ATI Physical Therapy, Inc. (ATIP) Q1 2023 Earnings Conference Call May 8, 2023 5:00 PM ET Corporate Participants Joanne Fong - Senior Vice President, Treasurer and Head of Investor Relations Sharon Vitti - Chief Executive Officer Chris Cox - Chief Operating Officer Joe Jordan - Chief Financial Officer Conference Call Participants Taji Phillips - Jefferies Benjamin Shaver - Deutsche Bank Mike Petusky - Barrington Operator Good afternoon and welcome to ATI Physical Therapy's First Quarter 2023 Earnings Confer ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from to Commission File Number 001-39439 ATI Physical Therapy, Inc. (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporatio ...

ATI Physical Therapy, Inc. (NYSE:ATIP) Q4 2022 Results Conference Call March 16, 2023 5:00 PM ET Company Participants Sharon Vitti - CEO Joseph Jordan - CFO Chris Cox - COO Joanne Fong - SVP, Treasurer and Head, IR Operator Good afternoon, everyone, and welcome to ATI Physical Therapy's Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. [Operator Instructions] Today's call is being recorded. On the call today is Sharon Vitti, Chief Executive Officer; Joseph Jordan, Chief Financial Offic ...

[Part I](index=7&type=section&id=PART%20I) [Business](index=7&type=section&id=Item%201.%20Business) 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](index=16&type=chunk) - Core services include physical therapy, ATI Worksite Solutions (AWS), Management Service Agreements (MSA), and Sports Medicine arrangements[16](index=16&type=chunk)[18](index=18&type=chunk) - The company's strategy focuses on exceeding customer expectations, strengthening relationships with stakeholders, and strategic capital allocation[19](index=19&type=chunk) - 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](index=24&type=chunk)[26](index=26&type=chunk) - 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](index=43&type=chunk)[45](index=45&type=chunk) - ATI is subject to extensive governmental regulations, including Medicare/Medicaid rules, anti-kickback laws (Stark Law), and patient privacy laws (HIPAA)[53](index=53&type=chunk)[57](index=57&type=chunk)[60](index=60&type=chunk) [Overview and Recent Developments](index=8&type=section&id=Item%201.%20Business-Overview) 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](index=20&type=chunk) - 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](index=22&type=chunk) - 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](index=24&type=chunk)[26](index=26&type=chunk) [Operating Model and Platform](index=10&type=section&id=Item%201.%20Business-Operating%20Model%20and%20Platform) 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](index=28&type=chunk) - 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](index=28&type=chunk) - 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](index=33&type=chunk) - ATI experienced elevated clinician attrition in **2021** and **2022** due to a tight labor market, despite implementing hiring and retention improvements[32](index=32&type=chunk) [Industry Factors and Competition](index=12&type=section&id=Item%201.%20Business-Industry%20Factors%20and%20Competition) 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](index=43&type=chunk) - 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](index=39&type=chunk)[40](index=40&type=chunk) - Medicare reimbursement rates are a significant factor, with a **2.0%** rate reduction effective **January 2023**, following 2022 adjustments[42](index=42&type=chunk) - 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](index=45&type=chunk) [Human Capital and COVID-19 Impact](index=14&type=section&id=Item%201.%20Business-Human%20Capital%20and%20COVID-19%20Impact) 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](index=50&type=chunk) - The company experienced elevated clinician attrition due to a tight labor market, implementing compensation and professional development initiatives to attract and retain therapists[47](index=47&type=chunk) - 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](index=51&type=chunk)[52](index=52&type=chunk) [Risk Factors](index=19&type=section&id=Item%201A.%20Risk%20Factors) 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](index=22&type=section&id=Item%201A.%20Risk%20Factors-Risks%20Relating%20to%20Liquidity) 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](index=73&type=chunk)[328](index=328&type=chunk) - 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](index=75&type=chunk) - The 2022 Credit Agreement and Series A Senior Preferred Stock contain restrictive covenants, where non-compliance could accelerate debt and lead to bankruptcy[84](index=84&type=chunk)[85](index=85&type=chunk) - 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](index=83&type=chunk) [Risks Relating to our Business and Industry](index=25&type=section&id=Item%201A.%20Risk%20Factors-Risks%20Relating%20to%20our%20Business%20and%20Industry) 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](index=90&type=chunk) - 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](index=100&type=chunk)[103](index=103&type=chunk) - The COVID-19 pandemic negatively impacted patient volumes, with **2022** visits per day at approximately **86.7%** of **2019** levels[109](index=109&type=chunk) - 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](index=120&type=chunk)[125](index=125&type=chunk) - 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](index=132&type=chunk) [Legal and Regulatory Risks](index=36&type=section&id=Item%201A.