the excess carrying value over fair value. Fair value is determined using valuation techniques based on estimates, judgments and assumptions the Company believes are appropriate in the circumstances. The Company completed the interim and annual impairment analyses of goodwill as of June 30, 2021, September 30, 2021 and October 1, 2021 using an average of a discounted cash flow analysis and comparable public company analysis. The Company concluded that no goodwill impairment occurred during the fourth quarter of 2021. Goodwill impairment charges were recorded during the second and third quarters of 2021. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples.

The Company completed the interim and annual impairment analysis of indefinite lived intangible assets as of June 30, 2021, September 30, 2021 and October 1, 2021 using the relief from royalty method. The Company concluded that no indefinite lived intangible asset impairment occurred during the fourth quarter of 2021. Indefinite lived intangibles asset impairment charges were recorded during the second and third quarters of 2021. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate.

~~The Company has one reporting unit for purposes of the Company’s goodwill impairment tests.~~

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Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of the Company’s reporting unit and 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 revenue growth rates, EBITDA margins, terminal growth rates, discount rates, relevant market multiples, royalty rates and other market factors. If current expectations of future growth rates, margins and cash flows are not met, or if market factors outside of our control change significantly, including discount rates, relevant market multiples, company share price and other market factors, then our reporting unit or indefinite-lived intangible assets might become impaired in the future, negatively impacting our operating results and financial position. As the carrying amounts of goodwill and the Company’s trade name indefinite-lived intangible asset were impaired as of March 31, 2022, June 30, 2022 and September 30, 2022 and written down to fair value, those amounts are more susceptible to an impairment risk if there are unfavorable changes in assumptions and estimates. Additionally, goodwill and indefinite-lived intangible assets associated with acquisitions that may occur in the future are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to impairment risk if business operating results or market conditions deteriorate.

To further illustrate sensitivity of the valuation models, if we had changed the assumptions used to estimate the fair value of our goodwill reporting unit and trade name indefinite-lived intangible asset in our most recent quantitative analysis, these isolated changes, which are reasonably possible to occur, would have led to the following approximate increase/(decrease) in the aggregate fair value of the reporting unit under the discounted cash flow analysis or trade name indefinite-lived intangible asset (in thousands):

Discount rate
Terminal growth rate(1)
EBITDA margin Royalty rate
50 basis points 100 basis points 100 basis points 50 basis points
Increase Decrease Increase Decrease Increase Decrease Increase Decrease
Goodwill $(45,000) $50,000 $55,000 $(40,000) $50,000 $(50,000)
Trade name $(20,000) $10,000 $10,000 $(20,000) $30,000 $(40,000)

~~(1)~~ ~~A change of 100 basis points to our assumed non-terminal revenue growth rates would result in approximately $50 million of an estimated impact to the fair value of our goodwill reporting unit.~~16, 2023.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 2 - Basis of Presentation and Recent Accounting Standards in the accompanying condensed consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of ~~September~~June 30, ~~2022,~~2023, the Company is exposed to interest rate variability with regard to its existing variable-rate debt instrument, which exposure primarily relates to movements in various interest rates, such as SOFR. The Company utilizes interest rate cap derivative instruments for purposes of hedging exposures related to such variable-rate cash payments. Based on our current hedging instruments as of ~~September~~June 30, ~~2022,~~2023, a hypothetical increase of interest rates by 100 basis points would increase our annual cash interest expense by approximately ~~$2.3~~$2.4 million and a hypothetical decrease of interest rates by 100 basis points would decrease our annual cash interest expense by approximately ~~$2.5~~$2.4 million. As of ~~September~~June 30, 2023, the fair value of the Company’s derivative instruments consisted of assets of $0.6 million. As of December 31, 2022, the fair value of the Company’s derivative instruments consisted of assets of ~~$7.2~~$5.0 million and liabilities of ~~$0.04~~$0.1 million. ~~As of December 31, 2021, the fair value of the Company’s derivative instrument consisted of a $0.3 million non-current asset and $0.3 million current liability.~~

