ATI Physical Therapy(US:ATIP)2022-08-08 16:00PART I - FINANCIAL INFORMATION - UNAUDITED Financial Statements The company reported a net loss of $135.7 million for Q2 2022 and $273.9 million for the six months ended June 30, 2022. The balance sheet reflects significant goodwill and intangible asset impairment, reducing total assets to $1.31 billion from $1.56 billion at year-end 2021. Cash flows from operations were negative $32.7 million for the first six months, while financing activities provided $81.4 million, primarily from a new debt and preferred stock issuance Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $79,680 | $48,616 | | Goodwill, net | $404,374 | $608,811 | | Total assets | $1,309,656 | $1,562,694 | | Long-term debt, net | $478,527 | $543,799 | | Total liabilities | $902,297 | $1,051,187 | | Total stockholders' equity | $267,019 | $511,507 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net operating revenue | $163,293 | $164,033 | $317,115 | $313,095 | | Goodwill and intangible asset impairment | $127,820 | $453,331 | $283,561 | $453,331 | | Operating loss | $(139,852) | $(444,270) | $(315,930) | $(451,055) | | Net loss | $(135,723) | $(439,126) | $(273,946) | $(456,944) | | Diluted loss per share | $(0.69) | $(3.12) | $(1.39) | $(3.39) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(32,737) | $(27,109) | | Net cash used in investing activities | $(17,618) | $(18,943) | | Net cash provided by (used in) financing activities | $81,419 | $(5,507) | | Net increase (decrease) in cash | $31,064 | $(51,559) | Note 1. Overview of the Company ATI Physical Therapy is a national outpatient rehabilitation provider with 926 owned clinics and 20 managed clinics in 25 states as of June 30, 2022. The company finalized a Business Combination with Fortress Value Acquisition Corp. II (FAII) on June 16, 2021, which was accounted for as a reverse recapitalization. The company continues to monitor the impact of COVID-19 and has utilized funds from the CARES Act, with a remaining liability for Medicare advance payments and deferred Social Security taxes - As of June 30, 2022, the company operated 926 owned clinics and 20 managed clinics across 25 states, specializing in outpatient rehabilitation34 - The Business Combination with FAII on June 16, 2021, was accounted for as a reverse recapitalization, with the historical operations of Wilco Holdco being deemed those of the company35 - Under the CARES Act, the company received $26.7 million in Medicare Accelerated and Advance Payment Program (MAAPP) funds. As of June 30, 2022, $1.6 million of this remains as a liability38 Note 5. Goodwill, Trade Name and Other Intangible Assets The company recorded significant non-cash impairment charges against goodwill and its trade name intangible asset during the first half of 2022. Triggering events, including a decrease in share price and changes in discount rates, prompted interim impairment tests. In Q1 2022, impairments were $116.3 million for goodwill and $39.4 million for the trade name. In Q2 2022, further impairments of $87.9 million for goodwill and $40.0 million for the trade name were recognized. These write-downs have increased the risk of future impairments Goodwill and Trade Name Impairment Charges (in thousands) | Period | Goodwill Impairment | Trade Name Impairment | Total Impairment | | :--- | :--- | :--- | :--- | | Q1 2022 | $116,300 | $39,400 | $155,700 | | Q2 2022 | $87,900 | $40,000 | $127,900 | | H1 2022 Total | $204,200 | $79,400 | $283,600 | - Goodwill balance decreased from $608.8 million at Dec 31, 2021, to $404.4 million at June 30, 2022, primarily due to impairment charges of $204.2 million65 - The carrying amounts of goodwill and the trade name have been written down to fair value, making them more susceptible to future impairment risk from unfavorable changes in assumptions like discount rates, growth rates, and market multiples77 Note 8. Borrowings On February 24, 2022, the company completed a major debt refinancing, replacing its 2016 credit facilities. It entered into a new $550.0 million credit facility, comprising a $500.0 million Senior Secured Term Loan due 2028 and a $50.0 million Revolving Loan facility due 2027. The refinancing settled the previous $555.0 million term loan, resulting in a $2.8 million loss on debt extinguishment. The new term loan bears interest at SOFR + 7.25% with a 1.0% floor as of June 30, 2022. The agreement includes financial covenants, such as maintaining