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

 

Prospectus Supplement No. 2

(to Prospectus dated July 30, 2021)

ATI Physical Therapy, Inc.

196,770,282 shares of Common Stock

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

 

 

This prospectus supplement updates and supplements the prospectus dated July 30, 2021 (the “Prospectus”), which forms a part of our registration statement on Form S-1 (No. 333-257801). This prospectus supplement is being filed to update and supplement the information in the Prospectus and in the related prospectus supplement dated August 9, 2021 (“Prospectus Supplement No. 1”) with the information contained in our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on August 16, 2021 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.

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

 

Our Common Stock and our Public Warrants are listed on the New York Stock Exchange, or NYSE, under the symbol “ATIP” and “ATIPWS” respectively. On August 16, 2021, the last reported sale prices of our Common Stock was $4.16 per share and the last reported sales price of our Public Warrants was $0.84 per warrant.

This prospectus supplement updates and supplements the information in the Prospectus and Prospectus Supplement No. 1 and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus and Prospectus Supplement No. 1, including any subsequent amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and Prospectus Supplement No. 1, and if there is any inconsistency between the information in the Prospectus, Prospectus Supplement No. 1 and this prospectus supplement, you should rely on the information in this prospectus supplement. The information in this prospectus supplement modifies and supersedes, in part, the information in the Prospectus and Prospectus Supplement No. 1. Any information in the Prospectus or Prospectus Supplement No. 1 that is modified or superseded shall not be deemed to constitute a part of the Prospectus except as modified or superseded by this prospectus supplement. You should not assume that the information provided in this prospectus supplement, the Prospectus or Prospectus Supplement No. 1 is accurate as of any date other than their respective dates. Neither the delivery of this prospectus supplement, the Prospectus, or Prospectus Supplement No. 1 nor any sale made hereunder, shall under any circumstances create any implication that there has been no change in our affairs since the date of this prospectus supplement, or that the information contained in this prospectus supplement, the Prospectus or Prospectus Supplement No. 1 is correct as of any time after the date of that information.

 

 

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

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities nor passed upon the accuracy or adequacy of this Prospectus Supplement No. 2. Any representation to the contrary is a criminal offense.

The date of this Prospectus Supplement is August 17, 2021

 

 

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 June 30, 2021

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)

 

 

 

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, each whole warrant exercisable for one share of Class A common stock at an exercise price of $11.50 per share		ATIP WS		New York Stock Exchange

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 August 12, 2021, there were approximately 207,282,536 and 196,643,050 shares of the registrant’s common stock issued and outstanding, respectively.

 

 

 

Table of Contents

 

		Page
PART I - FINANCIAL INFORMATION - UNAUDITED
Item 1. Financial Statements
Condensed Consolidated Balance Sheets			6
Condensed Consolidated Statements of Operations			7
Condensed Consolidated Statements of Comprehensive Income (Loss)			8
Condensed Consolidated Statements of Changes in Stockholders’ Equity			9
Condensed Consolidated Statements of Cash Flows			11
Notes to Condensed Consolidated Financial Statements			12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			38
Item 3. Quantitative and Qualitative Disclosures About Market Risk			69
Item 4. Controls and Procedures			69
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			71
Item 1A. Risk Factors			71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			71
Item 3. Defaults Upon Senior Securities			71
Item 4. Mine Safety Disclosures			71
Item 5. Other Information			71
Item 6. Exhibits			72
Signatures			74

 

 

2

CAUTIONARY NOTES 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 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 dependence upon governmental and third party private payors for reimbursement and that decreases in reimbursement rates or changes in payor and service mix may adversely affect our financial results;

 

•

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

 

•

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

 

•

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

 

•

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;

 

•

failure of steps being taken to significantly reduce attrition of physical therapists and significant hiring of physical therapists and the impact of unfavorable labor market dynamics;

 

•

further unfavorable shifts in payor, state and service mix;

 

•

our ability to attract and retain talented executives and employees;

 

•

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

 

•

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

 

3

•

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

 

•

our operations are subject to extensive regulation and macroeconomic uncertainty;

 

•

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

 

•

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

 

•

the severity of the weather and natural disasters that can occur in the regions of the U.S. in which we operate, which could cause disruption to our business;

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

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

These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Form 10-Q are more fully described under the heading “Risk Factors” and elsewhere in this Form 10-Q. The risks described under the heading “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. The Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

4

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.

 

5

PART I - FINANCIAL INFORMATION - UNAUDITED

Item 1. Financial Statements

ATI Physical Therapy, Inc.

Condensed Consolidated Balance Sheets

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

(unaudited)

 

		June 30, 2021				December 31, 2020
Assets:
Current assets:
Cash and cash equivalents		$	90,569			$	142,128
Accounts receivable (net of allowance for doubtful accounts of $61,634 and $69,693 at June 30, 2021 and December 31, 2020, respectively)			87,587				90,707
Other current assets			7,541				6,027
Total current assets			185,697				238,862
Non-current assets:
Property and equipment, net			133,971				137,174
Operating lease right-of-use assets			256,554				258,227
Goodwill			896,892				1,330,085
Trade name and other intangible assets, net			611,512				644,339
Other non-current assets			1,871				1,685
Total assets		$	2,086,497			$	2,610,372
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable		$	12,255			$	12,148
Accrued expenses and other liabilities			60,183				70,690
Current portion of operating lease liabilities			48,273				52,395
Current portion of long-term debt			8,167				8,167
Total current liabilities			128,878				143,400
Long-term debt, net			546,778				991,418
Redeemable preferred stock			—				163,329
Warrant liability			22,397				—
Contingent common shares liability			199,552				—
Deferred income tax liabilities			107,849				138,547
Operating lease liabilities			251,235				253,990
Other non-current liabilities			7,530				18,571
Total liabilities			1,264,219				1,709,255
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 1.0 million shares authorized, none issued and outstanding at June 30, 2021 and December 31, 2020			—				—
Class A common stock, $0.0001 par value; 470.0 million shares authorized; 207.3 million shares issued, 196.6 million shares outstanding at June 30, 2021; 138.9 million shares issued, 128.3 million shares outstanding at December 31, 2020			20				13
Additional paid-in capital			1,349,459				954,728
Accumulated other comprehensive loss			(710	)			(1,907	)
Accumulated deficit			(536,623	)			(68,804	)
Total ATI Physical Therapy, Inc. equity			812,146				884,030
Non-controlling interests			10,132				17,087
Total stockholders’ equity			822,278				901,117
Total liabilities and stockholders’ equity		$	2,086,497			$	2,610,372

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

 

6

ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

		Three Months Ended								Six Months Ended
		June 30, 2021				June 30, 2020				June 30, 2021				June 30, 2020
Net patient revenue		$	146,679			$	95,003			$	278,950			$	259,942
Other revenue			17,354				12,751				34,145				30,550
Net operating revenue			164,033				107,754				313,095				290,492
Clinic operating costs:
Salaries and related costs			80,917				53,966				161,571				149,315
Rent, clinic supplies, contract labor and other			44,079				38,708				87,375				84,137
Provision for doubtful accounts			3,585				3,941				10,756				9,961
Total clinic operating costs			128,581				96,615				259,702				243,413
Selling, general and administrative expenses			26,391				24,791				51,117				48,262
Goodwill and intangible asset impairment charges			467,118				—				467,118				—
Operating loss			(458,057	)			(13,652	)			(464,842	)			(1,183	)
Change in fair value of warrant liability (Note 12)			(4,539	)			—				(4,539	)			—
Change in fair value of contingent common shares liability (Note 13)			(20,948	)			—				(20,948	)			—
Loss on settlement of redeemable preferred stock			14,037				—				14,037				—
Interest expense, net			15,632				17,683				31,719				35,541
Interest expense on redeemable preferred stock			4,779				4,604				10,087				8,981
Other expense (income), net			5,626				(44,103	)			5,779				(43,971	)
(Loss) income before taxes			(472,644	)			8,164				(500,977	)			(1,734	)
Income tax (benefit) expense			(20,183	)			3,568				(30,698	)			1,776
Net (loss) income			(452,461	)			4,596				(470,279	)			(3,510	)
Net (loss) income attributable to non-controlling interest			(3,769	)			1,855				(2,460	)			3,185
Net (loss) income attributable to ATI Physical Therapy, Inc.		$	(448,692	)		$	2,741			$	(467,819	)		$	(6,695	)
(Loss) earnings per share of Class A common stock:
Basic		$	(3.22	)		$	0.02			$	(3.49	)		$	(0.05	)
Diluted		$	(3.22	)		$	0.02			$	(3.49	)		$	(0.05	)
Weighted average shares outstanding:
Basic and diluted			139,553				128,286				133,951				128,286

