ATI Physical Therapy(ATIP) - 2022 Q4 - Annual Report

Part I Business ATI Physical Therapy is a leading US outpatient physical therapy provider with 923 clinics, focusing on patient experience and strategic growth amidst regulatory and competitive challenges - ATI is a national outpatient physical therapy provider with 923 clinics and 20 managed clinics across 25 states as of December 31, 2022[16] - Core services include physical therapy, ATI Worksite Solutions (AWS), Management Service Agreements (MSA), and Sports Medicine arrangements[16][18] - The company's strategy focuses on exceeding customer expectations, strengthening relationships with stakeholders, and strategic capital allocation[19] - On March 15, 2023, the company entered a Transaction Support Agreement (TSA) with lenders and stockholders to enhance liquidity through new financing, debt exchange, and covenant modifications[24][26] - The company faces significant competition from national, regional, and physician-owned providers, and hospital systems, with competition based on quality, cost, outcomes, and convenience[43][45] - ATI is subject to extensive governmental regulations, including Medicare/Medicaid rules, anti-kickback laws (Stark Law), and patient privacy laws (HIPAA)[53][57][60] Overview and Recent Developments This section provides an overview of recent developments, including leadership changes and significant financial transactions - Sharon Vitti was appointed as the new Chief Executive Officer on April 28, 2022[20] - The company completed a significant debt refinancing on February 24, 2022, entering a new credit agreement and issuing non-convertible preferred stock and warrants[22] - On March 15, 2023, ATI entered a Transaction Support Agreement (TSA) to enhance liquidity through new financing, debt exchange, and covenant waivers, targeting a June 15, 2023, closing[24][26] Operating Model and Platform This section details the company's operational approach, brand strategy, patient experience focus, and technology utilization - The company operates under a single "ATI" brand, aiming for consistent patient experience and operational efficiency[28] - ATI emphasizes a strong patient experience, evidenced by an average Net Promoter Score (NPS) of 75 and a 4.9-star average Google Review rating as of Q4 2022[28] - The company utilizes a proprietary Electronic Medical Records (EMR) system, built on over 2.5 million unique patient cases, to support clinical workflows and track outcomes[33] - ATI experienced elevated clinician attrition in 2021 and 2022 due to a tight labor market, despite implementing hiring and retention improvements[32] Industry Factors and Competition This section analyzes the competitive landscape, market drivers, and regulatory influences affecting the outpatient physical therapy industry - The outpatient physical therapy market is highly fragmented and competitive, including national/regional providers, physician-owned practices, and hospital systems[43] - Key market drivers include growth in outpatient musculoskeletal services and the aging U.S. population, with the 65+ demographic projected to grow 30% from 2020 to 2030[39][40] - Medicare reimbursement rates are a significant factor, with a 2.0% rate reduction effective January 2023, following 2022 adjustments[42] - ATI consistently received an 'exceptional' rating from the CMS Merit-based Incentive Payment System (MIPS), scoring in the 99th percentile for its 2021 performance, anticipating the highest quality bonus on 2023 CMS payments[45] Human Capital and COVID-19 Impact This section discusses the company's workforce, challenges in clinician retention, and the impact of the COVID-19 pandemic on operations - As of December 31, 2022, the company had approximately 5,700 employees, none represented by a labor union[50] - The company experienced elevated clinician attrition due to a tight labor market, implementing compensation and professional development initiatives to attract and retain therapists[47] - The COVID-19 pandemic adversely impacted visit volumes due to postponed elective surgeries and stay-at-home orders, prompting ATI to introduce tele-physical therapy and workforce adjustments[51][52] Risk Factors The company faces significant risks, including substantial doubt about its going concern ability due to liquidity issues, reliance on payor reimbursement, intense competition, and internal control weaknesses Risks Relating to Liquidity This section highlights critical liquidity challenges, including negative cash flows, covenant violations, and the auditor's going concern opinion - The company's negative operating cash flows and losses raise substantial doubt about its going concern ability, anticipating a violation of its $30.0 million minimum liquidity covenant within twelve months[73][328] - The independent auditor's report for the year ended December 31, 2022, expresses substantial doubt about the company's going concern ability, potentially triggering a default under the 2022 Credit Agreement[75] - The 2022 Credit Agreement and Series A Senior Preferred Stock contain restrictive covenants, where non-compliance could accelerate debt and lead to bankruptcy[84][85] - Borrowings under the 2022 Credit Agreement are subject to variable interest rates, exposing the company to higher interest expenses in a rising rate environment[83] Risks Relating to our Business and Industry This section outlines business and industry-specific risks, including payor dependence, competitive pressures, and the impact of the COVID-19 