%20Risk%20Factors-Legal%20and%20Regulatory%20Risks) 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](index=148&type=chunk) - 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](index=151&type=chunk)[152](index=152&type=chunk)[154](index=154&type=chunk) - 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](index=159&type=chunk) - 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](index=162&type=chunk) [Risks Relating to Accounting and Financial Policies](index=43&type=section&id=Item%201A.%20Risk%20Factors-Risks%20Relating%20to%20Accounting%20and%20Financial%20Policies) 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](index=196&type=chunk)[198](index=198&type=chunk)[201](index=201&type=chunk) - 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](index=190&type=chunk)[192](index=192&type=chunk) - 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](index=187&type=chunk)[188](index=188&type=chunk)[189](index=189&type=chunk) - 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](index=194&type=chunk)[195](index=195&type=chunk) [Risks Relating to Ownership of Our Common Stock](index=46&type=section&id=Item%201A.%20Risk%20Factors-Risks%20Relating%20to%20Ownership%20of%20Our%20Common%20Stock) 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](index=201&type=chunk) - The company received NYSE notification of non-compliance with minimum trading price criteria, risking delisting if compliance is not regained[215](index=215&type=chunk) - 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](index=229&type=chunk)[232](index=232&type=chunk) - 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](index=223&type=chunk)[225](index=225&type=chunk)[227](index=227&type=chunk) [Unresolved Staff Comments](index=53&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[236](index=236&type=chunk) [Properties](index=53&type=section&id=Item%202.%20Properties) 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](index=236&type=chunk) - 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](index=236&type=chunk) [Legal Proceedings](index=53&type=section&id=Item%203.%20Legal%20Proceedings) 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](index=237&type=chunk) [Mine Safety Disclosures](index=53&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[237](index=237&type=chunk) [Part II](index=54&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=54&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) 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](index=240&type=chunk) - No cash dividends have been paid to date, nor are any expected in the foreseeable future[241](index=241&type=chunk) - 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](index=245&type=chunk) [Reserved](index=56&type=section&id=Item%206.%20Reserved) This item is not applicable - Not applicable[248](index=248&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=57&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2022, ATI saw slight revenue growth to **$635.7 million** but incurred a **$539.7 million** operating loss due to impairment charges and increased costs, facing critical liquidity issues and a going concern doubt [Key Business Metrics](index=66&type=section&id=Item%207.%20MD%26A-Key%20Business%20Metrics) This section presents key operational and financial metrics, including clinic count, patient visits, and revenue per visit Selected Operating and Financial Data | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Number of clinics (end of period) | 923 | 910 | 875 | | Average visits per day | 21,817 | 20,608 | 18,274 | | Total patient visits | 5,563,243 | 5,296,161 | 4,696,475 | | Net patient revenue per visit ($) | 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)](index=68&type=section&id=Item%207.%20MD%26A-Results%20of%20Operations) 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](index=297&type=chunk)[298](index=298&type=chunk) - 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](index=300&type=chunk) - 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](index=301&type=chunk) - 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](index=304&type=chunk) [Liquidity and Capital Resources](index=74&type=section&id=Item%207.%20MD%26A-Liquidity%20and%20Capital%20Resources) 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](index=320&type=chunk)[328](index=328&type=chunk) - As of **December 31, 2022**, the company had **$83.1 million** in cash and cash equivalents and no available capacity under its revolving credit facility[319](index=319&type=chunk) - On **March 15, 2023**, the company entered a Transaction Support Agreement (TSA) to enhance liquidity through new financing, debt exchange, and covenant modifications[333](index=333&type=chunk) Consolidated Cash Flows Summary ($ 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](index=82&type=section&id=Item%207.%20MD%26A-Critical%20Accounting%20Estimates) 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](index=367&type=chunk)[370](index=370&type=chunk)[373](index=373&type=chunk) - 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](index=379&type=chunk)[381](index=381&type=chunk)[655](index=655&type=chunk) - 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](index=382&type=chunk)[383](index=383&type=chunk)[386](index=386&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=85&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) 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](index=390&type=chunk) - ATI utilizes interest rate cap derivative instruments to hedge exposure to variable-rate cash payments[390](index=390&type=chunk) [Financial Statements and Supplementary Data](index=87&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) 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 **$890.2 million** total liabilities, alongside auditor's going concern doubt and internal control weaknesses [Report of Independent Registered Public Accounting Firm](index=88&type=section&id=Item%208.