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

 

7

ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

($ in thousands)

(unaudited)

 

		Three Months Ended								Six Months Ended
		June 30, 2021				June 30, 2020				June 30, 2021				June 30, 2020
Net (loss) income attributable to ATI Physical Therapy, Inc.		$	(448,692	)		$	2,741			$	(467,819	)		$	(6,695	)
Other comprehensive income:
Unrealized gain on interest rate swap			636				176				1,197				441
Comprehensive (loss) income		$	(448,056	)		$	2,917			$	(466,622	)		$	(6,254	)

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

 

8

ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

($ in thousands, except share data)

(unaudited)

 

		Common Stock								Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Accumulated Deficit				Non-Controlling Interest				Total Stockholders’ Equity
		Shares				Amount
Balance at January 1, 2021			938,557			$	9			$	954,732			$	(1,907	)		$	(68,804	)		$	17,087			$	901,117
Retrospective application of reverse recapitalization			127,346,957				4				(4	)			—				—				—				—
Adjusted balance at January 1, 2021			128,285,514			$	13			$	954,728			$	(1,907	)		$	(68,804	)		$	17,087			$	901,117
Share-based compensation			—				—				504				—				—				—				504
Other comprehensive income (1)			—				—				—				561				—				—				561
Distribution to non-controlling interest holder			—				—				—				—				—				(3,575	)			(3,575	)
Net income attributable to non-controlling interest			—				—				—				—				—				1,309				1,309
Net loss attributable to ATI Physical Therapy, Inc.			—				—				—				—				(19,127	)			—				(19,127	)
Balance at March 31, 2021			128,285,514			$	13			$	955,232			$	(1,346	)		$	(87,931	)		$	14,821			$	880,789
Net proceeds from FAII in Business Combination			25,512,254				3				210,102				—				—				—				210,105
Shares issued through PIPE investment			30,000,000				3				299,997				—				—				—				300,000
Shares issued to Wilco Holdco Series A Preferred stockholders			12,845,282				1				128,452				—				—				—				128,453
Warrant liability recognized upon the closing of the Business Combination			—				—				(26,936	)			—				—				—				(26,936	)
Contingent common shares liability recognized upon the closing of the Business Combination			—				—				(220,500	)			—				—				—				(220,500	)
Share-based compensation			—				—				3,112				—				—				—				3,112
Other comprehensive income (1)			—				—				—				636				—				—				636
Distribution to non-controlling interest holder			—				—				—				—				—				(920	)			(920	)
Net loss attributable to non-controlling interest			—				—				—				—				—				(3,769	)			(3,769	)
Net loss attributable to ATI Physical Therapy, Inc.			—				—				—				—				(448,692	)			—				(448,692	)
Balance at June 30, 2021			196,643,050			$	20			$	1,349,459			$	(710	)		$	(536,623	)		$	10,132			$	822,278

 

(1)	Other comprehensive income related to unrealized gain on interest rate swap

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

 

9

ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

($ in thousands)

(unaudited)

 

		Common Stock								Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Accumulated Deficit				Non-Controlling Interest				Total Stockholders’ Equity
		Shares				Amount
Balance at January 1, 2020			938,557			$	9			$	952,796			$	(1,325	)		$	(63,028	)		$	16,467			$	904,919
Retrospective application of reverse recapitalization			127,346,957				4				(4	)			—				—				—				—
Adjusted balance at January 1, 2020			128,285,514			$	13			$	952,792			$	(1,325	)		$	(63,028	)		$	16,467			$	904,919
Share-based compensation			—				—				494				—				—				—				494
Cumulative impact of ASC 842 adoption			—				—				—				—				(405	)			—				(405	)
Other comprehensive income (1)			—				—				—				265				—				—				265
Distribution to non-controlling interest holder			—				—				—				—				—				(1,553	)			(1,553	)
Net income attributable to non-controlling interest			—				—				—				—				—				1,330				1,330
Net loss attributable to ATI Physical Therapy, Inc.			—				—				—				—				(9,436	)			—				(9,436	)
Balance at March 31, 2020			128,285,514			$	13			$	953,286			$	(1,060	)		$	(72,869	)		$	16,244			$	895,614
Share-based compensation			—				—				466				—				—				—				466
Other comprehensive income (1)			—				—				—				176				—				—				176
Distribution to non-controlling interest holder			—				—				—				—				—				—				—
Net income attributable to non-controlling interest			—				—				—				—				—				1,855				1,855
Net income attributable to ATI Physical Therapy, Inc.			—				—				—				—				2,741				—				2,741
Balance at June 30, 2020			128,285,514			$	13			$	953,752			$	(884	)		$	(70,128	)		$	18,099			$	900,852

 

(1)	Other comprehensive income related to unrealized gain on interest rate swap

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

 

10

ATI Physical Therapy, Inc.

Condensed Consolidated Statements of Cash Flows

($ in thousands)

(unaudited)

 

		Six Months Ended
		June 30, 2021				June 30, 2020
Operating activities:
Net loss		$	(470,279	)		$	(3,510	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Goodwill and intangible asset impairment charges			467,118				—
Depreciation and amortization			18,768				19,748
Provision for doubtful accounts			10,756				9,961
Deferred income tax provision			(30,698	)			1,772
Amortization of right-of-use assets			22,349				22,445
Share-based compensation			3,616				960
Amortization of debt issuance costs and original issue discount			2,045				1,999
Non-cash interest expense			—				3,128
Loss on extinguishment of debt			5,534				—
Loss on settlement of redeemable preferred stock			14,037				—
Loss on disposal and impairment of assets			472				373
Change in fair value of warrant liability			(4,539	)			—
Change in fair value of contingent common shares liability			(20,948	)			—
Changes in:
Accounts receivable, net			(3,767	)			16,316
Other current assets			(1,621	)			2,987
Other non-current assets			(199	)			(395	)
Accounts payable			1,943				(2,828	)
Accrued expenses and other liabilities			(21,117	)			(13,423	)
Operating lease liabilities			(27,563	)			(21,336	)
Other non-current liabilities			766				(559	)
Accrued interest on redeemable preferred stock			10,087				8,981
Medicare Accelerated and Advance Payment Program Funds			(3,869	)			26,732
Provider Relief Fund general distribution payments received but not yet recognized			—				47,261
Net cash (used in) provided by operating activities			(27,109	)			120,612
Investing activities:
Purchases of property and equipment			(18,186	)			(11,334	)
Purchases of intangible assets			(1,025	)			—
Proceeds from sale of property and equipment			20				102
Proceeds from sale of clinics			248				—
Net cash used in investing activities			(18,943	)			(11,232	)
Financing activities:
Principal payments on long-term debt			(452,117	)			(4,083	)
Proceeds from revolving line of credit			—				68,750
Payments on revolving line of credit			—				(68,750	)
Cash inflow from Business Combination			229,338				—
Payments to Series A Preferred stockholders			(59,000	)			—
Proceeds from shares issued through PIPE investment			300,000				—
Payments for equity issuance costs			(19,233	)			—
Distribution to non-controlling interest holder			(4,495	)			(1,553	)
Net cash used in financing activities			(5,507	)			(5,636	)
Changes in cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents			(51,559	)			103,744
Cash and cash equivalents at beginning of period			142,128				38,303
Cash and cash equivalents at end of period		$	90,569			$	142,047
Supplemental noncash disclosures:
Derivative changes in fair value		$	(1,197	)		$	(441	)
Purchases of property and equipment in accounts payable		$	1,174			$	608
Warrant liability recognized upon the closing of the Business Combination		$	(26,936	)		$	—
Contingent common shares liability recognized upon the closing of the Business Combination		$	(220,500	)		$	—
Shares issued to Wilco Holdco Series A Preferred stockholders		$	128,453			$	—
Other supplemental disclosures:
Cash paid for interest		$	28,716			$	30,337
Cash paid for (received from) taxes		$	30			$	(847	)

