ATI Physical Therapy, Inc. [ATIP] Filings

10-Q 1 ati-20240930.htm 10-Q ati-20240930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2024


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

For transition period from to

Commission File Number 001-39439

ATI Physical Therapy, Inc.

(Exact name of registrant as specified in its charter)


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

790 Remington Boulevard

Bolingbrook, IL 60440

(630) 296-2223

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

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Class A common stock, $0.0001 par value

ATIP

New York Stock Exchange

Redeemable Warrants, exercisable for Class A common stock at an exercise price of $575.00 per share

ATIPW

OTC Market

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

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

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


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

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

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

As of October 30, 2024, there were approximately 4,411,441 shares of the registrant's common stock legally outstanding.

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			Page
PART I - FINANCIAL INFORMATION - UNAUDITED
Item 1. Financial Statements			7
Condensed Consolidated Balance Sheets			8
Condensed Consolidated Statements of Operations			9
Condensed Consolidated Statements of Comprehensive Loss			10
Condensed Consolidated Statements of Changes in Stockholders' Equity			11
Condensed Consolidated Statements of Cash Flows			13
Notes to Condensed Consolidated Financial Statements			15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			44
Item 3. Quantitative and Qualitative Disclosures About Market Risk			66
Item 4. Controls and Procedures			67
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			68
Item 1A. Risk Factors			68
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			68
Item 3. Defaults Upon Senior Securities			69
Item 4. Mine Safety Disclosures			69
Item 5. Other Information			69
Item 6. Exhibits			69
Signatures			70

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

•changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status;

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

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•risks associated with public health crises, epidemics and pandemics, as was the case with the novel strain of COVID-19, and their direct and indirect impacts or lingering effects on the business, which could lead to a decline in visit volumes and referrals;

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

•our inability to maintain high levels of service and patient satisfaction;

•risks associated with the locations of our clinics, including the economies in which we operate, and the potential need to close clinics and incur closure costs;

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

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

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

•risks associated with our ability to secure renewals of current suppliers and other material agreements that the Company currently depends upon for business operations;

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

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

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

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

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

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

•our ability to meet revenue and earnings expectations;

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

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

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

•our ability to maintain necessary insurance coverage at competitive rates;

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

•general economic conditions, including but not limited to inflationary and recessionary periods;

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

•risks associated with our ability to attract and retain talented executives and employees amidst the impact of unfavorable labor market dynamics, wage inflation and recent reduction in value of our share-based compensation incentives, including potential failure of steps being taken to reduce attrition of physical therapists and increase hiring of physical therapists;

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

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

•our inability to maintain effective internal control over financial reporting;

•risks related to dilution of common stock ownership interests and voting interests as a result of the issuance of 2L Notes and Series B Preferred Stock;

•costs related to operating as a public company; and

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

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

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These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Form 10-Q are more fully described under the heading “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K filed with the SEC (as defined below) on February 27, 2024 and in this Form 10-Q. The risks described under the heading “Item 1A. Risk Factors” are not exhaustive. Other sections of this Form 10-Q describe additional factors that could adversely affect the business, financial condition or results of operations of the Company. New risk factors emerge from time to time and it is not possible to predict all such risk factors, nor can the Company assess the impact of all such risk factors on the business of the Company or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. Readers should not place undue reliance on forward-looking statements. The Company undertakes no obligations to publicly update or revise any forward-looking statements after the date they are made or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or otherwise, except as required by law.

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

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PART I - FINANCIAL INFORMATION - UNAUDITED

Item 1. Financial Statements

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ATI Physical Therapy, Inc.

Condensed Consolidated Balance Sheets

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

(unaudited)


	September 30, 2024		December 31, 2023
Assets:
Current assets:
Cash and cash equivalents	$	23,460	$	36,802
Accounts receivable (net of allowance for doubtful accounts of $42,300 and $48,055 at September 30, 2024 and December 31, 2023, respectively)	99,970		88,512
Prepaid expenses	11,231		12,920
Insurance recovery receivable	24,117		23,981
Other current assets	1,543		4,367
Assets held for sale	—		2,056
Total current assets	160,321		168,638

Property and equipment, net	83,337		100,422
Operating lease right-of-use assets	183,233		194,423
Goodwill, net	289,650		289,650
Trade name and other intangible assets, net	245,546		245,858
Other non-current assets	5,194		4,290
Total assets	$	967,281	$	1,003,281

Liabilities, Mezzanine Equity and Stockholders' Equity:
Current liabilities:
Accounts payable	$	16,731	$	14,704
Accrued expenses and other liabilities	76,479		88,435
Current portion of operating lease liabilities	50,452		51,530

Liabilities held for sale	—		1,778
Total current liabilities	143,662		156,447

Long-term debt, net (1)	441,511		433,578
2L Notes due to related parties, at fair value	108,762		79,472


Deferred income tax liabilities	21,092		21,367
Operating lease liabilities	172,109		185,602
Other non-current liabilities	2,417		2,277
Total liabilities	889,553		878,743
Commitments and contingencies (Note 14)
Mezzanine equity:
Series A Senior Preferred Stock, $0.0001 par value; 1.0 million shares authorized; 0.2 million shares issued and outstanding; $1,365.76 stated value per share at September 30, 2024; $1,249.06 stated value per share at December 31, 2023	238,872		220,393
Stockholders' equity:
Class A common stock, $0.0001 par value; 470.0 million shares authorized; 4.5 million shares issued, 4.2 million shares outstanding at September 30, 2024; 4.2 million shares issued, 4.0 million shares outstanding at December 31, 2023	—		—
Treasury stock, at cost, 0.090 million shares and 0.007 million shares at September 30, 2024 and December 31, 2023, respectively	(723)		(219)
Additional paid-in capital	1,296,155		1,308,119
Accumulated other comprehensive income	63		406
Accumulated deficit	(1,461,506)		(1,409,306)
Total ATI Physical Therapy, Inc. equity	(166,011)		(101,000)
Non-controlling interests	4,867		5,145
Total stockholders' equity	(161,144)		(95,855)
Total liabilities, mezzanine equity and stockholders' equity	$	967,281	$	1,003,281

(1) Includes $17.0 million of principal amount of debt due to related parties as of September 30, 2024 and December 31, 2023, respectively.