minimum liquidity of $30.0 million through Q1 2024 - On Feb 24, 2022, the company executed a debt refinancing, entering a new $550.0 million credit facility, which includes a $500.0 million Senior Secured Term Loan and a $50.0 million Revolving Loan87 - The refinancing was used to repay the existing $555.0 million 2016 first lien term loan, resulting in a $2.8 million loss on debt extinguishment86 - The new credit agreement contains financial covenants requiring the company to maintain $30.0 million of minimum liquidity through Q1 2024, after which a Secured Net Leverage Ratio covenant will apply93 Note 10. Mezzanine and Stockholders' Equity In connection with its 2022 debt refinancing, the company issued 165,000 shares of Series A Senior Preferred Stock for gross proceeds of $165.0 million. These shares are classified as mezzanine equity because they are contingently redeemable. The preferred stock carries a 12.0% initial dividend rate, payable in-kind. The company also issued 11.5 million new warrants (2022 Warrants) classified as equity. As of June 30, 2022, the aggregate stated value of the preferred stock, including paid-in-kind dividends, was $172.0 million - Issued 165,000 shares of Series A Senior Preferred Stock with an initial stated value of $165.0 million, classified as mezzanine equity104 - The preferred stock has an initial dividend rate of 12.0% per annum, payable in-kind. As of June 30, 2022, accumulated paid-in-kind dividends were $7.0 million, bringing the aggregate stated value to $172.0 million107108110 - Concurrently issued 11.5 million warrants (Series I and Series II) to purchase common stock, which are classified as equity instruments117 Note 17. Commitments and Contingencies The company is involved in several legal matters, including consolidated shareholder class action and derivative complaints alleging false and misleading statements related to its business combination and financial results. The company has filed motions to dismiss these complaints. Additionally, the company received a voluntary request for documents from the SEC regarding its July 2021 earnings forecast. A probable net settlement liability of $3.0 million was recorded for a billing dispute with a payor - The company is facing consolidated shareholder class action and derivative complaints related to disclosures made between February and October 2021. Motions to dismiss have been filed169172 - In November 2021, the company received a voluntary request for documents from the SEC concerning its earnings forecast from July 2021. The company is cooperating with the request173 - A charge of $3.0 million was recorded for a probable net settlement liability related to a billing dispute with a payor165 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses key trends impacting performance, including a tight labor market for physical therapists, wage inflation, and reduced reimbursement rates from Medicare. Net patient revenue for Q2 2022 increased 1.2% YoY to $148.5 million, driven by higher visit volume but offset by a 2.5% decrease in revenue per visit. The company recorded significant goodwill impairment charges in H1 2022. Adjusted EBITDA was $5.4 million for Q2 2021, down from $24.0 million in Q2 2021. A major debt and equity financing in February 2022 provided liquidity, with the company holding $79.7 million in cash at quarter-end Trends and Factors Affecting the Company's Future Performance The company's performance is influenced by several key trends. In Q2 2022, referral and patient visit volumes improved after a soft start to the year. However, the business faces significant headwinds from a tight labor market, leading to increased competition for therapists, higher attrition, and wage inflation. Additionally, rate per visit has decreased, primarily due to Medicare rate cuts effective January 1, 2022, and unfavorable payor mix shifts. These factors, particularly changes in discount rates and a lower share price, led to significant goodwill and intangible asset impairment charges in the first half of 2022 - Key business trends include improved referral and patient visit volumes in Q2 2022, a continued tight labor market causing wage inflation, and a decrease in rate per visit due to Medicare cuts and unfavorable payor mix192193 - The company is focused on increasing clinical staffing levels and strengthening referral source relationships to drive visit volumes, but attrition remains above historical levels due to