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

 

11

Note 1. Overview of the Company

ATI Physical Therapy, Inc., together with its subsidiaries (herein referred to as “we”, “the Company”, “ATI Physical Therapy” and “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 June 30, 2021, had 889 clinics (as well as 23 clinics under management service agreements) located in 24 states. 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, including work conditioning and work hardening; hand therapy; and other specialized treatment services. The Company’s direct and indirect wholly-owned subsidiaries include, but are not limited to, Wilco Holdco, Inc., ATI Holdings Acquisition, Inc. and ATI Holdings, LLC.

On June 16, 2021 (the “Closing Date”), a Business Combination transaction (the “Business Combination”) was finalized pursuant to the Agreement and Plan of Merger (“Merger Agreement”), dated February 21, 2021 between the operating company, Wilco Holdco, Inc. (“Wilco Holdco”), and Fortress Value Acquisition Corp. II (“FAII”), a special purpose acquisition company. In connection with the closing of the Business Combination, the Company changed its name from Fortress Value Acquisition Corp. II to ATI Physical Therapy, Inc. The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “ATIP.”

The Business Combination is accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, FAII is treated as the acquired company and Wilco Holdco is treated as the acquirer for financial statement reporting and accounting purposes. As a result, the historical operations of Wilco Holdco are deemed to be those of the Company. Therefore, the financial statements included in this report reflect (i) the historical operating results of Wilco Holdco prior to the Business Combination; (ii) the combined results of the FAII and Wilco Holdco following the Business Combination on June 16, 2021; (iii) the assets and liabilities of Wilco Holdco at their historical cost; and (iv) the Company’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the Business Combination is reflected retroactively to the earliest period presented and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination consistent with the treatment of the transaction as a reverse recapitalization of Wilco Holdco, Inc. Refer to “Note 3 - Business Combination” for additional information.

Impact of COVID-19 and CARES Act

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

 

12

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law providing reimbursement, grants, waivers and other funds to assist health care providers during the COVID-19 pandemic. The Company has realized benefits under the CARES Act including, but not limited to, the following:

 

•

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

 

Three Months Ended
March 31, 2020				June 30, 2020				September 30, 2020				December 31, 2020				Total
$	—			$	44.3			$	23.1			$	24.1			$	91.5

 

•

The Company applied for and attained approval to receive $26.7 million of Medicare Accelerated and Advance Payment Program (“MAAPP”) funds during the quarter ended June 30, 2020. During the quarter ended June 30, 2021, the Company repaid $3.8 million in MAAPP funds. Because the Company has not yet met all required performance obligations or performed the services related to the remaining funds, as of June 30, 2021 and December 31, 2020, $22.6 million and $15.5 million of the funds are recorded in accrued expenses and other liabilities, respectively, and $0.3 million and $11.2 million of the funds are recorded in other non-current liabilities, respectively.

 

•

The Company elected to defer depositing the employer portion of Social Security taxes for payments due from March 27, 2020 through December 31, 2020, interest-free and penalty-free. Related to these payments, as of June 30, 2021 and December 31, 2020, $5.5 million is included in accrued expenses and other liabilities and $5.5 million is included in other non-current liabilities.

Note 2. Basis of Presentation and Recent Accounting Standards

The accompanying unaudited condensed consolidated financial statements of the Company were prepared in accordance with U.S. generally accepted accounting principles 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.

 

13

Management believes the unaudited condensed consolidated financial statements for the interim periods presented contain all necessary adjustments to present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented.

Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results the Company expects for the entire year. In addition, the influence of seasonality, changes in payor contracts, strategic transactions, 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. Preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts during the reporting period. Actual results could differ from those estimates.

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 (“CODM”) is our Chief Executive Officer (or in the absence of a Chief Executive Officer, the leadership team fulfilling the role of Principal 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.

For further information regarding the Company’s accounting policies and other information, the condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in our amended S-1 registration statement filed with the SEC on July 28, 2021.

Recently adopted accounting guidance

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 and simplifies the accounting for income taxes. This ASU is effective for the Company on January 1, 2022, with early adoption permitted. The Company early adopted this new accounting standard effective January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

Recent accounting pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This standard was subsequently amended by ASU No. 2021-01, Reference Rate Reform (Topics 848): Scope. This standard is optional and may be applied by entities after March 12, 2020, but no later than December 31, 2022. The Company has certain debt instruments for which the interest rates are indexed to the London InterBank Offered Rate (“LIBOR”), and as a result, is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.

 

14

Note 3. Business Combination

As discussed in Note 1, on June 16, 2021, a business combination between Wilco Holdco and FAII was consummated, which was accounted for as a reverse recapitalization of Wilco Holdco, Inc. At the time of the Business Combination, stockholders of Wilco Holdco, Inc. received 130.3 million shares of the Company’s Class A common stock, par value $0.0001 per share (the “Common Stock”), for the outstanding shares of Wilco Holdco common stock, par value $0.01 per share, that such stockholders owned. Upon conversion of unvested Incentive Common Units (“ICUs”) granted prior to the Business Combination under the Wilco Acquisition, LP 2016 Equity Incentive Plan, 2.0 million of these shares are restricted subject to vesting requirements, resulting in total unrestricted shares of 128.3 million and an exchange ratio of 136.7 unrestricted shares of ATI Physical Therapy, Inc. for every previously outstanding Wilco Holdco share.

Immediately following the Business Combination, there were 207.3 million shares issued and 196.6 million outstanding shares of common stock of ATI Physical Therapy, Inc., consisting of the following (in thousands):

 

		Class A Common Shares
FAII Class A common stock prior to Business Combination			34,500
FAII Class F common stock prior to Business Combination(1)			8,625
Less: FAII Class A common stock redemptions			(8,988	)
FAII common shares (Class A and Class F)			34,137
Add: Shares issued to Wilco Holdco stockholders(2)			130,300
Add: Shares issued through PIPE investment			30,000
Add: Shares issued to Wilco Holdco Series A Preferred stockholders			12,845
Total shares issued as of the closing date of the Business Combination(3)			207,282
Less: Vesting Shares(1)			(8,625	)
Less: Restricted shares(2)			(2,014	)
Total shares outstanding as of the closing date of the Business Combination(3)			196,643

 

(1)	Per the Merger Agreement, as of the closing of the Business Combination, all Class F shares converted into the equivalent number of Class A common shares and became subject to certain vesting and forfeiture provisions (“Vesting Shares”) as detailed in Note 13 - Contingent Common Shares Liability.