~~In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 was subsequently amended by ASU No. 2021-01, ~~Reference Rate Reform (Topic 848): Scope.~~ This standard is optional and may be applied by entities after March 12, 2020, but no later than December 31, 2022. As of September 30, 2022, the Company has a derivative instrument for which the interest rate is indexed to the LIBOR. During the period ended March 31, 2022, the Company modified the reference rate index on its hedged items, which are future variable-rate cash payments, from LIBOR to SOFR. The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivative, which is LIBOR. The guidance allows for different expedient elections to be made at different points in time. As of September 30, 2022, the Company continues to apply the hedge accounting expedients and does not anticipate that this guidance will have a material impact on its consolidated financial statements, however, the Company will continue to assess the potential impact on its future hedging relationships and expedient elections, as applicable.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the ~~commission’s~~SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in ~~company~~our reports filed or submitted under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure 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 have detected all 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 achieving its stated goals under all potential future conditions.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Principal Executive Officer and our Principal Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September~~June 30, ~~2022.~~2023. Based upon their evaluation, our Principal Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of ~~September~~June 30, ~~2022~~2023 due to the previously reported material weaknesses in internal control over financial reporting described ~~in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021.~~below.

Management concluded that notwithstanding the existence of the material weaknesses, the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company's financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Remediation Efforts with Respect to the Material Weaknesses

~~We are in~~The Company's management, under the oversight of the Audit Committee, has continued the process of ~~implementing our~~executing its remediation ~~plan for~~plan. Management has executed on the ~~previously reported material weaknesses~~following measures in internal control over financial reporting described in in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021. The material weaknesses were identified in our control environment related to the income tax provision. Theits remediation ~~plan includes steps to revise~~plan:

•revised the Company's tax staffing model, ~~refine~~and implemented technology to assist in the income tax provision processes, in order to better position the capabilities and capacity of the Company's in-house tax department based on tax reporting requirements;

•refined the scope of the Company's external tax advisors ~~and enhance~~to provide advice related to complex or unusual items, as well as advise on end-to-end corporate tax accounting matters;

•enhanced the design and precision of the Company's controls related to the income tax provision calculations and documentation, including controls related to the valuation allowance assessment.

~~The~~

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We believe the measures described above will contribute to remediating the control deficiencies we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over the income tax provision, we may take additional measures to address control deficiencies, or we may modify, or in appropriate circumstances not complete, certain of the remediation measures described above. These material weaknesses will not be considered remediated until ~~management completes~~ the ~~remediation plan and the enhanced~~applicable controls operate for a sufficient period of time and management has concluded, through testing, that ~~the related~~these controls are ~~effective. The Company will monitor the effectiveness of its remediation plan and will refine its remediation plan as appropriate.~~operating effectively.

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Changes in Internal Control over Financial Reporting

~~There~~Other than the changes related to the material weaknesses above, there have been no changes in our internal control over financial reporting during the fiscal quarter ended ~~September~~June 30, ~~2022~~2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

From time to time, the Company may be involved in legal proceedings or subject to claims arising in the ordinary course of business. 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 condition. Refer to Note 1716 - Commitments and Contingencies in the condensed consolidated financial statements included in Part I, Item 1, of this Form 10-Q for further details.

Item 1A. Risk Factors

Other than as described below, there have been no material changes from the Risk Factors previously disclosed in our Annual Report on Form 10-K filed with the ~~SEC~~U.S. Securities and Exchange Commission on March ~~1, 2022.~~16, 2023.

~~Certain of~~The 2L Notes are accounted for as liabilities at fair value and the changes in value could have a material effect on our ~~borrowings and other obligations~~financial results.

The 2L Notes are ~~based upon variable rates of interest, which could result in higher expense~~accounted for as a liability in the ~~event of increases in interest rates.~~

~~Borrowings~~Company's condensed consolidated balance sheets. The Company has made an irrevocable election to account for the 2L Notes under the ~~2022 Credit Agreement~~fair value option in accordance with ASC Topic 825, Financial Instruments, in lieu of bifurcating certain features in the Second Lien Note Purchase Agreement. As such, the 2L Notes are initially recorded as a liability at estimated fair value and are subject to ~~variable rates~~re-measurement at each balance sheet date with changes in fair value recognized in our statements of operations.

As a result of the recurring fair value measurement, our financial statements and results of operations may materially fluctuate quarterly, based on factors which are outside of our control. Due to the recurring fair value measurement, we expect to recognize non-cash gains or losses each reporting period and the amount of such gains or losses could be material and variable.