pandemic - A significant portion of revenue comes from governmental payors, with Medicare and Medicaid accounting for approximately 24.2% of net patient revenue in 2022, making the company vulnerable to reimbursement rate reductions[90] - Commercial payors, representing 57.6% of net patient revenue in 2022, are increasingly focused on cost control, potentially limiting reimbursement rates and subjecting contracts to renegotiation or termination[100][103] - The COVID-19 pandemic negatively impacted patient volumes, with 2022 visits per day at approximately 86.7% of 2019 levels[109] - The company operates in a highly competitive industry, facing challenges in attracting and retaining physical therapists, leading to elevated attrition and increased labor costs[120][125] - The company closed 23 clinics in both 2022 and 2021, potentially incurring further closure costs and losses as it right-sizes its clinic fleet[132] Legal and Regulatory Risks This section addresses legal and regulatory compliance risks, including anti-kickback laws, corporate practice of medicine, and patient privacy regulations - The company's operations are subject to extensive federal and state regulations, including anti-kickback laws, the Stark Law, and the False Claims Act, with violations leading to severe penalties[148] - Compliance with state laws on the "corporate practice of medicine" and fee-splitting is critical, as future interpretations or new legislation could necessitate operational restructuring[151][152][154] - The company is subject to patient information protection laws like HIPAA and HITECH, where a breach could result in significant penalties and reputational harm[159] - Uncertainty regarding the future of the Affordable Care Act (ACA) and other healthcare reform efforts could adversely impact reimbursement rates and the number of insured individuals[162] Risks Relating to Accounting and Financial Policies This section details risks related to accounting and financial policies, including material weaknesses in internal controls and potential asset impairments - The company identified material weaknesses in internal control over financial reporting related to income taxes, specifically an insufficient complement of tax personnel and ineffective controls over the income tax provision[196][198][201] - Goodwill and other intangible assets are a significant portion of total assets; the company recognized $486.3 million in impairment charges in 2022, with further impairments possible that could materially affect financial results[190][192] - Accounting for IPO Warrants, Earnout Shares, and Vesting Shares as liabilities requires re-measurement at each balance sheet date, potentially causing material fluctuations in financial results[187][188][189] - The company's ability to use its net operating loss (NOL) carryforwards ($68.9 million federal, $35.5 million state as of Dec 31, 2022) may be limited by Section 382 ownership change rules[194][195] Risks Relating to Ownership of Our Common Stock This section addresses risks related to common stock ownership, including price volatility, potential delisting, and significant shareholder influence - The company's stock price has been volatile and may continue to fluctuate significantly[201] - The company received NYSE notification of non-compliance with minimum trading price criteria, risking delisting if compliance is not regained[215] - As of December 31, 2022, Advent International Corporation beneficially owns approximately 56.1% of common stock, making ATI a "controlled company" with significant influence over corporate actions[229][232] - A recent Delaware Court of Chancery decision created uncertainty regarding the validity of a prior amendment to increase authorized shares, prompting the company to file a petition under Section 205 of the DGCL for validation[223][225][227] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[236] Properties As of December 31, 2022, the company operates 923 clinics and 20 managed clinics across 25 states. All properties, including the corporate headquarters in Bolingbrook, Illinois, are leased - As of December 31, 2022, the company operates 923 clinics and 20 clinics under management service agreements in 25 states[236] - All clinic properties are leased, typically with initial terms of 7 to 10 years; the Bolingbrook, Illinois, corporate office is leased until December 2032[236] Legal Proceedings The company is involved in legal proceedings arising in the ordinary course of business. For detailed information, the report refers to Note 18 of the consolidated financial statements - The company is involved in various legal proceedings; further details are in Note 18 - Commitments and Contingencies of the financial statements[237] Mine Safety Disclosures This item is not applicable to the company - Not applicable[237] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock and Public Warrants trade on the NYSE; no cash dividends are expected as earnings are retained for operations and expansion - The company's Class A common stock trades on the NYSE under the symbol "ATIP"[240] - No cash dividends have been paid to date, nor are any expected in the foreseeable future[241] - On February 24, 2022, the company issued 165,000 shares of Series A Senior Preferred Stock and warrants to purchase 11.5 million shares of common stock in a private placement[245] Reserved This item is not applicable - Not applicable[248] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, ATI saw slight revenue growth to $635.7 