%20Financial%20Statements-Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) This section presents the independent auditor's report, including their opinion on internal controls, going concern, and critical audit matters - The auditor's opinion states the company did not maintain effective internal control over financial reporting as of **December 31, 2022**, due to material weaknesses in tax personnel and income tax provision controls[398](index=398&type=chunk)[399](index=399&type=chunk) - The report includes an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern due to negative operating cash flows, operating losses, and net losses[399](index=399&type=chunk) - Critical Audit Matters identified include: 1) Valuation of patient service revenue and related accounts receivable due to significant judgment in estimating contractual allowances, and 2) Goodwill and trade name indefinite-lived intangible asset impairment assessments due to significant judgment in developing fair value estimates[408](index=408&type=chunk)[410](index=410&type=chunk)[414](index=414&type=chunk) [Consolidated Financial Statements](index=93&type=section&id=Item%208.%20Financial%20Statements-Consolidated%20Financial%20Statements) This section provides the company's consolidated balance sheets, statements of operations, and cash flows for the reported periods Consolidated Balance Sheets Summary ($ 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](index=99&type=section&id=Item%208.%20Financial%20Statements-Notes%20to%20Consolidated%20Financial%20Statements) 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](index=451&type=chunk) - **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](index=549&type=chunk)[550](index=550&type=chunk)[552](index=552&type=chunk) - **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](index=564&type=chunk) - **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](index=604&type=chunk)[608](index=608&type=chunk) - **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](index=678&type=chunk)[683](index=683&type=chunk)[685](index=685&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=150&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) This item is not applicable to the company - Not applicable[694](index=694&type=chunk) [Controls and Procedures](index=150&type=section&id=Item%209A.%20Controls%20and%20Procedures) 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](index=696&type=chunk) - 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](index=700&type=chunk)[701](index=701&type=chunk) - Remediation efforts include revising the tax staffing model, utilizing external advisors, and enhancing the design of controls related to the income tax provision[703](index=703&type=chunk) [Other Information](index=152&type=section&id=Item%209B.%20Other%20Information) 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](index=707&type=chunk) - 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](index=709&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=153&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to the company - Not applicable[710](index=710&type=chunk) [Part III](index=154&type=section&id=PART%20III) [Directors, Executive Officers and Corporate Governance](index=154&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) 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](index=712&type=chunk) [Executive Compensation](index=154&type=section&id=Item%2011.%20Executive%20Compensation) 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](index=713&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=154&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) 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](index=713&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=154&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) 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](index=714&type=chunk) [Principal Accountant Fees and Services](index=154&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) 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](index=715&type=chunk) [Part IV](index=155&type=section&id=PART%20IV) [Exhibits, Financial Statement Schedules](index=155&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) 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](index=717&type=chunk) [Form 10-K Summary](index=157&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable - None[723](index=723&type=chunk)

ATI Physical Therapy, Inc. (NYSE:ATIP) Q3 2022 Earnings Conference Call November 7, 2022 5:00 PM ET Company Participants Joanne Fong - Senior Vice President, Treasurer and Head of Investor Relations Sharon Vitti - Chief Executive Officer Eimile Tansey - Chief People Officer Ray Wahl - Chief Operating Officer Joseph Jordan - Chief Financial Officer Conference Call Participants Brian Tanquilit - Jefferies Jason Cassorla - Citi Operator Good afternoon, and welcome to ATI Physical Therapy’s Third Quarter 2022 E ...