(2)	Includes 1.2 million unrestricted shares and 2.0 million restricted shares upon conversion from vested and unvested ICUs, respectively, under the Wilco Acquisition, LP 2016 Equity Incentive Plan. Refer to Note 9 - Share-Based Compensation for further details.

(3)	Excludes 15.0 million Earnout Shares, 6.9 million Public Warrants and 3.0 million Private Placement Warrants to purchase Class A common stock. Refer to Note 12 - Warrant Liability and Note 13 - Contingent Common Shares Liability for further details.

PIPE investment

Concurrently with the closing of the Business Combination, pursuant to Subscription Agreements executed between FAII and certain investors, 30.0 million shares of Class A common stock (the “PIPE” investment) were newly issued in a private placement at a purchase price of $10.00 per share for an aggregate purchase price of $300.0 million. The initial PIPE investment included 7.5 million shares of Class A common stock newly issued to certain investment funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) at a purchase price of $10.00 per share for an aggregate purchase price of $75.0 million.

 

15

Wilco Holdco Series A Preferred Stock

Immediately following the Business Combination, all holders of the previously outstanding shares of Wilco Holdco Series A Preferred Stock received a proportionate share of $59.0 million and 12.8 million shares of ATI Physical Therapy, Inc. Class A common stock based on the terms of the Merger Agreement. Refer to Note 11 - Wilco Holdco Series A Preferred Stock for further details.

Earnout Shares

Subject to the terms and conditions of the Merger Agreement, certain stockholders of Wilco Holdco, Inc. were provided the contingent right to receive, in the aggregate, up to 15.0 million shares of Class A common stock that may be issued pursuant to an earnout arrangement if certain Class A common stock price targets are achieved between the Closing Date and the 10 year anniversary of the Closing Date (“Earnout Shares”). The Earnout Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Earnout Shares price target.

On the date of the Business Combination, the Company recorded a liability related to the Earnout Shares of $140.0 million. During the period from June 16, 2021 to June 30, 2021, the fair value of the Earnout Shares decreased to $126.7 million, resulting in a gain of $13.3 million recorded as a component of change in fair value of contingent common shares liability in the condensed consolidated statements of operations for the three and six months ended June 30, 2021. Refer to Note 13 - Contingent Common Shares Liability and Note - 14 - Fair Value Measurements for further details.

Vesting Shares

Pursuant to the Sponsor Letter Agreement executed in connection with the Merger Agreement, 8.6 million shares of Class F common stock of FAII outstanding immediately prior to the Business Combination converted to potential Class A common shares and became subject to certain vesting and forfeiture provisions (“Vesting Shares”). The Vesting Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Vesting Shares price target.

On the date of the Business Combination, the Company recorded a liability related to the Vesting Shares of $80.5 million. During the period from June 16, 2021 to June 30, 2021, the fair value of the Vesting Shares decreased to $72.9 million, resulting in a gain of $7.6 million recorded as a component of change in fair value of contingent common shares liability in the condensed consolidated statements of operations for the three and six months ended June 30, 2021. Refer to Note 13 - Contingent Common Shares Liability and Note - 14 - Fair Value Measurements for further details.

Warrants

Immediately following the Business Combination, the Company had outstanding Public Warrants to purchase an aggregate of 6.9 million shares of the Company’s Class A common stock (“Public Warrants”) and outstanding Private Placement Warrants to purchase an aggregate of 3.0 million shares of the Company’s Class A common stock (“Private Placement Warrants”) (collectively, the “Warrants”). In conjunction with the Business Combination, 3.0 million Private Placement Warrants were transferred and surrendered for no consideration based on terms of the Sponsor Letter Agreement.

 

16

On the date of the Business Combination, the Company recorded a liability related to the Warrants of $26.9 million. During the period from June 16, 2021 to June 30, 2021, the fair value of the Warrants decreased to $22.4 million, resulting in a gain of $4.5 million recorded as change in fair value of warrant liability in the condensed consolidated statements of operations for the three and six months ended June 30, 2021. Refer to Note 12 - Warrant Liability and Note 14 - Fair Value Measurements for further details for further details.

The following table reflects the components of cash movement related to the Business Combination, PIPE investment and debt repayments (in thousands):

 

Cash in trust with FAII as of the Closing Date of the Business Combination		$	345,036
Cash used for redemptions of FAII Class A common stock			(89,877	)
FAII transaction costs paid at closing			(25,821	)
Cash inflow from Business Combination			229,338
Wilco Holdco, Inc. transaction costs offset against proceeds			(19,233	)
Net proceeds from FAII in Business Combination			210,105
Cash proceeds from PIPE investment			300,000
Repayment of second lien subordinated loan			(231,335	)
Partial repayment of first lien term loan			(216,700	)
Cash payment to Wilco Holdco Series A Preferred stockholders			(59,000	)
Wilco Holdco, Inc. transaction costs expensed during the six months ended June 30, 2021			(5,543	)
Net decrease in cash related to Business Combination, PIPE investment and debt repayments		$	(2,473	)

For the three and six months ended June 30, 2021, the Company expensed $3.2 million and $5.5 million, respectively, in transaction costs related to the Business Combination, which are classified as selling, general and administrative expenses in the condensed consolidated statement of operations. In addition, $19.2 million of Wilco Holdco, Inc. transaction costs related to the Business Combination were offset against additional paid-in capital in the condensed consolidated statements of changes in stockholders’ equity as these costs were determined to be directly attributable to the recapitalization.

 

17

Note 4. Revenue from Contracts with Customers

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

 

		Three Months Ended								Six Months Ended
		June 30, 2021				June 30, 2020				June 30, 2021				June 30, 2020
Net patient revenue		$	146,679			$	95,003			$	278,950			$	259,942
ATI Worksite Solutions (1)			8,711				7,238				17,204				14,791
Management Service Agreements (1)			3,825				3,169				7,322				7,772
Other revenue (1)			4,818				2,344				9,619				7,987
		$	164,033			$	107,754			$	313,095			$	290,492

 

(1)	ATI Worksite Solutions, Management Service Agreements and Other revenue are included within other revenue on the face of the 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								Six Months Ended
		June 30, 2021				June 30, 2020				June 30, 2021				June 30, 2020
Commercial			56.2	%			50.2	%			55.8	%			51.4	%
Government			23.8	%			19.2	%			23.2	%			21.8	%
Workers’ compensation			14.7	%			22.5	%			15.3	%			19.0	%
Other (1)			5.3	%			8.1	%			5.7	%			7.8	%
			100.0	%			100.0	%			100.0	%			100.0	%

 

(1)	Other is primarily comprised of net patient revenue related to auto personal injury.

Note 5. Goodwill, Trade Name and Other Intangible Assets

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

 

		Six Months Ended June 30, 2021				Year Ended December 31, 2020
Beginning balance		$	1,330,085			$	1,330,085
Reductions - impairment charges			(433,193	)			—
Additions – acquisitions			—				—
Ending balance		$	896,892			$	1,330,085

 

18

The table below summarizes the Company’s carrying amount of trade name and other intangible assets at June 30, 2021 and December 31, 2020 (in thousands):

 

		June 30, 2021				December 31, 2020
Gross intangible assets:
ATI trade name (1)		$	610,000			$	643,700
Non-compete agreements			5,703				4,678
Other intangible assets			640				640
Accumulated amortization:
Accumulated amortization – non-compete agreements			(4,568	)			(4,437	)
Accumulated amortization – other intangible assets			(263	)			(242	)
Total trade name and other intangible assets, net		$	611,512			$	644,339

 

(1)	Not subject to amortization.