The 2L Notes are convertible into Common Stock, and the conversion of our 2L Notes into Common Stock would dilute the ownership interest of our existing stockholders and may adversely affect our stock price.

Pursuant to the terms of the Second Lien Note Purchase Agreement, holders of the 2L Notes may convert their 2L Notes into Common Stock at their option. Additionally, on or after June 15, 2025 and subject to certain conditions, the Company may, at its option, elect to convert (a “Forced Conversion”) a portion of the outstanding 2L Notes into the number of shares of Common Stock based on the Conversion Price then in effect. Any issuance by us toof our Common Stock upon conversion of our 2L Notes will dilute the ownership interest rate risk. During 2022, a rising interest rate environment was observed and interest rates may continue to rise again in the future. Such increases in interest rates would increase interest payment obligations under the 2022 Credit Agreementof our existing stockholders and could have a ~~negative~~dilutive effect on our ~~cash flow and/or financial condition.~~earnings per share. Furthermore, any sales in the public market of our Common Stock issuable upon conversion of the 2L Notes could adversely affect prevailing market prices of our Common Stock.

At times, we have sought to reduce our exposure to interest rate fluctuations by entering into interest rate hedging arrangements. However, any hedging arrangements we enter into may not fully mitigate our interest rate risk, may prove disadvantageous or may create additional risks.

~~Our outstanding indebtedness and our~~The Series ~~A Senior~~B Preferred Stock ~~contains covenants that may limit certain operating and financial decisions. Non-compliance with these covenants may result in~~stapled to the ~~acceleration~~2L Notes provide voting rights which will dilute the voting interests of our ~~indebtedness which could lead~~existing stockholders.

Pursuant to ~~bankruptcy, reorganization or insolvency.~~

~~Our credit agreements contain restrictive and financial covenants and~~ the ~~Certificate~~terms of ~~Designation for our~~the Second Lien Note Purchase Agreement, the Series ~~A Senior~~B Preferred Stock ~~contains provisions that impose significant operating and financial restrictions that may limit our ability~~represent voting rights only, with the number of votes being equal to take actions that may be in our long-term best interest, including, but not limited to, limitations on indebtedness, liens, investments, negative pledges, dividends, junior debt payments, fundamental changes and asset sales and affiliate transactions. Failure to comply with these covenants and restrictions could result in an eventthe number of ~~default, subject to customary cure periods. The financial covenants also require us to maintain a secured net leverage ratio, which we may be unable to meet.~~

~~In addition, the Certificate~~shares of ~~Designation for our~~Common Stock each share of Series ~~A Senior~~B Preferred Stock ~~contains provisions that may likewise impose significant operating and financial restrictions on~~is assumed convertible for at a conversion price of $12.87 per share (the "Voting Rights Conversion Price"). As a result, the voting rights associated with the Series B Preferred Stock will dilute the voting interests of our ~~business. If an Event of Noncompliance (as defined in the Certificate of Designation), then the holders of a majority of the then outstanding~~existing stockholders, for as long as such shares of Series ~~A Senior~~B Preferred Stock (but excluding any shares of Series A Senior Preferred Stock then held by Advent International Corporation or its controlled affiliates) (the “Majority Holders”) have the right to demand that the Company engage in a sale/refinancing process for the Series A Senior Preferred Stock.

Failure to comply with our debt agreements or our Series A Senior Preferred Stock could have a material adverse effect on our business, prospects, liquidity, financial condition or result of operation, and could result in the acceleration of some or all of our indebtedness, which could lead to bankruptcy, reorganization or insolvency.remain outstanding.

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~~Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.~~

We have incurred significant cumulative net taxable losses in the past. Our deferred tax assets as of December 31, 2021 include federal net operating losses, or NOLs, of $237.3 million and state NOLs of $577.3 million. Our unused NOLs generally carry forward to offset future taxable income, if any, until such unused losses expire, if subject to expiration. The ~~earliest NOLs will expire by statute in 2022 for state NOLs, and in 2036 for federal NOLs. We may be unable to use these NOLs to offset income before such unused NOLs expire.~~

~~In addition, if a corporation undergoes an “ownership change” (generally defined~~Preferred Equityholders as a ~~greater than 50 percentage-point cumulative change in~~group have significant influence over us.