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

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ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023

Net patient revenue	$	174,733	$	162,258	$	512,895	$	469,950
Other revenue	15,254		15,197		46,676		46,774
Net revenue	189,987		177,455		559,571		516,724

Cost of services:
Salaries and related costs	105,571		97,089		307,440		283,119
Rent, clinic supplies, contract labor and other	54,488		52,699		162,917		156,014
Provision for doubtful accounts	4,913		3,346		12,329		9,831
Total cost of services	164,972		153,134		482,686		448,964
Selling, general and administrative expenses	23,772		25,085		73,056		92,253
Long-lived asset impairment charges	114		—		852		—
Operating income (loss)	1,129		(764)		2,977		(24,493)
Change in fair value of 2L Notes	18,765		(1,485)		7,740		(8,495)
Change in fair value of warrant liability and contingent common shares liability	235		(394)		(16)		(1,895)


Interest expense, net	14,746		15,478		44,125		46,096
Other expense, net	380		117		347		1,089
Loss before taxes	(32,997)		(14,480)		(49,219)		(61,288)
Income tax (benefit) expense	(128)		131		(275)		282
Net loss	(32,869)		(14,611)		(48,944)		(61,570)
Net income attributable to non-controlling interests	945		586		3,256		2,602
Net loss attributable to ATI Physical Therapy, Inc.	(33,814)		(15,197)		(52,200)		(64,172)
Less: Series A Senior Preferred Stock redemption value adjustments	398		(2,927)		(777)		41,769
Less: Series A Senior Preferred Stock cumulative dividend	6,634		6,075		19,256		17,087
Net loss available to common stockholders	$	(40,846)	$	(18,345)	$	(70,679)	$	(123,028)

Loss per share of Class A common stock:
Basic	$	(9.38)	$	(4.42)	$	(16.46)	$	(29.83)
Diluted	$	(9.38)	$	(4.42)	$	(16.46)	$	(29.83)
Weighted average shares outstanding:
Basic and diluted	4,355		4,154		4,294		4,125

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

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ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Comprehensive Loss

($ in thousands)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023

Net loss	$	(32,869)	$	(14,611)	$	(48,944)	$	(61,570)
Other comprehensive loss:
Cash flow hedges	(85)		(43)		(343)		(4,349)
Comprehensive loss	(32,954)		(14,654)		(49,287)		(65,919)
Net income attributable to non-controlling interests	945		586		3,256		2,602
Comprehensive loss attributable to ATI Physical Therapy, Inc.	$	(33,899)	$	(15,240)	$	(52,543)	$	(68,521)

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

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ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity

($ in thousands, except share data)

(unaudited)


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






















Balance at January 1, 2024	4,032,621	$	—	6,794	$	(219)	$	1,308,119	$	406	$	(1,409,306)	$	5,145	$	(95,855)
Series A Senior Preferred Stock dividends and redemption value adjustments	—	—		—	—		(4,621)		—		—		—		(4,621)
Vesting of restricted shares distributed to holders of Incentive Common Units	684	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units and awards	263,719	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(78,412)	—		78,412	(478)		—		—		—		—		(478)
Non-cash share-based compensation	—	—		—	—		2,268		—		—		—		2,268
Other comprehensive loss	—	—		—	—		—		(140)		—		—		(140)
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(1,055)		(1,055)
Net income attributable to non-controlling interests	—	—		—	—		—		—		—		1,128		1,128
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(14,651)		—		(14,651)
Balance at March 31, 2024	4,218,612	$	—	85,206	$	(697)	$	1,305,766	$	266	$	(1,423,957)	$	5,218	$	(113,404)
Series A Senior Preferred Stock dividends and redemption value adjustments	—	—		—	—		(6,826)		—		—		—		(6,826)
Vesting of restricted shares distributed to holders of Incentive Common Units	644	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units and awards	8,930	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(3,508)	—		3,508	(16)		—		—		—		—		(16)
Non-cash share-based compensation	—	—		—	—		1,970		—		—		—		1,970
Other comprehensive loss	—	—		—	—		—		(118)		—		—		(118)
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(509)		(509)
Net income attributable to non-controlling interests	—	—		—	—		—		—		—		1,183		1,183
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(3,735)		—		(3,735)
Balance at June 30, 2024	4,224,678	$	—	88,714	$	(713)	$	1,300,910	$	148	$	(1,427,692)	$	5,892	$	(121,455)
Series A Senior Preferred Stock dividends and redemption value adjustments	—	—		—	—		(7,032)		—		—		—		(7,032)

