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Prospectus

 

Filed Pursuant Rule 424(b)(3)
Registration No. 333-257801

LOGO

ATI Physical Therapy, Inc.

196,770,282 shares of Common Stock

Up to 9,866,657 shares of Common Stock Issuable upon Exercise of the Warrants

 

 

This prospectus relates to: (1) the issuance by us of up to 6,899,991 shares of common stock, par value $0.0001 per share (“Common Stock”), of ATI Physical Therapy, Inc., a Delaware corporation (the “Company,” “we,” “our”) that may be issued upon exercise of the Public Warrants (the “Public Warrants”) at an exercise price of $11.50 per share, (2) the issuance by us of up to 2,966,666 shares of Common Stock issuable upon the exercise of 2,966,666 warrants (“Private Placement Warrants” and together with the Public Warrants, the “Warrants”) originally issued to the Sponsor (as such term is defined under “Selected Definitions”) in a private placement, currently exercisable at a price of $11.50 per Private Placement Warrant, (2) the offer and sale, from time to time by the selling security holders identified in this prospectus (the “Selling Securityholders”), or their permitted transferees of up to 181,770,282 shares of Common Stock currently outstanding and (3) up to 15,000,000 shares of Common Stock that may be issued in the form of Common Stock pursuant to the earnout provisions of the Merger Agreement.

This prospectus provides you with a general description of such securities and the general manner in which we and the Selling Securityholders may offer or sell the securities. More specific terms of any securities that we and the Selling Securityholders may offer or sell may be provided in a prospectus supplement that describes, among other things, the specific amounts and prices of the securities being offered and the terms of the offering. The prospectus supplement may also add, update or change information contained in this prospectus.

We will not receive any proceeds from the sale of the securities under this prospectus, although we could receive up to approximately $113,466,556 for the issuance by us of the Common Stock registered under this prospectus assuming the exercise of all the outstanding Warrants, to the extent such warrants are exercised for cash. However, we will pay the expenses associated with the sale of securities pursuant to this prospectus. Any amounts we receive from such exercises will be used for working capital and other general corporate purposes.

Information regarding the Selling Securityholders, the amounts of shares of Common Stock that may be sold by them and the times and manner in which they may offer and sell the shares of Common Stock under this prospectus is provided under the sections entitled “Selling Securityholders” and “Plan of Distribution,” respectively, in this prospectus. The Selling Securityholders may sell any, all, or none of the securities offered by this prospectus.

The Selling Securityholders and intermediaries through whom such securities are sold may be deemed “underwriters” within the meaning of the Securities Act of 1933, as amended, with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation. We have agreed to indemnify certain of the Selling Securityholders against certain liabilities, including liabilities under the Securities Act. You should read this prospectus and any prospectus supplement or amendment carefully before you invest in our securities.

Our Common Stock and our Public Warrants, which are not being registered hereunder, are listed on the New York Stock Exchange, or NYSE, under the symbol “ATIP” and “ATIPWS” respectively. On July 29, 2021, the last reported sale prices of our Common Stock was $3.63 per share and the last reported sales price of our Public Warrants was $0.78 per warrant.

 

 

We are an “emerging growth company” under federal securities laws and are subject to reduced public company reporting requirements. Investing in our Common Stock involves a high degree of risk. See “Risk Factors” beginning on page 12 of this prospectus.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is July 30, 2021


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TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     i  

MARKET AND OTHER INDUSTRY DATA

     ii  

SELECTED DEFINITIONS

     ii  

CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS

     iv  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     12  

USE OF PROCEEDS

     36  

DETERMINATION OF OFFERING PRICE

     37  

MARKET INFORMATION FOR SECURITIES AND DIVIDEND POLICY

     38  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     39  

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     45  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     50  

OUR BUSINESS

     72  

MANAGEMENT

     84  

EXECUTIVE COMPENSATION

     90  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     97  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     100  

SELLING SECURITYHOLDERS

     104  

DESCRIPTION OF SECURITIES

     111  

PLAN OF DISTRIBUTION

     123  

UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     125  

EXPERTS

     128  

LEGAL MATTERS

     128  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     128  

CHANGE IN AUDITOR

     128  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

You should rely only on the information contained in this prospectus. We have not authorized any dealer, salesperson or other person to provide you with information about the Company, except for the information contained in this prospectus. The information contained in this prospectus is complete and accurate only as of the date on the front cover page of this prospectus, regardless of the time of delivery of this prospectus or the sale of any securities. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The information contained in this prospectus may change after the date of this prospectus. Do not assume after the date of this prospectus that the information contained in this prospectus is still correct.

For investors outside the United States: We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering and the distribution of this prospectus outside the United States.


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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement on Form S-1 that we filed with the Securities and Exchange Commission (the “SEC”) using a “shelf” registration process. Under this shelf registration process, from time to time, the Selling Securityholders may offer and sell the securities offered by them described in this prospectus in one or more offerings from time to time through any means described in the section entitled “Plan of Distribution.” We may use the shelf registration statement to issue shares of Common Stock upon exercise of the Public Warrants. We will receive proceeds from any exercise of the Public Warrants for cash. Additional information about any offering may be provided in a prospectus supplement that describes, among other things, the specific amounts and prices of the Common Stock being offered and the terms of the offering.

A prospectus supplement may also add, update or change information included in this prospectus. Any statement contained in this prospectus will be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained in such prospectus supplement modifies or supersedes such statement. Any statement so modified will be deemed to constitute a part of this prospectus only as so modified, and any statement so superseded will be deemed not to constitute a part of this prospectus. You should rely only on the information contained in this prospectus, any applicable prospectus supplement or any related free writing prospectus. See “Where You Can Find Additional Information.”

Neither we nor the Selling Securityholders have authorized anyone to provide any information or to make any representations other than those contained in this prospectus, any accompanying prospectus supplement or any free writing prospectus we have prepared. We and the Selling Securityholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the securities offered hereby and only under circumstances and in jurisdictions where it is lawful to do so. No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus, any applicable prospectus supplement or any related free writing prospectus. This prospectus is not an offer to sell securities, and it is not soliciting an offer to buy securities, in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or any prospectus supplement is accurate only as of the date on the front of those documents only, regardless of the time of delivery of this prospectus or any applicable prospectus supplement, or any sale of a security. Our business, financial condition, results of operations and prospects may have changed since those dates.

This prospectus contains summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and you may obtain copies of those documents as described below under “Where You Can Find Additional Information.”

On June 16, 2021 (the “Closing Date”), we consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated as of February 21, 2021 (the “Merger Agreement”), by and among Fortress Value Acquisition Corp. II, a Delaware corporation (“FAII”), FVAC Merger Corp. II, a Delaware corporation and a direct, wholly-owned subsidiary of FAII (“Merger Sub”), and Wilco Holdco, Inc., a Delaware corporation (“Wilco”), which provided for, among other things, the merger of Merger Sub with and into Wilco, with Wilco being the surviving corporation and a direct, wholly-owned subsidiary of FAII (the “Merger,” and together with the other transactions and ancillary agreements contemplated by the Merger Agreement, the “Business Combination”). In connection with the Closing, we changed our name from “Fortress Value Acquisition Corp. II” to “ATI Physical Therapy, Inc.”

In connection with the closing of the Business Combination (the “Closing”), we own, directly or indirectly, 100% of the stock of Wilco and its subsidiaries, and the stockholders of Wilco as of immediately prior to the effective time of the Merger (the “ATI Stockholders”) hold a portion of our Common Stock.

 

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On the Closing Date, a number of purchasers (each, a “Subscriber”) purchased from the Company an aggregate of 30,000,000 shares of Common Stock (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of approximately $300 million, pursuant to separate subscription agreements (each, a “Subscription Agreement”) entered into concurrently with the Merger Agreement, effective as of February 21, 2021. Pursuant to the Subscription Agreements, we gave certain registration rights to the Subscribers with respect to the PIPE Shares.

MARKET AND OTHER INDUSTRY DATA

Certain market and industry data included in this prospectus, including the size of certain markets and our size or position within these markets, including our products, are based on estimates of our management and third-party reports. Management estimates have been derived from our management’s knowledge and experience in the markets in which we operate, as well as information obtained from surveys, reports by market research firms, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate, which, in each case, we believe are reliable.

We are responsible for all of the disclosure in this prospectus and while we believe the data from these sources to be accurate and complete, we have not independently verified data from these sources or obtained third-party verification of market share data and this information may not be reliable. In addition, these sources may use different definitions of the relevant markets. Data regarding our industry is intended to provide general guidance but is inherently imprecise.

Assumptions and estimates of our future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors—Risks Relating to our Business and Industry.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Cautionary Notes Regarding Forward-Looking Statements.”

SELECTED DEFINITIONS

Unless stated in this prospectus or the context otherwise requires, references to:

 

   

“Amended and Restated Bylaws” means the certain Amended and Restated Bylaws of the Company, adopted at the closing of the Business Combination.

 

   

“ATI” means ATI Physical Therapy, Inc. (f/k/a Fortress Value Acquisition Corp. II prior to the consummation of the Business Combination) and its consolidated subsidiaries.

 

   

“ATI Preferred Stock” means collectively, series A-1 and series A-2 shares of Wilco preferred stock.

 

   

“A&R RRA” means that certain Amended and Restated Registration Rights Agreement, as amended, effective at the closing of the Business Combination, by and among FAII, Fortress Acquisition Sponsor II LLC and the other parties thereto.

 

   

“A&R RRA Parties” means FAII, Fortress Acquisition Sponsor II LLC and the other signatories to the A&R RRA.

 

   

“The Board,” “Board of Directors” or “our Board” means the board of directors of ATI.

 

   

“Closing” means the closing of the transactions contemplated by the Merger Agreement.

 

   

“Closing Date” means June 16, 2021.

 

   

“Common Stock” means the shares of Common Stock, par value $0.0001 per share, of “ATI.”

 

   

“Earnout Shares” means the up to an additional 15,000,000 shares of Common Stock Wilco Acquisition and its designees (“Eligible ATI Equityholders”) have a contingent right to receive pursuant to the earnout provisions in the Merger Agreement.

 

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“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

   

“FAII” means Fortress Value Acquisition Corp. II, a Delaware corporation (n/k/a ATI Physical Therapy, Inc. following the consummation of the Business Combination).

 

   

“FAII Class A common stock” means the shares of Class A common stock, par value $0.0001 per share, of FAII, (following the consummation of the Business Combination, “Common Stock”).

 

   

“FAII Class F common stock” means the shares of Class F common stock, par value $0.0001 per share, of FAII, which upon consummation of the Business Combination were converted into FAII Class A common stock.

 

   

“FAII Common Stock” means the shares of common stock, par value $0.0001 per share, of FAII, consisting of FAII Class A common stock and FAII Class F common stock, prior to the consummation of the Business Combination.

 

   

“Founder Shares” means shares of FAII Class F common stock initially purchased by the Insiders whether or not converted into shares of FAII Class A common stock.

 

   

“FAII’s IPO” means FAII’s initial public offering, consummated on August 14, 2020, through the sale of 34,500,000 units (including 4,500,000 units sold pursuant to the underwriters’ exercise of their over-allotment option) at $10.00 per unit.

 

   

“Insiders” means holders of Founder Shares prior to FAII’s IPO.

 

   

“Merger Sub” means FAII Merger Corp. II, a Delaware corporation, wholly owned subsidiary of FAII prior to the consummation of the Business Combination.

 

   

“NYSE” means the New York Stock Exchange.

 

   

“Parent Sponsor Letter Agreement” means that certain amended and restated letter agreement dated February 21, 2021, by and among FAII, the Company and the Insiders.

 

   

“PIPE Investors” means the Sponsor and certain other investors who entered into Subscription Agreements with FAII (together with any permitted assigns under the Subscription Agreements) in connection with the Business Combination.

 

   

“Private Placement Warrants” means the 2,966,666 warrants to purchase shares of Common Stock purchased in a private placement in connection with FAII’s IPO.

 

   

“Public Warrants” means the warrants included in the public units issued in FAII’s IPO, each of which is exercisable for one share of Common Stock, in accordance with its terms.

 

   

“SEC” means the United States Securities and Exchange Commission.

 

   

“Second Amended and Restated Certificate of Incorporation” means the Second Amended and Restated Certificate of Incorporation of ATI, adopted at the closing of the Business Combination.

 

   

“Securities Act” means the Securities Act of 1933, as amended.

 

   

“Sponsor” means Fortress Acquisition Sponsor II LLC, a Delaware limited liability company.

 

   

“Stockholders Agreement” means the Stockholders Agreement dated February 21, 2021, by and among the Fortress Value Acquisition Corp. II and the other parties thereto.

 

   

“Subscription Agreements” means those certain Subscription Agreements, each dated as of February 21, 2021, by and between FAII and each of the PIPE Investors.

 

   

“Vesting Shares” means the shares of Common Stock issued upon the conversion of the Founder Shares (shares of FAII Class F common stock initially purchased by holders of Founder Shares prior to the FAII’s IPO), which are subject to certain vesting and forfeiture provisions.

 

   

“Wilco Acquisition” means Wilco Acquisition, L.P., a Delaware limited partnership.

 

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CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this prospectus 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 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 prospectus, 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 dependence upon governmental and third party private payors for reimbursement and that decreases in reimbursement rates or changes in payor 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;

 

   

risks associated with public health crises, including COVID-19;

 

   

our inability to realize the anticipated benefits of the Business Combination and compete effectively in a competitive industry subject to rapid technological change including competition that could impact our ability to recruit and retain skilled physical therapists;

 

   

the outcome of any legal proceedings instituted against us or any of our directors or officers, following the announcement of the Business Combination;

 

   

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

 

   

our operations are subject to extensive regulation and macroeconomic uncertainty;

 

   

failure of third-party customer service and technical support providers to adequately address customers’ requests;

 

   

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

 

   

the severity of 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 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;

 

   

our facilities face competition for experienced physical therapists and other clinical providers that may increase labor costs and reduce profitability;

 

   

risks associated with our reliance on IT in critical areas of our operations;

 

   

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;

 

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risk resulting from the Warrants, Earnout shares and Vesting shares being accounted for as liabilities;

 

   

costs related to operating as a public company and our ability to maintain the listing of our securities on the NYSE;

 

   

the risk that we may be required to recognize an impairment of our goodwill and other intangible assets, which represent a significant portion of our total assets; and

 

   

those factors discussed under the heading “Risk Factors” and elsewhere in this prospectus.

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.

These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this prospectus are more fully described under the heading “Risk Factors” and elsewhere in this prospectus. The risks described under the heading “Risk Factors” are not exhaustive. Other sections of this prospectus 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. The Company undertakes no obligations to update or revise publicly any forward-looking statements, 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 prospectus, 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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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all the information that you may consider important in making your investment decision. Therefore, you should read the entire prospectus carefully, including, in particular, the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes.

As used in this prospectus, unless the context otherwise requires or indicates, references to “ATI,” “Company,” “we,” “our,” and “us,” refer to ATI Physical Therapy, Inc. and its subsidiaries.

Overview

We are a nationally recognized outpatient physical therapy provider specializing in outpatient rehabilitation and adjacent healthcare services, with nearly 900 clinics (as well as 22 clinics under management service agreements) located in 24 states as of March 31, 2021. We operate with a commitment to providing our patients, medical provider partners, payors and employers with evidence-based, patient-centric care.

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

Physical therapy patients benefit from team-based care, robust techniques and individualized treatment plans in an encouraging environment. To achieve exceptional results, we use an extensive array of techniques including therapeutic exercise, manual therapy and strength training, among others. Our physical therapy model aims to deliver optimized outcomes and time to recovery for patients, insights and service satisfaction for referring providers and predictable costs and measurable value for payors.

In addition to providing services to physical therapy patients at outpatient rehabilitation clinics, we provide services through our ATI Worksite Solutions (“AWS”) program, Management Service Agreements (“MSA”), Home Health, and Sports Medicine arrangements. AWS provides an on-site team of healthcare professionals at employer worksites to promote work-related injury prevention, facilitate expedient and appropriate return-to-work follow-up and maintain the health and well-being of the workforce. MSA contracts with clinics or physician offices may provide dedicated service teams to oversee management and other physical therapy services. Home Health offers in-home rehabilitation. Sports Medicine arrangements provide certified healthcare professionals to various schools, universities and other institutions to perform on-site physical therapy and rehabilitation services.

Recent Developments

Business Combination Completion

On the Closing Date, we consummated the previously announced business combination pursuant to the Merger Agreement, which provided for, among other things, the merger of Merger Sub with and into Wilco, with Wilco being the surviving corporation and a direct, wholly-owned subsidiary of FAII. On the Closing Date and in connection with the closing of the Business Combination, we changed our name from Fortress Value Acquisition Corp. II to ATI Physical Therapy, Inc.

Pursuant to the Parent Sponsor Letter Agreement entered into concurrently with the Merger Agreement, all of the Founder Shares and shares of Common Stock issued upon the exercise or conversion of the Founder Shares (the “Vesting Shares”) are subject to vesting and forfeiture provisions as follows: (i) 33.33% of the


 

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Vesting Shares beneficially owned by the Insiders shall vest at such time as a $12.00 Common Share Price is achieved, (ii) 33.33% of the Vesting Shares beneficially owned by the Insiders shall vest at such time as a $14.00 Common Share Price is achieved and (iii) 33.34% of the Vesting Shares beneficially owned by the Insiders shall vest at such time as a $16.00 Common Share Price is achieved, in each case on or before the date that is ten years after the Closing Date. The “Common Share Price” will be considered achieved only when the VWAP equals or exceeds the applicable threshold for at least five days out of a period of ten consecutive trading days ending on the trading day immediately prior to the date of determination.

The Sponsor and each of the Insiders shall not (and will cause its respective affiliates not to) directly transfer any unvested Founder Shares or shares of Common Stock issued or issuable upon the exercise or conversion of the unvested Founder Shares prior to the later of (x) the expiration of the applicable lock-up period and (y) the date such Founder Shares converted into Common Stock become vested as described above.

Wilco Acquisition and its designees have the contingent right to receive up to an additional 15,000,000 shares of Common Stock (the “Earnout Shares”), on or before the date that is ten years after the consummation of the Business Combination, if the VWAP of our Common Stock exceeds certain thresholds. In the event the VWAP of our Common Stock is greater than (i) $12.00 for at least five days out of a period of ten consecutive trading days ending on the trading day immediately prior to the date of determination, there shall be a one-time issuance of 5,000,000 shares of our Common Stock, (ii) $14.00 for at least five days out of a period of ten consecutive trading days ending on the trading day immediately prior to the date of determination, there shall be a one-time issuance of 5,000,000 shares of our Common Stock and (iii) $16.00 for at least five days out of a period of ten consecutive trading days ending on the trading day immediately prior to the date of determination, there shall be a one-time issuance of 5,000,000 shares of our Common Stock.

Recently announced trends and preliminary results

Set forth below is certain unaudited selected financial and other data for the three months ended June 30, 2021 and 2020, as well as for the three months ended March 31, 2021. Our final unaudited interim condensed consolidated financial statements for the three- and six-month periods ended June 30, 2021 are not yet available. The following information reflects our expectations based on currently available information, is not a comprehensive statement of our financial results and is subject to change.

Our financial closing procedures for the three months ended June 30, 2021 are not yet complete and, as a result, our final results upon completion of our closing procedures may vary from the information herein. This information should not be viewed as a substitute for our full interim or annual financial statements prepared in accordance with GAAP. Further, these results are not necessarily indicative of the results to be expected for the remainder of the year or any future period. See the sections titled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding factors that could affect our results in future periods.

The preliminary financial and other data for the three months ended June 30, 2021 and 2020, as well as for the three months ended March 31, 2021, presented below have been prepared by, and are the responsibility of, management. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to such preliminary data for the three months ended June 30, 2021 and 2020. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.


 

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Summary of key performance results in second quarter 2021, in addition to prior sequential quarter and prior comparative quarter, were as follows ($’s in millions, except on per visit basis):

 

Three Months Ended

      
     June 30, 2021     March 31, 2021     June 30, 2020  

Visits per Day (in thousands)

     21.6       19.5       12.6  

growth rate, quarter over quarter

     10.5     —         —    

growth rate, year over year

     70.6     —         —    

Rate per Visit

   $ 106.26     $ 107.56     $ 117.41  

growth rate, quarter over quarter

     (1.2 )%      —         —    

growth rate, year over year

     (9.5 )%      —         —    

Net Operating Revenue

   $ 164.0     $ 149.1     $ 107.8  

growth rate, quarter over quarter

     10.0     —         —    

growth rate, year over year

     52.1     —         —    

Clinic Salaries and Related Costs

   $ 80.9     $ 80.7     $ 54.0  

As % net operating revenue

     49.3     54.1     50.1

Net (Loss) Income before Taxes

   $ (5.5   $ (28.3   $ 8.2  

Net (loss) income before taxes margin

     (3.4 )%      (19.0 )%      7.6

Net (Loss) Income(1)

     —       $ (17.8   $ 4.6  

Net (loss) income margin

     —         (12.0 )%      4.3

Adjusted EBITDA(2)

   $ 24.0     $ 5.6     $ 45.5  

Adjusted EBITDA margin

     14.6     3.8     42.2

Net (Decrease) Increase in Cash

   $ (7.1   $ (44.5   $ 93.4  

 

(1)

At this time, we are not yet able to calculate Income tax expense without unreasonable efforts, and accordingly, Net income (loss) for the quarter ended June 30, 2021 and will provide such totals in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 when filed.

(2)

A reconciliation of our non-GAAP results to our GAAP results is included below. See “Non-GAAP Financial Measures” below and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Non-GAAP Financial Measures.”

 

   

Visits per Day (“VPD”) were 21,569, compared to 19,520 in the first quarter of 2021 and 12,643 in the second quarter of 2020, an increase of 10.5% quarter over quarter and 70.6% year over year as a result of continued volume increases as COVID-19 restrictions in local markets evolved and referral levels improved, steadily increasing demand for our services.

 

   

Rate per Visit (“RPV”) was $106.26, compared to $107.56 in the first quarter of 2021 and $117.41 in the second quarter of 2020, a decrease of 1.2% quarter over quarter and 9.5% year over year driven by a faster rebound in lower reimbursing vs. higher reimbursing payors and state mix shift.

 

   

Net operating revenue was $164.0 million, compared to $149.1 million in the first quarter of 2021 and $107.8 million in the second quarter of 2020, an increase of 10.0% quarter over quarter and 52.1% year over year. The increase was driven by higher patient visit volumes, partially offset by lower RPV.

 

   

Clinic salaries and related costs were $80.9 million, compared to $80.7 million in the first quarter of 2021 and $54.0 million in the second quarter of 2020. Clinic salaries and related costs as a percentage of net operating revenue were 49.3%, compared to 54.1% in the first quarter of 2021 and 50.1% in the second quarter of 2020. The decreasing expense ratio was primarily driven by higher clinic labor productivity.


 

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Net (loss) income before taxes was $(5.5) million, compared to $(28.3) million in the first quarter of 2021 and $8.2 million in the second quarter of 2020. Net (loss) income before taxes margin was (3.4)%, compared to (19.0)% in the first quarter of 2021 and 7.6% in the second quarter of 2020.

 

   

Net (loss) income was $(17.8) million in the first quarter of 2021 and $4.6 million in the second quarter of 2020. Net (loss) income margin was (12.0)% in the first quarter of 2021 and 4.3% in the second quarter of 2020. At this time, we are not yet able to calculate income tax expense for the second quarter 2021 without unreasonable efforts and, accordingly second quarter 2021 net (loss) income will not be reported until we file our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021.

 

   

Adjusted EBITDA was $24.0 million, compared to $5.6 million in the first quarter of 2021 and $45.5 million (which includes CARES Act Provider Relief Funds of $44.3 million) in the second quarter of 2020. Adjusted EBITDA margin was 14.6%, compared to 3.8% in the first quarter of 2021 and 1.1% (excluding CARES Act Provider Relief Funds of $44.3 million) in the second quarter of 2020. The increase in margin was primarily driven by higher clinic labor productivity and the operating leverage inherent in our business model.

 

   

Net (decrease) increase in cash was $(7.1) million, compared to $(44.5) million in the first quarter of 2021 and $93.4 million in the second quarter of 2020 (including $118.2 million of cash flow resulting from the CARES Act Provider Relief Funds and MAAPP).

Summary of key balance sheet items as of end of second quarter 2021 were as follows ($’s in millions):

 

   

Cash and cash equivalents totaled $90.6 million. The revolving credit facility was undrawn with available capacity of $68.8 million, net of usage by letters of credit.

 

   

Gross debt totaled $559.1 million, and net debt (i.e. gross debt less $90.6 million of unrestricted cash) was $468.5 million. With the latest twelve months Adjusted EBITDA of $112.8 million as of June 30, 2021, gross and net debt leverage ratios were 5.0x and 4.2x, respectively.

Non-GAAP Financial Measures

The following table reconciles the supplemental non-GAAP financial measures, as defined under the rules of the SEC, presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. We believe Adjusted EBITDA and Adjusted EBITDA margin (i.e. Adjusted EBITDA divided by Net Operating Revenue) assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Information provided for the twelve months ended June 30, 2021 (or LTM) refers to the four-quarter period ended June 30, 2021. We regularly compute and review our key GAAP and non-GAAP measures on a last twelve months basis as it is used by management and our board of directors to assess our financial performance. Measures calculated on an LTM basis are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry.

Management believes these non-GAAP financial measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses these non-GAAP financial measures to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.


 

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Adjusted EBITDA and Adjusted EBITDA margin are not recognized terms under GAAP and should not be considered as an alternative to net income (loss) or the ratio of net income (loss) to net revenue as a measure of financial performance, cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. Additionally, these measures are not intended to be a measure of cash available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentations of these measures may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company.

We have reconciled Adjusted EBITDA to Net income (loss) for all historical periods. We are not able to reconcile to Net income (loss) for the period ended June 30, 2021 at this time, because the information necessary to complete that reconciliation is not yet available without unreasonable effort, and will provide such reconciliation in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 when filed, and are not able to provide a reconciliation for Adjusted EBITDA forecast for future periods. Please see “Reconciliation of GAAP to Non-GAAP Financial Measures” below for reconciliations of non-GAAP financial measures used in this release to their most directly comparable GAAP financial measures.


 

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Reconciliation of GAAP to Non-GAAP Financial Measures

 

$ in thousands   Twelve months
ended
    Three months
ended
June 30,
    Six months
ended
June 30,
    Three months
ended
March 31,
 
Unaudited   June 30, 2021     2021     2020     2021     2020     2021  

(Loss) income before taxes

  $ (30,358   $ (5,526   $ 8,164   $ (33,859   $ (1,734     (28,333

Income tax expense (benefit)(1)

        3,568         1,776       (10,515
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)(1)

        4,596         (3,510     (17,818

Plus (minus):

           

Net income attributable to non-controlling interest

    (4,449     (1,252     (1,855     (2,561     (3,185     (1,309

Income tax expense (benefit)

        3,568         1,776       (10,515

Interest expense, net

    65,469     15,632     17,683     31,719     35,541       16,087  

Interest expense on redeemable preferred stock

    20,137     4,779     4,604     10,087     8,981       5,308  

Depreciation and amortization expense

    38,720     9,149     9,763     18,768     19,748       9,619  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 89,519   $ 22,782   $ 38,359   $ 24,154   $ 59,351     $ 1,372  

Changes in fair value of warrant liability and contingent common shares liability(2)

    (25,487     (25,487     —         (25,487     —         —    

Loss on debt extinguishment(3)

    5,534     5,534     —         5,534     —         —    

Loss on settlement of redeemable preferred stock(4)

    14,037     14,037     —         14,037     —         —    

Transaction and integration costs(5)

    10,320     3,580     100     6,498     968     2,918  

Share-based compensation

    4,593     3,112     466     3,616     960     504  

Pre-opening de novo costs(6)

    1,578     441     268     875     862     434  

Reorganization and severance costs(7)

    5,477     —         1,255     362     2,397     362  

Business optimization costs(8)

    2,969     —         5,011     —         7,408     —    

Charges related to lease terminations(9)

    4,253     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 112,793   $ 23,999   $ 45,459   $ 29,589   $ 71,946   $ 5,590  

Adjusted EBITDA margin

    18.3     14.6     42.2     9.5     24.8     3.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

We have reconciled Adjusted EBITDA to Net income (loss) for all historical periods. At this time, we are not yet able to reconcile to Net income (loss) for the period ended June 30, 2021 and will provide such reconciliation in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 when filed.