When considering the ~~equity ownership of certain stockholders over a rolling three-year period) under Sections 382 and 383~~voting rights associated with the Series B Preferred Stock attached to the 2L Notes issued as part of the ~~Internal Revenue Code of 1986, as amended (the “Code”),~~2023 Debt Restructuring, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset future taxable income or taxes may be limited. This limitation is based in part on the pre-change equity value of the corporation, with a lower equity value resulting in a lower and more severe limitation. We may experience an “ownership change”Preferred Equityholders as a ~~result of future changes in our stock ownership (including dispositions~~group own more than 50.0% of our Common Stock byvotes. The Preferred Equityholders also have the ~~Selling Securityholders), some~~ability to convert their 2L Notes into Common Stock, which could lead to the group owning greater than 50.0% of our Common Stock. Furthermore, the Company's Board of Directors will be declassified commencing with the 2024 annual meeting of the stockholders and all directors will be elected annually going forward.

As long as the Preferred Equityholders own or control a significant percentage of our outstanding voting power, they will have the ability to significantly influence all corporate actions requiring stockholder approval, including the election and removal of directors and the size of our Board, any amendment to our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets, subject to any applicable restrictions set forth in the Company's 2022 Credit Agreement. The Preferred Equityholders influence over our management could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our Common Stock to decline or prevent stockholders from realizing a premium over the market price for our Common Stock.

The Preferred Equityholders’ interests may not align with our interests as a company or the interests of our other stockholders. Accordingly, the Preferred Equityholders could cause us to enter into transactions or agreements of which ~~changes may~~other stockholders would not ~~be within our control. If we are unable to use NOL carryforwards before they expire~~approve or ~~they become subject to limitation, it~~make decisions with which other stockholders would disagree. These potential conflicts of interest could have a material adverse effect on our business, financial condition and results of ~~operations.~~operations if, among other things, attractive corporate opportunities are allocated by the Preferred Equityholders to themselves or their other affiliates.

~~There is currently no market for our~~If the Series ~~I Warrants and Series II Warrants and a market for our Series I Warrants and Series II Warrants~~A Senior Preferred Stock were to be redeemed, it may not ~~develop,~~be economically favorable to the Company may lead to material adverse consequences for the Company and its other stakeholders.

The Company has the right to redeem the Series A Senior Preferred Stock, in whole or in part, at any time (subject to certain limitations on partial redemptions). Based on the voting rights associated with the Series B Preferred Stock attached to the 2L Notes issued as part of the 2023 Debt Restructuring, the Company determined that redemption of the Series A Preferred Stock is no longer solely within the control of the Company. If the Series A Senior Preferred Stock were to be redeemed prior to certain dates, the Company would have to pay certain redemption price premiums related to early redemption, which could be greater than the stated value, may not be economically favorable to the Company and may lead to material adverse consequences for the Company or its other stakeholders.

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Our share-based compensation incentives may not be effective in attracting, retaining and motivating key personnel and employees.

The Company adopted the ATI Physical Therapy 2021 Equity Incentive Plan (the "2021 Plan") under which it may grant equity interests of ATI Physical Therapy, Inc., in the form of stock options, stock appreciation rights, restricted stock awards and restricted stock units, to members of management, key employees and independent directors of the Company and its subsidiaries. We believe the granting of non-cash share-based compensation is important to our ability to attract and retain key personnel and employees. Additionally, the employment agreements for members of our senior leadership team include compensation terms in the form of share-based awards at specified amounts. The maximum number of shares reserved for issuance under the 2021 Plan is approximately 1.2 million. As of June 30, 2023, approximately 0.2 million shares were available for future grant. With the current number of shares available for future grant, the Company would need to amend, subject to stockholder approval, the 2021 Plan to increase the share reserve in order to fulfill the upcoming share-based compensation terms of its senior leadership employment agreements and provide share-based awards to other key personnel and employees. There can be no assurance that such stockholder approval would be obtained and, if we are unable to obtain such approval, we may be unable to retain our existing employees and attract additional qualified candidates, which could adversely impact our business and results of operations.