Amortization expense for the three and six months ended June 30, 2021 and 2020 was immaterial. The Company estimates that amortization expense related to intangible assets is expected to be immaterial over the next five fiscal years and thereafter.

Interim impairment testing

In late July 2021, the Company revised its earnings forecast to reflect (i) the impact of clinician attrition on both volume and operating cost expectations and (ii) payor, state and service mix shift impacts on net patient revenue per visit expectations. These factors accelerated in the second quarter and continued into the third quarter. The Company determined that the revision to its forecast, including factors related to the revision of the forecast, constitutes an interim triggering event requiring further analysis with respect to potential impairment to goodwill, trade name indefinite-lived intangible and other assets. Although the revision to the Company’s forecast occurred during the third quarter, because the impairment analysis was performed before the results for the quarter-ended June 30, 2021 were reported, the determination was made to recognize the resulting impairment charges in the financial statements as of the June 30, 2021 balance sheet date.

The combination of factors resulting in the Company’s change in forecast included:

 

•

The acceleration of attrition in the second quarter of 2021 and continuing into the third quarter caused, in part, by changes made during the COVID-19 pandemic related to compensation, staffing levels and support for clinicians.

 

•

Labor market dynamics increased competition for the available physical therapy providers in the workforce, creating wage inflation and elevated employee attrition at ATI.

 

•

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

 

19

As we determined that it was more likely than not that the fair value of our trade name indefinite-lived intangible asset was below its carrying value, the Company performed an interim quantitative impairment test as of the June 30, 2021 balance sheet date. The Company utilized the relief from royalty approach to estimate the fair value of the trade name indefinite-lived intangible asset. The key assumptions associated with determining the estimated fair value include projected revenue growth, the royalty rate and the discount rate. As a result of the analysis, we recognized a $33.7 million non-cash impairment charge during the period ended June 30, 2021 in the line item goodwill and intangible asset impairment charges in the Company’s condensed consolidated statements of operations, which represents the difference between the estimated fair value of the Company’s trade name indefinite-lived intangible asset and its carrying value. The carrying value of the trade name indefinite-lived intangible asset prior to the impairment charge was $643.7 million.

The Company evaluated its asset groups, including operating lease right-of-use assets that were evaluated based on clinic-level cash flows and clinic-specific market factors, noting no material impairment.

As we determined that it was more likely than not that the fair value of our single reporting unit was below its carrying value, the Company performed an interim quantitative impairment test as of the June 30, 2021 balance sheet date. In order to determine the fair value of our single reporting unit, the Company utilized an average of a discounted cash flow analysis and comparable public company analysis. The key assumptions associated with determining the estimated fair value include projected future revenue growth rates, earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins, the terminal growth rate, the discount rate and relevant market multiples. As a result of the analysis, we recognized a $433.2 million non-cash impairment charge during the period ended June 30, 2021 in the line item goodwill and intangible asset impairment charges in the Company’s condensed consolidated statements of operations, which represents the difference between the estimated fair value of the Company’s single reporting unit and its carrying value. The carrying value of goodwill prior to the impairment charge was $1.3 billion.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of the Company’s reporting unit and indefinite-lived intangible assets requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include projected future revenue growth rates, EBITDA margins, terminal growth rates, discount rates, relevant market multiples, royalty rates and other market factors. If current expectations of future growth rates, margins and cash flows are not met, or if market factors outside of our control change significantly, then our reporting unit or indefinite-lived intangible assets might become impaired in the future, negatively impacting our operating results and financial position. As the carrying amounts of goodwill and the Company’s trade name indefinite-lived intangible asset were impaired as of June 30, 2021 and written down to fair value, those amounts are more susceptible to an impairment risk if there are unfavorable changes in assumptions and estimates.

 

20

Note 6. Property and Equipment

Property and equipment consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

		June 30, 2021				December 31, 2020
Equipment		$	34,167			$	32,978
Furniture and fixtures			17,453				17,247
Leasehold improvements			168,619				162,853
Automobiles			19				19
Computer equipment and software			80,641				77,390
Construction-in-progress			13,457				9,594
			314,356				300,081
Accumulated depreciation and amortization			(180,385	)			(162,907	)
Property and equipment, net		$	133,971			$	137,174

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

 

		Three Months Ended								Six Months Ended
		June 30, 2021				June 30, 2020				June 30, 2021				June 30, 2020
Rent, clinic supplies, contract labor and other		$	6,474			$	6,217			$	12,980			$	12,588
Selling, general and administrative expenses			2,578				3,501				5,636				7,069
Total depreciation expense		$	9,052			$	9,718			$	18,616			$	19,657

 

21

Note 7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

		June 30, 2021				December 31, 2020
CARES Act funds (1)		$	28,075			$	21,031
Salaries and related costs			16,970				21,387
Transaction-related amount due to former owners (2)			3,611				3,611
Credit balance due to patients and payors			2,742				9,635
Revenue cycle management costs			1,295				2,469
Transaction-related costs (3)			521				2,547
Other payables and accrued expenses			6,969				10,010
Total		$	60,183			$	70,690

 

(1)	Includes current portion of MAAPP funds received and deferred employer Social Security tax payments.

(2)	Represents the amount due to former owners related to the Company’s utilization of net operating loss carryforwards generated prior to its acquisition of ATI Holdings Acquisition, Inc.

(3)	Represents costs related to public readiness initiatives and corporate transactions.

Note 8. Borrowings

Long-term debt consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

		June 30, 2021				December 31, 2020
First lien term loan (1) (due May 10, 2023, with principal payable in quarterly installments)		$	559,132			$	779,915
Second lien subordinated loan (2)			—				231,335
Less: unamortized debt issuance costs			(2,627	)			(8,933	)
Less: unamortized original issue discount			(1,560	)			(2,732	)
Total debt, net		$	554,945			$	999,585
Less: current portion of long-term debt			(8,167	)			(8,167	)
Long-term debt, net		$	546,778			$	991,418

 

(1)	Interest rate of 4.5% at June 30, 2021 and December 31, 2020, with interest payable in designated installments (dependent upon the base interest rate election) at a variable interest rate. The effective interest rate for the first lien term loan was 4.9% at June 30, 2021 and December 31, 2020.

(2)	Loan balance was repaid in its entirety on June 16, 2021 as part of the Business Combination. The effective interest rate for the second lien term loan was 10.9% at December 31, 2020.

 

22

2016 first and second lien credit agreements

In connection with the Business Combination on June 16, 2021, the Company paid down $216.7 million of its first lien term loan. The Company recognized $1.7 million in charges related to the derecognition of the proportionate amount of remaining unamortized deferred financing costs and unamortized original issue discount associated with the partial debt repayment.

In connection with the Business Combination on June 16, 2021, the Company paid $231.3 million to settle its second lien subordinated term loan. The Company recognized $3.8 million in charges related to the derecognition of the remaining unamortized deferred financing costs in conjunction with the debt repayment.

The total loss on debt extinguishment associated with the partial repayment of the first lien term loan and the settlement of the second lien subordinated term loan was $5.5 million for the three and six months ended June 30, 2021. This amount has been reflected in other expense (income), net in the condensed consolidated statements of operations.

The Company’s credit agreements contain covenants with which ATI Holdings Acquisition, Inc. (the “Borrower”) must comply. For the first lien credit agreement, the Borrower must maintain, as of the last day of each fiscal quarter when the sum of the outstanding balance of revolving loans, swingline loans and certain letters of credit exceeds 30% of the total revolving credit facility commitment, a ratio of consolidated first lien net debt to consolidated adjusted EBITDA, as defined in the agreements, not to exceed 6.25:1.00. Additionally, the agreements are subject to subjective acceleration clauses, effective upon a material adverse change in the Company’s business or financial condition. As of June 30, 2021, the Borrower was in compliance with the financial covenant contained in the first lien agreement.