million but incurred a $539.7 million operating loss due to impairment charges and increased costs, facing critical liquidity issues and a going concern doubt Key Business Metrics This section presents key operational and financial metrics, including clinic count, patient visits, and revenue per visit Selected Operating and Financial Data | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Number of clinics (end of period) | 923 | 910 | 875 | | Average visits per day | 21,817 | 20,608 | 18,274 | | Total patient visits | 5,563,243 | 5,296,161 | 4,696,475 | | Net patient revenue per visit ($) | 103.53 | 105.94 | 112.76 | | Same clinic revenue growth rate | 4.6% | 4.6% | (26.9)% | Clinic Rollforward | Clinic Activity | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Beginning of period | 910 | 875 | 872 | | New clinics opened | 36 | 51 | 23 | | Clinics acquired | 0 | 7 | 0 | | Clinics closed/sold | 23 | 23 | 20 | | End of period | 923 | 910 | 875 | Results of Operations (FY 2022 vs FY 2021) This section analyzes the company's financial performance, highlighting revenue changes, cost increases, and significant impairment charges Consolidated Statements of Operations Summary | Metric ($ in thousands) | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net revenue | $635,671 | $627,871 | 1.2% | | Total cost of services | $574,419 | $533,797 | 7.6% | | SG&A expenses | $114,724 | $111,809 | 2.6% | | Goodwill & intangible impairment | $486,262 | $962,303 | (49.5)% | | Operating loss | $(539,734) | $(980,038) | (44.9)% | | Net loss | $(493,047) | $(782,028) | (37.0)% | - Net patient revenue increased by 2.6% to $575.9 million, driven by a 5.0% increase in patient visits, partially offset by a 2.3% decrease in net patient revenue per visit (from $105.94 to $103.53)[297][298] - Salaries and related costs increased by 6.4% to $358.0 million, primarily due to wage inflation and increased staffing for higher visit volumes[300] - Rent, clinic supplies, contract labor, and other costs increased by 12.0% to $202.6 million, mainly due to higher contract labor costs and a larger clinic count[301] - A non-cash impairment charge of $486.3 million was recorded in 2022, compared to $962.3 million in 2021, related to the write-down of goodwill and the trade name intangible asset[304] Liquidity and Capital Resources This section assesses the company's liquidity position, cash flow trends, and recent actions taken to address financial stability - The company has negative operating cash flows ($65.5 million used in 2022) and anticipates violating its $30.0 million minimum liquidity covenant within twelve months, raising substantial doubt about its going concern ability[320][328] - As of December 31, 2022, the company had $83.1 million in cash and cash equivalents and no available capacity under its revolving credit facility[319] - On March 15, 2023, the company entered a Transaction Support Agreement (TSA) to enhance liquidity through new financing, debt exchange, and covenant modifications[333] Consolidated Cash Flows Summary ($ in thousands) | Cash Flow Activity | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(65,508) | $(42,100) | | Net cash used in investing activities | $(28,048) | $(39,889) | | Net cash provided by (used in) financing activities | $128,079 | $(11,523) | | Net increase (decrease) in cash | $34,523 | $(93,512) | Critical Accounting Estimates This section describes key accounting estimates requiring significant management judgment, including revenue recognition, deferred tax assets, and goodwill impairment - Patient revenue recognition involves significant judgment in estimating variable consideration, such as contractual allowances and implicit price concessions, based on historical collection experience[367][370][373] - The company evaluates deferred tax asset realizability, maintaining a valuation allowance if non-realization is probable; as of Dec 31, 2022, the allowance was $89.9 million[379][381][655] - Goodwill and indefinite-lived intangible assets are tested for impairment annually or upon triggering events, with fair value determinations requiring significant judgment on growth rates, margins, and discount rates; carrying amounts were written down in 2022, increasing susceptibility to future impairment[382][383][386] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate variability on its variable-rate debt, mitigated by interest rate caps; a 100 basis point increase would raise annual interest expense by $2.9 million - The company is exposed to interest rate risk from its variable-rate debt; a hypothetical 100 basis point increase would raise annual cash interest expense by approximately $2.9 million[390] - ATI utilizes interest rate cap derivative instruments to hedge exposure to variable-rate cash payments[390] Financial Statements and Supplementary Data The December 31, 2022, audited financial statements report a $493.0 million net loss on $635.7 million revenue, with $1.08 billion total assets and $890.2 million total liabilities, alongside auditor's going concern doubt and internal control weaknesses Report of Independent Registered Public Accounting Firm This section presents the independent auditor's report, including their opinion on internal controls, going concern, and critical audit matters - The auditor's opinion states the company did not maintain effective internal control over financial reporting as of December 31, 2022, due to material weaknesses in tax personnel and income tax provision controls[398][399] - The report includes