(2)

Represents non-cash charges related to the change in the estimated fair value of Warrants, Earnout Shares and Vesting Shares

(3)

Represents charges related to the derecognition of the proportionate amount of remaining unamortized deferred financing costs and original issuance discount associated with the partial repayment of the first lien term loan and derecognition of the unamortized original issuance discount associated with the full repayment of the subordinated second lien term loan.

(4)

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

(5)

Represents costs related to the Business Combination, clinic acquisitions and acquisition-related integration and consulting and planning costs related to preparation to operate as a public company.

(6)

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

(8)

Represents non-recurring costs to optimize our platform and ATI transformative initiatives. Costs primarily related to duplicate costs driven by IT and Revenue Cycle Management conversions, labor related costs during the transition of key positions and other incremental costs of driving optimization initiatives.

(9)

Represents charges related to lease terminations prior to the end of term for corporate facilities no longer in use.

Recent trends impacting our second quarter results and expectations for future periods, including the full year 2021

As a result of recently developing trends in our business, we are expecting that our results for the coming year will be significantly adversely affected as compared to our prior expectations, including in respect of revenue, net (loss) income and Adjusted EBITDA. These trends are likely to continue to have adverse effects on us in future periods after 2021 as well. We also expect that new clinic openings will be in the range of 55 to 65 clinics for the full year, down from an expectation of 90 clinics.


 

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We believe that these adverse effects are attributable to a combination of factors, which include:

 

   

The acceleration of attrition in the second quarter and continuing into the third quarter caused, in part, by changes made during the COVID-19 pandemic related to compensation, staffing levels and support for clinicians. We have taken swift actions to offset those changes, but the company expects the impact of attrition in the second and third quarters will impact overall profitability for the year.

 

   

Labor market dynamics increased competition for the available physical therapy providers in the workforce, creating wage inflation and elevated employee attrition at ATI, negatively affecting our ability to capitalize on continued customer demand.

 

   

Decrease in rate per visit primarily driven by continuing less favorable payor and state mix when compared to pre-pandemic profile, with general shift from workers compensation and auto personal injury to commercial and government, and further impacted by mix-shift out of higher reimbursement states.

These adverse trends have been partially offset by strong demand for our services.

Our ability to achieve our business plan and expectations for the remainder of 2021 depends upon a number of factors, including the success of a number of steps being taken to significantly reduce attrition of physical therapists and significant hiring of physical therapists.

The Company has determined that the revision to its 2021 forecast constitutes an interim triggering event that requires further analysis with respect to potential impairment to goodwill and trade name intangible assets. Accordingly, the Company is currently performing interim quantitative impairment testing during the third quarter of 2021. If it is determined that the fair value amounts are below the respective carrying amounts, the Company will record an impairment charge which could be material.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act.” As such, we will take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. As a result, ATI’s stockholders may not have access to certain information they deem important. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year (a) following August 14, 2025, the fifth anniversary of the closing of FAII’s IPO, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which ATI is deemed to be a large accelerated filer, which means the market value of our Common Stock that are held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as it is an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. ATI has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an


 

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emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Corporate Information

We were incorporated on June 10, 2020 as a Delaware corporation under the name “Fortress Value Acquisition Corp. II” and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar Business Combination with one or more businesses. On June 16, 2021, in connection with the consummation of the Business Combination, we changed our name to “ATI Physical Therapy, Inc.”

Our principal executive office is located at 790 Remington Boulevard, Bolingbrook, Illinois 60440 and our telephone number is (630) 296-2223. Our website is www.atipt.com. The information found on, or that can be accessed from or that is hyperlinked to, our website is not part of this prospectus.

Risk Factors

An investment in our common stock involves substantial risk. The occurrence of one or more of the events or circumstances described in the section entitled “Risk Factors,” alone or in combination with other events or circumstances, may have a material adverse effect on our business, cash flows, financial condition and results of operations. Important factors and risks that could cause actual results to differ materially from those in the forward-looking statements include, among others:

 

   

our dependence upon governmental and third party private payors for reimbursement and that decreases in reimbursement rates or changes in payor 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;

 

   

risks associated with public health crises, including COVID-19;

 

   

our inability to realize the anticipated benefits of the Business Combination and compete effectively in a competitive industry subject to rapid technological change including competition that could impact our ability to retain and attract skilled physical therapists;

 

   

the outcome of any legal proceedings instituted against us or any of our directors or officers, following the announcement of the Business Combination;

 

   

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

 

   

our operations are subject to extensive regulation and macroeconomic uncertainty;

 

   

failure of third-party customer service and technical support providers to adequately address customers’ requests;

 

   

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

 

   

the severity of 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;


 

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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;

 

   

our facilities face competition for experienced physical therapists and other clinical providers that may increase labor costs and reduce profitability;

 

   

risks associated with our reliance on IT in critical areas of our operations;

 

   

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;

 

   

the risk that we may be required to recognize an impairment of our goodwill and other intangible assets, which represent a significant portion of our total assets; and

 

   

costs related to operating as a public company.

You should carefully review and consider the risk factors set forth under the section entitled “Risk Factors”.


 

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THE OFFERING

Issuance of Common Stock

 

Shares of Common Stock offered by us

9,866,657 shares of Common Stock, consisting of (i) 6,899,991 shares of Common Stock that may be issued upon exercise of the Public Warrants and (ii) 2,966,666 shares of Common Stock that may be issued upon exercise of the Private Placement Warrants.

 

Shares of Common Stock outstanding prior to exercise of all Warrants

207,282,536 shares (as of July 27, 2021).

 

Shares of Common Stock outstanding assuming exercise of all Warrants

217,149,193 shares (based on total shares outstanding as of July 27, 2021).

 

Exercise price of Warrants

$11.50 per share, subject to adjustment as described herein.

 

Use of proceeds

We will receive up to an aggregate of approximately $113,466,556 from the exercise of the Warrants, assuming the exercise in full of all of the Warrants for cash. Unless we inform you otherwise in a prospectus supplement or free writing prospectus, we intend to use the net proceeds from the exercise of the Warrants for general corporate purposes.

Resale of Common Stock and Private Placement Warrants

 

Shares of Common Stock offered by the Selling Securityholders

199,736,948 shares of Common Stock, consisting of (i) 8,625,000 Founder Shares, (ii) 143,145,282 shares of Common Stock subject to the Amended and Restated Registration Rights Agreement, (iii) 2,966,666 shares of Common Stock issuable upon the exercise of the Private Placement Warrants, (iv) 30,000,000 PIPE Shares and (v) up to 15,000,000 Earnout Shares that may be issued in the form of Common Stock pursuant to the earnout provisions in the Merger Agreement.

 

Private Placement Warrants offered by the Selling Securityholders

2,966,666 Private Placement Warrants.

 

Use of proceeds

We will not receive any proceeds from the sale of the shares of Common Stock or Private Placement Warrants by the Selling Securityholders.

 

Restrictions to sell

Certain of our securityholders are subject to certain restrictions on transfer until the termination of applicable lockup periods. See the section entitled “Plan of Distribution – Restrictions to Sell.”

 

Risk factors

Any investment in the securities offered hereby is speculative and involves a high degree of risk. You should carefully consider the information set forth under “Risk Factors.”

 

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NYSE ticker symbols

Common Stock: ATIP

 

  Public Warrants: ATIPWS

 

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RISK FACTORS

Investing in our securities involves a high degree of risk. Investors should carefully consider the risks described below and all of the other information set forth in the registration statement of which this prospectus forms a part, including our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our Common Stock. If any of the events or developments described below 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 below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Notes Regarding Forward-Looking Statements.”

Risks Relating to our Business and Industry

We depend upon governmental payors through Medicare and Medicaid reimbursement and decreases in Medicare reimbursement rates may adversely affect our financial results.

A significant portion of our net patient revenue is derived from governmental third-party payors. In 2020, approximately 22.2% of our net patient revenue was derived from Medicare and Medicaid and net patient revenues from Medicare and Medicaid were approximately $117.4 million. In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. Additional reforms or other changes to these payment systems may be proposed or adopted, either by the U.S. Congress (“Congress”) or by the Centers for Medicare & Medicaid Services (“CMS”), including bundled payments, outcomes-based payment methodologies and a shift away from traditional fee-for-service reimbursement. If revised regulations are adopted, the availability, methods and rates of Medicare reimbursements for services of the type furnished at our facilities could change. Some of these changes and proposed changes could adversely affect our business strategy, operations and financial results. The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). In the 2020 MPFS final rule, CMS proposed an increase to the code values for office / outpatient evaluation and management codes and cuts to other codes to maintain budget neutrality of the MPFS. This change in code valuations became effective January 1, 2021. Under the new code values, physical / occupational therapy services expected to see code reductions resulting in an estimated 9% decrease in payment. In December 2020, Congress passed the Consolidated Appropriations Act, which reduced the original approximately 9% reduction in reimbursement for physical and occupational therapy services in 2021 to approximately 3% and suspended a 2% sequestration deduction through the first quarter of 2021. On April 14, 2021, H.R. 1868 was signed into law. H.R. 1868 extends the suspension of the 2% Medicare sequestration reduction through 2021. The suspension initially went effective on April 1, 2021 and is subject to potential further suspension pending possible Congressional action. Additional reductions in Medicare reimbursement are projected in subsequent years.

Medicare claims for outpatient therapy services furnished by therapy assistants on or after January 1, 2020 must include a modifier indicating the service was furnished by a therapy assistant. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapy assistant will be paid at an amount equal to 85% of the payment amount otherwise applicable for the service. On March 11, 2021, the President of the United States signed into law the American Rescue Plan Act of 2021, which will result in an additional 4% reduction in Medicare reimbursement for all Medicare providers beginning in 2022, unless the reductions are otherwise prevented by Congress.

Statutes, regulations and payment rules governing the delivery of therapy services to Medicare and Medicaid beneficiaries are complex and subject to interpretation. Compliance with such laws and regulations

 

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requires significant expense and management attention and can be subject to future government review and interpretation, as well as significant regulatory actions, including fines, penalties and exclusion from the Medicare and Medicaid programs if we are found to be in non-compliance. Any required actions to return to compliance, or any challenges to such regulatory actions, could be costly and time consuming and may not result in a favorable reversal of any such fines, penalties or exclusions.

Given the history of frequent revisions to the Medicare and Medicaid programs and their complexity, reimbursement rates and rules, we may not continue to receive reimbursement rates from Medicare or Medicaid that sufficiently compensate us for services or, in some instances, cover operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on our revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

We anticipate the federal and state governments to continue their efforts to contain growth in Medicaid expenditures, which could adversely affect our revenue and profitability.

Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led the federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending. We expect these state and federal efforts to continue for the foreseeable future. Furthermore, not all of the states in which we operate have elected to expand Medicaid as part of federal healthcare reform legislation. There can be no assurance that the program, on the current terms or otherwise, will continue for any particular period of time beyond the foreseeable future. Historically, state budget pressures have translated into reductions in state spending. In addition, an economic downturn, including the consequences of the COVID-19 pandemic, coupled with sustained unemployment, may also impact the number of enrollees in managed care programs as well as the profitability of managed care companies, which could result in reduced reimbursement rates. If Medicaid reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicaid program that are disadvantageous to our business, our business and results of operations could be materially and adversely affected.

Payments we receive from Medicare and Medicaid are subject to potential retroactive reduction.

Payments we receive from Medicare and Medicaid can be retroactively adjusted during the claims settlement process or as a result of post-payment audits. Payors may disallow our requests for reimbursement, or recoup amounts previously reimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursable because the documentation provided was inadequate or because certain services were not covered or were deemed medically unnecessary. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue, and the costs associated with complying with audits and investigations by regulatory and governmental authorities, could adversely affect our financial condition and results of operations.

Additionally, from time to time we become aware, either based on information provided by third parties and/or the results of internal audits, of payments from payor sources that were either wholly or partially in excess of the amount that we should have been paid for the services provided. We are also subject to regular post-payment inquiries, investigations and audits of the claims we submit to Medicare and Medicaid for payment for our services. These post-payment reviews have increased as a result of government cost-containment initiatives. Overpayments may result from a variety of factors, including insufficient documentation to support the services rendered or the medical necessity of such services, or other failures to document the satisfaction of the necessary conditions of payment. We are required by law in most instances to refund the full amount of the overpayment after becoming aware of it, and failure to do so within requisite time limits imposed by applicable law could lead to significant fines and penalties being imposed on us. Furthermore, initial billing of and payments for services

 

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that are unsupported by the requisite documentation and satisfaction of any other conditions of payment, regardless of our awareness of the failure at the time of the billing or payment, could expose us to significant fines and penalties. We and/or certain of our operating companies could also be subject to exclusion from participation in the Medicare or Medicaid programs in some circumstances, in addition to any monetary or other fines, penalties or sanctions that we may incur under applicable federal and/or state law. Our repayment of any overpayments, as well as any related fines, penalties or other sanctions that we may be subject to, and any costs incurred in responding to requests for records or pursuing the reversal of payment denials, could be significant and could have a material and adverse effect on our results of operations and financial condition.

From time to time we are also involved in various external governmental investigations, subpoenas, audits and reviews, including in connection with our claims for reimbursement and associated payments. Reviews, audits and investigations of this sort can lead to governmental subpoenas or other actions, which can result in the assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion from participation in government programs. Failure to comply with applicable laws, regulations and rules could have a material and adverse effect on our results of operations and financial condition. Furthermore, becoming subject to these governmental subpoenas, investigations, audits and reviews can require us to incur significant legal and document production expenses as we cooperate with the governmental authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues.

We depend upon reimbursement by third-party payors.

A significant portion of our revenue is derived from third-party payors. In 2020, approximately 53.1% of our revenue was derived from commercial payors. These private third-party payors attempt to control healthcare costs by contracting with healthcare providers to obtain services on a discounted basis. We believe that this trend will continue and may limit reimbursement for healthcare services in the future. In addition, Company claims are closely scrutinized, and failure to submit accurate and complete clinical documentation, including specific documentation by the service provider, could result in adverse actions taken by the payor. Further, if insurers or managed care companies from whom we receive substantial payments were to reduce the amounts they pay for services, our profit margins may decline, or we may lose patients if we choose not to renew our contracts with these insurers at lower rates. In addition, in certain geographical areas, our clinics must be approved as providers by key health maintenance organizations and preferred provider plans. Failure to obtain or maintain these approvals would adversely affect our financial results.

If payments from workers’ compensation payors are reduced or eliminated, our revenue and profitability could be adversely affected.

In 2020, approximately 17.6% of our revenue was derived from workers’ compensation payors. State workers’ compensation laws and regulations vary and changes to state laws could result in decreased reimbursement by third-party payors for physical therapy services, which could have an adverse impact on our revenue. Further, payments received under certain workers’ compensation arrangements may be based on pre-determined state fee schedules, which may be impacted by changes in state funding. Any modification to such schedules that reduces our ability to receive payments from workers’ compensation payors could be significant and could have a material adverse effect on our results of operations and financial condition. We may continue to experience unfavorable changes in rates and payor and service mix shifts driven by faster rebound in lower reimbursing payor classes as opposed to higher reimbursing classes such as workers compensation and auto personal injury. These changes may reflect longer term trends in our markets. See “Summary – Recent Developments.” Adverse changes in payor mix and/or payor rates are likely to adversely affect our results of operations in future periods, which effects may be material.

 

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Our payor contracts are subject to renegotiation or termination, which could result in a decrease in our revenue or profits.

The majority of our payor contracts are subject to termination by either party. Such contracts are routinely amended (sometimes through unilateral action by payors with respect to payment policies), renegotiated, subjected to bidding processes with our competitors, or terminated altogether. Oftentimes in the renegotiation process, certain lines of business may not be renewed or a payor may enlarge its provider network or otherwise change the way it conducts its business in a way that adversely impacts our revenue. In other cases, a payor may reduce its provider network in exchange for lower payment rates. Our revenue from a payor may also be adversely affected if the payor alters its utilization management expectations and/or administrative procedures for payments and audits, changes its order of preference among the providers to which it refers business or imposes a third-party administrator, network manager or other intermediary.

We are subject to risks associated with public health crises and epidemics / pandemics, such as COVID-19.

Our operations expose us to risks associated with public health crises and epidemics / pandemics, such as the COVID-19 pandemic that has spread globally since February 2020.

The COVID-19 pandemic has had, and will continue to have, a material and adverse impact on our operations, including through restrictions on the operation of physical locations, potential cancellations of physical therapy patient appointments and a decline in the scheduling of new or additional patient appointments. Due to these impacts and measures, we have experienced, and may continue to experience, significant and unpredictable reductions and cancellations of patient visits.

The continued spread of COVID-19, and the related global, national and regional policy response has also led to disruption and volatility in the global capital markets, which increases economic uncertainty and the cost of, and adversely impacts access to, capital. The COVID-19 pandemic has caused an economic slowdown of potentially extended duration, and could possibly cause a global recession.

Our financial results have been, and are expected to continue to be, negatively impacted by the COVID-19 pandemic, particularly since, as of December 31, 2020, approximately 40% of our customers are in the above-60 age group and may delay their return to physical therapy clinics. Visits per day decreased approximately 50.5%, 27.9% and 24.4% in the quarters ended June 30, 2020, September 30, 2020 and December 31, 2020, respectively, in relation to the comparative prior year periods. While we are experiencing a steady build toward pre-COVID-19 patient volumes across the country, we continue to experience lower aggregate patient volumes in many geographic areas in which we operate as compared to prior to the pandemic. The current economic crisis and increased unemployment rates resulting from COVID-19 have significantly reduced individual disposable income and depressed consumer confidence, which have reduced, and could continue to reduce, customer spend on certain medical procedures, including physical therapy, in both the short- and medium-term. Furthermore, we are unable to predict the impact that COVID-19 may have going forward on our business, results of operations or financial position of any of our major payors, which could impact each payor to a varying degree and at different times and could ultimately impact our own financial performance. Certain of our competitors may also be better equipped to weather the impact of COVID-19 and be better able to address changes in customer demand.

In addition, in response to COVID-19-related public health directives and orders, we have implemented alternative working practices and work-from-home requirements for appropriate employees. At the start of the pandemic and in accordance with many state orders, corporate support staff were asked to work remotely / from home to the greatest extent possible. Over the course of the pandemic, corporate staff have largely continued to work remotely and were asked to consult with their functional leaders as to whether certain job responsibilities needed to be performed from the office from time to time.

At the start of the pandemic, we formed a COVID-19 task force (the “Task Force”), consisting of representatives from clinic operations, human resources, legal, compliance, marketing / communications, sales

 

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and strategy, to determine, coordinate and communicate our response to the evolving situation. The Task Force has relied on state and local directives, CDC and Occupational Safety and Health Administration (“OSHA”) guidance and has consulted with a University of Chicago epidemiologist to establish policies and procedures to ensure the health and safety of our employees and patients.

We have implemented enhanced cleaning, sanitization and social distancing protocols and adopted a mask policy for all clinicians, patients and support staff and implemented screening protocols for all employees and patients designed to identify possible COVID-19 symptoms and exclude individuals from clinics or the workplace for the appropriate quarantine period. We launched ATI Connect, a tele-physical therapy platform to offer patients an alternative to in-clinic treatment. Additionally, we developed a corporate support center playbook for communicating and implementing the new policies and issued frequent communications to the staff and the field to ensure compliance with evolving CDC, regulatory and state and local guidance and requirements. These initiatives, and initiatives we may take in the future, require expenditures of time and resources that we would otherwise be investing in growing the business and could result in slower growth and opportunity costs.

To the extent our operating cash flows, together with our cash on hand, become insufficient to cover our liquidity and capital requirements, including funds for any future acquisitions and other corporate transactions, we may be required to seek third-party financing. There can be no assurance that we would be able to obtain any required financing on a timely basis or at all. Further, lenders and other financial institutions could require us to agree to more restrictive covenants, grant liens on our assets as collateral and/or accept other terms that are not commercially beneficial to us in order to obtain financing. Such terms could further restrict our operations and exacerbate any impact on its results of operations and liquidity that may result from COVID-19. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our securities.

The full extent to which the COVID-19 pandemic and the various governmental responses to it impact our business, operations and financial results will depend on numerous other evolving factors that we may not be able to accurately predict, including:

 

   

the duration and scope of the pandemic;

 

   

governmental, business and individual actions that have been and continue to be taken in response to the pandemic;

 

   

our ability to comply with the requirements necessary to retain the Coronavirus Aid, Relief, and Economic Security Act provider relief funds we received;

 

   

the effect on our patient, physician and facility referral sources and demand and ability to pay for physical therapy services;

 

   

disruptions of or restrictions on the ability of our employees to travel and to work, including as a result of their health and wellbeing;

 

   

availability of third-party providers to whom we outsource portions of our internal business functions, including billing and administrative functions relating to revenue cycle management;

 

   

increased cybersecurity risks as a result of remote working conditions;

 

   

the availability and cost of accessing the capital markets;

 

   

our ability to pursue, diligence, finance and integrate acquisitions;

 

   

our ability to comply with financial and operating covenants in our debt and operating lease agreements; and

 

   

potential for goodwill impairment charges.

Furthermore, COVID-19 could increase the magnitude of many of the other risks described herein and have other adverse effects on our operations that we are not currently able to predict. Additionally, we may also be

 

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required to delay or limit our internal strategies in the short- and medium-term by, for example, redirecting significant resources and management attention away from implementing our strategic priorities or executing opportunistic corporate development transactions.

The magnitude of the effect of COVID-19 on our business will depend, in part, on the length and severity of the COVID-19- related restrictions (including the effects of any “re-opening” actions and plans) and other limitations on our ability to conduct its business in the ordinary course. The longer the pandemic continues, the more severe the impacts described above will be on our business (which may also be disproportionately larger in certain local areas compared to the national level). The extent, length and consequences of the COVID-19 pandemic are uncertain and impossible to predict. COVID-19 and other similar outbreaks, epidemics or pandemics could have a material adverse effect on our business, financial condition, results of operations and cash flows, and could cause significant volatility in the trading prices of our securities.

We operate in a competitive industry, and if we are not able to compete effectively, our business, financial condition and results of operations will be harmed.

Even if our services are more effective than those of our competitors, current or potential clients may accept competitive services in lieu of our services. If we are unable to compete successfully in the physical therapy industry, our business, financial condition and results of operations could be materially adversely affected.

The outpatient physical therapy market is rapidly evolving and highly competitive. We expect competition to intensify in the future as existing competitors and new entrants introduce new physical therapy services and platforms. We currently face competition from a range of companies, including other incumbent providers of physical therapy consultation services, that are continuing to grow and enhance their service offerings and develop more sophisticated and effective service platforms. In addition, since there are limited capital expenditures required for providing physical therapy services, there are few financial barriers to enter the industry. Other companies could enter the healthcare industry in the future and divert some or all of our business. Competition from specialized physical therapy service providers, healthcare providers, hospital systems and other parties will result in continued pricing pressures, which is likely to lead to price declines in certain of our services, all of which could negatively impact our sales, profitability and market share.

Some competitors may have greater name recognition, longer operating histories and significantly greater resources than us. Further, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than us to new or changing opportunities, technologies, standards or client requirements and may have the ability to initiate or withstand substantial price competition. In addition, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their services in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger client base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources or larger sales forces than ours, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain geographies or segments of the physical therapy market, which could create additional price pressure. As we expand into new geographical areas, we may encounter competitors with stronger relationships or recognition in the community in such new areas, which could give those competitors an advantage in obtaining new patients or retaining existing ones.

We also compete for physical therapists and we have recently experienced an accelerated rate of attrition, which has had and may continue to have adverse effects on our business, financial condition, results of operations, as well as our ability to open new clinics.

Moreover, we expect that competition will continue to increase as a result of consolidation in the healthcare industry. Many healthcare industry participants are consolidating to create integrated healthcare systems with

 

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greater market power, including, in some cases, integrating physical therapy services with their core medical practices. As provider networks and managed care organizations consolidate, thus decreasing the number of market participants, competition to provide services like ours will become more intense, and the importance of establishing and maintaining relationships with key industry participants will become greater.

Rapid technological change in our industry presents us with significant risks and challenges.

The healthcare market is characterized by rapid technological change, changing consumer requirements, short product lifecycles and evolving industry standards. Our success will depend on our ability to enhance our brands with next-generation technologies and to develop, acquire and market new services to access new consumer populations. Moreover, we may not be successful in developing, using, selling or maintaining new technologies effectively or adapting solutions to evolving client requirements or emerging industry standards, and, as a result, our business, financial condition and results of operations could be materially adversely affected. In addition, we have limited insight into trends that might develop and later affect our business, and which could lead to errors in our analysis of available data or in predicting and reacting to relevant business, legal and regulatory trends and healthcare reform. Further, there can be no assurance that technological advances by one or more of our current or future competitors will not result in our present or future solutions and services becoming uncompetitive or obsolete. If any of these events occur, it could harm our business.

If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and patient satisfaction or adequately address competitive challenges.

We have experienced, and may continue to experience, rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management and our operational and financial resources. To manage growth effectively, we will be required, among other things, to continue to implement and improve our operating and financial systems and controls to expand, train and manage our employee base. This will require us to continue expending funds to enhance our operational, financial and management controls, reporting systems and procedures and to retain and attract sufficient numbers of talented personnel. If we are unable to implement and scale improvements to all of our control systems in an efficient and timely manner, or if we encounter deficiencies in existing systems and controls, then we will not be able to make available the services required to successfully execute our business plan. Failure to retain and attract sufficient numbers of qualified personnel could further strain our human resources department and impede our growth or result in ineffective growth.

In addition, as we expand our business, it is important that we continue to maintain a high level of patient service and satisfaction. As our patient base continues to grow, we will need to increase our patient services and other personnel, as well as our network of partners, to provide personalized patient service. If we are not able to continue to provide high quality physical therapy services with high levels of patient satisfaction, our reputation, as well as our business, results of operations and financial condition could be adversely affected.

Our current locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all, which could adversely affect our business.

The success of any of our clinics depends in substantial part on their locations. There can be no assurance that the current locations will continue to be attractive as demographic patterns and trade areas change. For example, neighborhood or economic conditions where our clinics are located could decline in the future, thus resulting in potentially reduced patient visits. In addition, rising real estate prices in some areas may restrict our ability to lease new desirable locations. If desirable locations cannot be obtained at reasonable prices, our ability to execute our growth strategies could be adversely affected, and we may be impacted by declines in patient visits as a result of the deterioration of certain locations, each of which could materially and adversely affect our business and results of operations.

 

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We may incur closure costs and losses.