Company Operations - As of September 30, 2022, the company operates 929 owned clinics and 20 clinics under management service agreements across 25 states[203]. - The number of clinics owned at the end of Q3 2022 was 929, an increase from 900 at the end of Q3 2021[238]. Financial Performance - Net patient revenue for Q3 2022 was $142.3 million, a slight increase of 0.3% from $141.9 million in Q3 2021[245]. - Total patient visits increased by approximately 2.4%, reaching 1,375,567 visits in Q3 2022 compared to 1,343,799 visits in Q3 2021[246]. - Net patient revenue per visit decreased by $2.10, or 2.0%, to $103.46 in Q3 2022 from $105.56 in Q3 2021[246]. - Other revenue for Q3 2022 was $14.5 million, down 15.6% from $17.2 million in Q3 2021, primarily due to the divestiture of the Home Health service line[247]. - Net patient revenue for the nine months ended September 30, 2022 was $429.7 million, an increase of 2.1% from $420.8 million in the same period of 2021[262]. - Other revenue for the nine months ended September 30, 2022 was $44.2 million, a decrease of 13.9% from $51.3 million in the same period of 2021[264]. - Operating loss for Q3 2022 was $(119.7) million, an improvement from $(516.9) million in Q3 2021[243]. - Net loss for Q3 2022 was $(116.7) million, compared to $(326.8) million in Q3 2021, reflecting a significant reduction in losses[243]. - Net loss for the nine months ended September 30, 2022, was $390.6 million, a decrease of approximately $393.1 million compared to a net loss of $783.7 million for the same period in 2021[275]. Expenses and Costs - Salaries and related costs increased by $3.5 million, or 4.0%, to $90.3 million in Q3 2022, representing 57.6% of net operating revenue[248]. - Rent, clinic supplies, contract labor, and other costs for Q3 2022 were $51.4 million, an increase of 12.4% from $45.8 million in Q3 2021, representing 32.8% of net operating revenue[249]. - Selling, general, and administrative expenses for Q3 2022 were $25.3 million, down 18.0% from $30.8 million in Q3 2021, accounting for 16.1% of net operating revenue[251]. - Interest expense, net for Q3 2022 was $11.8 million, an increase of 59.5% from $7.4 million in Q3 2021[254]. - Salaries and related costs for the nine months ended September 30, 2022 were $267.3 million, up 7.6% from $248.4 million in the same period of 2021[265]. - Interest expense, net decreased to $31.8 million for the nine months ended September 30, 2022, from $39.1 million in 2021, representing a decrease of 18.6%[272]. Impairment Charges - The company recorded non-cash impairment charges of approximately $66.4 million related to goodwill and $40.0 million related to the trade name indefinite-lived intangible asset during the quarter ended September 30, 2022[216]. - Goodwill and intangible asset impairment charges for Q3 2022 were $106.7 million, significantly lower than $509.0 million in Q3 2021[252]. - Goodwill and intangible asset impairment charges for the nine months ended September 30, 2022 were $390.2 million, down from $962.3 million in the same period of 2021[269]. Cash Flow and Liquidity - As of September 30, 2022, the company had $48.6 million in cash and cash equivalents and $50.0 million available under its revolving credit facility[283]. - The company had zero MAAPP funds as of September 30, 2022, down from $12.3 million at the end of 2021[285]. - For the nine months ended September 30, 2022, the company reported cash flow used in operating activities of $59.1 million, an operating loss of $435.6 million, and a net loss of $390.6 million[290]. - The company experienced a net decrease in cash and cash equivalents of $47,000 for the nine months ended September 30, 2022, compared to a decrease of $76.0 million in the same period of 2021[313]. - Cash and cash equivalents at the end of the period were $48.6 million as of September 30, 2022, down from $66.1 million at the end of September 2021[313]. - The company added approximately $77.3 million of cash to its balance sheet as a result of the 2022 Debt Refinancing and the Preferred Stock Financing[311]. Management and Governance - The company appointed Sharon Vitti as CEO on April 28, 2022, bringing 30 years of healthcare experience to the role[207]. - Management concluded that the condensed consolidated financial statements present fairly the company's financial position in conformity with U.S. GAAP despite the material weaknesses[338]. - The company is in the process of implementing its remediation plan and will monitor its effectiveness[340]. - The remediation plan includes revising the tax staffing model, refining the scope of external tax advisors, and enhancing controls related to income tax