Furthermore, in light of our recent low market capitalization and decreases in share price, our non-cash share-based compensation incentives may not be effective in attracting, retaining and motivating our senior management team, key personnel and employees. If our share-based compensation incentives under the 2021 Plan are not effective, the Company may need to explore alternative cash or non-cash compensation to retain senior management, key personnel and employees, which may lead to incurring higher compensation costs or may otherwise prove less effective. The inability to appropriately compensate and motivate the necessary personnel could cause increased employee turnover and harm to our business, results of operations, cash flow and financial condition.

If we are unable to maintain compliance with New York Stock Exchange ("NYSE") listing standards, our securities may be delisted, which could negatively impact the price of our securities and your ability to sell them.

In order to maintain our listing on the NYSE, we are required to comply with certain rules and listing standards of the NYSE, including those regarding minimum stockholders' equity, minimum share price, minimum market value of publicly held shares and various additional requirements. The NYSE previously notified the Company that, due to the average closing price of the Company's Common Stock, it was below the trading price criteria of the exchange. The notice had no immediate impact on the listing of the Company's Common Stock on the NYSE, subject to the Company's compliance with the NYSE's other continued listing requirements. The Company submitted a plan of compliance to the NYSE addressing how we intended to regain compliance.

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In connection with regaining compliance, on June 14, 2023, the Company effected a one-for-fifty (1-for-50) reverse stock split of its Class A common stock (the “Reverse Stock Split”). The Reverse Stock Split was approved by the Company’s stockholders at the Company’s 2023 Annual Meeting of Stockholders held on June 13, 2023, and the final reverse split ratio was subsequently approved by the Company’s board of directors on June 14, 2023. The Company's common stock commenced trading on a reverse split-adjusted basis on June 15, 2023. On August 1, 2023, we were notified by the NYSE that the calculation of the Company's average stock price for the 30 trading days ended July 31, 2023, indicated that the Company's average stock price was above the NYSE's minimum requirement of $1. The Company is no longer considered below the minimum share price continued listing criterion. The Reverse Stock Split may adversely affect the liquidity ~~and~~of the shares of our common stock given the reduced number of shares outstanding following the reverse split, especially if the reverse split-adjusted market price of our ~~Series I Warrants~~common stock does not generate greater investor interest. Furthermore, there can be no assurance that such reverse split will continue to be sufficient to satisfy the minimum share price requirement.

On June 28, 2023, the NYSE notified the Company that, due to the Company's average market capitalization, it was below the minimum market capitalization criteria of the exchange. The notice has no immediate impact on the listing of the Company's Common Stock on the NYSE, subject to the Company's compliance with the NYSE's other continued listing requirements. In accordance with applicable NYSE procedures, the Company has 45 days from receipt of the notice to submit a business plan advising the NYSE of the definitive action(s) the Company has taken, or is taking, that would bring it into compliance with continued listing standards within 18 months of receipt of the notice. The NYSE will review the plan and, ~~Series II Warrants.~~

~~Our Series I Warrants~~within 45 days of its receipt, determine whether the Company has made a reasonable demonstration of an ability to conform to the relevant standards in the 18-month period. If the NYSE accepts the plan, the Company’s common stock will continue to be listed and ~~Series II Warrants are not listed or~~ traded on ~~any stock exchange~~the NYSE during the 18-month period, subject to the Company’s compliance with the other continued listing standards of the NYSE and ~~there is currently~~continued periodic review by the NYSE of the Company’s progress with respect to its plan. The Company intends to submit its business plan to regain compliance to the NYSE. There can be no assurance that the Company's business plan will be accepted by the NYSE, or that the Company will be able to meet its business plan, if accepted by the NYSE.

If we are unable to satisfy the NYSE rules and listing standards, or are unable to make progress on our plans of compliance, our securities could be subject to delisting.

If the NYSE were to delist our securities from trading, we could face significant consequences, including:

•a limited availability for market quotations for our ~~Series I Warrants~~securities;

•further reduced liquidity with respect to our securities;

•a determination that our Common Stock is a "penny stock," which will require brokers trading in our Common Stock to adhere to more stringent rules and ~~Series II Warrants. Warrantholders therefore have no access to~~possibly result in a reduced level of trading ~~price or volume information about prior market history on which to base their investment decision. Furthermore, an active~~activity in the secondary trading market for our ~~Series I Warrants~~Common Stock;

•limited amount of news and ~~Series II Warrants~~analyst coverage; and

•a decreased ability to issue additional securities or obtain additional financing in the future.