The competitive, economic or reimbursement conditions in the markets in which we operate may require us to reorganize or close certain clinics. In the three months ended March 31, 2021, we opened 10 clinics and closed 3 clinics, compared to the three months ended March 31, 2020, during which we opened 3 clinics and closed 7 clinics. In fiscal year 2020, we opened 23 clinics and closed 20 clinics, compared to fiscal year 2019, during which we opened 71 clinics and closed 9 clinics. In the event a clinic is reorganized or closed, we may incur losses and closure costs, including, but not limited to, lease obligations, severance and write-down or write-off of goodwill and other intangible assets.

Our ability to generate revenue is highly sensitive to the strength of the economies in which we operate and the demographics and populations of the local communities that we serve.

Our revenues depend upon a number of factors, including, among others, the size and demographic characteristics of local populations and the economic condition of the communities that our locations serve. In the case of an economic downturn in a market (such as the current downturn resulting from the COVID-19 pandemic), the utilization of physical therapy services by the local population of such market, and our resulting revenues and profitability in that market, could be adversely affected. Our revenues could also be affected by negative trends in the general economy that affect consumer spending. Furthermore, significant demographic changes in, or significant outmigration from, the neighborhoods where our clinics are located could reduce the demand for our services, all of which could materially and adversely affect our business and results of operation.

The size and expected growth of our addressable market has not been established with precision and may be smaller than estimated.

Our estimates of the addressable market are based on a number of internal and third-party estimates and assumptions. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct. Accordingly, the statements in this prospectus relating to, among other things, the expected growth in the market for physical therapy services may prove to be inaccurate, and the actual size of our total addressable market and resulting growth rates may be materially lower than expected.

Risks Relating to our Operations

Future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.

We have historically acquired outpatient physical therapy clinics and, as an important part of our growth strategy, we intend to pursue similar acquisition activity in the future. Failure to successfully identify and complete acquisitions would likely result in slower growth. Even if we are able to identify appropriate acquisition targets, we may not be able to execute transactions on favorable terms or integrate targets in a manner that allows us to fully realize the anticipated benefits of these acquisitions. Acquisitions may involve significant cash expenditures, potential debt incurrence and operational losses, dilutive issuances of equity securities and expenses that could have an adverse effect on our financial condition and results of operations. Acquisitions also involve numerous risks, including:

 

   

the difficulty and expense of integrating acquired personnel into our business;

 

   

the diversion of management’s time from existing operations;

 

   

the potential loss of key employees of acquired companies and existing customers of the acquired companies that may not be familiar with our brand or services;

 

   

the difficulty of assignment and/or procurement of managed care contractual arrangements; and

 

   

the assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations.

 

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Failure of our third-party customer service and technical support providers to adequately address customers’ requests could harm our business and adversely affect our financial results.

Our customers rely on our customer service support organization to resolve issues with our services. We outsource a portion of our customer service and technical support activities to third-party service providers. We depend on these third-party customer service and technical support representatives working on our behalf, and expect to continue to rely on third parties in the future. This strategy presents risks to the business due to the fact that we may not be able to influence the quality of support as directly as we would be able to do if our own employees performed these activities. Our customers may react negatively to providing information to, and receiving support from, third-party organizations, especially if these third-party organizations are based overseas. If we encounter problems with our third-party customer service and technical support providers, our reputation may be harmed, our ability to sell our services could be adversely affected, and we could lose customers and associated revenue.

We depend upon the cultivation and maintenance of relationships with the physicians and other referral sources in our markets.

Our success is partially dependent upon referrals from physicians in the communities our clinics serve and our ability to maintain good relationships with these physicians and other referral sources. Physicians referring patients to our clinics are free to refer their patients to other therapy providers or to their own physician owned therapy practices. If we are unable to successfully cultivate and maintain strong relationships with such physicians and other referral sources (including as a result of negative publicity (whether true or not)), our business may be negatively impacted and our net operating revenues may decline. In addition, our relationships with referral sources are subject to extensive laws and regulations, and if those relationships with referral sources are found to be in violation of those requirements, we may be subject to significant civil, criminal and/or administrative penalties, exclusion from participation in government programs, such as Medicare and Medicaid, and/or reputational harm.

We operate our business in regions subject to natural disasters and other catastrophic events, and any disruption to our business resulting from such natural disasters would adversely affect our revenue and results of operations.

We operate our business in regions subject to severe weather and natural disasters, including hurricanes, floods, fires, earthquakes and other catastrophic events. In February 2021, the state of Texas experienced unprecedented cold weather, resulting in power outages across the state. Nearly all of our 57 clinics in Texas were impacted by the weather, with all clinics closing for at least one day. Due to the extreme weather conditions and power outages, we estimate losses in revenue of $317,093 based on a five-week comparison period of average visit volumes from January 11, 2021 through February 15, 2021. An insurance claim we submitted is currently under review and we cannot anticipate the outcome of such claim, which would have an impact on our business or results of operations. Any natural disaster could adversely affect our ability to conduct business and provide services to its customers, and the insurance we maintain may not be adequate to cover losses resulting from any business interruption resulting from a natural disaster or other catastrophic event.

Our systems infrastructure may not adequately support our operations.

We believe our future success will depend in large part on establishing an efficient and productive information technology (“IT”) systems infrastructure that is able to provide operational intelligence to support and enhance our value proposition. Our systems infrastructure is designed to address interoperability challenges across the healthcare continuum and any failure of our systems infrastructure to identify efficiencies or productivity may impact the execution of our strategies and have a significant impact on business and operating results. Our inability to continue improving our clinical systems and data infrastructure could impact our ability to perform and continue improving outcomes for patients using our proprietary software.

 

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Failure by us 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.

The collection of accounts receivable requires constant focus and involvement by management, as well as ongoing enhancements of information systems and billing center operating procedures. There can be no assurance that we will be able to improve upon or maintain our current levels of collectability and days sales outstanding in future periods. Further, some of our patients may experience financial difficulties, or may otherwise fail to pay accounts receivable when due, resulting in increased write-offs. If we are unable to properly bill and collect our accounts receivable, our financial condition and results of operations will be adversely affected. In addition, from time to time we are involved in disputes with various parties, including our payors and their intermediaries regarding their performance of various contractual or regulatory obligations. These disputes sometimes lead to legal and other proceedings and cause us to incur costs or experience delays in collections, increases in our accounts receivable or loss of revenue. In addition, in the event such disputes are not resolved in our favor or cause us to terminate our relationships with such parties, there may be an adverse impact on our financial condition and results of operations.

Legal and Regulatory Risks Relating to Our Business

Our operations are subject to extensive regulation.

Our operations are subject to extensive federal, state and local government laws and regulations, such as:

 

   

Medicare and Medicaid reimbursement rules and regulations (as discussed above);

 

   

federal and state anti-kickback laws, which prohibit the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration for referring an individual;

 

   

in return for ordering, leasing, purchasing or recommending or arranging for or to induce the referral of an individual or the ordering, purchasing or leasing of items or services covered, in whole or in part, by any federal healthcare program, such as Medicare and Medicaid;

 

   

the Physician Self-Referral Law and analogous state self-referral prohibition statutes, which, subject to limited exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services,” including physical therapy, if the physician or a member of such physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with an entity, and prohibits the entity from billing Medicare or Medicaid for such “designated health services”;

 

   

the federal False Claims Acts (the “False Claims Acts”), which impose civil and/or criminal penalties against any person or entity that knowingly submits or causes to be submitted a claim that the person knew or should have known (i) to be false or fraudulent; (ii) for items or services not provided or provided as claimed; or (iii) was provided by an individual not otherwise qualified or who was excluded from participation in federal healthcare programs. The False Claims Acts also impose penalties for requests for payment that otherwise violate conditions of participation in federal healthcare programs or other healthcare compliance laws;

 

   

U.S.C. 42 U.S. Code § 1320a–7, the Exclusions Statute of the Social Security Act, which subjects healthcare providers to exclusion from participation in federal healthcare programs if they engage in Medicare fraud, patient neglect or abuse / felony convictions related to fraud, breach of fiduciary duties or other financial misconduct related to healthcare service delivery;

 

   

the civil monetary penalty statute and associated regulations, which authorizes the government agency to impose civil money penalties, an assessment, and program exclusion for various forms of fraud and abuse; and

 

   

the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a

 

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scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity can be found guilty of violating HIPAA without actual knowledge of the statute or specific intent to violate it.

In recent years, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to the healthcare industry, and physical therapy providers, in particular, have been subject to increased enforcement. We believe we are in substantial compliance with all laws, but differing interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make changes in our methods of operations, facilities, equipment, personnel, services and capital expenditure programs and increase our operating expenses. If we fail to comply with these extensive laws and government regulations, we could become ineligible to receive government program reimbursement, suffer civil or criminal penalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations.

In conducting our business, we are required to comply with applicable state laws regarding fee-splitting and professional corporation laws.

The laws of some states restrict or prohibit the “corporate practice of medicine,” meaning business corporations cannot provide medical services through the direct employment of medical providers, or by exercising control over medical decisions by medical providers. In some states, such restrictions explicitly apply to physical therapy services; in others, those restrictions have been interpreted to apply to physical therapy services or are not fully developed.

Specific restrictions with respect to enforcement of the corporate practice of medicine or physical therapy vary from state to state and certain states in which we operate may present higher risk than others. Each state has its own professional entity laws and unique requirements for entities that provide professional services. Further, states impose varying requirements on the licenses that the shareholders, directors, officers, and professional employees of professional corporations must possess.

Many states also have laws that prohibit non-physical therapy entities, individuals or providers from sharing in or splitting professional fees for patient care (“fee-splitting”). Generally, these laws restrict business arrangements that involve a physical therapist sharing professional fees with a referral source, but in some states, these laws have been interpreted to extend to management agreements between physical therapists and business entities under some circumstances.

Such laws and regulations vary from state to state and are enforced by governmental, judicial, law enforcement or regulatory authorities with broad discretion. Accordingly, we cannot be certain that our interpretation of certain laws and regulations is correct with respect to how we have structured our operations, service agreements and other arrangements with physical therapists in the states in which we operate.

The enforcement environment in any state in which we operate could also change, leading to increased enforcement of existing laws and regulations. If a court or governing body determines that we, or the physical therapists whom we support, have violated any of the fee-splitting laws or regulations, or if new fee-splitting laws or regulations are enacted, we or the physical therapists whom we support could be subject to civil or criminal penalties, our contracts could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure our contractual arrangements with our licensed providers of physical therapy

 

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(which may not be completed on a timely basis, if at all, and may result in terms materially less favorable to us), all of which may have a material adverse effect on our business.

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

As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits, subpoenas and investigations to verify our compliance with these programs and applicable laws and regulations. Payors may also reserve the right to conduct audits. We also periodically conduct internal audits and reviews of its regulatory compliance. While our facilities intend to comply with the federal requirements for properly billing, coding and documenting claims for reimbursement, there can be no assurance that these audits will determine that all applicable requirements are fully met at the facilities that are reviewed. An adverse inspection, review, audit or investigation could result in:

 

   

refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from payors;

 

   

state or federal agencies imposing fines, penalties and other sanctions on us;

 

   

temporary suspension of payment for new patients;

 

   

decertification or exclusion from participation in the Medicare or Medicaid programs or one or more payor networks;

 

   

self-disclosure of violations to applicable regulatory authorities;

 

   

damage to our reputation; and

 

   

loss of certain rights under, or termination of, our contracts with payors.

We are currently, have in the past been, and will likely in the future be, subject to various external governmental investigations, subpoenas, audits and reviews. Certain adverse governmental investigations, subpoenas, audits and reviews may require us to refund amounts we have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations, which could have a material adverse effect on our business and operating results. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, subpoenas, audits or investigations could be significant.

Our facilities are subject to extensive federal and state laws and regulations relating to the privacy of individually identifiable information.

HIPAA required the Health and Human Services Department to adopt standards to protect the privacy and security of individually identifiable health-related information. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information. The regulations also provide patients with significant rights related to understanding and controlling how their health information is used or disclosed. The security regulations require healthcare providers to implement administrative, physical and technical practices to protect the security of individually identifiable health information that is maintained or transmitted electronically. The Health Information Technology for Electronic and Clinical Health Act (“HITECH”), which was signed into law in 2009, enhanced the privacy, security and enforcement provisions of HIPAA by, among other things establishing security breach notification requirements, allowing enforcement of HIPAA by state attorneys general and increasing penalties for HIPAA violations. Violations of HIPAA or HITECH could result in civil or criminal penalties.

In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient and consumer privacy concerns, including unauthorized access or theft of personal information. State statutes and regulations vary from state to state. Lawsuits, including class actions and actions by state attorneys general, directed at companies that have experienced a privacy or security breach also can occur.

 

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We have established policies and procedures in an effort to ensure compliance with these privacy related requirements. However, if there is a breach of these privacy related requirements, we may be subject to various penalties and damages and may be required to incur costs to mitigate the impact of the breach on affected individuals.

Our business may be adversely impacted by healthcare reform efforts, including repeal of or significant modifications to the ACA.

In recent years, Congress and certain state legislatures have considered and passed a number of laws that are intended to result in significant changes to the healthcare industry. However, there is significant uncertainty regarding the future of the Patient Protection and Affordable Care Act (“ACA”), the most prominent of these reform efforts. The law has been subject to legislative and regulatory changes and court challenges, and the prior presidential administration and certain members of Congress have stated their intent to repeal or make additional significant changes to the ACA, its implementation or its interpretation. In 2017, the Tax Cuts and Jobs Acts was enacted, which, effective January 1, 2019, among other things, removed penalties for not complying with ACA’s individual mandate to carry health insurance. Because the penalty associated with the individual mandate was eliminated, a federal judge in Texas ruled in December 2018 that the entire ACA was unconstitutional. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals upheld the lower court’s finding that the individual mandate is unconstitutional and remanded the case back to the lower court to reconsider its earlier invalidation of the full ACA. On March 2, 2020, the United States Supreme Court (the “Supreme Court”) granted the petitions for writs of certiorari to review this case and on June 17, 2021, the Supreme Court dismissed this case without specifically ruling on the constitutionality of the ACA. These and other efforts to challenge, repeal or replace the ACA may result in reduced funding for state Medicaid programs, lower numbers of insured individuals, and reduced coverage for insured individuals. There is uncertainty regarding whether, when and how the ACA will be further changed, what alternative provisions, if any, will be enacted, and the impact of alternative provisions on providers and other healthcare industry participants. Government efforts to repeal or change the ACA or to implement alternative reform measures could cause our revenues to decrease to the extent such legislation reduces Medicaid and/or Medicare reimbursement rates.

Our failure to comply with labor and employment laws could result in monetary fines and penalties.

Worker health and safety (OSHA and similar state and local agencies); family medical leave (the Family Medical Leave Act), wage and hour laws and regulations, equal employment opportunity and non-discrimination requirements, among other laws and regulations relating to employment, apply to us. Failure to comply with such laws and regulations could result in the imposition of consent orders or civil and criminal penalties, including fines, which could damage our reputation and have an adverse effect on our results of operations or financial condition. The regulatory framework for privacy issues is rapidly evolving and future enactment of more restrictive laws, rules or regulations and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our business, and noncompliance could result in regulatory penalties and significant legal liability.

There is an inherent risk of liability in the provision of healthcare services; damage to our reputation or our failure to adequately insure against losses, including from substantial claims and litigation, could have an adverse impact on our operations, financial condition or prospects.

There is an inherent risk of liability in the provision of healthcare services. As a participant in the healthcare industry, we are and expect to be, periodically subject to lawsuits, some of which may involve large claims and significant costs to defend. In such cases, coverage under our insurance programs may not be adequate to protect us. Our insurance policies are subject to annual renewal and its insurance premiums could be subject to material increases in the future. We cannot ensure that we will be able to maintain our insurance on acceptable terms in the future, or at all. A successful claim in excess of, or not covered by, our insurance policies could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and

 

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liquidity. Even where our insurance is adequate to cover claims against us, damage to our reputation in the event of a judgment against us, or continued increases in our insurance costs, could have an adverse effect on our business, financial condition, results of operations, cash flow, capital resources, liquidity, or prospects.

We have outstanding indebtedness and may incur additional debt in the future.

We have outstanding indebtedness and our ability to incur additional indebtedness is subject to and potentially restricted by the terms of any such indebtedness or future indebtedness. Our indebtedness could have detrimental consequences on our ability to obtain additional financing as needed for working capital, acquisition costs, other capital expenditures or general corporate purposes. We cannot be certain that cash flow from operations will be sufficient to allow us to pay principal and interest on the debt, support operations and meet other obligations. If we do not have the resources to meet our obligations, we may be required to refinance all or part of our outstanding debt, sell assets or borrow more money. We may not be able to do so on acceptable terms, in a timely manner, or at all. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. Defaults under our debt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operations.

Risks Relating to Our Human Resources

Our facilities face competition for experienced physical therapists and other clinical providers that may increase labor costs and reduce profitability.

Our ability to retain and attract clinical talent is critical to our ability to provide high quality care to patients and successfully cultivate and maintain strong relationships in the communities we serve. If we cannot recruit and retain our base of experienced and clinically skilled therapists and other clinical providers, management and support personnel, our business may decrease and our revenues may decline. We compete with other healthcare providers in recruiting and retaining qualified management, physical therapists and other clinical staff and support personnel responsible for the daily operations of our business, financial condition and results of operations. We have recently experienced an accelerated rate of attrition, which has had and may continue to have adverse effects on our business, financial condition, results of operations, as well as our ability to open new clinics.

As we implement actions to reduce attrition and increase hiring of physical therapists, we expect to experience increases in our labor costs, primarily due to higher wages and greater benefits required to retain and attract qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most efficient way, our efforts to manage them may have limited effectiveness and may lead to increased turnover and other challenges.

We face licensing and credentialing barriers, and associated variability across states is a risk to timely delivery of productive talent.

The scope of licensing laws differs from state to state, and the application of such laws to the activities of physical therapists and other clinical providers is often unclear. Given the nature and scope of the solutions and services that we provide, we are required to maintain physical therapy licenses and registrations for us and our providers in certain jurisdictions and to ensure that such licenses and registrations are in good standing. These licenses require us and our providers to comply with the rules and regulations of the governmental bodies that issued such licenses. Our providers’ failure to comply with such rules and regulations could result in significant administrative penalties, the suspension of a license or the loss of a license, all of which could negatively impact our business.

 

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Risks Relating to Our Information Technology

We rely on information technology in critical areas of our operations, and a disruption relating to such technology could harm our financial condition.

We rely on IT systems in critical areas of our operations, including our electronic medical records system and systems supporting revenue cycle management, and financial and operational reporting, among others. We have legacy IT systems that IT is continuing to upgrade and modernize. If one of these systems were to fail or cause operational or reporting interruptions, or if we decide to change these systems or hire outside parties to provide these systems, we may suffer disruptions, which could have a material adverse effect on our operation, results of operations and financial condition. In addition, we may underestimate the costs, complexity and time required to develop and implement new systems.

We use software vendors and network and cloud providers in our business and if they cannot deliver or perform as expected or if our relationships with them are terminated or otherwise change, it could have a material adverse effect on our business, financial condition and results of operations.

Our ability to provide our services and support our operations requires that we work with certain third-party providers, including software vendors and network and cloud providers, and depends on such third parties meeting our expectations in timeliness, quality, quantity and economics. Our third-party suppliers may be unable to meet such expectations due to a number of factors, including due to factors attributable to the COVID-19 pandemic. We might incur significant additional liabilities if the services provided by these third parties do not meet our expectations, if they terminate or refuse to renew their relationships with us or if they were to offer their services on less advantageous terms. We rely on internally developed software applications and systems to conduct our critical operating and administrative functions. We also depend on our software vendors to provide long-term software maintenance support for our information systems. In addition, while there are backup systems in many of our operating facilities, we may experience an extended outage of network services supplied by these vendors or providers that could impair our ability to deliver our solutions, which could have a material adverse effect on our business, financial condition and results of operations.

We are a target of attempted cyber and other security threats and must continuously monitor and develop our IT networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact or which may cause a violation of HIPAA or HITECH and subject us to potential legal and reputational harm.

In the normal course of business, our IT systems hold sensitive patient information including patient demographic data, eligibility for various medical plans including Medicare and Medicaid and protected health information subject to HIPAA and HITECH. We also contract with third-party vendors to maintain and store our patients’ individually identifiable health information. Numerous state and federal laws and regulations address privacy and information security concerns resulting from our access to our patients’ and employees’ personal information. Additionally, we utilize those same systems to perform our day-to-day activities, such as receiving referrals, assigning clinicians to patients, documenting medical information and maintaining an accurate record of all transactions.

While we have not experienced any known attacks on our IT systems that have compromised patient data, our IT systems and those of our vendors that process, maintain and transmit such data are subject to computer viruses, cyber-attacks, including ransomware attacks, or breaches. We maintain our IT systems with safeguard protection against cyber-attacks including active intrusion protection, firewalls and virus detection software, adhere to (and require our third-party vendors to adhere to) policies and procedures designed to ensure compliance with HIPAA and HITECH regulations, and have developed and tested a response plan in the event of a successful attack and maintains commercial insurance related to a cyber-attack. However, these safeguards do not ensure that a significant cyber-attack could not occur. A successful attack on our or our third-party vendors’ IT systems could have significant consequences to the business, including liability for compromised patient

 

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information, business interruption, significant civil and criminal penalties, lawsuits, reputational harm and increased costs to us, any of which could have a material adverse effect on our financial condition and results of operations.

In addition, insider or employee cyber and security threats are increasingly a concern for all large companies, including us. Our future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of protected health information, other confidential data or proprietary business information, operational or business delays resulting from the disruption of IT systems and subsequent mitigation activities, or regulatory action taken as a result of such incidents. We provide our employees with training and regular reminders on important measures they can take to prevent breaches. We routinely identify attempts to gain unauthorized access to our systems. However, given the rapidly evolving nature and proliferation of cyber threats, there can be no assurance our training and network security measures or other controls will detect, prevent or remediate security or data breaches in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems and operations. Accordingly, we may be vulnerable to losses associated with the improper functioning, security breach, or unavailability of our information systems, as well as any systems used in acquired company operations.

Risks Relating to Our Accounting and Financial Policies

We currently outsource, and from time to time in the future may outsource, a portion of our internal business functions to third-party providers. Outsourcing these functions has significant risks, and our failure to manage these risks successfully could materially adversely affect our business, results of operations and financial condition.

We currently, and from time to time in the future, may outsource portions of our internal business functions, including billing and administrative functions relating to revenue cycle management, to third-party providers. These third-party providers may not comply on a timely basis with all of our requirements, or may not provide us with an acceptable level of service. In addition, reliance on third-party providers could have significant negative consequences, including significant disruptions in our operations and significantly increased costs to undertake such operations, either of which could damage our relationships with our customers. We could experience a reduction in revenue due to inability to collect from patients, overpayments, claim denials, recoupments or governmental and third-party audits all of which may impact our profitability and cash flow.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes included elsewhere in this prospectus. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant estimates and judgments used in preparing financial statements include those related to the determination of the revenue transaction price for current transactions and estimation of expected collections on our accounts receivable, among others. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors.

The Warrants are accounted for as liabilities and the changes in value of the Warrants could have a material effect on our financial results.

On April 12, 2021, the Acting Director of the Division of Corporation Finance and Acting Chief Accountant of the SEC together issued a statement regarding the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations

 

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for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Statement”). Specifically, the SEC Statement focused on warrants that have certain settlement terms and provisions related to certain tender offers or warrants which do not meet the criteria to be considered indexed to an entity’s own stock, which terms are similar to those contained in the warrant agreement governing the warrants. As a result of the SEC Statement, FAII reevaluated the accounting treatment of the 6,900,000 Public Warrants and 5,933,333 Private Placement Warrants then-outstanding, and determined that the Warrants should be reclassified as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings.

As a result, included on FAII’s balance sheet as of December 31, 2020 contained in FAII’s Annual Report on Form 10-K/A for the period ended December 31, 2020 (the “Amended Annual Report”) are derivative liabilities related to embedded features contained within the warrants. Accounting Standards Codification 815-40, “Derivatives and Hedging—Contracts on an Entity’s Own Equity,” provides for the remeasurement of the fair value of such derivatives at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value being recognized in earnings in the statement of operations. As a result of the recurring fair value measurement, our financial statements and results of operations may 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 on the Warrants each reporting period and that the amount of such gains or losses could be material.

The Earnout Shares and Vesting Shares are accounted for as liabilities and the changes in value of these shares could have a material effect on our financial results.

We account for the potential Earnout Shares and the Vesting Shares as liabilities in accordance with the guidance in Accounting Standards Codification 480, “Distinguishing Liabilities from Equity,” and 815-40, “Derivatives and Hedging—Contracts on an Entity’s Own Equity,” which provide for the remeasurement of the fair value of such shares at each balance sheet date and changes in fair value are recognized in our statements of operations. As a result of the recurring fair value measurement, our financial statements and results of operations may fluctuate quarterly, based on factors which are outside of our control, and such fluctuations could have a material effect on our financial results.

In light of our recent reduction in our forecast, we may be required to recognize an impairment of our goodwill and other intangible assets, which represent a significant portion of our total assets. Any such impairment charge may be material and have material adverse effect on our business, financial condition, and results of operations

As of June 30, 2021, we had $1,330 million of goodwill and $645 million of trade name and other intangible assets recorded on our balance sheet. We test such assets for impairment at least annually on the first day of the fourth quarter of each year or on an interim basis whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment may result from, among other things, increased attrition, adverse market conditions, adverse changes in applicable laws or regulations, including changes that affect the services we offer, lower visit volumes and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets. An impairment of all or a part of our goodwill or other identifiable intangible assets may have a material adverse effect on our business, financial condition, and results of operations. Refer to “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and Note 2 to our consolidated financial statements included elsewhere in this prospectus for further discussion of our goodwill and intangible assets.

The Company has determined that the revision to 2021 forecast constitutes an interim triggering event that requires further analysis with respect to a potential impairment to goodwill and trade name intangible assets. Accordingly, the Company is currently performing interim quantitative impairment testing during the third

 

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quarter of 2021. If it is determined that the fair value amounts are below the respective carrying amounts, the Company will record an impairment charge which could be material

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results.

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting

such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely basis.

If we identify any new material weaknesses in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses in our internal controls over financial reporting.

We may face litigation and other risks as a result of the material weakness in FAII’s internal control over financial reporting.

Following the issuance of the SEC Statement, after consultation with FAII’s independent registered public accounting firm, FAII’s management and audit committee concluded that it was appropriate to restate FAII’s previously issued audited financial statements as of December 31, 2020 and for the period from June 10, 2020 (inception) through December 31, 2020. As part of the Restatement, FAII identified a material weakness in FAII’s internal controls over financial reporting.

As a result of such material weakness, the Restatement, the change in accounting for the Warrants, and other matters raised or that may in the future be raised by the SEC, we face potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the Restatement and material weaknesses in FAII’s internal control over financial reporting and the preparation of FAII’s financial statements. As of the date of this prospectus, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.

Risks Relating to Ownership of Our Common Stock

Our stock price may change significantly and you could lose all or part of your investment as a result.