Issuance of common stock upon vesting of restricted stock units and awards	11,951	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(1,525)	—		1,525	(10)		—		—		—		—		(10)
Non-cash share-based compensation	—	—		—	—		2,277		—		—		—		2,277
Other comprehensive loss	—	—		—	—		—		(85)		—		—		(85)
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(1,970)		(1,970)
Net income attributable to non-controlling interests	—	—		—	—		—		—		—		945		945
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(33,814)		—		(33,814)
Balance at September 30, 2024	4,235,104	$	—	90,239	$	(723)	$	1,296,155	$	63	$	(1,461,506)	$	4,867	$	(161,144)

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










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

Vesting of restricted shares distributed to holders of Incentive Common Units	751	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units and awards	25,387	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(3,163)	—		3,163	(51)		—		—		—		—		(51)
Non-cash share-based compensation	—	—		—	—		1,454		—		—		—		1,454
Other comprehensive loss	—	—		—	—		—		(3,456)		—		—		(3,456)
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(710)		(710)
Net income attributable to non-controlling interests	—	—		—	—		—		—		—		1,060		1,060
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(26,270)		—		(26,270)
Balance at March 31, 2023	3,990,121	$	—	4,703	$	(197)	$	1,380,170	$	1,443	$	(1,365,781)	$	4,839	$	20,474
Series A Senior Preferred Stock dividends and redemption value adjustments	—	—		—	—		(73,584)		—		—		—		(73,584)
Capital contribution from recognition of delayed draw right asset	—	—		—	—		690		—		—		—		690
Vesting of restricted shares distributed to holders of Incentive Common Units	737	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units and awards	10,824	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(1,206)	—		1,206	(15)		—		—		—		—		(15)
Issuance of common stock for fractional adjustments related to Reverse Stock Split	26,346	—		—	—		—		—		—		—		—
Non-cash share-based compensation	—	—		—	—		2,754		—		—		—		2,754
Other comprehensive loss	—	—		—	—		—		(850)		—		—		(850)
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(965)		(965)
Net income attributable to non-controlling interests	—	—		—	—		—		—		—		956		956
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(22,705)		—		(22,705)
Balance at June 30, 2023	4,026,822	$	—	5,909	$	(212)	$	1,310,030	$	593	$	(1,388,486)	$	4,830	$	(73,245)
Series A Senior Preferred Stock dividends and redemption value adjustments	—	—		—	—		(3,148)		—		—		—		(3,148)
Vesting of restricted shares distributed to holders of Incentive Common Units	701	—		—	—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units and awards	3,974	—		—	—		—		—		—		—		—
Tax withholdings related to net share settlement of restricted stock units and awards	(581)	—		581	(5)		—		—		—		—		(5)
Non-cash share-based compensation	—	—		—	—		2,284		—		—		—		2,284
Other comprehensive loss	—	—		—	—		—		(43)		—		—		(43)
Distribution to non-controlling interest holders	—	—		—	—		—		—		—		(977)		(977)
Net income attributable to non-controlling interests	—	—		—	—		—		—		—		586		586
Net loss attributable to ATI Physical Therapy, Inc.	—	—		—	—		—		—		(15,197)		—		(15,197)
Balance at September 30, 2023	4,030,916	$	—	6,490	$	(217)	$	1,309,166	$	550	$	(1,403,683)	$	4,439	$	(89,745)

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

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ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Cash Flows

($ in thousands)

(unaudited)


	Nine Months Ended
	September 30, 2024		September 30, 2023
Operating activities:
Net loss	$	(48,944)	$	(61,570)
Adjustments to reconcile net loss to net cash used in operating activities:
Long-lived asset impairment charges	852		—
Depreciation and amortization	25,991		28,341
Provision for doubtful accounts	12,329		9,831
Deferred income tax provision	(275)		282
Non-cash lease expense related to right-of-use assets	35,300		35,844
Non-cash share-based compensation	6,515		6,492
Amortization of debt issuance costs and original issue discount	2,214		2,200
Non-cash interest expense	—		6,020
Loss on extinguishment of debt	—		444
(Gain) loss on disposal and sale of assets	(86)		1,519
Change in fair value of 2L Notes	7,740		(8,495)
Change in fair value of warrant liability and contingent common shares liability	(16)		(1,895)


Change in fair value of non-designated derivative instrument	(291)		(67)
Changes in:
Accounts receivable, net	(23,787)		(13,642)
Insurance recovery receivable	(136)		(359)
Prepaid expenses and other current assets	910		3,901
Other non-current assets	(904)		94
Accounts payable	2,559		(1,109)
Accrued expenses and other liabilities	(12,025)		9,015
Operating lease liabilities	(39,563)		(34,694)
Other non-current liabilities	218		73


Net cash used in operating activities	(31,399)		(17,775)

Investing activities:
Purchases of property and equipment	(9,313)		(14,592)

Proceeds from sale of property and equipment	106		91
Proceeds from sale of clinics	479		355

Payment of holdback liabilities related to acquisitions	—		(490)
Net cash used in investing activities	(8,728)		(14,636)

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Financing activities:

Proceeds from 2L Notes from related parties	25,000		3,243
Financing transaction costs	—		(6,287)
Deferred financing costs	—		(84)




Proceeds from revolving line of credit	31,153		20,000
Payments on revolving line of credit	(25,323)		(44,750)



Payment of contingent consideration liabilities	(7)		(397)
Taxes paid on behalf of employees for shares withheld	(504)		(71)
Distribution to non-controlling interest holders	(3,534)		(2,652)
Net cash provided by (used in) financing activities	26,785		(30,998)