the tight labor market199 - The company recorded non-cash impairment charges in H1 2022 totaling $283.6 million for goodwill and trade name assets, triggered by factors including changes in discount rates and a decrease in share price194195 - Future reimbursement rates are at risk, with Medicare sequestration resuming in 2022 and a proposed 4.5% reduction in the 2023 Medicare Physician Fee Schedule conversion factor206 Results of Operations For Q2 2022, net operating revenue was $163.3 million, a slight decrease of 0.5% YoY. Net patient revenue grew 1.2% to $148.5 million, as a 3.9% increase in patient visits was mostly offset by a 2.5% decline in revenue per visit. Salaries and related costs rose 10.7% due to wage inflation and higher staffing. A goodwill impairment of $127.8 million contributed to a net loss of $135.7 million, an improvement from a $439.1 million loss in Q2 2021 which included a larger impairment. For the six-month period, net operating revenue increased 1.3% to $317.1 million, with a net loss of $273.9 million Q2 2022 vs Q2 2021 Performance (in thousands) | Metric | Q2 2022 | Q2 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Operating Revenue | $163,293 | $164,033 | (0.5)% | | Net Patient Revenue | $148,506 | $146,679 | 1.2% | | Salaries and related costs | $89,606 | $80,917 | 10.7% | | Goodwill Impairment | $127,820 | $453,331 | (71.8)% | | Net Loss | $(135,723) | $(439,126) | 69.1% | - The 1.2% increase in Q2 net patient revenue was driven by a 3.9% rise in total patient visits, but partially offset by a 2.5% decrease in net patient revenue per visit (from $106.26 to $103.57) due to unfavorable payor mix and Medicare rate cuts224225 H1 2022 vs H1 2021 Performance (in thousands) | Metric | H1 2022 | H1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Operating Revenue | $317,115 | $313,095 | 1.3% | | Net Patient Revenue | $287,431 | $278,950 | 3.0% | | Salaries and related costs | $177,021 | $161,571 | 9.6% | | Goodwill Impairment | $283,561 | $453,331 | (37.4)% | | Net Loss | $(273,946) | $(456,944) | 40.0% | Non-GAAP Financial Measures The company uses EBITDA and Adjusted EBITDA as key non-GAAP metrics to evaluate operating performance. Adjusted EBITDA for Q2 2022 was $5.4 million, a significant decrease from $24.0 million in Q2 2021. For the first six months of 2022, Adjusted EBITDA was $0.7 million, compared to $29.6 million in the prior year period. The adjustments to reconcile net loss to Adjusted EBITDA primarily include non-cash goodwill impairment charges, changes in fair value of liabilities, and costs related to legal matters, transactions, and debt extinguishment Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Line Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(135,723) | $(439,126) | $(273,946) | $(456,944) | | EBITDA | $(127,145) | $(425,528) | $(269,620) | $(424,156) | | Goodwill impairment charges | $127,820 | $453,331 | $283,561 | $453,331 | | Other adjustments | $4,761 | $(23,804) | $(7,200) | $(103,886) | | Adjusted EBITDA | $5,436 | $23,999 | $741 | $29,589 | - Adjusted EBITDA is calculated by adding back items such as income tax, interest, D&A, goodwill impairment, changes in fair value of liabilities, legal settlements, and transaction costs to net income261 Liquidity and Capital Resources As of June 30, 2022, the company had $79.7 million in cash and cash equivalents and $48.2 million available under its revolving credit facility. The company's liquidity was bolstered by a February 2022 debt and preferred stock financing which added approximately $77.3 million in cash. For the first six months of 2022, net cash used in operating activities was $32.7 million. Management believes existing cash, operating cash flow, and credit facility access will be sufficient to fund operations for at least the next 12 months - Cash and cash equivalents stood at $79.7 million as of June 30, 2022, up from $48.6 million at December 31, 2021267 - In February 2022, the company completed a debt refinancing and preferred stock financing, adding approximately $77.3 million of cash to its balance sheet286 - Net cash used in operating activities was $32.7 million for the six months ended June 30, 2022, an increase in cash used of $5.6 million from the prior year period, partly due to the application of MAAPP funds288290 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate variability on its variable-rate debt. As of June 30, 2022, the debt is indexed to SOFR. The company