The trading price of our Common Stock is likely to be volatile. The stock market recently has experienced extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies. You may not be able to resell your shares at an attractive price due to a number of factors such as those listed in “—Risks Relating to Our Business and Industry” and the following:

 

   

results of operations that vary from the expectations of securities analysts and investors;

 

   

changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors or other unexpected adverse developments in our financial results, guidance or other forward-looking information, or industry, geographical or market sector trends;

 

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declines in the market prices of stocks generally;

 

   

strategic actions by us or our competitors;

 

   

announcements by us or our competitors of significant contracts, acquisitions, joint ventures, other strategic relationships or capital commitments;

 

   

any significant change in our management;

 

   

changes in general economic or market conditions or trends in our industry or markets;

 

   

changes in business or regulatory conditions, including new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

future sales of our Common Stock or other securities;

 

   

investor perceptions or the investment opportunity associated with our Common Stock relative to other investment alternatives;

 

   

the public’s response to press releases or other public announcements by us or third-parties, including

 

   

our filings with the SEC;

 

   

litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;

 

   

guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

   

the development and sustainability of an active trading market for our stock;

 

   

actions by institutional or activist stockholders;

 

   

changes in accounting standards, policies, guidelines, interpretations or principles; and

 

   

other events or factors, including those resulting from natural disasters, war, acts of terrorism, health pandemics or responses to these events.

These broad market and industry fluctuations may adversely affect the market price of our Common Stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our Common Stock is low.

In the past, following periods of market volatility or other unexpected adverse developments in our financial results, guidance or other forward-looking information, or industry, geographical or market sector trends, stockholders have instituted securities class action litigation. If we become involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.

Because there are no current plans to pay cash dividends on our Common Stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We intend to retain future earnings, if any, for future operations, expansion and debt repayment and there are no current plans to pay any cash dividends for the foreseeable future. The declaration, amount and payment of any future dividends on shares of our Common Stock will be at the sole discretion of our Board. Our Board may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our Board may deem relevant. In we have no direct operations and no significant assets

 

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other than our ownership of our subsidiaries from whom we will depend on for distributions, and whose ability to pay dividends may be limited by covenants of any future indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our Common Stock unless you sell such our Common Stock for a price greater than that which you paid for it.

If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.

The trading market for our Common Stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We will not control these analysts. In addition, some financial analysts may have limited expertise with our model and operations. Furthermore, if one or more of the analysts who do cover us downgrade our stock or industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

Future sales, or the perception of future sales, by us or our stockholders in the public market could cause the market price for our Common Stock to decline.

The sale of shares of Common Stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of Common Stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that it deems appropriate.

The Insiders and certain holders of Common Stock and preferred stock have each agreed, subject to certain exceptions, not to dispose of or distribute any of their common stock or securities convertible into or exchangeable for shares of Common Stock during the period from the date of the A&R RRA continuing through the date that is 180 days after the Closing Date.

Upon the expiration or waiver of the lock-ups described above, shares held by the Insiders and holders of the common stock and preferred stock will be eligible for resale, subject to volume, manner of sale and other limitations under Rule 144.

As restrictions on resale end, the market price of shares of Common Stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of Common Stock or other securities.

In addition, the Common Stock reserved for future issuance under our equity incentive plans will become eligible for sale in the public market once those shares are issued, subject to provisions relating to various vesting agreements, lock-up agreements and, in some cases, limitations on volume and manner of sale applicable to affiliates under Rule 144, as applicable. The aggregate number of shares of Common Stock expected to be reserved for future issuance under our equity incentive plans is 20.8 million. The compensation committee of our Board may determine the exact number of shares to be reserved for future issuance under our equity incentive plans at its discretion. We will file one or more registration statements on Form S-8 under the Securities Act to register shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock issued pursuant to our equity incentive plans. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of Common Stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of Common Stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to ATI’s stockholders.

 

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Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

Certain provisions of our Second Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction deemed undesirable by our that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.

These provisions provide for, among other things:

 

   

there is no cumulative voting with respect to the election of our Board;

 

   

the division of our Board into three classes, with only one class of directors being elected in each year;

 

   

the ability of our Board to issue one or more series of preferred stock;

 

   

advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

   

certain limitations on convening special stockholder meetings;

 

   

limiting the ability of stockholders to act by written consent;

 

   

the ability of our Board to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a director in certain circumstances;

 

   

providing that our Board is expressly authorized to adopt, amend, alter or repeal our bylaws;

 

   

the removal of directors only for cause; and

 

   

that certain provisions may be amended only by the affirmative vote of at least 65% (for amendments to the indemnification provisions) or 66.7% (for amendments to the provisions relating to the board of directors) of the shares of our Common Stock entitled to vote generally in the election of our directors.

These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (“DGCL”), which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.

Our Amended and Restated Bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our Amended and Restated Bylaws provide that, subject to limited exceptions, any (i) derivative action or proceeding brought on our behalf, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder or employee to us or our stockholders, (iii) action asserting a claim arising pursuant to any provision of the DGCL, our Second Amended and Restated Certificate of Incorporation or our Amended and Restated Bylaws or (iv) action asserting a claim governed by the internal affairs doctrine shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, another state or federal court located within the State of Delaware. Our Amended and Restated Bylaws also provide that, to the fullest extent permitted by law, the

 

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federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of the Amended and Restated Bylaws described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. This exclusive forum provision does not apply to claims under the Exchange Act but does apply to other state and federal law claims including actions arising under the Securities Act. Section 22 of the Securities Act, however, creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such a forum selection provision as written in connection with claims arising under the Securities Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. If a court were to find these provisions of our Amended and Restated Bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

As a “controlled company” within the meaning of NYSE listing standards, we qualify for exemptions from certain corporate governance requirements. We have the opportunity to elect any of the exemptions afforded a controlled company.

Because Advent International Corporation (“Advent”) controls more than a majority of our total voting power, we are a “controlled company” within the meaning of NYSE Listing Standards. Under NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with the following NYSE rules regarding corporate governance:

 

   

the requirement that a majority of its board of directors consist of independent directors;

 

   

the requirement that compensation of its executive officers be determined by a majority of the independent directors of the board or a compensation committee comprised solely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement that director nominees be selected, or recommended for the board’s selection, either by a majority of the independent directors of the board or a nominating committee comprised solely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Advent has significant influence over us.

Advent beneficially owns approximately 62.86% of our Common Stock. As long as Advent owns or controls a significant percentage of our outstanding voting power, it 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. Advent’s 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.

Advent’s interests may not align with our interests as a company or the interests of our other stockholders. Accordingly, Advent could cause us to enter into transactions or agreements of which other stockholders would not approve or make decisions with which other stockholders would disagree. Further, Advent is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or

 

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indirectly with us. Advent may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In recognition that partners, members, directors, employees, stockholders, agents and successors of Advent and its successors and affiliates and any of their respective managed investment funds and portfolio companies may serve as our directors or officers, the Second Amended and Restated Certificate of Incorporation provides, among other things, that none of Advent or any partners, members, directors, employees, stockholders, agents or successors of Advent and its successors and affiliates and any of their respective managed investment funds and portfolio companies has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do (except as otherwise expressly provided in any agreement entered into between us and such exempted person). In the event that any of these persons or entities acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and these persons and entities will not have any duty to communicate or offer such corporate opportunity to us and may pursue or acquire such corporate opportunity for themselves or direct such opportunity to another person. These potential conflicts of interest could have a material adverse effect on our business, financial condition and results of operations if, among other things, attractive corporate opportunities are allocated by Advent to themselves or their other affiliates.

The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements.

As a result, our stockholders may not have access to certain information they deem important. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following August 14, 2025, the fifth anniversary of the closing of our IPO, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion or (iii) the last day of the fiscal year in which we are deemed to be a large accelerated filer, which means the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt in the prior three-year period.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company, which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.

 

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We cannot predict if investors will find our Common Stock less attractive because we will rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.

 

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USE OF PROCEEDS

We are not selling any securities under this prospectus and we will not receive any proceeds from the sale of securities by the Selling Securityholders, although we could receive up to approximately $113,466,556 assuming the exercise of all of the outstanding Warrants for cash. Any amounts we receive from such exercises will be used for working capital and other general corporate purposes. The holders of the Warrants are not obligated to exercise such Warrants and we cannot assure you that the holders of the Warrants will choose to exercise any or all of such Warrants.

 

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DETERMINATION OF OFFERING PRICE

The offering price of the shares of Common Stock underlying the Warrants offered hereby is determined by reference to the exercise price of the public warrant of $11.50 per share. The Public Warrants are listed on the NYSE under the symbol “ATIPWS.”

We cannot currently determine the price or prices at which shares of our Common Stock or Warrants may be sold by the Selling Securityholders under this prospectus.

 

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MARKET INFORMATION FOR SECURITIES AND DIVIDEND POLICY

Market Information

Our Common Stock and Public Warrants are currently listed on the NYSE under the symbols “ATIP” and “ATIP WS,” respectively. Prior to the consummation of the Business Combination, our Common Stock and Public Warrants were listed on the NYSE under the symbols “FAII” and “FAII WS,” respectively. As of July 27, 2021, following the business combination, there were 207,282,536 shares of Common Stock issued and outstanding held of record by 45 holders, and warrants to purchase an aggregate of 9,866,657 shares of Common Stock outstanding held of record by 2 holders.

Dividends

We have not paid any cash dividends on our Common Stock to date. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any cash dividends will be within the discretion of our Board at such time. In addition, we are not currently contemplating and do not anticipate declaring any stock dividends in the foreseeable future as it is currently expected that available cash resources will be utilized in connection with our ongoing operations and development.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Unless the context otherwise requires, the “Company” refers to Fortress Value Acquisition Corp. II prior to the Closing and to the combined company and its subsidiaries following the Closing, “ATI” refers to the business of Wilco Holdco, Inc. and its subsidiaries prior to the Closing, and “FAII” refers to Fortress Value Acquisition Corp. II prior to the Closing.

The following unaudited pro forma condensed combined financial information present the combination of the financial information of FAII and ATI adjusted to give effect to the Business Combination. The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.”

The unaudited pro forma condensed combined balance sheet as of March 31, 2021 combines the historical balance sheet of FAII and the historical balance sheet of ATI, on a pro forma basis as if the Business Combination, summarized below, had been consummated on March 31, 2021. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2021 and the year ended December 31, 2020, combines the historical statements of operations of FAII and ATI for such periods, on a pro forma basis as if the Business Combination, summarized below, had been consummated on January 1, 2020, the beginning of the earliest period presented, giving effect to:

 

   

the reverse recapitalization between FAII and ATI; and

 

   

the issuance and sale of 30,000,000 shares of Class A Stock at a purchase price of $10.00 per share and an aggregate purchase price of $300.0 million pursuant to the PIPE Investment.

The unaudited pro forma condensed combined financial statements were derived as described below and should be read in conjunction with:

 

   

the accompanying notes to the unaudited pro forma condensed combined financial statements;

 

   

the historical unaudited financial statements of ATI as of and for the three months ended March 31, 2021 and the related notes which are included elsewhere in this prospectus;

 

   

the historical audited financial statements of ATI for the year ended December 31, 2020 and the related notes which are included elsewhere in this prospectus;

 

   

the historical unaudited financial statements of FAII as of and for the three months ended March 31, 2021 and the related notes which are included elsewhere in this prospectus;

 

   

the historical audited financial statements of FAII for the period from June 10, 2020 (inception) to December 31, 2020, (As Restated) and the related notes which are included elsewhere in this prospectus; and

 

   

other information relating to FAII and ATI which are included elsewhere in this prospectus.

Description of the Business Combination

The aggregate merger consideration received by ATI stockholders in connection with the Business Combination was $1.5 billion, of which $59.0 million constituted cash consideration payable to the holders of ATI preferred stock, and the remaining amount of merger consideration constituted Class A Stock valued at $10.00 per share to ATI stockholders. Additionally, ATI’s stockholders are entitled to receive Earnout Shares up to an aggregate of 15,000,000 shares of Common Stock if the price of the Common Stock trading on the NYSE exceeds certain market share price milestones during the ten-year period following the closing of the Business Combination.

 

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We also obtained PIPE Investment commitments from certain investors for a private placement of 30,000,000 shares of Common Stock pursuant to the terms of the Subscription Agreements for an aggregate purchase price equal to $300.0 million.

In connection with the closing of the Business Combination, 8,625,000 of the Founder Shares converted to unvested shares of Common Stock and will vest upon achieving certain market share price milestones within a period of ten years post-Business Combination (“Vesting Shares”). These shares are forfeited if the set milestones are not reached.

The following summarizes the pro forma shares of Common Stock outstanding, excluding the potential dilutive effect of the Earnout Shares, Vesting Shares, exercise of Public Warrants and Private Placement Warrants and the shares underlying the equity awards to be granted pursuant to the terms of the New Employment Agreements:

 

     Shares
Outstanding
     %  

FAII public stockholders

     25,512,254        12.8

ATI Shareholders

     143,145,282        72.1

PIPE Investment

     30,000,000        15.1
  

 

 

    

Pro Forma Class A Stock at March 31, 2021

     198,657,536        100.0
  

 

 

    

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF MARCH 31, 2021

(in thousands)

 

     Historical                    
     Fortress
Value
Acquisition
Corp. II
     Wilco
Holdco,

Inc.
     Transaction
Accounting
Adjustments
         Pro Forma
Combined
 

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ 163      $ 97,677      $ 345,007     (A)    $ 92,228  
           300,000     (B)   
           (12,075   (C)   
           (448,047   (D)   
           (27,872   (E)   
           (13,747   (F)   
           (59,000   (I)   
           (89,878   (N)   

Accounts receivable

     —          94,684        —            94,684  

Prepaid expenses

     348        —          (348   (M)      —    

Other current assets

     —          11,236        (3,953   (E)      7,631  
           348     (M)   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total Current Assets

     511        203,597        (9,565        194,543  

Investments held in Trust Account

     345,007        —          (345,007   (A)      —    

Property and equipment, net

     —          134,452        —            134,452  

Operating lease right-of-use assets

     —          255,336        —            255,336  

Goodwill

     —          1,330,085        —            1,330,085  

Trade name and other intangible assets, net

     —          644,934        —            644,934  

Other non-current assets

     —          1,784        —            1,784  
  

 

 

    

 

 

    

 

 

      

 

 

 

Total Assets

   $ 345,518      $ 2,570,188      $ (354,572      $ 2,561,134  
  

 

 

    

 

 

    

 

 

      

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

             

Current Liabilities:

             

Accounts payable

   $ —        $ 12,359      $ —          $ 12,359  

Accounts payable and accrued expenses

     5,509        —          (5,509   (F)      —    

Franchise tax payable

     49        —          (45   (F)      —    
           (4   (M)   

Accrued expenses and other liabilities

     —          71,579        (5,217   (E)      66,366  
           4     (M)   

Current portion of operating lease liabilities

     —          48,182        —            48,182  

Current portion of long-term debt

     —          8,167        —            8,167  
  

 

 

    

 

 

    

 

 

      

 

 

 

Total Current Liabilities

     5,558        140,287        (10,771        135,074  

Deferred underwriting commissions payable

     12,075        —          (12,075   (C)      —    

Warrant liabilities

     20,798        —          —            20,798  

Long-term debt, net

     —          990,370        (442,138   (D)      548,232  

Redeemable preferred stock

     —          168,637        (168,637   (I)      —    

Deferred income tax liabilities

     —          128,032        —            128,032  

Operating lease liabilities

     —          250,165        —            250,165  

Contingent consideration common shares liability

     —          —          78,114     (K)      213,964  
           135,850     (L)   

Other non-current liabilities

     —          11,908        —            11,908  
  

 

 

    

 

 

    

 

 

      

 

 

 

Total Liabilities

     38,431        1,689,399        (419,657        1,308,173  

Commitments and contingencies

             

Class A common stock subject to possible redemption

     302,087        —          (302,087   (G)      —    

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF MARCH 31, 2021

(in thousands)

 

     Historical                   
     Fortress
Value
Acquisition
Corp. II
    Wilco
Holdco,

Inc.
    Transaction
Accounting
Adjustments
         Pro Forma
Combined
 

Stockholders’ Equity:

           

Common stock

     —         9       (9   (J)      —    

Class A common stock

     —         —         3     (B)      19  
         3     (G)   
         1     (I)   
         13     (J)   
         (1   (N)   

Class F common stock

     1       —         (1   (K)      —    

Additional paid-in capital

     10,808       955,236       299,997     (B)      1,358,228  
         (20,503   (E)   
         302,084     (G)   
         (14,002   (H)   
         128,452     (I)   
         (4   (J)   
         (78,113   (K)   
         (135,850   (L)   
         (89,877   (N)   

Accumulated other comprehensive loss

     —         (1,346     —            (1,346

Accumulated deficit

     (5,809     (87,931     (5,909   (D)      (118,761
         (6,105   (6,105)   
         (8,193   (F)   
         14,002     (H)   
         (18,816   (I)   

Non-controlling interests

     —         14,821       —            14,821  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total Stockholders’ Equity

     5,000       880,789       367,172          1,252,961  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 345,518     $ 2,570,188     $ (354,572      $ 2,561,134  
  

 

 

   

 

 

   

 

 

      

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2021

(in thousands, except share and per share data)

 

     Historical                  
     Fortress
Value
Acquisition
Corp. II
    Wilco
Holdco,

Inc.
    Transaction
Accounting
Adjustments
        Pro Forma
Combined
 

Net patient revenue

   $ —       $ 132,271     $ —         $ 132,271  

Other revenue

     —         16,791       —           16,791  
  

 

 

   

 

 

   

 

 

     

 

 

 

Net operating revenue

     —         149,062       —           149,062  

Clinic operating costs:

          

Salaries and related costs

     —         80,654       —           80,654  

Rent, clinic supplies, contract labor and other

     —         43,296       —           43,296  

Provision for doubtful accounts

     —         7,171       —           7,171  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total clinic operating costs

     —         131,121       —           131,121  
  

 

 

   

 

 

   

 

 

     

 

 

 

Selling, general and administrative expenses

     —         24,726       219     (FF)     30,240  
         5,049     (HH)  
         246     (II)  

General and administrative expenses

     5,000       —         (5,000   (HH)     —    

Franchise tax expense

     49       —         (49   (HH)     —    
  

 

 

   

 

 

   

 

 

     

 

 

 

Operating loss

     (5,049     (6,785     (465       (12,299

Other (income) expense, net

     —         153       —           153  

Interest (income) expense

     (16     —         16     (AA)     —    

Interest expense, net

     —         16,087       (8,842   (CC)     7,245  

Interest expense on redeemable preferred stock

     —         5,308       (5,308   (BB)     —    

Decrease in fair value of warrant liabilities

     12,836       —         —           (12,836
  

 

 

   

 

 

   

 

 

     

 

 

 

Income (loss) before taxes

     7,803       (28,333     13,669         (6,861

Income tax expense (benefit)

     —         (10,515     3,828     (GG)     (6,687
  

 

 

   

 

 

   

 

 

     

 

 

 

Net (loss) income

     7,803       (17,818     9,841         (174
  

 

 

   

 

 

   

 

 

     

 

 

 

Net income attributable to non-controlling interest

     —         1,309       —           1,309  

Net (loss) income attributable to Company

     7,803       (19,127     9,841         (1,483
  

 

 

   

 

 

   

 

 

     

 

 

 

Other comprehensive loss:

          

Unrealized gain on interest rate swap

     —         561       —           561  

Comprehensive loss

     7,803       (18,566     9,841         (922
  

 

 

   

 

 

   

 

 

     

 

 

 

Weighted average shares outstanding of Class A common stock—basic and diluted

     34,500,000             198,657,536  

Basic and diluted net income (loss) per share attributable to common shareholders

   $ —             $ (0.00

Weighted average shares outstanding of Class F common stock

     8,625,000          

Basic and diluted net loss per share, Class F common stock

   $ 0.90          

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR YEAR ENDED DECEMBER 31, 2020

(in thousands, except share and per share data)

 

    Historical                  
    Fortress
Value
Acquisition
Corp. II
    Wilco
Holdco,

Inc.
    Transaction
Accounting
Adjustments
        Pro Forma
Combined
 

Net patient revenue

  $ —       $ 529,585     $ —         $ 529,585  

Other revenue

    —         62,668       —           62,668  
 

 

 

   

 

 

   

 

 

     

 

 

 

Net operating revenue

    —         592,253       —           592,253  

Clinic operating costs:

         

Salaries and related costs

    —         306,471       —           306,471  

Rent, clinic supplies, contract labor and other

    —         166,144       —           166,144  

Provision for doubtful accounts

    —         16,231       —           16,231  
 

 

 

   

 

 

   

 

 

     

 

 

 

Total clinic operating costs

    —         488,846       —           488,846  

Selling, general and administrative expenses

    —         104,320       1,527     (DD)     120,181  
        875     (FF)  
        9,647     (HH)  
        3,812     (II)  

General and administrative expenses

    1,496       —         8,039     (EE)     —    
        (9,535   (HH)  

Franchise tax expense

    112       —         (112   (HH)     —    
 

 

 

   

 

 

   

 

 

     

 

 

 

Operating loss

    (1,608     (913     (14,253       (16,774

Other (income) expense, net

    —         (91,002     —           (91,002

Interest (income) expense

    (19     —         19     (AA)     —    

Interest expense, net

    —         69,291       (31,817   (CC)     37,474  

Interest expense on redeemable preferred stock

    —         19,031       (19,031   (BB)     —    

Loss on settlement of redeemable preferred stock

    —         —         18,816     (BB)     18,816  

Increase in fair value of warrant liabilities

    7,031       —         —           7,031  

Loss on excess of fair value over cash received for Private Placement Warrants

    4,217       —         —           4,217  

Offering costs related to warrant liabilities

    775       —         —           775  
 

 

 

   

 

 

   

 

 

     

 

 

 

Income (loss) before taxes

    (13,612     1,767       17,760         5,915  

Income tax expense (benefit)

    —         2,065       4,973     (GG)     7,038  
 

 

 

   

 

 

   

 

 

     

 

 

 

Net (loss) income

    (13,612     (298     12,787         (1,123
 

 

 

   

 

 

   

 

 

     

 

 

 

Net income attributable to non-controlling interest

    —         5,073       —           5,073  

Net (loss) income attributable to Company

    (13,612     (5,371     12,787         (6,196
 

 

 

   

 

 

   

 

 

     

 

 

 

Other comprehensive loss:

         

Unrealized loss on interest rate swap

    —         (582     —           (582
 

 

 

   

 

 

   

 

 

     

 

 

 

Comprehensive loss

    (13,612     (5,953     12,787         (6,778
 

 

 

   

 

 

   

 

 

     

 

 

 

Weighted average shares outstanding of Class A common stock—basic and diluted

    34,500,000             198,657,536  

Basic and diluted net income (loss) per share attributable to common shareholders

  $ —             $ (0.03

Weighted average shares outstanding of Class F common stock

    8,625,000          

Basic and diluted net loss per share, Class F common stock

  $ (1.58        

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

1. Basis of Presentation

The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses,” using the assumptions set forth in the notes to the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information has been adjusted to include Transaction Accounting Adjustments, which reflect the application of the accounting required by U.S. GAAP, linking the effects of the Business Combination, described above, to the FAII and ATI historical financial statements (“Transaction Accounting Adjustments”).

The Business Combination has been accounted for as a reverse recapitalization, in accordance with U.S. GAAP. Under this method of accounting, FAII is treated as the “acquired” company for financial reporting purposes. Accordingly, the Business Combination is treated as the equivalent of ATI issuing stock for the net assets of FAII, accompanied by a recapitalization. The net assets of FAII is stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are those of ATI.

ATI has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances under both the no redemption and maximum redemption scenarios:

 

   

ATI stockholders have the greatest voting interest in the combined entity with approximately 72% of the voting interest;

 

   

ATI’s former executive management makes up all of the management of the Company;

 

   

ATI’s existing directors and individuals designated by, or representing, ATI stockholders constitute a majority of the initial Company Board following the consummation of the Business Combination;

 

   

the Company assumes the name “ATI Physical Therapy, Inc.;” and

 

   

ATI is the larger entity based on assets and revenue. Additionally, ATI has a larger employee base and substantive operations.

The unaudited pro forma condensed combined balance sheet as of March 31, 2021 assumes that the Business Combination occurred on March 31, 2021. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2021 and for the year ended December 31, 2020 give pro forma effect to the Business Combination as if it had been completed on January 1, 2020, the beginning of the earliest period presented. All periods are presented on the basis of ATI as the accounting acquirer.

The pro forma adjustments are based on the information currently available and reflect assumptions and estimates underlying the pro forma adjustments as described in the accompanying notes. Additionally, the unaudited pro forma condensed combined financial information is based on preliminary accounting conclusions, which are subject to change. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates and accounting, the final amounts recorded may differ materially from the information presented. The unaudited pro forma condensed combined financial information does not purport to represent the actual results of operations that the Company would have achieved had FAII and the ATI been combined during the periods presented in the unaudited pro forma condensed combined financial statements and is not intended to project the future results of operations that the Company may achieve. The unaudited pro forma condensed combined financial information does not reflect any anticipated synergies, operating efficiencies, tax savings, or cost savings that may be associated with the Company.

There were no intercompany balances or transactions between FAII and ATI as of the date and for the periods of this unaudited pro forma condensed combined financial information. Accordingly, no pro forma adjustments were required to eliminate the activities between FAII and ATI.

 

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The pro forma condensed combined provision for income taxes does not necessarily reflect the amounts that would have resulted had FAII an ATI filed consolidated income tax returns during the periods presented.

2. Accounting Policies

Management will perform a comprehensive review of the two entities’ accounting policies. As a result of that review, management may identify differences between the accounting policies of the two entities which, when conformed, could have a material impact on the financial statements of the Company. Based on its initial analysis, management did not identify any significant differences that would have a material impact on the unaudited pro forma condensed combined financial information. As a result, the unaudited pro forma condensed combined financial information does not assume any differences in accounting policies.

Certain reclassification adjustments have been made to the unaudited pro forma condensed combined financial information to align FAII and ATI’s financial statement presentation. Such reclassification adjustments are described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

3. Transaction Accounting Adjustments to Unaudited Pro Forma Condensed Combined Financial Information

The Transaction Accounting Adjustments included in the unaudited pro forma condensed combined balance sheet as of March 31, 2021 are as follows:

 

  (A)

Reflects the reclassification of $345.0 million of investments held in the Trust Account that became available following the Business Combination.

 

  (B)

Reflects the proceeds of $300.0 million from the issuance and sale of 30,000,000 shares of Class A Stock at $10.00 per share in the PIPE Investment.

 

  (C)

Reflects the settlement of $12.1 million of deferred underwriters’ fees.

 

  (D)

Reflects the application of cash to the partial and full repayments relating to ATI’s first and second lien term loans of $448.0 million with the corresponding adjustment to pro forma long-term debt, net related to the debt payoff offset by the write-off of deferred financing costs and original issue discounts of $5.9 million.

 

  (E)

Represents the payment of the ATI’s acquisition-related transaction costs incurred of approximately $27.9 million as part of the Business Combination. Of ATI’s transaction costs, approximately $20.5 million was capitalized as deferred offering costs, $3.9 million was capitalized in other currents assets and $5.2 million was accrued for as accrued expenses and other liabilities on ATI’s historical balance sheet as of March 31, 2021, and the remaining $6.1 million of transaction costs are not eligible to be capitalized, and have been expensed through accumulated deficit in the unaudited pro forma condensed combined balance sheet.

 

  (F)

Represents the payment of FAII’s acquisition-related transaction costs of approximately $13.7 million as part of the Business Combination. Of the FAII transaction costs, approximately $5.5 million was accrued for as accounts payable and accrued expenses and $0.05 million was accrued for as franchise tax payable on the FAII historical balance sheet and $8.1 million was expensed through accumulated deficit in the unaudited pro forma condensed combined balance sheet.