Changes in cash and cash equivalents:
Net decrease in cash and cash equivalents	(13,342)		(63,409)
Cash and cash equivalents at beginning of period	36,802		83,139
Cash and cash equivalents at end of period	$	23,460	$	19,730

Supplemental noncash disclosures:
Derivative changes in fair value (1)	$	343	$	4,349
Purchases of property and equipment in accounts payable	$	2,113	$	1,644
Exchange of Senior Secured Term Loan for related party 2L Notes	$	—	$	100,000
Debt discount on Senior Secured Term Loan	$	—	$	(1,797)
Capital contribution from recognition of delayed draw right asset	$	—	$	690
Series A Senior Preferred Stock dividends and redemption value adjustments	$	18,479	$	76,732

Exchange of delayed draw right for related party 2L Notes	$	3,450	$	—

Other supplemental disclosures:
Cash paid for interest	$	42,883	$	38,998
Cash received from hedging activities	$	399	$	5,247
Cash paid for taxes, net of refunds	$	23	$	1

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

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

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Note 1. Overview of the Company

ATI Physical Therapy, Inc., together with its subsidiaries (herein referred to as “we,” "our," “the Company,” “ATI Physical Therapy” or “ATI”), is a nationally recognized healthcare company, specializing in outpatient rehabilitation and adjacent healthcare services. The Company provides outpatient physical therapy services under the name ATI Physical Therapy and, as of September 30, 2024, had 874 clinics located in 24 states (as well as 16 clinics under management service agreements). The Company was founded in 1996 under the name Assessment Technologies Inc. Fortress Value Acquisition Corp. II (herein referred to as "FAII" or "FVAC") was organized as a Delaware corporation in 2020 and assisted in the Company's initial public offering, upon which it was renamed to ATI Physical Therapy, Inc. The Company offers a variety of services within its clinics, including physical therapy to treat spine, shoulder, knee and neck injuries or pain; work injury rehabilitation services, such as work conditioning and work hardening; hand therapy; and other specialized treatment services.

Note 2. Basis of Presentation and Recent Accounting Standards

Basis of presentation

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

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

Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results the Company expects for the entire year. In addition, the influence of seasonality, changes in payor contracts, changes in rate per visit, changes in referral and visit volumes, strategic transactions and initiatives, labor market dynamics and wage inflation, changes in laws and general economic conditions in the markets in which the Company operates and other factors impacting the Company's operations may result in any period not being comparable to the same period in previous years.

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of the Company, its subsidiaries, and entities for which the Company has a controlling financial interest, including variable interest entities for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation, and net earnings are reduced by the portion of net earnings attributable to non-controlling interests.

Use of estimates

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

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For further information regarding the Company's accounting policies and other information, refer to the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2023. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K filed with the SEC on February 27, 2024.

Reverse Stock Split

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

As a result of the Reverse Stock Split, every fifty (50) shares of common stock either issued and outstanding or held as treasury stock were combined into one new share of common stock. Any fractional shares of common stock resulting from the Reverse Stock Split were rounded up to the nearest whole share. All outstanding securities entitling their holders to purchase or acquire shares of common stock, including stock options, warrants, Earnout Shares, Vesting Shares and shares of common stock subject to vesting were adjusted as a result of the Reverse Stock Split, as required by the terms of those securities. The Reverse Stock Split did not change the par value of the common stock or the number of shares authorized for issuance.

All information included in these unaudited condensed consolidated financial statements and related notes has been adjusted, on a retrospective basis, to reflect the Reverse Stock Split.

Liquidity and going concern

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

As of September 30, 2024, the Company had $23.5 million in cash and cash equivalents with no available capacity under its revolving credit facility. The Company was in compliance with its minimum liquidity covenant under the 2022 Credit Agreement (as defined in Note 8) as of September 30, 2024.

The Company has continued to generate negative operating cash flows and net losses. For the nine months ended September 30, 2024, the Company had cash flows used in operating activities of $31.4 million and net loss of $48.9 million. These results are, in part, due to the Company's current capital structure, including cash interest costs, and the Company's pace of visit volume and operating performance at the clinic level. The Company has continued to fund cash used in operations primarily from financing activities and expects to need additional liquidity by early 2025 to continue funding working capital requirements, necessary capital expenditures as well as to be available for general corporate purposes, including interest repayments. The Company is at risk of insufficient funding to meet its obligations as they become due as well as potential non-compliance with its minimum liquidity financial covenant under its 2022 Credit Agreement. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern.

On June 15, 2023, the Company completed a debt restructuring transaction under its 2022 Credit Agreement including: (i) a delayed draw new money financing in an aggregate principal amount of $25.0 million, comprised of (A) second lien paid-in-kind convertible notes (the “2L Notes”) and (B) shares of Series B Preferred Stock (as defined in Note 8). The Company utilized the delayed draw of $25.0 million during the nine months ended September 30, 2024.

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On October 2, 2024, the Company entered into the Second Amendment to Note Purchase Agreement, pursuant to which the Company issued $10.5 million of second lien paid-in-kind notes (the "Second Lien Loans"). Refer to Note 16 - Subsequent Events for more information about the Second Lien Loans.

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

Future liquidity needs are expected to require additional sources of liquidity beyond operating results. Additional liquidity sources considered include but are not limited to:

•raising additional debt and/or equity capital,

•disposal of assets, and/or

•other strategic alternatives to improve its business, results of operations and financial condition.