uses an interest rate cap to hedge this exposure. A hypothetical 100 basis point increase in interest rates would increase annual cash interest expense by approximately $1.6 million, while a 100 basis point decrease would lower it by $1.4 million. The company has adopted hedge accounting expedients related to the transition from LIBOR to SOFR - The company is exposed to interest rate risk from its variable-rate debt indexed to SOFR308 - A hypothetical 100 basis point change in interest rates would impact annual cash interest expense by approximately $1.4 million to $1.6 million308 - The company utilizes an interest rate cap derivative to hedge its exposure to variable-rate cash payments and has elected to apply hedge accounting expedients for the LIBOR-to-SOFR transition308310 Controls and Procedures The company's management, including the Principal Executive Officer and Principal Financial Officer, concluded that as of June 30, 2022, disclosure controls and procedures were not effective. This conclusion is due to previously reported material weaknesses in internal control over financial reporting related to the income tax provision. The company is actively implementing a remediation plan, which includes hiring additional tax personnel and enhancing control design. Despite the material weaknesses, management asserts that the condensed consolidated financial statements are fairly presented in all material respects - The Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were not effective as of June 30, 2022314 - The ineffectiveness is due to previously identified material weaknesses in internal control over financial reporting concerning the income tax provision314316 - A remediation plan is in process, focusing on hiring tax personnel and improving control design and documentation for the income tax provision and valuation allowance assessment316 PART II - OTHER INFORMATION Legal Proceedings The company is involved in legal proceedings and claims that arise in the ordinary course of business. For detailed information on these matters, the report refers to Note 17 of the condensed consolidated financial statements - The company is periodically involved in legal proceedings and claims. For specific details, refer to Note 17 - Commitments and Contingencies in the financial statements321 Risk Factors The company highlights several material risk factors. These include exposure to rising interest rates on its variable-rate debt, which could increase expenses. The restrictive covenants in its credit agreements and Series A Senior Preferred Stock could limit operational and financial decisions, with non-compliance potentially leading to debt acceleration. The ability to utilize significant net operating loss (NOL) carryforwards may be limited by future "ownership changes" under tax law. Lastly, there is currently no public market for its recently issued Series I and Series II Warrants, which could adversely affect their liquidity and price - The company's variable-rate debt under the 2022 Credit Agreement exposes it to rising interest rates, which could negatively affect cash flow and financial condition322 - Restrictive covenants in debt agreements and the Series A Senior Preferred Stock impose significant operating and financial limitations, and failure to comply could result in default and acceleration of debt324325 - The ability to use significant federal and state Net Operating Loss (NOL) carryforwards may be limited if the company experiences an "ownership change" as defined by the IRS327328 - There is no current trading market for the Series I and Series II Warrants, and one may not develop, which would negatively impact their liquidity and price329 Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2022, the company did not have any sales of unregistered equity securities. The company did, however, repurchase equity securities by withholding 6,607 shares of common stock at an average price of $1.79 per share to satisfy employee tax withholding obligations related to the vesting of restricted stock awards - There were no sales of unregistered equity securities during the quarter ended June 30, 2022331 Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | June 1 - June 30, 2022 | 6,607 | $1.79 | | Total | 6,607 | $1.79 | - The shares purchased were withheld to satisfy employee minimum tax withholding obligations upon the vesting of stock awards and were not part of a publicly announced repurchase program333334