 

  (G)

Reflects the reclassification of $302.1 million of Class A Stock subject to possible redemption to permanent equity.

 

  (H)

Reflects the elimination of FAII historical accumulated deficit, after recording the transaction costs incurred by FAII as described in note (F).

 

  (I)

Reflects the settlement of ATI’s redeemable preferred stock in exchange for $59.0 million of cash proceeds and $128.5 million of Class A Stock equal to 12,845,284 shares with a par value of $0.0001.

 

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  The loss on settlement of redeemable preferred stock of $18.8 million is calculated based on the difference between the value transferred for ATI’s redeemable preferred stock and its historical book value.

 

  (J)

Reflects the recapitalization of ATI and issuance of 130.3 million of the Class A Stock to ATI stockholders as consideration in the Business Combination.

 

  (K)

Reflects the conversion of 8,625,000 FAII Class F common stock at $0.0001 par value into Vesting Shares. The Vesting Shares are classified as a liability in the unaudited pro forma condensed combined balance sheet and vest upon achieving certain market share price milestones as outlined in the Business Combination Agreement during the earn-out period. The earn-out liability is recognized at their estimated fair value of $78.1 million as of March 31, 2021. Post-Business Combination, this liability will be remeasured to its fair value at the end of each reporting period and subsequent changes in the fair value post-Business Combination will be recognized in the combined company’s statement of operations.

 

  (L)

Represents recognition of 15,000,000 Earnout Shares stipulated under terms of the Business Combination Agreement. The Earnout Shares are classified as a liability in the unaudited pro forma condensed combined balance sheet and become issuable upon achieving certain market share price milestones as outlined in the Business Combination Agreement during the earn-out period. The earn-out liability is recognized at their estimated fair value of $135.9 million as of March 31, 2021. Post-Business Combination, this liability will be remeasured to its fair value at the end of each reporting period and subsequent changes in the fair value post-Business Combination will be recognized in the combined company’s statement of operations.

 

  (M)

The following table summarizes reclassification adjustments to the unaudited pro forma condensed combined balance sheet:

 

FAII Reclassifications    Historical      Reclassification
Amount
 
     (in thousands)  

Prepaid expenses(1)

   $ 348      $ (348

Other current assets(1)

     —          348  

Franchise tax payable(2)

     49        (4

Accrued expenses and other liabilities(2)

     —          4  

 

(1)

Reflects the reclassification of $0.3 million of prepaid expenses into $0.3 million of other currents assets.

(2)

Reflects the reclassification of $0.004 million of franchise tax payable into $0.004 million of accrued expenses and other liabilities, after recording the settlement of transaction costs incurred by FAII.

 

  (N)

Represents the actual redemption of 8,987,746 shares of Class A Stock for approximately $89.9 million allocated to Class A Stock and additional paid-in capital using par value of $0.0001 per share and at a redemption price of $10.00 per share.

Transaction Accounting Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Operations

The Transaction Accounting Adjustments included in the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2021 and the year ended December 31, 2020 are as follows:

 

  (AA)

Reflects elimination of investment (income) expense related to the interest earned on the investment held in the Trust Account.

 

  (BB)

Represents the elimination of ATI’s redeemable preferred stock’s historical interest expense. Additionally, reflects the recognition of the pro forma loss on settlement of redeemable preferred

 

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  stock, which is a non-recurring item and is reflected as if incurred on January 1, 2020, the date the Business Combination occurred for the purposes of the unaudited pro forma condensed combined statements of operations.

 

  (CC)

Reflects the elimination of historical interest expense, including amortization of deferred financing costs and original issue discounts related to the partial and full repayments of the ATI’s first and second lien term loans, respectively. Additionally, reflects the write-off of deferred financing costs and original issue discounts as described in adjustment (D), which is a non-recurring item.

 

     For the
three months ended
March 31, 2021
     For the
year ended
December 31,
2020
 
     (in thousands)         

Historical interest expense, including amortization of deferred financing costs and original issue discounts

   $ (8,842    $ (37,726

Write-off of deferred financing costs and original issue discounts from adjustment (D)

     —          5,909  
  

 

 

    

 

 

 

Total pro forma adjustments to interest expense, net

   $ (8,842    $ (31,817
  

 

 

    

 

 

 

 

  (DD)

Reflects the total portion of ATI transaction costs incurred not eligible for capitalization of $7.3 million. Of this amount, $2.3 million and $3.5 million are already incurred and expensed in ATI’s historical statements of operations for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively. Transaction costs are reflected as if incurred on January 1, 2020, the date the Business Combination occurred for the purposes of the unaudited pro forma condensed combined statements of operations. This is a non-recurring item.

 

  (EE)

Reflects the total transaction costs incurred by FAII of $13.9 million. Of this amount, $4.8 million and $1.1 million are already incurred and expensed in FAII’s statements of operations for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively. Transaction costs are reflected as if incurred on January 1, 2020, the date the Business Combination occurred for the purposes of the unaudited pro forma condensed combined statements of operations. This is a non-recurring item.

 

  (FF)

Reflects the increase in compensation expense pertaining to new executed executive employment agreements entered into in connection with the Business Combination which also includes stock-based compensation expense related to time-based incentive awards granted to the executives under these agreements.

 

  (GG)

Reflects the income tax effect of pro forma adjustments using the estimated blended tax rate of 28.0%, compromised of the federal statutory corporate tax rate of 21.0% and the blended state statutory tax rate of 7%.

 

  (HH)

The following table summarizes reclassification adjustments to the unaudited pro forma condensed combined statements of operations:

 

FAII Reclassifications—For the three months ended March 31, 2021    Historical      Transaction
Accounting
Adjustment
     Reclassification
Amount
 
            (in thousands)         

Selling, general and administrative expenses(1)

   $ —        $ —        $ 5,049  

General and administrative expenses(1)

     5,000        —          (5,000

Franchise tax expense(1)

     (49      49        —    

 

(1)

Reflects the reclassification of $5.0 million in general and administrative expenses and $0.05 million in franchise tax expense into $5.05 million of selling, general and administrative expense.

 

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FAII Reclassifications—For the year ended December 31, 2020    Historical      Transaction
Accounting
Adjustment
     Reclassification
Amount
 
            (in thousands)         

Selling, general and administrative expenses(1)

   $ —        $ —        $ 9,647  

General and administrative expenses(1)

     1,496        8,039        (9,535

Franchise tax expense(1)

     112        —          (112

 

(1)

Reflects the reclassification of $9.5 million in general and administrative expenses and $0.1 million in franchise tax expense into $9.6 million of selling, general and administrative expense, after recording the transaction costs incurred by FAII.

 

  (II)

Reflects the compensation expense related to the vesting of certain ATI incentive common units, with such vesting being triggered by the Business Combination, a portion of which is non-recurring. These costs are reflected as incurred on January 1, 2020, the date the Business Combination occurred for the purposes of the unaudited pro forma condensed combined statements of operations.

4. Net Loss Per Share

Represents the net loss per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination, assuming the shares were outstanding since January 1, 2020. As the Business Combination is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net income per share assumes that the shares issuable in connection with the Business Combination have been outstanding for the entire periods presented. For shares redeemed, this calculation is retroactively adjusted to eliminate such shares for the entire period.

The unaudited pro forma condensed combined financial information has been prepared for the three months ended March 31, 2021 and the year ended December 31, 2020:

 

     For the three
months ended
March 31, 2021
     For the year ended
December 31, 2020
 

Pro forma net loss (in thousands)

   $ (922    $ (6,778

Weighted average shares outstanding of Class A Stock(1)(2)

     198,657,536        198,657,536  

Basic and diluted net loss per share—Class A Stock

   $ (0.00    $ (0.03

 

(1)

The Public Warrants and Private Placement Warrants are exercisable at $11.50 per share which does not exceed the current market price of Class A Stock and the approximate per share redemption price, as of June 23, 2021. Additionally, including these warrants would result in anti-dilution, and thus they have been excluded from the calculation of diluted loss per share.

(2)

The 8,625,000 Vesting Shares and 15,000,000 Earnout Shares are excluded from the earnings per share calculation as these are not deemed to be participating securities, and further would be anti-dilutive.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information which the Company’s management believes is relevant to an assessment and understanding of its consolidated results of operations and financial condition. The discussion should be read in conjunction the Company’s audited and unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this prospectus. The discussion and analysis should also be read together with the unaudited pro forma financial information as of and for the three month period ended March 31, 2021 and the year ended December 31, 2020. See the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.” This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus.

Overview

We are a nationally recognized outpatient physical therapy provider in the United States specializing in outpatient rehabilitation and adjacent healthcare services, with 882 owned clinics (as well as 22 clinics under management service agreements) located in 24 states as of March 31, 2021. We operate with a commitment to providing our patients, medical provider partners, payors and employers with evidence-based, patient-centric care. We offer a variety of services within our clinics, including physical therapy to treat spine, shoulder, knee and neck injuries or 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 benefit from team-based care, leading-edge techniques and individualized treatment plans in an encouraging environment. To achieve optimal results, we use an extensive array of techniques including therapeutic exercise, manual therapy and strength training, among others. Our physical therapy model aims to deliver optimized outcomes and time to recovery for patients, insights and service satisfaction for referring providers and predictable costs and measurable value for payors.

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

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

COVID-19 pandemic impacts

The onset of the coronavirus (“COVID-19”) pandemic in the United States resulted in changes to our operating environment leading to significantly reduced visit volumes and associated patient service revenues since March 2020. In response, the Company implemented measures to reduce labor-related costs in relation to the reduced visit volumes through reduced working schedules, voluntary and involuntary furloughs and headcount reductions. In addition, the Company executed plans to reduce discretionary spend, including by reducing bonuses and incentives and delaying certain capital expenditures. The Company, however, took significant measures to ensure employees were cared for, including by maintaining health benefits for furloughed workers and reducing executive compensation to establish an employee relief pool that provided assistance to employees most in need.

 

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As an essential business, we implemented various safety measures and maintained our operations in a way that allowed nearly all clinical locations to remain open since the onset of the pandemic. We also established a telehealth option, ATI Connect, to provide patients with an online avenue to obtain physical therapy services, which launched amidst state and national lockdowns.

We continue to closely monitor the impact of COVID-19 on all aspects of our business, and our priorities remain protecting the health and safety of employees, maximizing the availability of services to satisfy patient needs, and preserving the operational and financial stability of our business. While we expect the disruption caused by COVID-19 to be temporary, we cannot predict the length of such disruption, and if such disruption continues for an extended period, it could have a material impact on the Company’s results of operations, financial condition and cash flows.

As a result of the COVID-19 pandemic, visits per day (“VPD”) decreased to a low point of 12,643 during the quarter ended June 30, 2020. Since then, VPD has sequentially increased to 18,159, 19,441, and 19,520 in the quarters ended September 30, 2020, December 31, 2020 and March 31, 2021, respectively, as local restrictions in certain markets evolved and referral levels improved as hospitals and other facilities began to perform elective surgeries again. In the first quarter of 2021, the Company realized stable VPD compared to December 31, 2020 in what is normally a period with slightly lower volume due to seasonal factors. As visit volumes rebound, the Company continues to match its clinical staffing levels accordingly. As of March 31, 2021, no Company employees remained on furlough. The chart below reflects the quarterly trend in VPD.

 

 

LOGO

The COVID-19 pandemic is still evolving and much of its future impact remains unknown and difficult to predict. The future impact of the COVID-19 pandemic on our visit volumes and operational performance will depend on certain developments, including the duration and spread of the virus and its newly identified strains, effectiveness and rollout of vaccines and other therapeutic remedies and the potential for continued restrictive policies enforced by federal, state and local government, all of which create uncertainty and cannot be predicted. Nevertheless, we do believe that the overall adverse impact will diminish over time, and that our visit volumes will continue to improve as the prevalence of the virus decreases, social distancing, masking and testing measures become more routine and as a greater proportion of the US population becomes vaccinated or otherwise develops immunity.

 

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CARES Act

On March 27, 2020, the CARES Act was signed into law providing reimbursement, grants, waivers and other funds to assist health care providers during the COVID-19 pandemic. The CARES Act stimulus provisions include, but are not limited to, the following:

 

   

$100.0 billion provided in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing and responding to COVID-19 and for reimbursing “eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19.” A portion of the fund was allocated for general distribution to Medicare providers, with the remainder allocated for targeted distributions to providers that meet additional criteria. The provider relief funds are subject to certain restrictions and are subject to recoupment if not used for designated purposes. The U.S. Department of Health and Human Services (“HHS”) has indicated that the CARES Act provider relief funds are subject to ongoing reporting and changes to the terms and conditions.

 

   

Expansion of the Medicare Accelerated and Advance Payment Program (“MAAPP”) funds allowed healthcare providers to apply to receive advanced payments for future Medicare services, with the expectation that the advanced funds would offset reimbursement from Medicare when such future services are provided based on the terms of the program.

 

   

Tax provisions enacted related to the suspension of certain payment requirements for the employer portion of Social Security taxes, the timing of realization of certain tax attributes, changes to the prior and future limitations on interest deductions, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property and the creation of certain payroll tax credits associated with the retention of employees.

 

   

Temporary suspension of the 2% cut to Medicare payments due to sequestration so that, for the period from May 1, 2020 to March 31, 2021, the Medicare program would be exempt from any sequestration order. In April 2021, the President of the United States signed into law H.R. 1868, which extends the sequestration relief through December 2021.

The Company has realized benefits under the CARES Act including, but not limited to, the following:

 

   

In 2020, the Company received approximately $91.5 million of general distribution payments under the Provider Relief Fund. These payments have been recognized as other income in the consolidated statement of operations and comprehensive income/(loss) throughout 2020 in a manner commensurate with the reporting and eligibility requirements issued by the HHS. Based on the terms and conditions of the program, including recent reporting guidance issued by the HHS in early 2021, the Company believes that it has met the applicable terms and conditions. This includes, but is not limited to, the fact that the Company’s COVID-19 related expenses and lost revenues for the year ended December 31, 2020 exceeded the amount of funds received. To the extent that reporting requirements and terms and conditions are subsequently modified, it may affect the Company’s ability to comply and ability to retain the funds.

 

   

The Company applied for and attained approval to receive $26.7 million of MAAPP funds during the quarter ended June 30, 2020. Based on current guidance, the MAAPP funds received are required to be applied to future Medicare billings commencing during the quarter ending June 30, 2021. Because the Company has not yet met all required performance obligations or performed the services related to these funds, as of March 31, 2021 and December 31, 2020, $22.1 million and $15.5 million of the funds are recorded in accrued expenses and other liabilities, respectively, and $4.6 million and $11.2 million of the funds are recorded in other non-current 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 March 31, 2021 and December 31, 2020, $5.5 million is included in accrued expenses and other liabilities and $5.5 million is included in other non-current liabilities.

 

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Market and industry trends and factors

 

   

Physical Therapy Services Growth. Outpatient physical therapy continues to play a key role in treating musculoskeletal conditions for patients. According to the 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, quality healthcare services addressing such conditions in lower cost outpatient settings may continue increasing in prevalence.

 

   

U.S. Population Demographics. The population of adults aged 65 and older in the U.S. is expected to continue to grow and thus expand the Company’s market opportunity. According to the U.S. Census Bureau, the population of adults over the age of 65 is expected to grow 40% from 2016 through 2030.

 

   

Rise in outpatient care trends. With a growing focus on value-based care emphasizing up-front, conservative care to deliver better outcomes and save costs for the healthcare system, the healthcare industry is seeing a continued growth in outpatient services.

 

   

Federal funding for Medicare and Medicaid. Federal and state funding of Medicare and Medicaid and the terms of access to these reimbursement programs affect demand for physical therapy services. Beginning in January 2021, the Company realized a reduction of Medicare reimbursement rates of approximately 3% in accordance with the Medicare physician fee schedule for therapy services, and a further sequestration reduction of 2% has been postponed until December 31, 2021.

 

   

Workers’ compensation funding. Payments received under certain workers’ compensation arrangements may be based on pre-determined 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.

The Business Combination and Public Company Costs

On June 16, 2021, we consummated the previously announced business combination pursuant to the Merger Agreement. In connection with the Closing, we own, directly or indirectly, 100% of the stock of Wilco and its subsidiaries, and the ATI Stockholders hold a portion of our Common Stock. In connection with the Closing, we changed our name from “Fortress Value Acquisition Corp. II” to “ATI Physical Therapy, Inc.”

On the Closing Date, the Subscribers purchased from the Company an aggregate of 30,000,000 PIPE Shares, for a purchase price of $10.00 per share and an aggregate purchase price of approximately $300 million, pursuant to separate subscription agreements (each, a “Subscription Agreement”) entered into concurrently with the Merger Agreement, effective as of February 21, 2021. Pursuant to the Subscription Agreements, the Company gave certain registration rights to the Subscribers with respect to the PIPE Shares.

As a consequence of the Business Combination, we became the successor to an SEC-registered and NYSE-listed company, which will require us to hire additional staff and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources and fees.

Recent Developments

See “Prospectus Summary—Recent Developments—Business Combination Completion” and “—Recently announced trends and preliminary results” for additional information regarding current trends affecting our business and financial performance.”

 

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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, Home Health and Sports Medicine service lines.

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

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

Provision for doubtful accounts. Provision for doubtful accounts represents the Company’s estimate of net patient revenue recorded during the period that may ultimately prove uncollectible based on historical write-off experience.

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

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

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

Interest expense on redeemable preferred stock. Represents interest expense related to accruing dividends on the Company’s redeemable preferred stock based on contract terms.

Key Business Metrics

When evaluating the results of operations, Management has identified a number of metrics that allow for specific evaluation of performance on a more detailed basis. See “Results of Operations” for further discussion on financial statement metrics such as net operating revenue, net income, EBITDA and Adjusted EBITDA.

Patient visits

As the main operations of the Company are driven by physical therapy services provided to patients, management considers total patient visits to be a key volume measure of such services. In addition to total patient visits, management analyzes 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.

Net patient revenue per visit

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

Clinics

To better understand geographical and location-based trends, the Company evaluates metrics based on the 882 owned and 22 managed clinic locations as of March 31, 2021. De novo clinics represent organic new clinics opened

 

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during the current period based on sophisticated site selection analytics. Acqui-novo clinics represent an existing clinic, not previously owned by the Company, in a target geography that provides the Company with an immediate presence, available staff and referral relationships of the former owner within the surrounding areas. Same clinic revenue growth rate identifies revenue growth year over year on clinics that have been operating for over one year. This metric is determined by isolating the population of clinics that have been open for at least 12 months and calculating the percentage change in revenue of this population between the current and prior period.

The following table presents selected operating and financial data that we believe are key indicators of our operating performance.

 

     Three months Ended
March 31,
 
     2021     2020  

Number of clinics owned (end of period)

     882       868  

Number of clinics managed (end of period)

     22       31  

De novo and acqui-novo clinics opened during the period

     10       3  

Business days

     63       64  

Average visits per day

     19,520       22,855  

Total patient visits

     1,229,786       1,462,744  

Net patient revenue per visit

   $ 107.56     $ 112.76  

Same clinic revenue growth rate

     (20.1 %)      (5.0 %) 

Results of Operations

Three months ended March 31, 2021 compared to three months ended March 31, 2020

The following table summarizes the Company’s consolidated results of operations for the three months ended March 31, 2021 and 2020:

 

    Three months ended March 31,        
    2021     2020     Increase/(Decrease)  
(in $ thousands, except percentages)   $     % of
Revenue
    $     % of
Revenue
    $     %  

Net patient revenue

  $ 132,271       88.7   $ 164,939       90.3   $ (32,668     (19.8 %) 

Other revenue

    16,791       11.3     17,799       9.7     (1,008     (5.7 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenue

    149,062       100.0     182,738       100.0     (33,676     (18.4 %) 

Clinic operating costs:

           

Salaries and related costs

    80,654       54.1     95,349       52.2     (14,695     (15.4 %) 

Rent, clinic supplies, contract labor and other

    43,296       29.0     45,429       24.9     (2,133     (4.7 %) 

Provision for doubtful accounts

    7,171       4.8     6,020       3.3     1,151       19.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total clinic operating costs

    131,121       88.0     146,798       80.3     (15,677     (10.7 %) 

Selling, general and administrative expenses

    24,726       16.6     23,471       12.8     1,255       5.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (6,785     -4.6     12,469       6.8     (19,254     (154.4 %) 

Other expenses, net

    153       0.1     132       0.1     21       16.2

Interest expense, net

    16,087       10.8     17,858       9.8     (1,771     (9.9 %) 

Interest expense on redeemable preferred stock

    5,308       3.6     4,377       2.4     931       21.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (28,333     (19.0 %)      (9,898     (5.4 %)      (18,435     186.3

Income tax benefit

    (10,515     (7.1 %)      (1,792     (1.0 %)      (8,723     n/m  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  ($ 17,818     (12.0 %)    ($ 8,106     (4.4 %)    ($ 9,712     119.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Net patient revenue. Net patient revenue for the three months ended March 31, 2021 was $132.3 million compared to $164.9 million for the three months ended March 31, 2020, a decrease of $32.7 million or 19.8%.

The decrease in net patient revenue was primarily driven by decreased visit volumes as a result of federal, state and local restrictions (e.g., “stay-at-home” orders) established in response to the COVID-19 pandemic, unfavorable revenue mix and one less business day in the current period. Total patient visits decreased by approximately 0.2 million visits, or 15.9%, driving a decrease in average visits per day of 3,335, or 14.6%. Net patient revenue per visit decreased $5.20, or 4.6%, to $107.56 for the three months ended March 31, 2021. The decrease in net patient revenue per visit was primarily driven by unfavorable payor mix shifts during the three months ended March 31, 2021 from higher reimbursing states and payor classes.

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

 

 

LOGO

Other revenue. Other revenue for the three months ended March 31, 2021 was $16.8 million compared to $17.8 million for the three months ended March 31, 2020, a decrease of $1.0 million or 5.7%. The decrease in other revenue was primarily driven by volume reduction in the MSA, Sports Medicine, and Home Health service lines as a result of COVID-19 related restrictions. These decreases were partially offset by increased revenue volumes in the AWS service line.

Salaries and related costs. Salaries and related costs for the three months ended March 31, 2021 were $80.7 million compared to $95.3 million for the three months ended March 31, 2020, a decrease of $14.7 million or 15.4%. Salaries and related costs as a percentage of net operating revenue was 54.1% and 52.2% for the three months ended March 31, 2021 and 2020, respectively. The decrease of $14.7 million was primarily due to the lower level of wages and benefits as the Company matched its labor supply with reduced visit volumes due to the COVID-19 pandemic. The increase as a percentage of net operating revenue was primarily driven by reduced cost leverage due to lower visit volumes.

Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the three months ended March 31, 2021 were $43.3 million compared to $45.4 million for the three months ended March 31, 2020, a decrease of $2.1 million or 4.7%. Rent, clinic supplies, contract labor and other costs as a percentage of net operating revenue was 29.0% and 24.9% for the three months ended March 31, 2021 and 2020, respectively. The $2.1 million decrease was primarily driven by lower discretionary spend. The increase as a percentage of net operating revenue was primarily driven by unfavorable changes to cost leverage of the Company’s facilities-related fixed costs due to lower visit volumes.

Provision for doubtful accounts. Provision for doubtful accounts for the three months ended March 31, 2021 was $7.2 million compared to $6.0 million for the three months ended March 31, 2020, an increase of

 

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$1.2 million or 19.1%. Provision for doubtful accounts as a percentage of net operating revenue was 4.8% and 3.3% for the three months ended March 31, 2021 and 2020, respectively. The increase of $1.2 million and increase as percentage of revenue was primarily driven by unfavorable cash collections during the three months ended March 31, 2021.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended March 31, 2021 were $24.7 million compared to $23.5 million for the three months ended March 31, 2020, an increase of $1.3 million or 5.3%. Selling, general and administrative expenses as a percentage of net operating revenue was 16.6% and 12.8% for the three months ended March 31, 2021 and 2020, respectively. The increase of $1.3 million was primarily due to higher transaction expenses and external consulting costs, partially offset by lower business optimization costs during the three months ended March 31, 2021. The increase as a percentage of revenue relates to unfavorable changes to cost leverage in a period of lower visit volumes due to selling, general and administrative costs being more fixed in nature.

Other expenses, net. Other expense, net for the three months ended March 31, 2021 was $0.2 million compared to $0.1 million for the three months ended March 31, 2020.

Interest expense, net. Interest expense, net for the three months ended March 31, 2021 was $16.1 million compared to $17.9 million for the three months ended March 31, 2020, a decrease of $1.8 million or 9.9%. The decrease in interest expense was primarily driven by lower effective interest rates under the Company’s first and second lien credit agreement during the three months ended March 31, 2021.

Interest expense on redeemable preferred stock. Interest expense on redeemable preferred stock for the three months ended March 31, 2021 was $5.3 million compared to $4.4 million for the year three months March 31, 2020, an increase of $0.9 million or 21.3%. The increase was driven by contractual accrued dividend rate increases.

Income tax benefit. Income tax benefit for the three months ended March 31, 2021 was $10.5 million compared to $1.8 million for the three months ended March 31, 2020, an increase of $8.7 million. The change was primarily driven by a higher net loss before income taxes of $18.4 million for the three months ended March 31, 2021, as well as a higher estimated annual effective tax rate driven by higher expected permanent book to tax differences in 2021 such as transaction costs and interest expense on redeemable preferred stock.

Net loss. Net loss for the three months ended March 31, 2021 was $17.8 million compared to $8.1 million for the three months ended March 31, 2020, an increase of $9.7 million or 119.8%. The increase was primarily driven by lower net operating revenue of $33.7 million, partially offset by lower salaries and related costs of $14.7 million and a higher income tax benefit of $8.7 million.

Non-GAAP Financial Measures

The following table reconciles the supplemental non-GAAP financial measures, as defined under the rules of the SEC, presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. EBITDA and Adjusted EBITDA are defined as net income from continuing operations calculated in accordance with GAAP, less net income attributable to non-controlling interests, plus the sum of income tax expense, interest expense, net, depreciation and amortization (“EBITDA”) and further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, business optimization costs, reorganization and severance costs, transaction and integration costs, charges related to lease terminations, share-based compensation and pre-opening de novo costs (“Adjusted EBITDA”).

 

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We present EBITDA and Adjusted EBITDA because they are key measures used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions. The Company believes EBITDA and Adjusted EBITDA are useful to investors for the purposes of comparing our results period-to-period and alongside peers and understanding and evaluating our operating results in the same manner as our management team and board of directors.

These supplemental measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. In addition, since these non-GAAP measures are not determined in accordance with GAAP, they are susceptible to varying calculations and may not be comparable to other similarly titled non-GAAP measures of other companies.

EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)

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

 

     Three months ended
March 31,
 
(in $ thousands)    2021      2020  

Net loss

   $ (17,818    $ (8,106

Plus (minus):

     

Net income attributable to non-controlling interest

     (1,309      (1,330

Interest expense, net

     16,087        17,858  

Interest expense on redeemable preferred stock

     5,308        4,377  

Income tax benefit

     (10,515      (1,792

Depreciation and amortization expense

     9,619        9,985  
  

 

 

    

 

 

 

EBITDA

     1,372      $ 20,992  

Transaction and integration costs(1)

     2,918        868  

Share-based compensation

     504        494  

Pre-opening de novo costs(2)

     434        594  

Reorganization and severance costs(3)

     362        1,142  

Business optimization costs(4)

     —          2,397  
  

 

 

    

 

 

 

Adjusted EBITDA (Non-GAAP measure)

     5,590      $ 26,487  
  

 

 

    

 

 

 

 

(1)

Represents costs related to the Business Combination, acquisitions and acquisition-related integration and consulting and planning costs related to preparation to operate as a public company.