There can be no assurance that the Company will be successful in accessing such alternative options or financing if or when needed. Failure to do so could have a material adverse impact on the Company's business, financial condition, results of operations and cash flows, and may lead to events including bankruptcy, reorganization or insolvency.

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

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

Segment reporting

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

Cash, cash equivalents and restricted cash

Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less when issued. Cash and cash equivalents held by subsidiaries that are less than wholly-owned were $10.4 million and $10.9 million as of September 30, 2024 and December 31, 2023, respectively.

Restricted cash consists of cash held as collateral in relation to the Company's corporate credit card agreement. Restricted cash included within cash and cash equivalents as presented within our unaudited condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023, and our unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2024 and September 30, 2023 was $0.8 million, respectively.

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Recent accounting pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which provides guidance to improve the disclosures for reportable segments through enhanced disclosures about significant segment expenses. This ASU is effective for the Company's annual financial statements to be issued for the year ended December 31, 2024, and the Company's interim financial statements during the year ended December 31, 2025, with early adoption permitted. This ASU shall be applied on a retrospective basis for all prior periods presented in the financial statements. The Company expects to adopt this new accounting standard in its Annual Report on Form 10-K for the year ended December 31, 2024, and does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which provides guidance to improve the disclosures for income taxes primarily through enhanced rate reconciliation and income taxes paid disclosures. This ASU is effective for the Company's annual financial statements to be issued for the year ended December 31, 2025, with early adoption permitted, and shall be applied on a prospective basis. The Company expects to adopt this new accounting standard in its Annual Report on Form 10-K for the year ended December 31, 2025, and does not expect the adoption of this standard to have a material impact on the Company's consolidated financial statements.

Note 3. Divestitures

Clinics held for sale

The Company determined during the fourth quarter of 2023 and through 2024 to sell certain clinics. The Company classified the assets and liabilities of these clinics as held for sale at the lower of its carrying amount or fair value less cost to sell. The clinics did not meet the criteria to be classified as discontinued operations. During the nine months ended September 30, 2024, the Company completed all but one of its anticipated divestitures and concluded the remaining anticipated divestiture transaction was no longer probable. As a result, the remaining assets and liabilities previously classified as held for sale were reclassified as held and used into the respective line items within the condensed consolidated balance sheet.

There were no assets or liabilities classified as held for sale as of September 30, 2024. Major classes of assets and liabilities classified as held for sale as of December 31, 2023 were as follows (in thousands):


	December 31, 2023


Property and equipment, net	674
Operating lease right-of-use assets	1,382


Total assets held for sale	$	2,056



Current portion of operating lease liabilities	357
Operating lease liabilities	1,421
Total liabilities held for sale	$	1,778

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Note 4. Revenue from Contracts with Customers and Accounts Receivable

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


	Three Months Ended				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Net patient revenue	$	174,733	$	162,258	$	512,895	$	469,950
ATI Worksite Solutions (1)	8,921		9,289		27,641		27,874
Management Service Agreements (1)	3,780		3,664		11,235		11,159
Sports Medicine and other revenue (1)	2,553		2,244		7,800		7,741
	$	189,987	$	177,455	$	559,571	$	516,724

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

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


	Three Months Ended				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Commercial	58.7	%	58.5	%	58.6	%	58.4	%
Government	22.2	%	23.3	%	22.1	%	23.5	%
Workers’ compensation	11.8	%	11.6	%	11.9	%	11.7	%
Other (1)	7.3	%	6.6	%	7.4	%	6.4	%
	100.0	%	100.0	%	100.0	%	100.0	%

(1) Primarily comprised of net patient revenue from auto personal injury reimbursement.

Accounts receivable, net of allowance for doubtful accounts was $100.0 million and $88.5 million as of September 30, 2024 and December 31, 2023, respectively. The allowance for doubtful accounts as of September 30, 2024 and December 31, 2023 was $42.3 million and $48.1 million, respectively. During the nine months ended September 30, 2024, provision for doubtful accounts was $12.3 million, and write-offs and other adjustments were $18.1 million.

Note 5. Goodwill, Trade Name and Other Intangible Assets

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


Goodwill at December 31, 2023 (1)	$	289,650
Impairment charges (2)	—



Goodwill at September 30, 2024 (1)	$	289,650

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

(2) The Company did not identify any triggering events during the nine months ended September 30, 2024 that resulted in additional impairment loss.

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The table below summarizes the Company’s carrying amount of trade name and other intangible assets at September 30, 2024 and December 31, 2023 (in thousands):


	September 30, 2024		December 31, 2023
Gross intangible assets:
ATI trade name (1,2)	$	245,000	$	245,000
Non-compete agreements	770		2,395
Other intangible assets	640		640
Accumulated amortization:
Accumulated amortization – non-compete agreements	(462)		(1,807)
Accumulated amortization – other intangible assets	(402)		(370)
Total trade name and other intangible assets, net	$	245,546	$	245,858

(1) Not subject to amortization.

(2) The Company did not identify any triggering events during the nine months ended September 30, 2024 that resulted in impairment loss.

Note 6. Property and Equipment

Property and equipment consisted of the following at September 30, 2024 and December 31, 2023 (in thousands):


	September 30, 2024		December 31, 2023
Equipment	$	38,440	$	37,984
Furniture and fixtures	14,735		14,311
Leasehold improvements	178,815		178,888

Computer equipment and software	110,911		108,749
Construction-in-progress	1,794		2,134
	344,695		342,066
Accumulated depreciation and amortization	(261,358)		(241,644)
Property and equipment, net	$	83,337	$	100,422

Property and equipment includes gross internally developed computer software costs in the amount of $67.5 million and $66.1 million as of September 30, 2024 and December 31, 2023, respectively, with associated accumulated amortization of $61.1 million and $55.6 million, respectively. The related amortization expense was $5.5 million and $5.8 million for the nine months ended September 30, 2024 and 2023, respectively.