provision calculations[339]. Market Conditions - The company faces a tight labor market for physical therapy providers, contributing to hiring competition and wage inflation in the industry[212]. - The U.S. population aged 65 and older is expected to grow by 30% from 2020 to 2030, expanding the company's market opportunity[225]. Legal and Compliance - The outcome of any legal proceedings cannot be predicted with certainty and could materially affect future results of operations[344]. - The company does not expect its disclosure controls and procedures to prevent all errors and instances of fraud[336]. - As of September 30, 2022, the company reported material weaknesses in internal control over financial reporting, specifically related to the income tax provision[337]. Debt and Financing - The Senior Secured Term Loan, amounting to $500.9 million, bears an interest rate of 10.8% as of September 30, 2022, with an effective interest rate of 11.4%[297]. - The company issued 165,000 shares of non-convertible preferred stock with an initial stated value of $1,000 per share, totaling $165.0 million, along with warrants to purchase common stock[303]. - The Series A Senior Preferred Stock carries an initial dividend rate of 12.0% per annum, payable quarterly in arrears, with paid-in-kind dividends of $5.3 million and $12.3 million for the three and nine months ended September 30, 2022, respectively[304]. - The company must maintain a minimum liquidity of $30.0 million through the first quarter of 2024, with a Secured Net Leverage Ratio not to exceed 7.00:1.00 starting in the second quarter of 2024[300]. - The company is at risk of violating its minimum liquidity covenant if business results do not improve in the next twelve months[291]. - The company may need to consider alternatives such as amending the liquidity covenant or raising funds from other sources if business results do not improve[292].

Financial Data and Key Metrics Changes - Net operating revenue for Q2 2022 was $163.3 million, essentially flat compared to $164 million in Q2 2021 [21] - Net patient revenue increased by 1% year-over-year to $148.5 million, driven by higher volumes but partially offset by a lower rate per visit [21] - Adjusted EBITDA for the quarter was $5.4 million, a decrease from $24 million in the same quarter last year, reflecting the impact of a tight labor market and higher costs [27] Business Line Data and Key Metrics Changes - Visits per day per clinic increased to 24.2, up 1.3 visits from 22.9 in Q1 2022, driven by higher labor productivity [21][22] - The provider productivity metric rose to 9.1 visits per day per clinical FTE, an increase from 8.5 in Q1 2022 [10][17] - The annualized clinician turnover rate increased to 37% in Q2 2022, up from 28% in Q1 2022, indicating challenges in staff retention [18] Market Data and Key Metrics Changes - The company reported a 50% year-over-year growth in its Texas pilot program for workers' compensation and auto personal injury programs [14] - Referrals for ATI services are at approximately 90% to 96% of pre-COVID levels, indicating a recovery in demand [36] Company Strategy and Development Direction - The company is focused on three key areas: pipeline, provider productivity, and provider base, which are critical for near-term growth [9] - A comprehensive location review is underway to assess return on investment and inform future investment decisions [13][74] - The company plans to open approximately 35 new clinics in 2022, having already opened 22 year-to-date [31] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by a tight labor market, which has constrained the ability to meet patient volume projections [11][12] - The revised guidance for 2022 reflects anticipated impacts from the labor market, with revenue guidance adjusted to $635 million to $655 million [28][30] - Management remains optimistic about the company's future, emphasizing the importance of overcoming labor challenges to drive growth [15][78] Other Important Information - The company has made strides in launching technologies to improve treatment plans and clinical outcomes [8] - The company received an exceptional rating under the Merit-based Incentive Payment System for the third consecutive year [19] Q&A Session Summary Question: What is the source of the increase in referrals? - The majority of referrals are from traditional sources, with a mix of existing and new relationships, currently at about 90% to 96% of pre-COVID levels [36] Question: Is the goal to increase visits per day per clinic to the high 20s? - The focus is on adding clinicians to meet demand, which would help achieve higher visit rates [37][40] Question: What is the impact of contract labor on costs? - The reliance on contractors has increased costs per visit by approximately 15%, and contractor wages are about 60% higher than full-time PT salaries [45] Question: Are there any covenant issues with the revised guidance? - There are no covenant issues, and the company expects to maintain liquidity above the required levels [68] Question: What has been learned in the past 100 days? - The company has a strong culture and demand for services, with a focus on improving provider recruitment and retention strategies [76][82]