Revolving credit facility

The first lien agreement includes a revolving credit facility with a maximum borrowing capacity of $70.0 million, including $15.0 million sub-limit for swingline loans and amounts available for letters of credit. The issuance of such letters of credit and the making of swingline loans reduces the amount available under the applicable revolving credit facility.

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

The Company drew amounts of $19.0 million and $49.8 million under its revolving credit facility in March and April 2020, respectively. The Company repaid the borrowed amounts in full in June 2020. As of June 30, 2021 and December 31, 2020, no borrowings were outstanding under the revolving credit facility.

 

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The Company had letters of credit totaling $1.2 million under the letter of credit sub-facility on the revolving credit facilities as of June 30, 2021 and December 31, 2020, respectively. The letters of credit auto-renew on an annual basis and are pledged to insurance carriers as collateral.

Aggregate maturities of long-term debt at June 30, 2021 are as follows (in thousands):

 

2021 (remainder of year after June 30, 2021)		$	4,083
2022			8,167
2023			546,882
Total future maturities			559,132
Unamortized original issue discount and debt issuance costs			(4,187	)
Total debt, net		$	554,945

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 selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Share-based compensation expense is adjusted for forfeitures as incurred.

Wilco Acquisition, LP 2016 Equity Incentive Plan

Prior to the Business Combination, Wilco Acquisition, LP was the parent company of Wilco Holdco, Inc. and its subsidiaries. In 2016, the Company adopted the Wilco Acquisition, LP 2016 Equity Incentive Plan (the “2016 Plan”) under which, prior to the Business Combination, it granted profit interests of Wilco Acquisition, LP in the form of Incentive Common Units, to members of management, key employees and independent directors of Wilco Acquisition, LP and its subsidiaries.

Service-based vesting

Prior to the Business Combination, Wilco Acquisition, LP granted Incentive Common Units, subject to service-based vesting, to members of management, key employees and independent directors. Following the closing of the Business Combination, holders of service-based ICUs are entitled to a distribution of a number of Class A common shares of ATI Physical Therapy, Inc. based on the distribution priorities under the Wilco Acquisition, LP limited partnership agreement. The shares related to vested service-based ICUs convert to unrestricted Class A common shares of ATI. The shares related to unvested service-based ICUs convert to restricted Class A common shares of ATI eligible to vest over the shorter of: (a) the existing vesting schedule applicable to the underlying ICUs, or (b) in installments on each quarterly anniversary of the closing over three years post-closing, subject to the grantee’s continued service through each vesting date.

 

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Pursuant to the 2016 Plan, total share-based compensation expense related to service-based awards recognized in the three months ended June 30, 2021 and 2020 was $0.4 million and $0.5 million, respectively. Total share-based compensation expense related to service-based awards recognized in the six months ended June 30, 2021 and 2020 was $0.9 million and $1.0 million, respectively.

As of June 30, 2021, the remaining unvested restricted shares from converted service-based ICUs totaled 0.5 million Class A common shares, with unrecognized compensation expense of $3.8 million to be recognized over a weighted-average period of 2.8 years. There were no service-based awards granted under the 2016 Plan during the three and six months ended June 30, 2021.

Performance-based vesting

Prior to the Business Combination, Wilco Acquisition, LP granted Incentive Common Units, subject to performance-based vesting, to members of management, key employees and independent directors. Following the closing of the Business Combination, holders of performance-based ICUs are entitled to a distribution of a number of Class A common shares of ATI Physical Therapy, Inc. based on the distribution priorities under the Wilco Acquisition, LP limited partnership agreement. The shares related to performance-based ICUs convert to restricted Class A common shares of ATI eligible to vest in installments on each quarterly anniversary of the closing over the shorter of: (a) the eight-year period from the original grant date of the underlying ICUs, or (b) three years post-closing, subject to the grantee’s continued service through each vesting date.

Based on the terms of the performance-based ICUs, commencement of vesting is generally contingent upon the occurrence of certain events, such as a change-in-control subject to the achievement of specified investment returns of certain Wilco Acquisition, LP unit holders, or an initial public offering (“IPO”). Under the terms of the award agreements, in the event of an IPO, the performance-based vesting requirements convert to service-based vesting requirements. The performance-based awards follow the treatment of an IPO as a result of the Business Combination.

Prior to the Business Combination, no share-based compensation expense was recognized related to the performance-based awards, as a change-in-control or IPO cannot be assessed as probable prior to its occurrence. Following the closing of the Business Combination, the Company began recognizing share-based compensation expense associated with the performance-based awards. Recognition of such expense follows a straight-line expense allocation based on the original grant date and the shorter of (a) the eight-year period from the original grant date of the underlying ICUs, or (b) three years post-closing of the Business Combination. For the three and six months ended June 30, 2021, the Company recognized $2.7 million of share-based compensation expense related to the performance-based awards.

As of June 30, 2021, the remaining unvested restricted shares from converted performance-based ICUs totaled 1.1 million shares, with unrecognized compensation expense of $3.0 million to be recognized over a weighted-average period of 2.9 years. There were no performance-based awards granted under the 2016 Plan during the three and six months ended June 30, 2021.

 

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Unallocated and forfeited Incentive Common Units

Following the closing of the Business Combination, Wilco Acquisition, LP intends to transfer to employees of ATI restricted Class A common shares of ATI Physical Therapy, Inc. received by Wilco Acquisition, LP in connection with the Business Combination in respect of the remaining unallocated ICU pool. Such restricted shares of ATI will vest on a quarterly basis over a three year period, subject to the grantee’s continued service through each vesting date. The remaining unallocated ICU pool converted to 0.3 million unvested restricted Class A common shares of ATI in connection with the Business Combination, with unrecognized compensation expense of $3.4 million to be recognized over a weighted-average period of 3.0 years.

If any restricted shares of ATI are forfeited following the closing of the Business Combination and prior to vesting, such shares will be forfeited to Wilco Acquisition, LP and may be reallocated to employees by the Compensation Committee under the 2016 Plan.

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 ATI Physical Therapy, Inc., in the form of share-based awards, 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 20.8 million. There were no awards granted under the 2021 Plan during the three and six months ended June 30, 2021.

Note 10. Stockholders’ Equity

ATI Physical Therapy, Inc. preferred stock

The Company is authorized to issue 1.0 million shares of preferred stock with a par value of $0.0001 per share. As of June 30, 2021, there was no preferred stock issued or outstanding.

Class A common stock

The Company is authorized to issue 470.0 million shares of Class A common stock with a par value of $0.0001 per share. Holders of the Company’s Class A common stock are entitled to one vote for each share on each matter on which they are entitled to vote. At June 30, 2021, there were 207.3 million shares of Class A common stock issued and 196.6 million shares outstanding.

As a result of the recapitalization associated with the Business Combination, shares are reflected as if they were issued and outstanding as of the earliest reported period to reflect the new capital structure. At the time of the Business Combination, stockholders of Wilco Holdco, Inc. received 130.3 million shares of the Company’s Class A common stock, par value $0.0001 per share, for the outstanding shares of Wilco Holdco common stock, par value $0.01 per share, that such stockholders owned. Upon conversion of unvested Incentive Common Units granted prior to the Business Combination under the Wilco Acquisition, LP 2016 Equity Incentive Plan, 2.0 million of these shares are restricted subject to vesting requirements, resulting in total unrestricted shares of 128.3 million and an exchange ratio of 136.7 unrestricted shares of ATI Physical Therapy, Inc. for every previously outstanding Wilco Holdco share.