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


	Three Months Ended				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Rent, clinic supplies, contract labor and other	$	6,210	$	6,343	$	18,191	$	19,152
Selling, general and administrative expenses	2,400		2,772		7,488		8,635
Total depreciation and amortization expense	$	8,610	$	9,115	$	25,679	$	27,787

Note 7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following at September 30, 2024 and December 31, 2023 (in thousands):


	September 30, 2024		December 31, 2023
Salaries and related costs	$	24,246	$	37,630
Accrued legal settlement (1)	22,805		21,324
Credit balances due to patients and payors	9,143		7,712
Accrued professional fees	4,500		4,146
Accrued interest	4,383		4,913
Accrued contract labor	2,752		2,255
Accrued occupancy costs	2,544		2,593




Other payables and accrued expenses	6,106		7,862
Total	$	76,479	$	88,435

(1) Includes estimated liability of $21.5 million and $20.0 million related to settlement agreement as of September 30, 2024 and December 31, 2023, respectively. Refer to Note 14 - Commitments and Contingencies for additional information.

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Note 8. Borrowings

Long-term debt, net consisted of the following at September 30, 2024 and December 31, 2023 (in thousands):


	September 30, 2024		December 31, 2023
Senior Secured Term Loan (1, 2) (due February 24, 2028)	$	410,048	$	410,048
Revolving Loans (3) (due February 24, 2027)	44,280		38,450
Less: unamortized debt issuance costs	(6,353)		(7,395)
Less: unamortized original issue discount	(6,464)		(7,525)
Total debt, net	441,511		433,578
Less: current portion of long-term debt	—		—
Long-term debt, net	$	441,511	$	433,578

(1) Interest rate of 11.5% and 12.7% at September 30, 2024 and December 31, 2023, respectively, with interest payable in cash in designated installments at a variable interest rate. The effective interest rate was 12.6% and 13.9% at September 30, 2024 and December 31, 2023, respectively.

(2) Includes $10.0 million of interest previously paid-in-kind and added to the principal amount.

(3) Weighted average interest rate of 8.5% at September 30, 2024 and 9.5% at December 31, 2023, with interest payable in cash in designated installments at a variable interest rate.

2L Notes due to related parties, at fair value consisted of the following at September 30, 2024 and December 31, 2023 (in thousands):


	September 30, 2024		December 31, 2023
2L Notes due to related parties, at fair value (1)	$	108,762	$	79,472

(1) The effective interest rate for the 2L Notes was 8.0% at both September 30, 2024 and December 31, 2023.

2023 Debt Restructuring Transaction

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

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

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Based on the results of the cash flow tests and requirements pursuant to Accounting Standards Codification ("ASC") Topic 470, Debt, the Company accounted for the impacts related to amounts held by HPS Investment Partners, LLC as a modification, and the impacts related to amounts held and exchanged by Onex Credit Partners, LLC (“Onex”), Knighthead Capital Management, LLC (“Knighthead”) and Marathon Asset Management LP (“Marathon”) as an extinguishment. The Company recognized $0.4 million in loss on debt extinguishment within other expense, net in the consolidated statements of operations related to lenders treated under extinguishment accounting during the nine months ended September 30, 2023. The loss on debt extinguishment consisted of various offsetting components, including the derecognition of $4.3 million of unamortized deferred financing costs and original issue discount on the Senior Secured Term Loan and the recognition of $0.7 million of fair value premium at issuance on the 2L Notes, offset by the recognition of $2.8 million in delayed draw right assets related to the commitment provided by certain lenders and the recognition of $1.8 million of incremental original issue discount on the Senior Secured Term Loan.

2022 Credit Agreement

Effective February 24, 2022, ATI Holdings Acquisition, Inc. (the "Borrower"), an indirect subsidiary of the Company, entered into a credit agreement among the Borrower, Wilco Intermediate Holdings, Inc. ("Holdings"), as loan guarantor, Barclays Bank PLC, as administrative agent and issuing bank, and a syndicate of lenders (the "2022 Credit Agreement"). The 2022 Credit Agreement provided an initial $550.0 million credit facility (the "2022 Credit Facility") that was comprised of a $500.0 million senior secured term loan (the "Senior Secured Term Loan") and a $50.0 million "super priority" senior secured revolver (the "Revolving Loans") with a $10.0 million letter of credit sublimit. The 2022 Credit Agreement was subsequently amended as part of the 2023 Debt Restructuring, in which $100.0 million of the initial Senior Secured Term Loan principal was exchanged for 2L Notes.

Senior Secured Term Loan

The Senior Secured Term Loan matures on February 24, 2028 and bears interest, at the Company's election, at a base interest rate of the Alternate Base Rate ("ABR"), as defined in the agreement, plus an applicable credit spread, or at a base interest rate of the Adjusted Term Secured Overnight Financing Rate ("SOFR"), as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio, as defined in the agreement.

As of September 30, 2024, the outstanding principal amount on the Senior Secured Term Loan was $410.0 million, of which $17.0 million was due to related parties and is primarily attributable to Onex. As of September 30, 2024, borrowings on the Senior Secured Term Loan bear interest, payable in cash, at 11.5%, consisting of 12-month SOFR, subject to a 1.0% floor, plus a credit spread of 7.25%.