PART I - FINANCIAL INFORMATION - UNAUDITED [Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) 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](index=14&type=section&id=Note%201.%20Overview%20of%20the%20Company) 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 rehabilitation[34](index=34&type=chunk) - 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 company[35](index=35&type=chunk) - 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 liability[38](index=38&type=chunk) [Note 5. Goodwill, Trade Name and Other Intangible Assets](index=20&type=section&id=Note%205.%20Goodwill%2C%20Trade%20Name%20and%20Other%20Intangible%20Assets) 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 million**[65](index=65&type=chunk) - 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 multiples[77](index=77&type=chunk) [Note 8. Borrowings](index=25&type=section&id=Note%208.%20Borrowings) 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 Loan[87](index=87&type=chunk) - 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 extinguishment[86](index=86&type=chunk) - 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 apply[93](index=93&type=chunk) [Note 10. Mezzanine and Stockholders' Equity](index=28&type=section&id=Note%2010.%20Mezzanine%20and%20Stockholders%27%20Equity) 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 equity[104](index=104&type=chunk) - 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 million**[107](index=107&type=chunk)[108](index=108&type=chunk)[110](index=110&type=chunk) - Concurrently issued **11.5 million** warrants (Series I and Series II) to purchase common stock, which are classified as equity instruments[117](index=117&type=chunk) [Note 17. Commitments and Contingencies](index=40&type=section&id=Note%2017.%20Commitments%20and%20Contingencies) 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 filed[169](index=169&type=chunk)[172](index=172&type=chunk) - 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 request[173](index=173&type=chunk) - A charge of **$3.0 million** was recorded for a probable net settlement liability related to a billing dispute with a payor[165](index=165&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=44&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) 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](index=46&type=section&id=Trends%20and%20Factors%20Affecting%20the%20Company%27s%20Future%20Performance) 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 mix[192](index=192&type=chunk)[193](index=193&type=chunk) - 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 market[199](index=199&type=chunk) - 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 price[194](index=194&type=chunk)[195](index=195&type=chunk) - 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 factor[206](index=206&type=chunk) [Results of Operations](index=53&type=section&id=Results%20of%20Operations) 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 cuts[224](index=224&type=chunk)[225](index=225&type=chunk) 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](index=61&type=section&id=Non-GAAP%20Financial%20Measures) 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 income[261](index=261&type=chunk) [Liquidity and Capital Resources](index=63&type=section&id=Liquidity%20and%20Capital%20Resources) 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, 2021[267](index=267&type=chunk) - In February 2022, the company completed a debt refinancing and preferred stock financing, adding approximately **$77.3 million** of cash to its balance sheet[286](index=286&type=chunk) - 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 funds[288](index=288&type=chunk)[290](index=290&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=69&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) 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 SOFR[308](index=308&type=chunk) - A hypothetical **100 basis point** change in interest rates would impact annual cash interest expense by approximately **$1.4 million** to **$1.6 million**[308](index=308&type=chunk) - 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 transition[308](index=308&type=chunk)[310](index=310&type=chunk) [Controls and Procedures](index=71&type=section&id=Item%204.