(2)

Represents renovation, equipment and marketing costs relating to the start-up and launch of new locations incurred prior to opening.

(3)

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

(4)

Represents non-recurring costs to optimize our platform and ATI transformative initiatives. Costs primarily related to duplicate costs driven by IT and RCM conversions, labor related costs during the transition of key positions and other incremental costs /driving optimization initiatives.

 

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Results of Operations

Year ended December 31, 2020 compared to year ended December 31, 2019

The following table summarizes the Company’s consolidated results of operations for the years ended December 31, 2020 and December 31, 2019:

 

    Years Ended December 31,  
    2020     2019     Increase/(Decrease)  
(in $ thousands, except percentages)   $     % of
Revenue
    $     % of
Revenue
    $     %  

Net patient revenue

  $ 529,585       89.4   $ 717,596       91.4   ($ 188,011     (26.2 %) 

Other revenue

    62,668       10.6     67,862       8.6     (5,194     (7.7 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenue

    592,253       100.0     785,458       100.0     (193,205     (24.6 %) 

Clinic operating costs:

           

Salaries and related costs

    306,471       51.7     414,492       52.8     (108,021     (26.1 %) 

Rent, clinic supplies, contract labor and other

    166,144       28.1     170,516       21.7     (4,372     (2.6 %) 

Provision for doubtful accounts

    16,231       2.7     22,191       2.8     (5,960     (26.9 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total clinic operating costs

    488,846       82.5     607,199       77.3     (118,353     (19.5 %) 

Selling, general and administrative expenses

    104,320       17.6     119,221       15.2     (14,901     (12.5 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (913     (0.2 %)      59,038       7.5     (59,951     (101.5 %) 

Other (income) expenses, net

    (91,002     (15.4 %)      825       0.1     (91,827     NM  

Interest expense, net

    69,291       11.7     76,972       9.8     (7,681     (10.0 %) 

Interest expense on redeemable preferred stock

    19,031       3.2     15,511       2.0     3,520       22.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    1,767       0.3     (34,270     (4.4 %)      36,037       (105.2 %) 

Income tax expense (benefit)

    2,065       0.3     (44,019     (5.6 %)      46,084       (104.7 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (298     (0.1 %)    $ 9,749       1.2   ($ 10,047     (103.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net patient revenue. Net patient revenue for the year ended December 31, 2020 was $529.6 million, compared to $717.6 million for the year ended December 31, 2019, a decrease of $188.0 million or 26.2%.

The decrease in net patient revenue was primarily driven by decreased visit volumes as a result of federal, state and local restrictions (e.g., “stay-at-home” orders) established in response to the COVID-19 pandemic, partially offset by two additional working days in 2020 compared to 2019, and higher net patient revenue per visit driven by favorable revenue mix. Total patient visits decreased by approximately 1.7 million visits or 26.8%, driving a decrease in average visits per day of 6,878 or 27.3%. Net patient revenue per visit increased $0.88 or 0.8%, to $112.76 for the year ended December 31, 2020.

 

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The following chart reflects additional detail with respect to drivers of the change in net patient revenue:

 

 

LOGO

Other revenue. Other revenue for the year ended December 31, 2020 was $62.7 million compared to $67.9 million for the year ended December 31, 2019, a decrease of $5.2 million or 7.7%. The decrease in other revenue was primarily driven by volume reduction in the Sports Medicine, MSA and Home Health service lines as a result of COVID-19 related restrictions.

Salaries and related costs. Salaries and related costs for the year ended December 31, 2020 were $306.5 million compared to $414.5 million for the year ended December 31, 2019, a decrease of $108.0 million or 26.1%. Salaries and related costs as a percentage of net operating revenue was 51.7% and 52.8% for the years ended December 31, 2020 and 2019, respectively. The decrease was primarily due to the lower level of wages and benefits resulting from measures implemented by the Company to match labor supply with reduced visit volumes due to the COVID-19 pandemic, including reduced working schedules, voluntary and involuntary furloughs and headcount reductions. The decrease as a percentage of net operating revenue was primarily driven by improved clinician productivity as a result of a shift in the Company’s clinical labor models.

Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the year ended December 31, 2020 were $166.1 million compared to $170.5 million for the year ended December 31, 2019, a decrease of $4.4 million or 2.6%. Rent, clinic supplies, contract labor and other costs as a percentage of net operating revenue was 28.1% and 21.7% for the years ended December 31, 2020 and 2019, respectively. The $4.4 million decrease was driven by a reduction in the use of contract labor. The increase as a percentage of net operating revenue was primarily driven by unfavorable changes to cost leverage of the Company’s facilities- related fixed costs due to lower visit volumes.

Provision for doubtful accounts. Provision for doubtful accounts for the year ended December 31, 2020 was $16.2 million compared to $22.2 million for the year ended December 31, 2019, a decrease of $6.0 million or 26.9%. Provision for doubtful accounts as a percentage of net operating revenue was 2.7% and 2.8% for the years ended December 31, 2020 and 2019, respectively. The decrease of $6.0 million was primarily driven by lower visit volumes.

Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2020 were $104.3 million compared to $119.2 million for the year ended December 31, 2019, a decrease of $14.9 million or 12.5%. Selling, general and administrative expenses as a percentage of net operating revenue was 17.6% and 15.2% for the years ended December 31, 2020 and 2019, respectively. The decrease was primarily due to reduced bonus and incentives and discretionary spend, partially offset by charges related to lease terminations, for the year ended December 31, 2020. The increase as a percentage of revenue relates to unfavorable changes to cost leverage in a period of lower visit volumes due to selling, general and administrative costs being more fixed in nature.

 

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Other (income) expenses, net. Other income, net for the year ended December 31, 2020 was $91.0 million of income compared to $0.8 million of expense for the year ended December 31, 2019. The increase was driven by $91.5 million of provider relief funds received from the federal government under the CARES Act.

Interest expense, net. Interest expense, net for the year ended December 31, 2020 was $69.3 million compared to $77.0 million for the year ended December 31, 2019, a decrease of $7.7 million or 10.0%. The decrease in interest expense was primarily driven by lower effective interest rates under the Company’s first and second lien credit agreement during the year ended December 31, 2020.

Interest expense on redeemable preferred stock. Interest expense on redeemable preferred stock for the year ended December 31, 2020 was $19.0 million compared to $15.5 million for the year ended December 31, 2019, an increase of $3.5 million or 22.7%. The increase was driven by contractual accrued dividend rate increases.

Income tax expense (benefit). Income tax expense for the year ended December 31, 2020 was $2.1 million compared to a benefit of $44.0 million for the year ended December 31, 2019, a change of $46.1 million. The change was primarily driven by the release of a significant portion of the Company’s valuation allowance in 2019.

Net (loss) income. Net loss for the year ended December 31, 2020 was $0.3 million compared to net income of $9.7 million for the year ended December 31, 2019, a change of $10.0 million or 103.1%. The decrease was primarily driven by lower net operating revenue of $193.2 million and a lower income tax benefit of $46.1 million, partially offset by higher other income of $91.0 million and lower salaries and related costs of $108.0 million.

Year ended December 31, 2019 compared to year ended December 31, 2018

The following table summarizes the Company’s consolidated results of operations for the years ended December 31, 2019 and December 31, 2018:

 

    Year Ended December 31,  
    2019     2018     Increase/(Decrease)  
(in $ thousands, except percentages)   $     % of
Revenue
    $     % of
Revenue
    $     %  

Net patient revenue

  $ 717,596       91.4   $ 680,238       92.1   $ 37,358       5.5

Other revenue

    67,862       8.6     58,416       7.9     9,446       16.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenue

    785,458       100.0     738,654       100.0     46,804       6.3

Clinic operating costs:

           

Salaries and related costs

    414,492       52.8     398,899       54.0     15,593       3.9

Rent, clinic supplies, contract labor and other

    170,516       21.7     163,407       22.1     7,109       4.4

Provision for doubtful accounts

    22,191       2.8     37,368       5.1     (15,177     (40.6 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total clinic operating costs

    607,199       77.3     599,674       81.2     7,525       1.3

Selling, general and administrative expenses

    119,221       15.2     106,911       14.5     12,310       11.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    59,038       7.5     32,069       4.3     26,969       84.1

Other expenses, net

    825       0.1     694       0.1     131       18.9

Interest expense, net

    76,972       9.8     73,493       9.9     3,479       4.7

Interest expense on redeemable preferred stock

    15,511       2.0     12,775       1.7     2,736       21.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (34,270     (4.4 %)      (54,893     (7.4 %)      20,623       (37.6 %) 

Income tax benefit

    (44,019     (5.6 %)      (9,966     (1.3 %)      (34,053     NM  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income (loss)

  $ 9,749       1.2   ($ 44,927     (6.1 %)    $ 54,676       (121.7 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Net patient revenue. Net patient revenue for the year ended December 31, 2019 was $717.6 million compared to $680.2 million for the year ended December 31, 2018, an increase of $37.4 million or 5.5%.

The increase in net patient revenue was primarily driven by increased visit volume from new and existing clinics, partially offset by lower net patient revenue per visit. Our total patient visits increased by 469,714 or 7.9% for the year ended December 31, 2019, driving an increase in average visits per day of 1,842. The increase in visit volume was partially offset by lower net patient revenue per visit of $2.56 or 2.2%, as a result of changes in revenue mix.

The following chart reflects additional detail with respect to drivers of the change in net patient revenue:

 

 

LOGO

Other revenue. Other revenue for the year ended December 31, 2019 was $67.9 million compared to $58.4 million for the year ended December 31, 2018, an increase of $9.5 million or 16.2%. The increase in other revenue was primarily driven by growth in the AWS service line as a result of new contracts and additional demand from existing employer worksites.

Salaries and related costs. Salaries and related costs for the year ended December 31, 2019 were $414.5 million compared to $398.9 million for the year ended December 31, 2018, an increase of $15.6 million or 3.9%. Salaries and related costs as a percentage of net operating revenue was 52.8% and 54.0% for the years ended December 31, 2019 and 2018, respectively. The $15.6 million increase was primarily due to increased wages and benefits for additional healthcare professionals supporting growth in the business. The decrease as a percentage of net operating revenue was primarily driven by improved leverage of the Company’s revenue cycle support function costs.

Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the year ended December 31, 2019 were $170.5 million compared to $163.4 million for the year ended December 31, 2018, an increase of $7.1 million or 4.4%. Rent, clinic supplies, contract labor and other costs as a percentage of net operating revenue was 21.7% and 22.1% for the years ended December 31, 2019 and 2018, respectively. The $7.1 million increase was primarily comprised of increased rent and occupancy costs from new clinics and increased clinical outside services to support growth in the business. The decrease as a percentage of net operating revenue was primarily driven by improved leverage of the Company’s facilities-related fixed costs.

Provision for doubtful accounts. Provision for doubtful accounts for the year ended December 31, 2019 was $22.2 million compared to $37.4 million for the year ended December 31, 2018, a decrease of $15.2 million or 40.6%. Provision for doubtful accounts as a percentage of net operating revenue was 2.8% and 5.1% for the years ended December 31, 2019 and 2018, respectively. The decrease in both dollar value and percentage of net operating revenue was primarily driven by improved collection experience on payor and patient balances.

Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2019 were $119.2 million compared to $106.9 million for the year ended December 31, 2018, an increase of $12.3 million or 11.5%. Selling, general and administrative expenses as a percentage of net operating revenue was 15.2% for the year ended December 31, 2019 and 14.5% for the year ended December 31, 2018. The increase in both dollar value and percentage of net operating revenue was primarily due to a company-wide reorganization resulting in higher employee severance costs during the year ended December 31, 2019.

 

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Other expenses, net. Other expense was $0.8 million for the year ended December 31, 2019 and was relatively consistent compared to $0.7 million of expense for the year ended December 31, 2018.

Interest expense, net. Interest expense for the year ended December 31, 2019 was $77.0 million compared to $73.5 million for the year ended December 31, 2018, an increase of $3.5 million or 4.7%. The increase in interest expense was primarily driven by a higher average principal balance outstanding under the Company’s first lien credit agreement during the year ended December 31, 2019 due to $40.0 million of incremental term loan borrowings in October 2018.

Interest expense on redeemable preferred stock. Interest expense on redeemable preferred stock for the year ended December 31, 2019 was $15.5 million compared to $12.8 million for the year ended December 31, 2018, an increase of $2.7 million or 21.4%. The increase was driven by contractual accrued dividend rate increases.

Income tax benefit. Income tax benefit for the year ended December 31, 2019 was $44.0 million compared to $10.0 million for the year ended December 31, 2018, an increase of $34.0 million. The increase in income tax benefit was primarily driven by the release of the Company’s valuation allowance related to a significant portion of its federal and state deferred tax assets due to the continued improvements in operating performance and the expectation of current and future taxable income.

Net income (loss). Net income for the year ended December 31, 2019 was $9.7 million compared to net loss of $44.9 million for the year ended December 31, 2018, a change of $54.7 million or 121.7%. The change was driven by an increase in net operating revenue of $46.8 million and a higher income tax benefit, partially offset by increased operating expenses.

EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)

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

 

     Year Ended December 31,  
(in $ thousands)    2020      2019      2018  

Net (loss) income (GAAP)

   $ (298    $ 9,749      $ (44,927

Plus (minus):

        

Net income attributable to non-controlling interest

     (5,073      (4,400      (3,887

Interest expense, net

     69,291        76,972        73,493  

Interest expense on redeemable preferred stock

     19,031        15,511        12,775  

Income tax expense (benefit)

     2,065        (44,019      (9,966

Depreciation and amortization expense

     39,700        39,104        37,755  
  

 

 

    

 

 

    

 

 

 

EBITDA

   $ 124,716      $ 92,917      $ 65,243  

Business optimization costs(1)

     10,377        18,512        14,523  

Reorganization and severance costs(2)

     7,512        8,331        7,024  

Transaction and integration costs(3)

     4,790        4,535        637  

Charges related to lease terminations(4)

     4,253        —          —    

Share-based compensation

     1,936        1,822        2,935  

Pre-opening de novo costs(5)

     1,565        2,275        3,650  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (Non-GAAP financial measure)

   $ 155,149      $ 128,392      $ 94,012  
  

 

 

    

 

 

    

 

 

 

 

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(1)

Represents non-recurring costs to optimize our platform and Company transformative initiatives. Costs primarily related to duplicate costs driven by IT and RCM conversions, labor related costs during the transition of key positions and other incremental costs driving optimization initiatives.

(2)

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

(3)

Represents costs related to the Business Combination, acquisitions and acquisition-related integration and consulting and planning costs related to preparation to operate as a public company.

(4)

Represents charges related to lease terminations prior to the end of term for corporate facilities no longer in use.

(5)

Represents renovation, equipment and marketing costs relating to the start-up and launch of new locations incurred prior to opening.

Liquidity and Capital Resources

Our principal sources of liquidity are operating cash flows, borrowings under our credit agreements and proceeds from equity issuances. We have used these funds to meet our short-term and long-term capital uses, which consist of salaries, benefits and other employee-related expenses, rent, clinical supplies, outside services, capital expenditures, acquisitions, de novos and acqui-novos and debt service. Our capital expenditure requirements will depend on many factors, including de novo openings, patient volume and revenue growth rates.

We may be required to seek additional equity or debt financing in connection with the business. If additional financing is necessary from outside sources, we may not be able to raise it on acceptable terms or at all, and the cost or availability of future financing may be impacted by financial market conditions, including future developments related to the COVID-19 pandemic. While we expect the disruption caused by COVID-19 to be temporary, we cannot predict the duration of any such disruption, and if such disruption continues for an extended period, it could have a material impact on the Company’s liquidity and financial condition. If additional capital is unavailable when desired, our business, results of operations and financial condition would be materially and adversely affected. We believe our operating cash flow, combined with our existing cash, cash equivalents and credit facility, will continue to be sufficient to fund our operations and growth strategies for at least the next 12 months.

As of March 31, 2021 and December 31, 2020, we had $97.7 million and $142.1 million in cash and cash equivalents, respectively, and $70.0 million available under our revolving credit facility, less $1.2 million of outstanding letters of credit.

With respect to the CARES Act, the Company has $26.7 million of MAAPP funds and $11.0 million of deferred employer Social Security taxes contributing to the Company’s balance of cash and cash equivalents as of March 31, 2021 and December 31, 2020. The Company expects to begin applying MAAPP funds to Medicare billings in the second quarter of 2021 and remit payments on its deferred employer Social Security taxes in 2021 and 2022. As noted previously, during the year ended December 31, 2020, the Company received approximately $91.5 million of general distribution payments under the Provider Relief Fund of the CARES Act.

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

 

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2016 first and second lien credit agreements

On May 10, 2016, ATI Holdings Acquisition, Inc. (the “Borrower”) entered into (a) a First Lien Credit Agreement (the “First Lien Credit Agreement”) with, among others, the lenders party thereto and Barclays Bank PLC, as administrative agent, and (b) a Second Lien Credit Agreement (the “Second Lien Credit Agreement” and, together with the First Lien Credit Agreement, the “Credit Agreements”) with, among others, the lenders party thereto and Wilmington Trust, National Association, as administrative agent.

The aggregate outstanding principal amount under the Credit Agreements was $998.5 million and $999.6 million as of March 31, 2021 and December 31, 2020, respectively. On the Closing Date, the Borrower repaid, using funds received upon the closing of the Business Combination, (a) in full the aggregate outstanding indebtedness under the Second Lien Credit Agreement and (b) a portion of the aggregate outstanding indebtedness under the First Lien Credit Agreement. The term loan under the First Lien Credit Agreement is payable in quarterly installments and matures on May 10, 2023. The Second Lien Credit Agreement was terminated upon the repayment of the outstanding indebtedness under such agreement.

The First Lien Credit Agreement includes a revolving credit facility with a maximum borrowing capacity of $70.0 million, including $15.0 million sub-limit for swingline loans and amounts available for letters of credit. The issuance of such letters of credit and the making of swingline loans reduces the amount available under the applicable revolving credit facility. The Borrower may make draws under the revolving credit facility to make or purchase additional investments and for general working capital purposes until the maturity date of the revolving credit facility.

The revolving facility under the First Lien Credit Agreement matures on May 10, 2023 unless (a) as of February 9, 2023 (the “Springing Maturity Date”), either (i) more than $100.0 million of first lien term loans remain outstanding on the Springing Maturity Date or (ii) the debt incurred to refinance any portion of the first lien term loans in excess of $100.0 million does not satisfy specified parameters, in which case the first lien revolving facility will mature on February 9, 2023, or (b) the Borrower makes certain prohibited restricted payments, in which case the first lien revolving facility will mature on the later of (i) the date of such restricted payment and (ii) May 10, 2021.

The first lien credit arrangement is guaranteed by Wilco Intermediate Holdings, Inc. and its domestic subsidiaries, subject to customary exceptions (collectively, the “Guarantors”) and secured by substantially all of the assets of the Borrower and Guarantors.

The borrowings under the First Lien Credit Agreement bears interest, at the Borrower’s election, at a base interest rate of the Alternate Base Rate (“ABR”) or London InterBank Offered Rate (“LIBOR”) plus an interest rate spread, as defined in the First Lien Credit Agreements. The ABR is the highest of (i) the federal funds rate plus 0.50%, (ii) one-month LIBOR plus 1.00%, and (iii) the prime rate. The LIBOR term may be one, two, three, or six months (or, to the extent available, 12 months or a shorter period).

The per annum interest rate spread for first lien revolving loans is (a) 3.50% for ABR loans and (b) 4.50% for LIBOR loans, with stepdowns based on the first lien leverage ratio. As of March 31, 2021 and December 31, 2020, the applicable interest rate spreads were 3.0% for ABR revolving borrowings and 4.0% for LIBOR revolving borrowings. In addition to the stated interest rate on borrowings under the revolving credit facility, we are required to pay a commitment fee of between 0.25% and 0.50% per annum on any unused portion of the revolving credit facility based on our first lien leverage ratio.

The per annum interest rate spread for first lien term loans is (a) 2.50% for ABR loans and (b) 3.50% for LIBOR loans. As of March 31, 2021 and December 31, 2020, the effective interest rate for the first lien term loans was 4.9% and 10.9%, respectively.

The First Lien Credit Agreement contains covenants with which the Borrower must comply. Pursuant to the First Lien Credit Agreement, the Borrower must maintain, as of the last day of each fiscal quarter when the sum

 

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of the outstanding balance of revolving loans, swingline loans and certain letters of credit exceeds 30% of the total revolving credit facility commitment, a ratio of consolidated first lien net debt to consolidated Adjusted EBITDA, as defined in the First Lien Credit Agreement, not to exceed 6.25:1.00. As of March 31, 2021 and December 31, 2020, the Borrower was in compliance with the financial covenant contained in the First Lien Credit Agreement.

Consolidated Cash Flows

Three months ended March 31, 2021 compared to three months ended March 31, 2020

The following table presents selected data from our consolidated statements of cash flows for the three months ended March 31, 2021 and 2020:

 

     Three months ended
March 31,
 
(in $ thousands)    2021      2020  

Net cash (used in) provided by operating activities

   $ (30,072    $ 1,872  

Net cash used in investing activities

     (8,762      (6,958

Net cash (used in) provided by financing activities

     (5,617      15,405  
  

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     (44,451      10,319  

Cash and cash equivalents at beginning of period

     142,128        38,303  
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 97,677      $ 48,622  
  

 

 

    

 

 

 

Net cash used in operating activities for the three months ended March 31, 2021 was $30.1 million compared to $1.9 million provided by operating activities for the three months ended March 31, 2020, a change of $31.9 million. The change was primarily the result of a higher net loss before taxes and lower cash inflows from accounts receivable driven by lower revenue volumes.

Net cash used in investing activities for the three months ended March 31, 2021 was $8.8 million compared to $7.0 million for the three months ended March 30, 2020, an increase of $1.8 million. The increase is primarily driven by $1.4 million of higher capital expenditures during the three months ended March 31, 2021 as a result of a higher number of new clinics in the current period.

Net cash used in financing activities for the three months ended March 31, 2021 was $5.6 million compared to $15.4 million of cash provided by financing activities for the three months ended March 31, 2020, a change of $21.0 million. The change was driven by $19.0 million of draws on the revolving credit facility in the three months ended March 31, 2020 which did not recur in the current period.

Year ended December 31, 2020 compared to year ended December 31, 2019

 

     Year ended December 31,  
(in $ thousands)    2020      2019      2018  

Net cash provided by operating activities

   $ 138,604      $ 47,944      $ 16,710  

Net cash used in investing activities

     (21,809      (42,678      (41,468

Net cash (used in) provided by financing activities

     (12,970      (13,029      30,265  
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     103,825        (7,763      5,265  

Cash and cash equivalents at beginning of period

     38,303        46,066        40,801  
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 142,128      $ 38,303      $ 46,066  
  

 

 

    

 

 

    

 

 

 

 

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Net cash provided by operating activities for the year ended December 31, 2020 was $138.6 million compared to $47.9 million for the year ended December 31, 2019, an increase of $90.7 million. The increase was primarily the result of the receipt of MAAPP funds during the year ending December 31, 2020, as well as changes in deferred tax expense, non-cash interest and charges related to lease termination, partially offset by a reduction of net income of $10.0 million.

Net cash used in investing activities for the year ended December 31, 2020 was $21.8 million compared to $42.7 million for the year ended December 31, 2019, a decrease of $20.9 million. The decrease is primarily driven by $19.3 million of lower capital expenditures during the year ended December 31, 2020 driven by a lower number of new clinic openings due to delayed capital expenditures as part of our response to the impacts of COVID-19.

Net cash used in financing activities for the year ended December 31, 2020 remained consistent year over year at $13.0 million.

Year ended December 31, 2019 compared to year ended December 31, 2018

Net cash provided by operating activities for the year ended December 31, 2019 was $47.9 million compared to $16.7 million for the year ended December 31, 2018, an increase of $31.2 million. The increase in net cash provided by operating activities was primarily the result of a $54.7 million increase in net income and a $20.0 million increase in cash provided from the change in operating assets and liabilities, partially offset by a net decrease of $46.2 million in non-cash charges primarily driven by the lower provision for doubtful accounts resulting from improved collection efforts and the release of our valuation allowance related to a significant portion of our federal and state deferred tax assets.

Net cash used in investing activities for the year ended December 31, 2019 was $42.7 million compared to $41.5 million for the year ended December 31, 2018, an increase of $1.2 million. The increase is primarily driven by our acquisition of one rehabilitation center during the year ended December 31, 2019.

Net cash used in financing activities for the year ended December 31, 2019 was $13.0 million compared to net cash provided by financing activities of $30.0 million for the year ended December 31, 2018, a change of $43.0 million. The change is primarily driven by net proceeds from additional borrowings under our First Lien Credit Agreement during the year ended December 31, 2018.

Commitments and Contingencies

In the normal course of business, the Company is 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. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require disclosure of the contingency and the possible range of loss.

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 7 and 11 to our consolidated financial statements and Notes 7 and 10 in our consolidated condensed interim financial statements included elsewhere in this prospectus for further information.

Off-Balance Sheet Arrangements

As of March 31, 2021 and December 31, 2020, the Company did not have any off-balance sheet arrangements.

 

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Critical Accounting Estimates

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

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

 

   

Patient Revenue Recognition and Allowance for Doubtful Accounts

 

   

Realization of Deferred Tax Assets

 

   

Goodwill and Intangible Assets

Additional information related to our critical accounting estimates can be found in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” of our consolidated financial statements included elsewhere in this prospectus.

Patient Revenue Recognition and Allowance for Doubtful Accounts

Net patient revenue

We provide an array of services to our patients including physical therapy, work conditioning, hand therapy, aquatic therapy, functional capacity assessment, sports medicine, wellness programs and home health. Net patient revenue consists of these physical therapy services.

Net patient revenue is recognized at an amount equal to the consideration the Company expects to receive from third-party payors, patients and others for services rendered when the performance obligations under the terms of the contract are satisfied.

There is an implied contract between the Company and the patient upon each patient visit resulting in the Company’s patient service performance obligation. Generally, the performance obligation is satisfied at a point in time, as each service provided is distinct and future services rendered are not dependent on previously rendered services. The Company has separate contractual agreements with third-party payors (e.g., insurers, managed care programs, government programs, workers’ compensation) that provide for payments to the Company at amounts different from its established rates. While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the patients covered by the third-party payors. The payor contracts do not indicate performance obligations of the Company but indicate reimbursement rates for patients who are covered by those payors when the services are provided.

To determine the transaction price associated with the implied contract, the Company includes the estimated effects of any variable consideration, such as contractual allowances and implicit price concessions. When the

 

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Company has contracts with negotiated prices for services provided (contracted payors), the Company considers the contractual rates when estimating contractual allowances. Variable consideration is estimated using a portfolio approach that incorporates whether or not the Company has historical differences from negotiated rates due to non-compliance with contract provisions. Historical results indicate that it is probable that negotiated prices less variable consideration will be realized; therefore, this amount is deemed the transaction price and recorded as revenue. The Company records an estimated provision for doubtful accounts based on historical collections for claims with similar characteristics, such as location of service and type of third-party payor, at the time of recognition. Any subsequent impairment of the related receivable is recorded as provision for doubtful accounts.