an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern due to negative operating cash flows, operating losses, and net losses[399] - Critical Audit Matters identified include: 1) Valuation of patient service revenue and related accounts receivable due to significant judgment in estimating contractual allowances, and 2) Goodwill and trade name indefinite-lived intangible asset impairment assessments due to significant judgment in developing fair value estimates[408][410][414] Consolidated Financial Statements This section provides the company's consolidated balance sheets, statements of operations, and cash flows for the reported periods Consolidated Balance Sheets Summary ($ in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $83,139 | $48,616 | | Goodwill, net | $286,458 | $608,811 | | Total assets | $1,078,985 | $1,562,694 | | Liabilities & Equity | | | | Long-term debt, net | $531,600 | $543,799 | | Total liabilities | $890,198 | $1,051,187 | | Total stockholders' equity | $48,447 | $511,507 | Consolidated Statements of Operations Summary ($ in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net revenue | $635,671 | $627,871 | $592,253 | | Operating loss | $(539,734) | $(980,038) | $(913) | | Net loss | $(493,047) | $(782,028) | $(298) | | Loss per share (Basic & Diluted) | $(2.51) | $(4.69) | $(0.04) | Consolidated Statements of Cash Flows Summary ($ in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(65,508) | $(42,100) | | Net cash used in investing activities | $(28,048) | $(39,889) | | Net cash provided by (used in) financing activities | $128,079 | $(11,523) | Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, covering critical accounting policies, debt, equity, and contingencies - Note 2 (Going Concern): The company anticipates violating its $30.0 million minimum liquidity covenant within twelve months, which, combined with negative cash flows and losses, raises substantial doubt about its going concern ability[451] - Note 5 (Goodwill Impairment): The company recorded non-cash interim impairment charges of $318.9 million for goodwill and $164.4 million for its trade name intangible asset during 2022 due to increased discount rates and decreased share price[549][550][552] - Note 8 (Borrowings): As of Dec 31, 2022, total debt was $531.6 million, net, primarily consisting of a $503.5 million Senior Secured Term Loan and $48.2 million in Revolving Loans under the 2022 Credit Agreement[564] - Note 11 (Mezzanine Equity): In February 2022, the company issued 165,000 shares of Series A Senior Preferred Stock with an initial stated value of $165.0 million; as of Dec 31, 2022, the aggregate stated value including paid-in-kind dividends was $182.9 million[604][608] - Note 18 (Contingencies): The company is party to stockholder class action and derivative complaints alleging false and misleading statements regarding its 2021 business combination and is cooperating with an SEC inquiry into its July 2021 earnings forecast[678][683][685] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[694] Controls and Procedures Management concluded that as of December 31, 2022, disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting related to income taxes, for which a remediation plan is underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022[696] - Material weaknesses were identified in internal control over financial reporting, specifically an insufficient complement of tax personnel and ineffective controls related to the income tax provision, including valuation allowances[700][701] - Remediation efforts include revising the tax staffing model, utilizing external advisors, and enhancing the design of controls related to the income tax provision[703] Other Information On March 15, 2023, the company entered a Transaction Support Agreement (TSA) with lenders and stockholders to improve liquidity through new financing, debt exchange, and covenant modifications - On March 15, 2023, the Company entered a Transaction Support Agreement (TSA) with lenders and stockholders to enhance liquidity[707] - The TSA contemplates new financing, an exchange of $100.0 million of term loans for new notes, a reduction in the minimum liquidity covenant, and a waiver of the Secured Net Leverage Ratio covenant for certain periods[709] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[710] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information is incorporated by reference to the definitive proxy statement for the 2023 Annual Meeting of Stockholders[712] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information is incorporated by reference to the definitive proxy statement for the 2023 Annual Meeting of Stockholders[713] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information is incorporated by reference to the definitive proxy statement for the 2023 Annual Meeting of Stockholders[713] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information is incorporated by reference to the definitive proxy statement for the 2023 Annual Meeting of Stockholders[714] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information is incorporated by reference to the definitive proxy statement for the 2023 Annual Meeting of Stockholders[715] Part IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements, financial statement schedules, and all exhibits filed as part of the Annual Report on Form 10-K - This section lists the financial statements, schedules, and exhibits filed with the Form 10-K[717] Form 10-K Summary This item is not applicable - None[723]