 

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As of June 30, 2021, shares of Class A common stock reserved for potential future issuance, on an as-if converted basis, were as follows (in thousands):

 

		June 30, 2021
Shares available for grant under the ATI 2021 Equity Incentive Plan			20,728
Earnout Shares reserved			15,000
Class A common stock Warrants outstanding			9,867
Vesting Shares reserved(1)			8,625
Restricted shares(1,2)			2,014
Total shares of common stock reserved			56,234

 

(1)	Represents shares of Class A common stock legally issued, but not outstanding, as of June 30, 2021.

(2)	Represents 2.0 million restricted shares upon conversion from unvested Incentive Common Units under the Wilco Acquisition, LP 2016 Equity Incentive Plan. Refer to Note 9 - Share-Based Compensation for further details.

Note 11. Wilco Holdco Series A Preferred Stock

On May 10, 2016, Wilco Holdco, Inc. issued shares of Series A Preferred Stock (the “preferred stock”) for a total consideration value of $98.0 million. Prior to the Business Combination, the preferred stock was a class of equity that had priority over the Common Stock with respect to distribution rights, liquidation rights and dividend rights.

The preferred stockholders, from and after issuance, were entitled to cumulative preferred dividends at an annual rate per share equal to 10.25% of the original issue price. The dividend rate of the preferred stock increased by 0.25% at the end of each fiscal quarter beginning after the second anniversary of the issuance of the preferred stock.

Based on the terms of the preferred stockholder agreement, Wilco Holdco, Inc. was required to redeem all outstanding shares of preferred stock upon the occurrence of certain events, such as those related to full repayment of the first and second lien credit agreements or a deemed liquidating event. Based on these redemption requirements, the preferred stock was classified as debt (redeemable preferred stock) in the Company’s historical condensed consolidated balance sheets.

Cumulative dividends related to the preferred stock were accrued as preferred dividends that increase the balance of the redeemable preferred stock on the Company’s condensed consolidated balance sheets and were recognized as interest expense on redeemable preferred stock in the Company’s condensed consolidated statements of operations. For the three months ended June 30, 2021 and 2020, the Company incurred cumulative preferred dividends related to the preferred stock of $4.8 million and $4.6 million, respectively. For the six months ended June 30, 2021 and 2020, the Company incurred cumulative preferred dividends related to the preferred stock of $10.1 million, and $9.0 million, respectively. No dividends were paid related to the preferred stock.

 

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In connection with the Business Combination, holders of the outstanding shares of Series A Preferred Stock received a proportionate share of $59.0 million and 12.8 million shares of Class A common stock based on the settlement terms in the Merger Agreement. The Company recorded a loss on settlement of redeemable preferred stock in the condensed consolidated statement of operations of $14.0 million based on the value of the cash and equity provided to preferred stockholders in relation to the outstanding redeemable preferred stock liability. The balance of redeemable preferred stock was $0.0 million and $163.3 million as of June 30, 2021 and December 31, 2020, respectively.

Note 12. Warrant Liability

The Company has outstanding Public Warrants to purchase an aggregate of 6.9 million shares of the Company’s Class A common stock and outstanding Private Placement Warrants to purchase an aggregate of 3.0 million shares of the Company’s Class A common stock. There were no warrants exercised during the three and six months ended June 30, 2021.

The Company accounts for its outstanding Public Warrants and Private Placement Warrants in accordance with the guidance contained in Accounting Standards Codification 815-40, “Derivatives and Hedging - Contracts on an Entity’s Own Equity” (“ASC 815-40”) and determined that the Warrants do not meet the criteria for equity treatment thereunder. As such, each Warrant must be recorded as a liability and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in change in fair value of warrant liability in the Company’s condensed consolidated statements of operations.

The following table presents the change in the fair value of warrant liability that is recognized in the condensed consolidated statement of operations for the three and six months ended June 30, 2021:

 

		Private Placement Warrants				Public Warrants				Warrant Liability
Fair value as of Business Combination, June 16, 2021		$	8,099			$	18,837			$	26,936
Changes in fair value			(1,365	)			(3,174	)			(4,539	)
Fair value as of June 30, 2021		$	6,734			$	15,663			$	22,397

Each Public Warrant entitles the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share, subject to adjustment. The Public Warrants are exercisable 30 days after the completion of the Business Combination, subject to certain conditions, including that the Company has an effective registration statement under the Securities Act covering the Class A common stock issuable upon exercise of the Public Warrants. The Public Warrants will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation. The Company may call the Public Warrants for redemption for cash or for Class A common stock under certain circumstances.

 

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The Private Placement Warrants are identical to the Public Warrants, except that (i) the Private Placement Warrants and the Class A common stock issuable upon exercise of the Private Placement Warrants are not transferable, assignable or salable until 30 days after the completion of the Business Combination, subject to certain limited exceptions, (ii) the Private Placement Warrants are non-redeemable (except under certain circumstances) so long as they are held by the initial purchasers or such purchasers’ permitted transferees, (iii) the Private Placement Warrants may be exercised by the holders on a cashless basis, and (iv) the Private Placement Warrants and the Class A common stock issuable upon exercise of the Private Placement Warrants are entitled to registration rights. If the Private Placement Warrants are held by someone other than the initial stockholders or their permitted transferees, the Private Placement Warrants will be redeemable by the Company in all redemption scenarios and exercisable by such holders on the same basis as the Public Warrants.

The exercise price and number of Class A common stock issuable upon exercise of the Warrants may be adjusted in certain circumstances including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation.

Note 13. Contingent Common Shares Liability

Earnout Shares

Subject to the terms and conditions of the Merger Agreement, certain stockholders of Wilco Holdco, Inc. were provided the contingent right to receive, in the aggregate, up to 15.0 million shares of Class A common stock if, from the closing of the Business Combination until the 10^th anniversary thereof, the dollar volume-weighted average price (“VWAP”) of Class A common stock exceeds certain thresholds:

 

•

The first issuance of 5.0 million Earnout Shares will occur if the VWAP exceeds $12.00 for any 5 trading days within any consecutive 10 trading day period.

 

•

The second issuance of 5.0 million Earnout Shares will occur if the VWAP exceeds $14.00 for any 5 trading days within any consecutive 10 trading day period.

 

•

The third issuance of 5.0 million Earnout Shares will occur if the VWAP exceeds $16.00 for any 5 trading days within any consecutive 10 trading day period.

The Earnout Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Earnout Shares price target.

The Company accounts for the potential Earnout Shares as a liability in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in the Company’s statements of operations. On June 16, 2021, the Company estimated the fair value of the potential Earnout Shares to be $140.0 million. As of June 30, 2021, no Earnout Shares have been issued as none of the corresponding share price thresholds have been met.

During the period from June 16, 2021 to June 30, 2021, the fair value of the Earnout Shares decreased to $126.7 million, resulting in a gain of $13.3 million recorded as a component of change in fair value of contingent common shares liability in the condensed consolidated statement of operations for the three and six months ended June 30, 2021.

 

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The fair value of the Earnout Shares as of June 30, 2021 was $126.7 million and was recorded as a component of contingent common shares liability in the condensed consolidated balance sheets. Refer to Note 14 - Fair Value Measurements for further details.

Vesting Shares

Subject to the terms and conditions of the Sponsor Letter Agreement that was executed in connection with the Merger Agreement, 8.6 million shares of Class F common stock of FAII outstanding immediately prior to the Business Combination converted to potential Class A common shares and became subject to vesting and forfeiture provisions. The Vesting Shares vest in three equal tranches of 2.9 million shares each if the trading price of common stock exceeds certain thresholds within 10 years of the Closing Date:

 

•

The first issuance of 2.9 million Vesting Shares will occur if the VWAP exceeds $12.00 for any 5 trading days within any consecutive 10 trading day period.