For non-contracted payors, the Company determines the transaction price by applying established rates to the services provided and adjusting for contractual allowances provided to third-party payors and implicit price concessions. The Company estimates the contractual allowances and implicit price concessions using a portfolio approach based on historical collections for claims with similar characteristics, such as location of service and type of third-party payor, in relation to established rates, because the Company does not have a contract with the underlying payor. Any subsequent changes in estimate on the realization of the receivable is recorded as a revenue adjustment. Management believes that calculating at the portfolio level would not differ materially from considering each patient account separately

The Company continually reviews the revenue transaction price estimation process to consider updates to laws and regulations and changes in third-party payor contractual terms that result from contract renegotiations and renewals. Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payors and government entities, which are often subject to interpretation, the Company may receive reimbursement for healthcare services that is different from the estimates, and such differences could be material.

In its evaluation of the revenue transaction price, management assesses historical collection experience in relation to contracted rates, or for non-contracted payors, established rates. The practice of applying historical collection experience to determine the revenue transaction price for current transactions involves significant judgment and estimation. Management subsequently monitors the appropriateness of its estimates for claims on a date of service basis as cash collections on previous periods mature. Actual cash collections upon maturity may differ from the transaction price estimated upon initial recognition, and such differences could be material. If initial revenue recognition estimates increased or decreased by 100 basis points, the impact to annual net patient revenue would be approximately $5.3 million. Management believes subsequent changes in estimate as a result of maturity of claims with dates of service in 2018, 2019 and 2020 have not been material to the consolidated statements of operations and comprehensive income (loss).

The following table disaggregates net patient revenue for each associated payor class for the three months ended March 31 and years ended December 31:

 

     Three months
ended March 31,
    Years ended December 31,  
     2021     2020     2020     2019     2018  

Commercial

     55.4     52.1     53.1     51.5     50.0

Government

     22.6     23.3     22.2     23.6     23.2

Workers’ Compensation

     16.0     17.0     17.6     17.2     18.9

Other(1)

     6.0     7.6     7.1     7.7     7.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Other is primarily comprised of net patient revenue related to auto personal injury which by its nature may have longer-term collection characteristics relative to other payor classes.

 

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The following table disaggregates accounts receivable, net associated with net patient revenue for each associated payor class as of:

 

     March 31,
2021
    December 31,  
    2020     2019  

Commercial

     43.2     42.8     42.0

Government

     11.2     11.2     12.4

Workers’ Compensation

     20.8     18.6     17.7

Other(1)

     24.8     27.4     27.9
  

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

 

(1)

Other is primarily comprised of accounts receivable associated with net patient revenue related to auto personal injury.

Allowance for doubtful accounts

The allowance for doubtful accounts is based on estimates of losses related to receivable balances. The risk of collection varies based upon the service, the payor class and the patient’s ability to pay the amounts not reimbursed by the payor. The Company estimates the allowance for doubtful accounts based upon several factors, including the age of the outstanding receivables, the historical experience of collections, the impact of economic conditions and, in some cases, evaluating specific customer accounts for the ability to pay. Management judgment is used to assess the collectability of accounts and the ability of the Company’s customers to pay. The provision for doubtful accounts is included in clinic operating costs in the consolidated statements of operations and comprehensive income (loss). When it is determined that a customer account is uncollectible, that balance is written off against the existing allowance.

Realization of Deferred Tax Assets

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in operations in the period that includes the enactment date.

We evaluate the realizability of deferred tax assets and reduce those assets using a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Among the factors used to assess the likelihood of realization are projections of future taxable income streams and the expected timing of the reversals of existing temporary differences. The judgments made at any point in time may be impacted by changes in tax codes, statutory tax rates or future taxable income levels. This could materially impact our assessment of the need for valuation allowance reserves and could cause our provision for income taxes to vary significantly from period to period.

Goodwill and Intangible Assets

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

The cost of acquired businesses is allocated first to its identifiable assets, both tangible and intangible, based on estimated fair values. Costs allocated to finite-lived identifiable intangible assets are generally amortized on a

 

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straight-line basis over the remaining estimated useful lives of the assets. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill.

Goodwill and intangible assets with indefinite lives are not amortized but must be reviewed at least annually for impairment. If the impairment test indicates that the carrying value of an intangible asset exceeds its fair value, then an impairment loss should be recognized in the consolidated statements of operations and comprehensive income (loss) in an amount equal to the excess carrying value over fair value. Fair value is determined using valuation techniques based on estimates, judgments and assumptions the Company believes are appropriate in the circumstances. The Company completed the annual impairment analysis of goodwill as of October 1, 2020 using an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value include projected future revenue growth rates, EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples. The Company completed the annual impairment analysis of indefinite lived intangible assets as of October 1, 2020 using the relief from royalty approach. The key assumptions associated with determining the estimated fair value include projected revenue growth, the royalty rate and the discount rate.

The Company has one reporting unit for purposes of the Company’s annual goodwill impairment test, The Company concluded that no goodwill impairment occurred during the years ended December 31, 2020, 2019 and 2018.

If we do not achieve our earnings and cash flow projections or our cost of capital rises significantly, the assumptions and estimates underlying the goodwill and intangible asset impairment evaluations could be adversely affected and result in future impairment charges that would negatively impact our operating results and financial position. Factors that could result in the cash flows being lower than the current estimates include decreased revenue caused by unforeseen changes in the healthcare market or the inability to achieve the estimated operating margins in the forecasts due to unforeseen factors. Additionally, changes in the broader economic environments could cause changes to the estimated discount rates and comparable company valuation indicators which may impact the estimated fair value of the Company’s reporting unit.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” to the Company’s consolidated financial statements elsewhere in this prospectus.

Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate variability with regard to existing variable-rate debt instruments, which exposure primarily relates to movements in various interest rates, such as prime and LIBOR. The Company utilizes derivative instruments such as interest rate swaps for purposes of hedging exposures related to such variability. Management believes that the result of its interest rate cap reduces the risk of interest rate variability to an immaterial amount. As of March 31, 2021 and December 31, 2020, the fair value of the Company’s derivative instrument was a liability of $1.5 million and $2.1 million, respectively.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This standard is optional and may be applied by entities after March 12, 2020, but no later than December 31, 2022. The Company has certain debt instruments for which the interest rates are indexed to LIBOR, and as a result, is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.

 

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OUR BUSINESS

Overview

We are the largest independent outpatient physical therapy provider in the United States by clinic count as of March 31, 2021. We believe we have the most advanced platform in the industry in terms of our team, our clinical systems, and our corporate infrastructure. We are leveraging our platform to directly address some of the most pressing challenges in the U.S. healthcare system, including high costs and poor clinical outcomes. Our mission is to exceed the expectations of the hundreds of thousands of patients we serve each year by providing the right care at the right place at the right time, while reducing the total cost of such care. Our vision is to transform the way musculoskeletal (“MSK”) conditions are treated, with a focus on prevention and avoidance of unnecessary medical visits, medications and surgical procedures.

We strive to deliver evidence-based, patient-centric care that positions us as the first point of contact for MSK health. Physical therapists can diagnose and treat over 70% of MSK conditions without any other provider intervention, according to a study published in the Journal of Orthopaedic & Sports Physical Therapy. For the 30% of MSK disorders that cannot be treated by physical therapy alone, physical therapists serve as knowledgeable care navigators who can direct patients to the appropriate specialists. As the triage point for MSK issues, physical therapists can help reduce unnecessary costs as well as time in treatment. Our proprietary, internally developed electronic medical records (“EMR”) platform supports our clinical workflows and leverages our database of more than two and a half million unique patient cases as well as peer-reviewed best practices guidelines and care protocols to maximize outcomes for our patients. Our EMR is purpose-built for physical therapy and has diagnosis-specific guidelines in place covering approximately 90% of our patient cases. Our ability to manage, deliver and track superior clinical outcomes positions us as an attractive partner for payors seeking to reduce downstream healthcare costs and move from a fee-for-service world to value-based care.

We are focused on providing exceptional patient experiences and creating friendly clinic environments that help our patients attain their physical goals. We also bring evidence-based treatment protocols and individualized treatment plans to accelerate our patients’ return to the quality of life and activities they cherish. Our team-based approach matches physical therapists, physical therapy assistants, and operational support specialists with patients based on acuity to ensure that patients can be seen in a timely fashion and enables all our clinicians to operate at the top of their respective licenses to the fullest extent of their education and experience while avoiding activities, such as clerical tasks, that can be performed by someone else with a different set of skills.

We have an operating model that we believe is unique in the industry. We operate under a single “ATI” brand and own nearly 100% of our clinics, which we believe enables us to control all aspects of the clinical and patient experience, align incentives across our teams, track and analyze clinical outcome data, and drive growth and efficiency in our operations. Together, we believe these components of our customer-centric and patient outcomes-driven model allow us to deliver better results at lower costs for our key stakeholders:

 

   

Patients. We are highly focused on providing the best patient experience. Our clinics are in convenient, attractive locations and we strive to maintain a consistently positive look, feel and experience. Additionally, we work to deliver functional outcomes that meet or exceed national physical therapy industry outcomes across all body regions, which enables patients to return to their normal activities. We are extremely proud of our average Net Promotor Score (“NPS”) of 77 over the trailing four quarters as of March 31, 2021, our CareWire score of 9.7 out of 10 and our average Google Review rating of 4.9 stars across our clinics as of March 31 2021. We believe these metrics are indicative of our patients’ overall high satisfaction with our services and loyalty to the ATI brand.

 

   

Medical Provider Partners. Our medical provider partners also benefit from our customer-driven culture, expansive patient outcomes database, and case management approach, which facilitate end-to-end patient care with MSK issues. Our proprietary EMR system includes a variety of custom tools and analytics to evaluate patient performance in real-time, providing each medical partner

 

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provider with simple, intuitive reports on shared patients regarding functional outcomes and satisfaction. These scorecards are used to drive continuous quality improvement and deliver more predictable results. We clinically integrate with our physician group and health network partners to coordinate care for patients across a continuum of settings. Such coordination can lead to better experiences and outcomes for patients, as well as reduced costs caused by duplicative testing and excessive delays often seen across uncoordinated healthcare settings.

 

   

Payors. We derive revenue from a diverse range of payor sources, including commercial health plans, government programs (i.e., Medicaid and Medicare), workers’ compensation insurance and auto/personal injury insurance. We believe we offer significant value to payors not only through superior outcomes that reduce downstream costs, but also through our national footprint, convenient locations and high customer ratings, which help ensure patients are satisfied with their plan offerings and benefits.

 

   

Employers. We recently began to offer our solutions directly to self-insured employers through our ATI First offering. In these arrangements, we educate employees on the benefits of physical therapy and reduce barriers to our services. Through our ATI First model, we expect to drive lower healthcare expenditures through early-intervention and treatment of MSK conditions and hope to improve workforce productivity through lower absenteeism resulting from such MSK conditions.

We believe physical therapy sits on the “right” side of healthcare trends because it has been proven to reduce downstream healthcare costs in a more patient-friendly, outpatient care setting. With our scale and unique platform, we believe that we are leading the physical therapy industry toward a “next generation” integrated care model that emphasizes up-front, conservative care to deliver better outcomes and save costs for the healthcare system. We believe we are best positioned to continue moving the industry toward value-based care.

Our Platform

We have invested significantly in our clinical and corporate infrastructure since partnering with Advent in 2016. Key elements of our platform that we believe best position us to lead the transformation of the industry toward value-based care include:

 

   

Our Clinical Systems & Data. Our proprietary EMR is purpose-built for physical therapy. With our robust outcomes data, we are able to drive discussions with our payor and employer partners to develop and pilot innovative reimbursement models based on improving outcomes and lowering total healthcare costs. We have continued to add to and enhance our EMR capabilities, including caseload management and compliance measures, ensuring our clinicians can focus on treating patients and achieving positive outcomes.

 

   

Our Technology-Enabled Infrastructure. We incorporate data and analytics in everything that we do.

We relentlessly track our key performance indicators to produce real-time reports on the operational and financial performance at the clinic, clinician, and patient levels, enabling us to adjust quickly in response to market dynamics. We have also made significant investments in our business development activities, enhancing our analytics capabilities to enhance referral source education, consumer targeting, and de novo site planning to ensure we maximize the return on our capital.

Our Services

Physical Therapy

We are the largest independent outpatient physical therapy provider by clinic count as of March 31, 2021. 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.

 

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To further enhance our traditional outpatient physical therapy services, we introduced ATI Connect in early 2020, a tele-physical therapy offering which launched amidst state lockdowns nationwide in response to COVID-19 (as defined below). We believe that, while virtual visits will not fully replace the need for in-person treatment, ATI Connect serves as a convenient option for patients who either lack immediate access to a clinic or are looking to supplement traditional treatments. This offering also allows us to serve patients in locations where we do not have a physical presence today.

We recently introduced ATI First which leverages our existing clinic footprint and clinical expertise to unlock value for self-insured employers looking to reduce MSK costs, by moving physical therapists closer to the triage point for MSK conditions to avoid unnecessary downstream costs. ATI First educates employees around the benefits of physical therapy and encourages them to seek out physical therapy services before undergoing a costlier procedure. While our ATI First solution is relatively small today, we intend to leverage our demonstrated success in generating significant savings under our existing contracts to win new contracts and continue evolving our business towards value-based arrangements.

ATI Worksite Solutions (“AWS”)

AWS is an on-site service that provides customized cost-saving injury prevention programs, work-related injury assessment services, wellness offerings and consultations for employers, ranging from Fortune 100 companies to small local businesses. We staff athletic trainers, physical therapy assistants and other clinicians as Certified Early Intervention Specialists at the employer’s site to provide early interventions and promote physical health and wellness.

Management Service Agreements (“MSA”)

We partner with physician-owned practices to improve their financial performance, lower operating costs and optimize patient outcomes. Utilizing our resources and infrastructure, we provide dedicated service teams to oversee the integration of our programs into physical therapy practices. This includes front office staffing, proprietary EMR integration, caseload management and continued education in progressive therapies.

Home Health

We provide complete, in-home caregiver services that help individuals maintain independence and improve their quality of life. We offer skilled nursing care in patients’ homes, then help coordinate a smooth transition to outpatient physical therapy.

Sports Medicine

Our Sports Medicine athletic trainers work with athletes at all levels of competition to prevent, evaluate and treat sports injuries. We offer onsite sports physical therapy services, clinical evaluation and diagnosis, immediate and emergency care, nutrition programs and concussion management, among others.

Our Industry

MSK conditions affect individuals of all ages and are some of the most common causes of health problems in the United States, with an estimated 50% of adults suffering from an MSK condition today, according to industry research. Annual spend on MSK conditions or disorders is estimated to be approximately $300 to $400 billion, or 8% to 11% of the $3.6 trillion U.S. healthcare market in 2019, according to a recent market study. Physical therapy and related services are low-cost solutions that can address a variety of MSK conditions.

The U.S. outpatient physical therapy industry was approximately $22 billion in 2019, representing approximately 55% of the physical therapy market, and is projected to grow 4% annually post COVID-19 through 2025, according to a recent market study. The outpatient physical therapy landscape is highly fragmented

 

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with an estimated 38,000 clinics in the U.S. The ten largest players comprise approximately 15% of the market based on number of clinics in 2020, with most of the remaining clinics owned by single practitioners, smaller local groups, or regional operators. We are currently the second largest provider in the industry, and the largest independent provider that is not owned by a hospital operator.

Physical therapy presents a strong value proposition in the healthcare industry as a low cost, high-impact service that can save downstream MSK costs. Research demonstrates that when used as a first line treatment option, physical therapy can meaningfully reduce the probability of ER visits, utilization of advanced imaging services, and need for opioid prescriptions. Furthermore, in addressing core MSK issues earlier on, physical therapy can reduce the need for, and utilization of, high cost surgical procedures as well as other expensive treatment options. In the treatment of lower back pain, physical therapy has demonstrated a reduction in cost per patient by up to $2,736.

We believe there are several favorable tailwinds to the outpatient physical therapy industry:

 

   

Focus on Preventative Care and Early Intervention. Physical therapy is a low-cost treatment option and prevention tool for high-risk patients with MSK conditions. Utilization of physical therapy through early intervention can prevent issues and minimize risks. Physical therapy prior to surgeries can also expedite patient recovery and help improve outcomes. Demonstrated savings through decreased claims and healthcare costs position physical therapy to garner additional spend from payors and employers, as a first line of defense.

 

   

Shift Towards Lower Cost Outpatient Settings. Total physical therapy and related services is a $40 billion industry in the U.S in 2019. Only approximately 55% of physical therapy spend today is delivered in an outpatient setting, which can provide many of the same services at a lower price point. As the healthcare industry continues to shift patients away from high-cost hospitals and long-term care facilities, low-cost alternatives such as outpatient physical therapy are poised to benefit from this trend.

 

   

Aging Population. Older populations have experienced a growing prevalence of chronic illness and injury in recent years; the number of individuals that are 65 years or older and have an MSK condition increased 68% from 1996 to 2014. According to statistics from the US Census Bureau, one in five Americans will be of retirement age by 2030, with the 65+ age group expected to grow by 11 million from 2019 to 2025. With the aging population as well as a growing desire amongst all age groups to optimize physical wellness and remain active, we believe the demand for physical therapy services will continue to increase in the future.

 

   

Transition to Value-Based Care. We believe value-based arrangements are re-shaping healthcare.

Providers are being challenged to deliver high-quality care and achieve better outcomes at lower costs. We believe this trend places us firmly on the “right” side of healthcare. Physical therapy has demonstrated its ability to improve outcomes as well as help avoid downstream costs from expensive imaging, costly and addictive opioids, surgeries, and long hospital stays.

Our Competitive Advantages

We believe we have unique capabilities and strategies that set us apart from other players in the industry. Our history of growth is founded on a commitment to a relatively simple business model: providing superior, coordinated clinical care, value and convenience to patients and payors. Our business model encompasses the following competitive advantages:

 

   

Extraordinary Patient Experience. We seek to exceed customer expectations by providing the highest quality of care in a friendly and encouraging environment. Our clinicians and administrative staff are trained in the ATI Way, a program designed to put the patient first, ensuring each patient has a consistent experience and receives the same extraordinary service in each of our clinics nationwide. Our clinics are vibrant and modern, complete with state-of-the-art equipment and technology, creating

 

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a welcoming and supportive environment where patients can focus on getting better. We are conveniently located close to where our customers work, shop and live, with early morning and late evening hours to fit a variety of schedules. Our administrative staff is available to verify insurance and help navigate the healthcare ecosystem on behalf of our patients. We solicit feedback through satisfaction surveys issued to every patient and evaluate NPS post-treatment to drive continuous quality improvement and customer loyalty.

 

   

Evidence-Based Protocols and Established Patient Outcomes and Quality. Since 2015, we have assembled over two and a half million unique patient cases through our clinics. We have extensive empirical data on outcomes, alongside corresponding patient satisfaction scores, which allow us to holistically understand how to optimize treatment pathways by condition and drive predicted outcomes. Our Clinical Effectiveness Department utilizes our extensive database of real-world evidence to develop ATI Best Practices, treatment protocols and techniques developed from our experience in treating millions of patients. We currently have diagnosis-specific reference documents in place covering 90% of patients and will install additional clinical resources as we continue growing our patient outcomes registry.

We believe we can drive better functional outcomes for our patients as compared to our peers. The Alliance for Physical Therapy Quality and Innovation sponsored an empirical study on clinical outcomes. The leading academic research center in this area conducted the study and released their findings in July 2019. This study analyzed data from 386,000 patient episodes across all 50 states from 2016 to 2018 and was the largest investigation of its kind in physical therapy. Patient episodes available for shoulder, neck, knee, and back were evaluated and patient-reported outcome scores for each body region were normalized to a 0 (worst) to 100 (best) scale. The average outcome scores at the start of care were around 55 for shoulder, 65 for neck, 44 for knee, and 64 for back and improved to over 71 for all body regions. Based on patient case data captured in our EMR, our patient outcomes in 2019 and 2020 presented equal or greater improvement across all body regions based on average outcome scores, when compared to the national industry outcomes published by The Alliance for Physical Therapy Quality and Innovation through their analysis of outcomes data gathered from industry participants, including other physical therapy providers and an EMR vendor.

We believe our unique data set and capabilities position us well as the industry continues to shift towards value-based care. Beginning in 2019, physical therapy providers were included in the CMS Quality Payment Program and were eligible to report quality metrics for the Merit-based Incentive Payment System (“MIPS”). We opted to report 2019 performance, and we received an ‘exceptional’ rating based on the data submitted across our platform and will receive a quality ‘bonus’ on all 2021 billed CMS payments. Being an early adopter, this positions us as a leader in the industry as CMS MIPS measures reporting becomes mandatory for all physical therapy providers beginning in 2020.

 

   

Coordinated Across Care Continuum and Throughout Care Episode. We employ physical health case management techniques, including creation and delivery of personalized patient reports to partner healthcare providers throughout the care episode. The case data in our patient registry incorporates the same patient outcome measures recommended by the American Academy of Orthopedic Surgeons and accepted by CMS for MIPS measures. This consistent approach in evaluating treatment effectiveness for MSK conditions allows for seamless patient progression throughout the care continuum. This approach enables us to serve as a trusted advisor to our patients, helping them better navigate the healthcare ecosystem and returning them to health quickly.

 

   

Unified Brand. We are the largest independent outpatient physical therapy provider in the United States, with nearly 900 clinics across 24 states as of March 31, 2020, all operating under the ATI brand. With a single recognizable banner, we have established an association between the “ATI” name and high-quality therapy, much like our counterparts in various consumer industries have done for their products and services. Our unified brand reduces confusion amongst payors, providers and patients, allowing us to effectively leverage our national platform. With our proprietary EMR, referral resources can send patients to any “ATI” bannered clinic across the country. Moreover, patients can easily

 

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associate each clinic with our impressive NPS score and Google review rating. Ultimately, we view our strong unified brand as a compelling competitive advantage as we seek to continue increasing market share.

 

   

Operating Platform for High Performance at Scale. Our operating platform is developed with extensive clinical personnel input and is purpose-built for physical therapy and MSK rehab. Our clinician assignment software matches providers to patient cases, with the goal of ensuring that our therapists are practicing at the top of their license and in compliance with healthcare laws and regulations and licensure requirements. Our clinicians have ready access to ATI Best Practices personalized for each patient by sociodemographic factors, detailed reports on patient satisfaction and individualized patient progression results compared to predicted outcomes. Our operating platform centralizes administrative activities and streamlines EMR tasks, allowing our therapists to focus their time on delivering exceptional patient experiences and outstanding clinical care. We standardize our processes and practices so we can efficiently deliver consistent outcomes at scale across existing and new regions, which we believe will further drive our financial performance.

In 2003, our team founded the ATI Foundation, a 501(c)(3) charitable organization that gives help and hope to children with physical impairments. It was created as a way for our employees and patients to give back to the communities in which we live, work and serve. Since its inception, the ATI Foundation has raised in excess of a million dollars to make a day-to-day impact on the lives of children in our communities.

 

   

Dedicated, Experienced Payor Relations Team. As part of our effort to deepen our relationships with payors, we have invested time and energy over the past year into assembling a highly qualified payor team. Dedicated leadership brings decades of experience with respected names like Optum, Express Scripts, Walgreens, and Aetna, and is well-positioned to drive meaningful conversations around addressing the needs of our partners. Armed with data from our EMR, we believe our team can effectively demonstrate the benefit that working with us brings to both patient and insurer and have meaningful discussions around value-based arrangements. We expect that as we continue to have these conversations, our value proposition will become abundantly clear to all parties involved, driving advantageous rates for our therapy services.

 

   

Highly Experienced Management Team. Our management team has extensive public and private company experience working in the retail health ecosystem, including physical therapy, consumer retail, leading hospital and health systems, and health plans. Our leadership team is highly accomplished and embodies our cultural alignment around teamwork, communication and quality of care. Our managers help organize teams of clinicians, technologists and staff to drive clinical and operational excellence. Our team is well positioned to execute on our objectives and advance an outstanding and caring workplace environment.

Our Growth Strategies

We believe our path to sustainable, robust growth is based on three key pillars: same-clinic growth, our robust de novo program, and accretive M&A.

Multi-Channel Approach to Driving High Same-Clinic Growth. We intend to continue driving high same-clinic growth through the strategies we develop at a local level and customize to unique conditions and opportunities for each region. We utilize a salesforce to build relationships with prescribers and referral partners. We also direct sales and marketing spend toward increasing patient awareness to most effectively capture patients which have been referred to us. We have steadily improved our proprietary analytics to optimize marketing spend and messaging, including direct- to-consumer advertising to build patient-level brand awareness. Our multi-channel same-clinic volume “funnel” includes strategies focused on providers, consumers and employers.

 

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We are equally focused on servicing our growing volumes efficiently. We have made significant investments in training and development to standardize productivity measures across our clinics. We also recently introduced the operational support specialist role to further help alleviate administrative burden on our physical therapists and physical therapy assistants, ensuring our clinicians can work at the top of their respective licenses.

We are seeking to grow ATI First, our direct-to-employer offering that leverages our extensive outcomes data to deliver high ROI healthcare cost savings for employers. ATI First aims to help self-insured employers decrease MSK spend for their employees and dependents by encouraging patients to use physical therapy first. Education programs and reduced barriers improve access for employers while driving additional volumes to our locations and enhancing our rates.

We are pursuing partnerships with payors and national retailers to educate patients on more convenient, lower cost care pathways and integrate physical therapy services into health centers. We are also developing several other initiatives to grow our same-clinic volumes and expand our reach, including digitization of the non- clinical experience, which may include patient scheduling, check-in, and billing, to enhance patient experience while reducing administrative burdens for clinicians and patients.

Continue Expanding our Footprint through our Robust De Novo Program. We have opened more than 300 standalone de novo clinics since 2016 with highly compelling and predictable unit economics. Our historical de novos between 2014 and 2018 have ramped quickly and predictably, typically breaking even at the clinic contribution level in just over one year.

We have built proprietary systems to identify future sites in urban and suburban, high-traffic areas. By incorporating various datasets, including CMS and census data, we are able to compile a comprehensive assessment of potential new locations. We leverage both bottoms-up and top-down analyses to address opportunities on a one-by-one square mile geocode and utilize a cross-functional team to assess the physical locations and develop a “go to market” strategy to determine the most attractive sites. Through our proprietary site-selection process we have identified actionable whitespace opportunity for more than 900 potential de novo clinics within our existing states today. As we enter new states organically or through acquisitions, we create new whitespace into which we can expand with de novo clinics.

In addition to our traditional approach to de novo growth, we have recently supplemented this initiative with our acqui-novo strategy, where we acquire an existing clinic location in a target geography instead of developing anew. Through the widespread volume disruption which emerged as a byproduct of COVID-19 stay-at-home measures, many local physical therapy practices experienced periods of significant business disruption, encouraging them to seek a more established organization to join. We believe that we stand out as an ideal option for these operators to exit their practice and join the Company due to our unified national brand and robust compensation program for clinical staff. Acqui-novos have similar up-front costs compared to de novos, but provide us with immediate presence, available staff, and referral relationships of the former owner within the surrounding areas. We view this as an alternative to a de novo build and may choose to expand through either a de novo or acqui-novo.

M&A Platform Primed for Future Acquisitions. The physical therapy industry is highly fragmented, with approximately 38,000 outpatient clinics in the United States in 2020, according to a recent market study. Within the landscape of outpatient clinics, opportunities for accretive M&A exist across both middle-market private equity-backed companies and local / regional operators. We believe our brand name, presence and superior platform make us an attractive partner for selling operators.