Changes in the political landscape may ~~never develop or, if developed, it may not be sustained. You may be unable to sell your Series I Warrants and Series II Warrants unless a market can be established and sustained.~~

~~Our liquidity position could~~ lead to ~~our inability to continue as a going concern.~~volatile economic conditions.

~~The Company has negative operating cash flows, operating losses and net losses~~Changes in the current year, which will continue until operating results improve. If business results in the coming twelve months do not improve relative to the previous twelve months, the Company would be at risk of violating its $30.0 million minimum liquidity covenant under its 2022 Credit Agreement. As a result, there is substantial doubt about the Company’s ability to continue as a going concernpolitical landscape may affect economic conditions within the ~~twelve months following~~U.S., which could also trigger global economic conditions, including volatile equity capital markets, which may adversely affect the ~~issuance date of~~Company's business, revenues and earnings. Such conditions could impact the ~~condensed consolidated financial statements as of and for the period ended September 30, 2022.~~

Investing in our securities involves a high degree of risk. Investors should carefully consider the risks described in our Form 10-K 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~~Company's access to invest in our Common Stock. If any of the events or developments described in our Form 10-K 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 Form 10-K and in this Form 10-Q are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently knowncapital markets 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 Note Regarding Forward-Looking Statements.”~~raise funds, if needed.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

During the quarter ended ~~September~~June 30, ~~2022,~~2023, the Company did not have any sales of equity securities in transactions that were not registered under the Securities ~~Act.~~Act, except as previously disclosed in our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 15, 2023.

Issuer Purchases of Equity Securities

During the three months ended ~~September~~June 30, ~~2022,~~2023, the Company withheld shares of our common stock in connection with employee minimum statutory tax withholding obligations payable upon the vesting of restricted stock, as follows:

Total Number of Shares Purchased(1)
Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans of Programs
July 1 - July 31, 2022 — $ — — —
August 1 - August 31, 2022 158 $ 1.79 — —
September 1 - September 30, 2022 6,110 $ 1.15 — —
Total 6,268 $ 1.17 — —


	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans of Programs
April 1 - April 30, 2023	—	$	—	—	—
May 1 - May 31, 2023	1,110	$	11.95	—	—
June 1 - June 30, 2023	96	$	10.46	—	—
Total	1,206	$	11.83	—	—

(1) Represents shares delivered to or withheld by us in connection with employee minimum tax withholding obligations upon exercise or vesting of stock awards. No shares were purchased in the open market pursuant to a repurchase program.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~During the second quarter of 2023, no director or Section 16 officer adopted or terminated any Rule 10b5-1 plan or non-Rule 10b5-1 trading arrangements.