Revolving Loans

The Revolving Loans are subject to a maximum borrowing capacity of $50.0 million and mature on February 24, 2027. Letters of credit on the Revolving Loans are subject to a $10.0 million sublimit and reduce the available borrowing capacity on the Revolving Loans. Borrowings on the Revolving Loans bear interest, at the Company's election, at a base interest rate of the ABR, as defined in the agreement, plus an applicable credit spread, or at a base interest rate of the Adjusted Term SOFR Rate, as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio.

As of September 30, 2024, $44.3 million in Revolving Loans were outstanding and bearing interest, payable in cash, at a weighted average rate of 8.5%, consisting of 12-month SOFR plus a credit spread of approximately 4.3%. During the nine months ended September 30, 2024, the Company repaid approximately $25.3 million in Revolving Loans and drew an additional $31.2 million in Revolving Loans.

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Commitment fees on the Revolving Loans are payable quarterly at 0.5% per annum on the daily average undrawn portion for the quarter and are expensed as incurred. The balances of unamortized issuance costs related to the Revolving Loans were $0.3 million as of September 30, 2024, and $0.5 million as of December 31, 2023.

Letters of Credit

The Company had letters of credit totaling $5.7 million and $6.5 million under the letter of credit sub-facility on the Revolving Loans as of September 30, 2024 and December 31, 2023, respectively. The letters of credit auto-renew on an annual basis and are pledged to insurance carriers as collateral.

Guarantees, covenants and prepayments

The 2022 Credit Facility is guaranteed by certain of the Company’s subsidiaries and is secured by substantially all of the assets of Holdings, the Borrower and the Borrower’s wholly-owned subsidiaries, including a pledge of the stock of the Borrower, in each case, subject to customary exceptions.

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

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

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

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

2L Notes

As part of the 2023 Debt Restructuring, Knighthead, Marathon, and Onex collectively exchanged a principal amount of $100.0 million of Senior Secured Term Loan for $100.0 million of 2L Notes stapled with a number of shares of Series B Preferred Stock. Of the $100.0 million of 2L Notes issued, approximately $50.8 million were issued to Knighthead, $40.4 million were issued to Marathon, and $8.8 million were issued to Onex, all related parties. On the Closing Date, an additional $3.2 million of 2L Notes with stapled Series B Preferred Stock were issued among the same related parties as part of the First Amendment to the Second Lien Note Purchase Agreement. The terms of the issued 2L Notes and Series B Preferred Stock are the same as those that were subject to the exchange.

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The 2L Notes are subordinated in right of payment and lien priority to the 2022 Credit Facility and mature on August 24, 2028, unless earlier converted, accrue interest at an annual rate of 8.0% payable in-kind on a quarterly basis in the form of additional 2L Notes, and are convertible into shares of common stock, at the holder’s option, at a fixed conversion price of $12.50, subject to certain adjustments in the agreement (the "Conversion Price"). Upon conversion of the 2L Notes, the Company shall deliver to the holder a number of shares of common stock equal to (i) the principal amount of such 2L Notes plus any accrued and unpaid interest divided by (ii) the Conversion Price.

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

The Company has made an irrevocable election to account for the 2L Notes under the fair value option in accordance with ASC Topic 825, Financial Instruments, in lieu of bifurcating certain features in the Second Lien Note Purchase Agreement. As such, the 2L Notes were initially recorded as a liability at estimated fair value and are subject to re-measurement at each balance sheet date with changes in fair value recognized in the Company's statements of operations. The interest cost associated with the 2L Notes is accounted for as part of the change in fair value of the 2L Notes. As a result of applying the fair value option, direct costs and fees related to the issuance of the 2L Notes were expensed as incurred. As of September 30, 2024, the principal amount and estimated fair value of the 2L Notes were approximately $140.9 million and $108.8 million, respectively. As of December 31, 2023, the principal amount and estimated fair value of the 2L Notes were approximately, $107.8 million and $79.5 million, respectively. Refer to Note 11 - Fair Value Measurements for further details on the fair value of the 2L Notes.

The following table presents changes in the principal amount of the 2L Notes during the current year (in thousands):



2L Notes, principal amount at December 31, 2023	$	107,812
2L Notes issued during period	25,000
Paid-in-kind interest added during period	8,129
2L Notes, principal amount at September 30, 2024	$	140,941

As of September 30, 2024, of the 2L Notes principal outstanding and due to related parties, approximately $70.8 million, $54.7 million, $10.1 million, and $5.3 million were outstanding with Knighthead, Marathon, Onex, and Caspian Capital LP ("Caspian"), respectively. As of December 31, 2023, of the 2L Notes principal outstanding and due to related parties, approximately $54.7 million, $43.6 million and $9.5 million were outstanding with Knighthead, Marathon, and Onex, respectively.

Delayed Draw Right

As part of the 2023 Debt Restructuring, the Company also obtained the right to cause to be issued to Knighthead, Marathon and Caspian an additional $25.0 million of aggregate principal in the form of 2L Notes under its delayed draw right ("Delayed Draw Right”), which is governed by the Second Lien Note Purchase Agreement. Upon obtaining the Delayed Draw Right, the Company accounted for the Delayed Draw Right as an asset at fair value, which represented the Company's option to draw funds subject to certain conditions. For Knighthead's and Marathon's portion of the Delayed Draw Right, the asset was recognized as part of the calculation of loss on debt extinguishment. For Caspian, the Delayed Draw Right was recognized as a capital contribution as there was no previous lender relationship with the Company with respect to the Senior Secured Term Loan. At the Closing Date, the Company recognized approximately $3.5 million in Delayed Draw Right assets, which is included in other current assets on the Company's unaudited condensed consolidated balance sheets at December 31, 2023.