We have a long history of success in M&A. We have realized highly attractive returns on our historical acquisitions, with our acquisitions from 2014 to 2016 yielding purchase price to clinic-level EBITDA multiples of, on average, 6.3x at acquisition close, 5.3x at one year post-close and 4.6x at two years post-close. In effectuating M&A activity, we seek to leverage our brand and infrastructure to improve volumes and profitability

 

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of acquired clinics. Following our partnership with Advent in 2016, we shifted our historical focus on M&A activity to our de novo growth strategy, but we currently have ongoing discussions with a number of targets in our pipeline, and we believe our platform positions us well to capture significant synergies.

Impact of COVID-19

COVID-19 has had a significant impact on the outpatient physical therapy industry. In March 2020, as the pandemic began to affect all aspects of daily-life, hospitals and surgical centers began to postpone elective and non- essential surgeries, reducing the volume of individuals requiring physical therapy services. Additionally, closures of non-essential businesses, stay-at-home orders, and social-distancing guidelines all adversely impacted the flow of visits to clinics.

We kept the vast majority of our clinics open during this period to ensure that we continue to provide the convenience and services that our patients need. As a substitute to in-person visits, we also quickly introduced our ATI Connect offering to improve access to our patients that require physical therapy but are not comfortable with in-person sessions. In response to the suppressed volumes, we quickly right-sized our workforce to better match clinicians to demand at the local level. At the same time, we took significant measures to make sure our employees are cared for, including maintaining health benefits for furloughed workers and reducing executive compensation to establish an employee relief pool that provided assistance to our employees most in need.

In response to the COVID-19 crisis, the ATI Foundation expanded its mission to include ATI Team Forward. Through the generosity of the Company’s executive leadership, the Company Board and Advent, the ATI Team Forward grant program assisted our team members with a variety of unforeseen difficulties and hardships created by the pandemic.

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed in response to the COVID-19 pandemic. The CARES Act provided several stimulus measures benefitting providers, including the Company. We benefited from $91.5 million of Provider Relief Funds, used to offset COVID-19 related expenses and lost revenue, $11 million of Social Security taxes deferral, and $26.7 million of Medicare Accelerated and Advance Payments Program funds.

For more information, see “Risk Factors—Risks Relating to our Business and Industry—We are subject to risks associated with public health crises and epidemics/pandemics, such as COVID-19.

Our Competition

The outpatient physical therapy market is rapidly evolving and highly competitive. Competition within the industry may intensify in the future as existing competitors and new entrants introduce new physical therapy services and platforms and consolidation in the healthcare industry continues. We currently face competition from the following categories of principal competitors:

 

   

National physical therapy providers, such as our largest public competitor focused on outpatient physical therapy, U.S. Physical Therapy, Inc., Select Medical, Upstream Rehabilitation, Athletico Physical Therapy and Confluent Health;

 

   

Regional physical therapy providers, such as Cora Physical Therapy, Professional Physical Therapy, PRN Physical Therapy and Results Physiotherapy;

 

   

Physician-owned physical therapy providers, such as the Illinois Bone and Joint Institute, DuPage Medical Group and Rothman Orthopaedics;

 

   

Individual practitioners or local physical therapy operators, which number in the thousands across the nation; and

 

   

Vertically integrated hospital systems and scaled physician practices, such as Kaiser Permanente.

 

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The principal competitive factors in the outpatient physical therapy market include the quality of care, cost of care, treatment outcomes, breadth of location and geographic convenience, brand awareness and relationships with referral sources and key industry participants.

We believe that we compare favorably to our principal competitors with respect to these factors due to our unified brand, team-based approach to care, proprietary EMR and data-driven operating platform. We believe that our operational and clinical excellence better provides consistent delivery of care across all of our clinics regardless of geography and our national scale and customer satisfaction scores enhance our brand awareness.

Our Employees and Human Capital Resources

Everything we do is grounded in our patient-centric culture. Our clinicians are a driving force for favorable patient outcomes and are key to our success. We are taking steps designed to address recent unexpectedly high rates of attrition among our physical therapists. See “Prospectus Summary—Recent Developments—Recently announced trends and preliminary results.”

We are an equal opportunity employer and are committed to maintaining a diverse and inclusive work environment. Employees are treated with dignity and respect in an environment free from harassment and discrimination regardless of race, color, age, gender, disability, minority, sexual orientation or any other protected class. Our commitment to diversity and inclusion helps us attract and retain the best talent, enables employees to realize their full potential and drives high performance through innovation and collaboration.

As of March 31, 2020, we had approximately 5,000 employees. This number is not inclusive of any contractors or temporary staff but does include our on-call clinicians. We do not have any employees who are represented by a labor union or are party to a collective bargaining agreement.

Properties

We lease all of the properties used for our clinics under operating leases with lease terms typically ranging from seven to ten years with options to renew. We intend to lease the premises for any new clinic locations. Our typical clinic occupies 1,000 to 5,000 square feet.

We also lease our executive offices located in Bolingbrook, Illinois, under an operating lease expiring in December 2032. We currently lease approximately 134,697 square feet of space at our executive offices.

Legal Proceedings

We are involved in, and from time to time may become involved in, investigations, claims, lawsuits, audits or other proceedings arising in the ordinary course of our business. While we do not expect the outcome of these proceedings to have a material adverse effect on our financial condition or results of operations, such proceedings are inherently unpredictable and could result in sanctions, damages, fines and other penalties that could, in the aggregate, materially impact our financial condition or results of operations.

Governmental Regulations and Supervision

We are subject to extensive federal, state and local government laws and regulations, including Medicare and Medicaid reimbursement rules and regulations, anti-kickback laws, self-referral prohibition statutes, false claims statutes, exclusions statutes, civil monetary penalty statutes and associated regulations, among others. We have made significant investments around our compliance controls across the organization, and we periodically conduct internal compliance audits and reviews. As such, we believe that we are in compliance with all applicable laws and statutes today.

 

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General

We are subject to extensive federal, state and local government laws and regulations. In particular, we are subject to federal and state laws that regulate the reimbursement of our services and that are designed to prevent fraud and abuse, and impose state licensure and corporate practice of medicine restrictions, as well as federal and state laws and regulations relating to the privacy of individually identifiable information. We maintain a robust compliance program, have made significant investments around our controls across the organization, and we periodically conduct internal audits and reviews along with compliance training designed to keep our officers, directors and employees educated and up-to-date and to emphasize our policy of strict compliance.

Reimbursement; Fraud and Abuse

We are subject to laws regulating reimbursement under various federal and state healthcare programs. The marketing, billing, documenting and other practices of healthcare companies are all subject to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, health insurance carriers and state agencies often conduct audits and request customer records and other documents to support our claims submitted for payment of services rendered to customers. Similarly, government agencies and their contractors periodically open investigations and obtain information from us and from healthcare providers pursuant to the legal process. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could significantly impact our financial condition and results of operations.

Various federal and state laws prohibit the submission of false or fraudulent claims, including claims to obtain payment under Medicare, Medicaid, and other government healthcare programs. These laws include the federal False Claims Act, which prohibits persons or entities from knowingly submitting or causing to be submitted a claim that the person knew or should have known (i) to be false or fraudulent; (ii) for items or services not provided or provided as claimed; or (iii) was provided by an individual not otherwise qualified or who was excluded from participation in federal healthcare programs. The False Claims Act also imposes penalties for requests for payment that otherwise violate conditions of participation in federal healthcare programs or other healthcare compliance laws. In recent years, federal and state government agencies have increased the level of enforcement resources and activities targeted at the healthcare industry. Additionally, the False Claims Act and similar state statutes allow individuals to bring lawsuits on behalf of the government, in what are known as qui tam or “whistleblower” actions, and can result in civil and criminal fines, imprisonment, and exclusion from participation in federal and state healthcare programs. The use of these private enforcement actions against healthcare providers has increased dramatically in recent years, in part because the individual filing the initial complaint is entitled to share in a portion of any settlement or judgment. Revisions to the False Claims Act enacted in 2009 expanded significantly the scope of liability, provided for new investigative tools, and made it easier for whistleblowers to bring and maintain False Claims Act suits on behalf of the government.

Anti-Kickback Regulations

We are subject to federal and state laws regulating financial relationships involving federally-reimbursable healthcare services. These laws include Section 1128B(b) of the Social Security Act (the “Anti-Kickback Law”), under which civil and criminal penalties can be imposed upon persons who, among other things, offer, solicit, pay or receive remuneration in return for (i) the referral of patients for the rendering of any item or service for which payment may be made, in whole or in part, by a federal health care program (including Medicare and Medicaid); or (ii) purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, ordering any good, facility, service, or item for which payment may be made, in whole or in part, by a federal health care program (including Medicare and Medicaid). We believe that our business procedures and business arrangements are in compliance with these laws and regulations. However, the provisions are broadly written and the full extent of their specific application to specific facts and arrangements to which we are a party is uncertain and difficult to predict. In addition, several states have enacted state laws similar to the Anti-Kickback Law, many of which are more restrictive than the federal Anti-Kickback Law.

 

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The Office of the Inspector General (“OIG”) of the Health and Human Services Department has issued regulations describing compensation arrangements that fall within a “Safe Harbor” and, therefore, are not viewed as illegal remuneration under the Anti-Kickback Law. Failure to fall within a Safe Harbor does not mean that the Anti-Kickback Law has been violated; however, the OIG has indicated that failure to fall within a Safe Harbor may subject an arrangement to increased scrutiny under a “facts and circumstances” test. Federal case law provides limited guidance as to the application of the Anti-Kickback Law to these arrangements. However, we believe our arrangements, including our compensation and financial arrangements, comply with the Anti- Kickback Law. If our arrangements are found to violate the Anti-Kickback Law, it could have an adverse effect on our business, financial condition and results of operations. Penalties for violations include denial of payment for the services, significant criminal and civil monetary penalties, and exclusion from the Medicare and Medicaid programs. In addition, claims resulting from a violation of the Anti-Kickback Law are considered false for purposes of the False Claims Act.

Physician Self-Referral

Provisions of the Omnibus Budget Reconciliation Act of 1993 (42 U.S.C. § 1395nn) (the “Stark Law”) prohibit referrals by a physician of “designated health services” which are payable, in whole or in part, by Medicare or Medicaid, to an entity in which the physician or the physician’s immediate family member has an investment interest or other financial relationship, subject to several exceptions. The Stark Law is a strict liability statute and proof of intent to violate the Stark Law is not required. Physical therapy services are among the “designated health services”. Further, the Stark Law has application to our management contracts with individual physicians and physician groups, as well as, any other financial relationship between us and referring physicians, including medical advisor arrangements and any financial transaction resulting from a clinic acquisition. The Stark Law also prohibits billing for services rendered pursuant to a prohibited referral. Several states have enacted laws similar to the Stark Law. These state laws may cover all (not just Medicare and Medicaid) patients. As with the Anti-Kickback Law, we consider the Stark Law in planning our clinics, establishing contractual and other arrangements with physicians, marketing and other activities, and believe that our operations are in compliance with the Stark Law. If we violate the Stark Law or any similar state laws, our financial results and operations could be adversely affected. Penalties for violations include denial of payment for the services, significant civil monetary penalties, and exclusion from the Medicare and Medicaid programs.

Corporate Practice; Fee-Splitting; Professional Licensure

The laws of some states restrict or prohibit the “corporate practice of medicine,” meaning business corporations cannot provide medical services through the direct employment of medical providers, or by exercising control over medical decisions by medical providers. In some states, the specific restrictions explicitly apply to physical therapy services, in others the specific restrictions have been interpreted to apply to physical therapy services or are not fully developed. The specific restrictions with respect to enforcement of the corporate practice of medicine or physical therapy vary from state to state and certain states in which we operate may present higher risk than others.

Many states also have laws that prohibit a non-physical therapy entity, individual, or provider fee-splitting. Generally, these laws restrict business arrangements that involve a physical therapist sharing professional fees with a referral source, but in some states, these laws have been interpreted to extend to management agreements between physical therapists and business entities under some circumstances.

We believe that each of our facilities and medical provider partners comply with any current corporate practice and fee-splitting laws of the state in which they are located. However, such laws and regulations vary from state to state and are enforced by governmental, judicial, law enforcement or regulatory authorities with broad discretion. We cannot be certain that our interpretation of certain laws and regulations is correct with respect to how we have structured our operations, service agreements and other arrangements with physical therapists in the states in which we operate. Future interpretations of corporate practice and fee-splitting laws, the

 

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enactment of new legislation, or the adoption of new regulations relating to these laws could cause us to have to restructure our business operations or close our facilities in a particular state.

Health Information Practices

HIPAA required the Health and Human Services Department to adopt standards to protect the privacy and security of individually identifiable health-related information. HIPAA created a source of funding for fraud control to coordinate federal, state and local healthcare law enforcement programs, conduct investigations, provide guidance to the healthcare industry concerning fraudulent healthcare practices, and establish a national data bank to receive and report final adverse actions. HIPAA also criminalized certain forms of health fraud against all public and private payors. Additionally, HIPAA mandates the adoption of standards regarding the exchange of healthcare information in an effort to ensure the privacy and electronic security of patient information and standards relating to the privacy of health information. Sanctions for failing to comply with HIPAA include criminal penalties and civil sanctions. In February of 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. Title XIII of ARRA, HITECH, provided for substantial Medicare and Medicaid incentives for providers to adopt electronic health records (“EHRs”) and grants for the development of health information exchange (“HIE”). Recognizing that HIE and EHR systems will not be implemented unless the public can be assured that the privacy and security of patient information in such systems is protected, HITECH also significantly expanded the scope of the privacy and security requirements under HIPAA. Most notable are the mandatory breach notification requirements and a heightened enforcement scheme that includes increased penalties, and which now apply to business associates as well as to covered entities. In addition to HIPAA, a number of states have adopted laws and/or regulations applicable in the use and disclosure of individually identifiable health information that can be more stringent than comparable provisions under HIPAA.

In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient and consumer privacy concerns, including unauthorized access or theft of personal information. State statutes and regulations vary from state to state, some of which are more stringent than HIPAA.

We believe that our operations comply with applicable standards for privacy and security of protected healthcare information. We cannot predict what negative effect, if any, HIPAA/HITECH or any applicable state law or regulation will have on our business.

Other Regulatory Factors

Political, economic and regulatory influences are fundamentally changing the healthcare industry in the United States. Congress, state legislatures and the private sector continue to review and assess alternative healthcare delivery and payment systems. Potential alternative approaches could include mandated basic healthcare benefits, controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, and price controls. Legislative debate is expected to continue in the future and market forces are expected to demand only modest increases or reduced costs. For instance, managed care entities are demanding lower reimbursement rates from healthcare providers and, in some cases, are requiring or encouraging providers to accept capitated payments that may not allow providers to cover their full costs or realize traditional levels of profitability. We cannot reasonably predict what impact the adoption of federal or state healthcare reform measures or future private sector reform may have on our business.

 

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MANAGEMENT

The Company’s directors and executive officers and their ages as of July 28, 2021 are as follows:

 

Name

  

Age

  

Position

Labeed Diab

   51    Chief Executive Officer; Director

Diana Chafey

   52    Chief Legal Officer and Corporate Secretary

Joseph Jordan

   39    Chief Financial Officer

Augustus Oakes

   46    Chief Information Officer

Ray Wahl

   48    Chief Operating Officer

Joe Zavalishin

   47    Chief Development Officer

Ryan Wilson

   45    Chief Commercial Officer

John L. Larsen

   63    Chair; Director

John Maldonado

   45    Director

Carmine Petrone

   38    Director

Joanne Burns

   60    Director

Chris Krubert

   53    Director

James E. Parisi

   56    Director

Andrew A. McKnight

   43    Director

Labeed Diab. Mr. Diab joined the Company as its Chief Executive Officer and member of the Company Board in 2019. Prior to joining the Company, Mr. Diab served as President of Humana Pharmacy Solutions (“Humana”) between 2017 and 2019, where he managed all capabilities that comprise Humana. Mr. Diab also served as Chief Operating Officer and Executive Vice President at Brookdale Senior Living (“Brookdale”). Prior to joining Brookdale in 2015, Mr. Diab served in various executive leadership roles for Walmart Inc. (“Walmart”) between 2009 and 2015. While at Walmart, he served as Walmart’s Vice President and General Manager and later as President of the Midwest Division, culminating in his role as President of Health and Wellness for the United States region. Prior to his career at Walmart, Mr. Diab served as a Regional Vice President of Aramark’s Health Care Division and as a Regional Vice President for Rite Aid Corporation. A registered pharmacist, Mr. Diab began his career as a Pharmacy Manager with American Stores Company and later served in regional roles for CVS Caremark. Mr. Diab received his B.S. from Southwestern Oklahoma State University and completed an advanced management program at Duke University.

Diana Chafey. Ms. Chafey joined the Company as its Chief Legal Officer and Corporate Secretary in 2018. Prior to joining the Company, Ms. Chafey served as Executive Vice President, General Counsel and Corporate Secretary of the Warranty Group between 2013 and 2018, where she oversaw global legal, compliance, risk management, regulatory and corporate governance matters and related affairs. Ms. Chafey also previously held roles as partner at DLA Piper US LLP until 2013 and associate at McGuire Woods LLP from 2002 until 2003, representing clients in domestic and global regulatory and transactional matters. Ms. Chafey received her B.A. from Arizona State University and her J.D. from Valparaiso University School of Law.

Joseph Jordan. Mr. Jordan was named Chief Financial Officer of the Company in 2019. Prior to assuming his role as Chief Financial Officer, Mr. Jordan served as the Company’s Senior Vice President and Chief Accounting Officer beginning in 2018. Prior to joining the Company, Mr. Jordan spent approximately two years at Sears Holdings Corporation (“Sears”), first as Assistant Controller and later as Vice President and Corporate Controller. Mr. Jordan began his career in 2003 and held various positions at Deloitte & Touche LLP and Sun Coke Energy prior to joining Sears. Mr. Jordan received his B.S. in Accounting from Purdue University.

Augustus Oakes. Mr. Oakes joined the Company as Vice President of Business Technology in 2018 and currently serves as Chief Information Officer. Prior to joining the Company, Mr. Oakes served as an IT strategy consultant at KPMG LLP from 2013 until 2018, where he helped clients build modern IT operating models and

 

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prepare for digital disruption. Mr. Oakes also served in various IT leadership roles at Walgreen Company, d/b/a Walgreens (“Walgreens”) and as a management consultant with Accenture plc. Mr. Oakes holds a degree from Loyola University Chicago.

Ray Wahl. Mr. Wahl became Chief Operating Officer of the Company in 2019. Previously, Mr. Wahl served on the Company’s leadership team as East Division President, overseeing operations in Delaware, Maryland, Pennsylvania, Michigan, Ohio, North Carolina, South Carolina and Georgia. Mr. Wahl joined the Company in 2006 and has held various leadership positions, overseeing growth through new clinic opportunities, acquisitions and strategic partnerships. Prior to joining the Company, Mr. Wahl was an Athletic Trainer from 1996 until 2000 with Plaza Physical Therapy. Mr. Wahl received his doctorate of physical therapy from Temple University and his M.B.A. from Northwestern University Kellogg School of Management.

Joe Zavalishin. Mr. Zavalishin joined the Company as Chief Development Officer in 2019. Prior to joining the Company, Mr. Zavalishin served as a Senior Vice President at OptumRx, a large manager of pharmacy benefits (“Optum”), where he was responsible for network development and strategy, payor and provider relationships, and pricing from 2016 until 2019. Prior to Optum, Mr. Zavalishin served as Executive Vice President of AxelaCare Health, a national provider of home infusion pharmacy and nursing services (“Axela”), overseeing operations including pricing and strategy from 2013 through 2015 when Axela was acquired by Optum. Mr. Zavalishin’s role was greatly expanded in connection with the acquisition of Axela by Optum. Prior to that time, Mr. Zavalishin served as Vice President of Contracts & Pricing Development at Walgreens from 2009 until 2013. Mr. Zavalishin also served as Vice President of Pharmacy Network and Operations and as Head of Planning and Business Strategy for Medical Products at Aetna Inc. from 2004 until 2009. Mr. Zavalishin received his B.A. from the University of Connecticut and an M.B.A. in Finance and Strategy from Rensselaer Polytechnic Institute.

Ryan Wilson. Mr. Wilson joined the Company as Chief Commercial Officer in 2021. Prior to joining the Company, Mr. Wilson served as Chief Customer Officer and Senior Vice President of Sales for Bayer Consumer Health, North America from 2019 until 2021. He also served as the Chief Growth Officer and Senior Vice President of Sales and Marketing for Brookdale from 2017 until 2019. Most of his career has been spent in the consumer health marketplace, including a decade with healthcare products leader Johnson & Johnson, from 2005 until 2015. Mr. Wilson received his B.S. from the University of Illinois at Urbana-Champaign and his M.B.A. from Northwestern University. He also completed an advanced management program at Duke University.

John L. Larsen. Mr. Larsen serves as the Chair of the Company Board and a member of the Audit Committee and the Chair of the Nominating and Corporate Governance Committee. Mr. Larsen’s role at the Company has primarily been to work alongside executives and board members, participating in and nurturing broad networks of alliances with others. Mr. Larsen has been a member of the Company Board since 2018 and was nominated for Chair in 2021. Mr. Larsen is an executive at Bridgeway Partners LLC (“Bridgeway”). Prior to forming Bridgeway in 2020, Mr. Larsen served in various roles at UnitedHealth Group from 2005 until 2018. Mr. Larsen was also an executive at Gondola Eye, LLC from 2019 until 2020.

Andrew A. McKnight. Mr. McKnight has served on the Board since June 2020. Mr. McKnight is a Managing Partner of the Credit Funds business at Fortress. Mr. McKnight is based in Dallas and heads the liquid credit investment strategies at Fortress, serves on the investment committee for the Credit Funds business at Fortress and is a member of the Management Committee of Fortress. Mr. McKnight previously served on the board of directors of Mosaic Acquisition Corp. from 2017 to 2020. Mr. McKnight has also served on the board of directors and as the Chief Executive Officer of FVAC I since its inception in January 2020 and continues to serve on the board of directors of MP Materials where he is a member of the Compensation Committee. Additionally, Mr. McKnight has served as a director and Chief Executive Officer of FVAC III since its inception in August 2020, and as Chairman of the FVAC IV board. Prior to joining Fortress in February 2005, he was the trader for Fir Tree Partners (“Fir Tree”) where he was responsible for analyzing and trading high yield and convertible bonds, bank debt, derivatives and equities for the value-based hedge fund. Prior to Fir Tree, Mr. McKnight

 

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worked on Goldman, Sachs & Co.’s (“Goldman”) distressed bank debt trading desk. Mr. McKnight received a B.A. in Economics from the University of Virginia.

John Maldonado. Mr. Maldonado has served on the Company Board since 2016 and is currently a member of the Health Care Compliance Committee and Nominating and Corporate Governance Committee. Mr. Maldonado is a Managing Partner at Advent. Prior to joining Advent in 2006, he worked at Bain Capital, Parthenon Capital and the Parthenon Group. He also currently serves on the board of directors of AccentCare, Inc., a provider in post-acute healthcare services (“AccentCare”), Definitive Healthcare, LLC, a healthcare data provider, RxBenefits, a pharmacy adviser to employee benefits consultants, Healthcare Private Equity Association, an association that supports the healthcare private equity community, and Syneos Health, a biopharmaceutical solutions organization. Mr. Maldonado received his B.A. in mathematics, summa cum laude, from Dartmouth College and his M.B.A., with high distinction, as a Baker Scholar from Harvard Business School.

Carmine Petrone. Mr. Petrone has served on the Company Board since 2016 and is currently the Chair of the Compensation Committee. Mr. Petrone is a Managing Director at Advent, focused on investments in the healthcare sector. Prior to joining Advent in 2010, Mr. Petrone was an associate at Thomas H. Lee Partners from 2006 to 2008. Mr. Petrone currently serves on the board of directors of AccentCare. He holds a B.A. in Economics from the Johns Hopkins University and an M.B.A. from Harvard Business School.

Joanne M. Burns. Ms. Burns joined the Company Board in 2021 and currently serves as a member of the Audit Committee and Compensation Committee. Prior to serving on the Company Board, Ms. Burns served as the Chief Strategy Officer for Cerner Corporation, a healthcare IT company. Ms. Burns serves on the board of directors of Availity, a healthcare claims clearinghouse, as the chair of the performance and compensation committee and a member of the finance committee. Ms. Burns also serves on the board of directors of Innara Health, a neonatal medical device company, and she is chair of the board of directors and the compensation committee of SNOMED International, an international non-profit organization focused on clinical terminology used in electronic health records. Ms. Burns received her B.S. from the State University of New York College at Plattsburgh and her M.P.A. from the University of San Francisco.

Christopher Krubert. Dr. Krubert joined the Company Board in 2016 and currently serves as the Chair of the Health Care Compliance Committee and a member of the Compensation Committee. Dr. Krubert also currently serves on the board of directors of Solis Mammography, a mammography and imaging services company, Special Docs, a concierge medicine company, and Alteon Health, an acute care medical group. He currently serves as an operating partner with Advent. Dr. Krubert holds a B.A. from the University of Illinois, an M.B.A. from the University of Michigan and an M.D. from the University of Chicago Pritzker School of Medicine.

James E. Parisi. Mr. Parisi joined the Company Board in 2021 and currently serves as the Chair of the Audit Committee and a member of the Nominating and Corporate Governance Committee. Mr. Parisi currently serves on the board of directors of Cboe Global Markets, Inc., a global exchange operator, as the chair of the audit committee, a member of the compensation committee and a member of the Alternate Trading System oversight committee. Previously, Mr. Parisi served on the board of directors of Cotiviti Inc., a clinical and financial analytics company, as the Chair of the audit committee and a member of the board strategy committee from 2015 until 2018. Mr. Parisi also serves on the board of directors for Cboe Futures Inc., a futures exchange, where he was a member of the regulatory oversight committee from 2016 until 2018 and served on the board of directors of Pursuant Health, Inc., a provider of self-service health and wellness testing kiosks, as the chair of the audit committee from 2014 until 2021. Mr. Parisi served as Chief Financial Officer of CME Group Inc., a publicly traded company, from 2004 through 2014. Mr. Parisi received his B.S. from the University of Illinois at Urbana-Champaign and his M.B.A. from the University of Chicago Booth School of Business.

 

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Classified Board of Directors

In accordance with our Second Amended and Restated Certificate of Incorporation, we have a classified Board of Directors which divides our Board into three classes with staggered three-year terms, with only one class of directors being elected in each year. Our current directors will be divided among the three classes as follows:

 

   

the Class I directors will be Labeed Diab and Andrew A. McKnight, and their terms will expire at the first annual meeting of stockholders after the effectiveness of the filing;

 

   

the Class II directors will be Joanne Burns, John Maldonado and Jamie Parisi, and their terms will expire at the second annual meeting of stockholders; and

 

   

the Class III directors will be Chris Krubert, John Larsen and Carmine Petrone, and their terms will expire at the third annual meeting of stockholders.

At each succeeding annual meeting of the stockholders successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term or until the election and qualification of their respective successors in office, subject to their earlier death, resignation or removal.

Committees of the Board of Directors

We have four standing committees—an Audit Committee, a Compensation Committee, a Nominating and Governance Committee and a Healthcare Compliance Committee. The Board may from time to time establish other committees. Each of the committees will report to the Board as it deems appropriate and as the Board may request. The composition, duties and responsibilities of these committees are set forth below.