%20Controls%20and%20Procedures) 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, 2022[314](index=314&type=chunk) - The ineffectiveness is due to previously identified material weaknesses in internal control over financial reporting concerning the income tax provision[314](index=314&type=chunk)[316](index=316&type=chunk) - 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 assessment[316](index=316&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=73&type=section&id=Item%201.%20Legal%20Proceedings) 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 statements[321](index=321&type=chunk) [Risk Factors](index=73&type=section&id=Item%201A.%20Risk%20Factors) 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 condition[322](index=322&type=chunk) - 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 debt[324](index=324&type=chunk)[325](index=325&type=chunk) - 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 IRS[327](index=327&type=chunk)[328](index=328&type=chunk) - 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 price[329](index=329&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=74&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) 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, 2022[331](index=331&type=chunk) 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 program[333](index=333&type=chunk)[334](index=334&type=chunk)

Financial Data and Key Metrics Changes - Net operating revenue for Q1 2022 was $154 million, a 3.2% increase year-over-year from $149 million in Q1 2021 [17] - Net patient revenue increased by 5% year-over-year to $139 million, driven by higher volumes but partially offset by lower rates per visit [17] - Operating loss for Q1 2022 was $176 million, significantly increasing from $7 million in Q1 2021, primarily due to a $156 million impairment charge [21] - Adjusted EBITDA for Q1 2022 was a loss of $5 million, decreasing year-over-year from adjusted EBITDA of $6 million in Q1 2021 [23] Business Line Data and Key Metrics Changes - Visits per day per clinic during Q1 2022 were 22.9, a slight increase from 22.8 in Q4 2021 [17] - Referrals per day in Q1 were approximately 91% of pre-COVID levels from 2019, while visits per day were about 84% of the same [9] - Annualized clinician turnover decreased to 28%, down approximately 900 basis points from historical levels [11] Market Data and Key Metrics Changes - Patient visits increased from 19,300 per day in January to 22,600 per day by March 2022 [13] - The company opened 12 new clinics in Q1 2022, primarily in Arizona, Georgia, and Texas, with plans to open 20 to 30 new clinics for the full year [26] Company Strategy and Development Direction - The company aims to regain market momentum and meet performance commitments through various avenues including new clinics, acquisitions, digital health, and strategic partnerships [28] - A focus on building relationships with local physicians and communities is emphasized to drive referral growth [9] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by COVID-19 variants but expressed optimism about achieving pre-COVID visit levels later in the year [9] - The company maintains its full-year 2022 revenue guidance in the range of $675 million to $705 million, with an adjusted EBITDA expectation of $25 million to $35 million [24] Other Important Information - The company reported a provision for doubtful accounts of $5 million, approximately 3.7% of net patient revenue, which is an improvement from 5.4% in Q1 2021 [20] - Cash generated during Q1 was $46 million, with available liquidity of approximately $144 million as of March 31, 2022 [23] Q&A Session Summary Question: Challenges in hiring and clinical FTE - Management noted a decrease in turnover to 28% and an increase in hiring at 39%, indicating that hiring is outpacing turnover [31] Question: Positioning with new graduates - The company has a mentoring program for new graduates to support their transition into the workforce [34] Question: Referral share and sales strategies - Management expressed confidence in the sales and referral resurgence program, indicating that it takes time to see results [36] Question: Improvement in referrals - Referrals are a mix of new doctors and returning existing referral sources [38] Question: Year-over-year rate decline - The decline in rates was attributed to Medicare fee schedule changes and a shift in payer mix [44] Question: Guidance and modeling KPIs - Management suggested focusing on referrals turning into visits and hiring to model out the rest of the year [51]