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During the nine months ended September 30, 2024, the Company issued $25.0 million of aggregate principal in the form of 2L Notes under its Delayed Draw Right, which are subject to the same terms as the convertible 2L Notes and associated shares of Series B Preferred Stock allowing for voting rights on an as-converted basis prior to conversion. Approximately $12.0 million, $8.0 million, and $5.0 million of the 2L Notes were issued to Knighthead, Marathon and Caspian, respectively. The Delayed Draw Right assets were de-recognized upon issuance of 2L Notes under the Delayed Draw Right which reduced the initial carrying value of the 2L Notes in the form of an original issue discount.

Series B Preferred Stock

The 2L Notes are effectively stapled with one share of the Company’s Series B Preferred Stock for every $1,000 principal amount of the 2L Notes. The Series B Preferred Stock represents voting rights only, with the number of votes being equal to the number of shares of common stock that each share of Series B Preferred Stock would convert into at a conversion price of $12.87 per share (the "Voting Rights Conversion Price"). Additional voting rights accrue to the lenders through the deemed issuance of the annual 8.0% paid-in-kind 2L Notes with stapled shares of Series B Preferred Stock. The Series B Preferred Stock does not have any dividend or redemption rights. Upon conversion of 2L Notes to common stock, the stapled shares of Series B Preferred Stock would be canceled in an amount commensurate with the portion of 2L Notes converted.

The following table presents approximate changes in outstanding shares of Series B Preferred Stock during the current year (in thousands):



Series B Preferred Stock, shares at December 31, 2023			108
Increase (decrease) in shares during period			33
Series B Preferred Stock, shares at September 30, 2024			141

Common stock voting rights, as converted basis(1)			10,951

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

Guarantees and covenants

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

The Second Lien Note Purchase Agreement includes affirmative and negative covenants (other than financial covenants) that are substantially consistent with the 2022 Credit Agreement, as well as customary events of default. Failure to comply with the Second Lien Note Purchase Agreement covenants and restrictions could result in an event of default under the borrowing agreement, subject to customary cure periods. In such an event, all amounts outstanding under the Second Lien Note Purchase Agreement, together with any accrued interest, could then be declared immediately due and payable.

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Aggregate maturities of the Company's borrowings at September 30, 2024 are as follows (in thousands):


2024 (remainder of year)	$	—
2025	—
2026	—
2027	44,280
2028	550,989

Thereafter	—
Total future maturities(1)	595,269
Unamortized original issue discount and debt issuance costs	(12,817)
2L Notes due to related parties, principal amount(1, 2)	(140,941)
Long-term debt, net(1)	$	441,511

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

(2) The principal amount of the 2L Notes differs from the estimated fair value presented on the unaudited condensed consolidated balance sheet due to the Company's election of the fair value option. Refer to Note 11 - Fair Value Measurements for further details on the fair value of the 2L Notes.

Note 9. Share-Based Compensation

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

ATI 2021 Equity Incentive Plan

The Company adopted the ATI Physical Therapy 2021 Equity Incentive Plan (the "2021 Plan") under which it may grant equity interests of the Company, in the form of stock options, stock appreciation rights, restricted stock awards and restricted stock units, to members of management, key employees and independent directors of the Company and its subsidiaries. The Compensation Committee is authorized to make grants and to make various other decisions under the 2021 Plan. The maximum number of shares reserved for issuance under the 2021 Plan is approximately 5.7 million. As of September 30, 2024, approximately 1.0 million shares were available for future grant.

2024 grants

During the third quarter of 2024, the Company granted approximately 3.8 million stock options under the 2021 Plan to certain employees and independent directors of the Company. The stock options are exercisable at $10.00, $12.50, $25.00 and $50.00, which represent out-of-the-money exercise prices on the date of grant, and may be exercised for one share of Class A common stock. The stock options will vest over three years and have a maximum term of 10 years from the date of grant.

The fair value of each stock option granted was determined using a lattice based option-pricing model, which captures the impact of early exercises on the expected option term by assuming that early exercise will occur when the share price reaches a defined multiple of the strike price. The expected term was calculated as the average time the option remains outstanding, consider

ATI Physical Therapy, Inc. [ATIP] Filings
ATI Physical Therapy, Inc. [ATIPW] Filings
10-Q	[2024-11-04]
10-Q	[2024-08-05]
10-Q	[2024-05-06]
10-K	[2024-02-27]
10-Q	[2023-11-06]
10-Q	[2023-08-08]
10-Q	[2023-05-08]
10-K	[2023-03-16]
10-Q	[2022-11-08]
10-Q	[2022-08-09]
10-Q	[2022-05-10]
S-1	[2022-04-12]
10-K	[2022-03-01]
10-Q	[2021-11-17]
10-Q	[2021-08-16]
S-1	[2021-07-09]
10-Q	[2021-05-17]
10-K	[2021-03-09]
10-Q	[2020-11-10]
10-Q	[2020-09-16]
S-1	[2020-07-24]

ATI Physical Therapy, Inc. [ATIP] Filings

ATI Physical Therapy, Inc. [ATIPW] Filings