8084

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Item 6. Exhibits


Exhibit Number						Description
3.1						Third Amended and Restated Certificate of Incorporation (filed as exhibit 3.1 to the Current Report on Form 8-K of the Company on June 13, 2023 and incorporated herein by reference)
3.2						Certificate of Amendment to Third Amended and Restated Certificate of Incorporation (filed as exhibit 3.1 to the Current Report on Form 8-K of the Company on June 14, 2023 and incorporated herein by reference)
3.3						First Amended and Restated Certificate of Designation of Series A Senior Preferred Stock of ATI Physical Therapy, Inc. (filed as exhibit 3.1 to the Current Report on Form 8-K of the Company on June 15, 2023 and incorporated herein by reference)
3 .4						Certificate of Designation of Series B Preferred Stock of ATI Physical Therapy, Inc. (filed as exhibit 3.2 to the Current Report on Form 8-K of the Company on June 15, 2023 and incorporated herein by reference)
3.5						Amended and Restated Bylaws of ATI Physical Therapy, Inc. (filed as Exhibit 3.2 to the Current Report on Form 8-K of the Company on June 23, 2021 and incorporated herein by reference)
10.1†						Second Amendment to 2021 Equity Incentive Plan (filed as exhibit 10.3 to the Current Report on Form 8-K of the Company on June 13, 2023 and incorporated herein by reference)
10.2						Amended and Restated Transaction Support Agreement, dated April 17, 2023, by and among ATI Physical Therapy, Inc., ATI Holdings Acquisition, Inc., Wilco Intermediate Holdings, and other parties thereto (filed as exhibit 10.1 to the Current Report on Form 8-K of the Company on April 21, 2023 and incorporated herein by reference)
10.3						Amendment No. 2 to Credit Agreement, dated April 17, 2023, by and among ATI Holdings Acquisition, Inc., Wilco Intermediate Holdings, Inc., HPS Investment Partners, LLC, as Lender Representative and Barclays Bank PLC, as Administrative Agent (filed as exhibit 10.2 to the Current Report on Form 8-K of the Company on April 21, 2023 and incorporated herein by reference)
10.4						Consent to Amendment No. 2 to Credit Agreement, dated June 15, 2023, by and among ATI Holdings Acquisition, Inc., Wilco Intermediate Holdings, Inc., HPS Investment Partners, LLC, as Lender Representative and Barclays Bank PLC as Administrative Agent (filed as exhibit 10.3 to the Current Report on Form 8-K of the Company on June 15, 2023 and incorporated herein by reference)
10.5						Second Lien Note Purchase Agreement, dated April 17, 2023, by and among ATI Physical Therapy, Inc., Wilco Holdco, Inc., Wilco Intermediate Holdings, Inc., ATI Holdings Acquisition, Inc., the Purchasers party thereto and Wilmington Savings Fund Society, FSB (filed as exhibit 10.3 to the Current Report on Form 8-K of the Company on April 21, 2023 and incorporated herein by reference)
10.6						First Amendment to the Investors’ Rights Agreement, dated February 24, 2022, by and among the Company and the Preferred Equityholders party thereto (filed as exhibit 10.5 to the Current Report on Form 8-K of the Company on June 15, 2023 and incorporated herein by reference)
10.7						Registration Rights Agreement, dated June 15, 2023, by and among the Company and certain Preferred Equityholders (filed as exhibit 10.6 to the Current Report on Form 8-K of the Company on June 15, 2023 and incorporated herein by reference)

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10.8						First Amendment to Note Purchase Agreement, dated June 15, 2023, by and among ATI Physical Therapy, Inc., Wilco Holdco, Inc., Wilco Intermediate Holdings, Inc., ATI Holdings Acquisition, Inc., the Subsidiary Guarantors party thereto, the other Purchasers party thereto and Wilmington Savings Fund Society, FSB (filed as exhibit 10.7 to the Current Report on Form 8-K of the Company on June 15, 2023 and incorporated herein by reference)
31.1*						Certification of Principal Executive 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.
31.2*						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~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*						Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						XBRL Instance Document
101.SCH*						XBRL Taxonomy Extension Schema Document
101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						XBRL 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 our behalf by the undersigned thereunto duly authorized.

ATI PHYSICAL THERAPY, INC.

Date: ~~November~~August 8, ~~2022~~2023


/s/ JOSEPH JORDAN
Joseph Jordan
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

8186


	Series A Senior Preferred Stock
Aggregate stated value as of February 24, 2022	$	165,000
Accumulated paid in-kind dividends as of September 30, 2022	12,263
Aggregate stated value as of September 30, 2022	$	177,263

Preferred shares issued and outstanding as of September 30, 2022	165

Stated value per share as of September 30, 2022	$	1,074.32


Year
2022 (remainder of year after September 30, 2022)	$	16,886
2023	68,962
2024	61,479
2025	51,983
2026	45,643
Thereafter	101,471
Total undiscounted future cash flows	346,424
Less: Imputed Interest	(64,598)
Present value of future cash flows	$	281,826
Presentation on Balance Sheet
Current	$	52,366
Non-current	$	229,460


	Discount rate		Terminal growth rate(1)		EBITDA margin		Royalty rate
	50 basis points		100 basis points		100 basis points		50 basis points
	Increase	Decrease	Increase	Decrease	Increase	Decrease	Increase	Decrease
Goodwill	$(45,000)	$50,000	$55,000	$(40,000)	$50,000	$(50,000)
Trade name	$(20,000)	$10,000	$10,000	$(20,000)			$30,000	$(40,000)