 

•

The second issuance of 2.9 million Vesting Shares will occur if the VWAP exceeds $14.00 for any 5 trading days within any consecutive 10 trading day period.

 

•

The third issuance of 2.9 million Vesting Shares will occur if the VWAP exceeds $16.00 for any 5 trading days within any consecutive 10 trading day period.

The Vesting Shares are subject to acceleration in the event of a sale or other change in control if the holders of Class A common stock would receive a per share price in excess of the applicable Vesting Shares price target.

The Company accounts for the Vesting Shares as a liability in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, and is subject to re-measurement at each balance sheet date. Changes in fair value are recognized in the Company’s statements of operations. On June 16, 2021, the Company estimated the fair value of the Vesting Shares to be $80.5 million. As of June 30, 2021, no Vesting Shares are outstanding as none of the corresponding share price thresholds have been met.

During the period from June 16, 2021 to June 30, 2021, the fair value of the Vesting Shares decreased to $72.9 million, resulting in a gain of $7.6 million recorded as a component of change in fair value of contingent common shares liability in the condensed consolidated statements of operations for the three and six months ended June 30, 2021.

The fair value of the Vesting Shares as of June 30, 2021 was $72.9 million and was recorded as a component of contingent common shares liability in the condensed consolidated balance sheets. Refer to Note 14 - Fair Value Measurements for further details.

Note 14. Fair Value Measurements

The Company determines fair value measurements used in its condensed consolidated financial statements based upon the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels, with Level 1 having the highest priority and Level 3 having the lowest.

 

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•

Level 1: Observable inputs, which include unadjusted quoted prices in active markets for identical instruments.

 

•

Level 2: Observable inputs other than Level 1 inputs, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instruments.

 

•

Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

As of June 30, 2021 and December 31, 2020, respectively, the recorded values of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and deferred revenue approximate their fair values due to the short-term nature of these items.

The Company’s term loan and revolving line of credit are Level 2 fair value measures which have variable interest rates and, therefore, the recorded amounts approximate fair value. The Company utilizes the market approach valuation technique based on interest rates that are currently available to the Company for issuance of debt with similar terms and maturities.

Fair value measurement of share-based financial liabilities

The Company determined the fair value of the Public Warrant liability using Level 1 inputs.

The Company determined the fair value of the Private Placement Warrant liability using the price of the Public Warrants as a Level 2 input.

The Company determined the fair value of the Earnout Shares liability and Vesting Shares liability using Level 3 inputs. The contingent common shares contain specific market conditions to determine whether the shares vest based on the Company’s common stock price over a specified measurement period. Given the path-dependent nature of the requirement in which the shares are earned, a Monte-Carlo simulation was used to estimate the fair value of the liability. The Company’s common stock price was simulated to each measurement period based on the above methodology. In each iteration, the simulated stock price was compared to the conditions under which the shares vest. In iterations where the stock price corresponded to shares vesting, the future value of the vesting shares was discounted back to present value. The fair value of the liability was estimated based on the average of all iterations of the simulation.

Inherent in a Monte Carlo valuation model are assumptions related to expected stock-price volatility, expected term, risk-free interest rate and dividend yield. The Company estimates the volatility based on the historical volatility of certain guideline companies as of the valuation date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected term of the Earnout Shares and Vesting Shares. The dividend yield percentage is zero based on the Company’s current expectations related to the payment of dividends during the expected term of the Earnout Shares or Vesting Shares.

 

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The key inputs into the Monte Carlo option pricing model were as follows as of the Closing Date and June 30, 2021 for the respective Level 3 instruments:

 

		Earnout Shares								Vesting Shares
		June 16, 2021				June 30, 2021				June 16, 2021				June 30, 2021
Risk-free interest rate			1.56	%			1.44	%			1.56	%			1.44	%
Volatility			39.03	%			39.38	%			39.03	%			39.38	%
Dividend yield			—	%			—	%			—	%			—	%
Expected term (years)			10				10				10				10
Share price		$	10.28			$	9.54			$	10.28			$	9.54

The following table presents the changes in the fair value for the respective Level 3 instruments recognized in change in fair value of contingent common shares liability in the condensed consolidated statements of operations for the three and six months ended June 30, 2021:

 

		Earnout Shares Liability				Vesting Shares Liability
Fair value as of Business Combination, June 16, 2021		$	140,000			$	80,500
Changes in fair value			(13,300	)			(7,648	)
Fair value as of June 30, 2021		$	126,700			$	72,852

Note 15. Income Taxes

The effective tax rate and income tax benefit for the three months ended June 30, 2021 were 4.3% and $20.2 million, compared to an effective tax rate and income tax expense of 43.7% and $3.6 million for the three months ended June 30, 2020. The effective tax rate and income tax benefit for the six months ended June 30, 2021 were 6.1% and $30.7 million, compared to an effective tax rate and income tax expense of (102.4)% and $1.8 million for the six months ended June 30, 2020.

The effective tax rate for the three and six months ended June 30, 2021 was estimated based on full-year 2021 forecast. The estimated effective tax rate was different than the statutory rate primarily due to nondeductible transaction costs and interest expense on redeemable preferred stock. In addition, there was no basis in a significant component of the goodwill impaired for tax purposes. Therefore, a portion of the book impairment charge will never create a deduction for tax purposes in any period. As a result, this permanent difference has a substantial impact on the effective tax rate. The estimated effective tax rate applicable to year-to-date losses, in addition to the tax-effect of nondeductible impairment charges, nondeductible loss on settlement of redeemable preferred stock and fair value adjustments related to liability-classified share-based instruments, resulted in a tax benefit of $20.2 million for the three months ended June 30, 2021, and a tax benefit of $30.7 million for the six months ended June 30, 2021.

The effective tax rate for the three and six months ended June 30, 2020 was estimated based on full-year 2020 forecast. The effective tax rate was different than the statutory rate primarily due to nondeductible interest expense on redeemable preferred stock. The estimated effective tax rate applicable to year-to-date losses, in addition to the tax-effect of income related to general distribution payments recognized under the Provider Relief Fund of the CARES Act, resulted in tax expense of $3.6 million for the three months ended June 30, 2020, and tax expense of $1.8 million for the six months ended June 30, 2020.

 

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As of June 30, 2021, the Company determined that its federal and certain state deferred income tax assets are able to be realized. The Company continues to maintain a valuation allowance mainly related to certain state net operating losses. The conclusion is based on various factors, including future sources of taxable income from indefinite-lived deferred tax liabilities, as well as recent and expected future annual taxable income, which is partly attributable to interest limitation addbacks.

Note 16. Leases

The Company leases various facilities and office equipment for its physical therapy operations and administrative support functions under operating leases. The Company’s initial operating lease terms are generally between 7 and 10 years. Right-of-use (“ROU”) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The amortization of operating lease ROU assets and the accretion of operating lease liabilities are reported together as fixed lease expense. The fixed lease expense is recognized on a straight-line basis over the life of the lease.

Lease costs are included as components of clinic operating costs and selling, general and administrative expenses on the condensed consolidated statements of operations. Lease costs incurred by lease type were as follows for the periods indicated below (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2021				2020				2021				2020
Lease cost
Operating lease cost		$	15,903			$	16,080			$	31,726			$	32,122
Variable lease cost (1)			5,000				4,511				9,936				8,982
Total lease cost (2)		$	20,903			$	20,591			$	41,662			$	41,104

 

(1)	Includes short term lease costs, which are not material.

(2)	Sublease income was not material.

Other supplemental quantitative disclosures were as follows for the periods indicated below (in thousands):

 

		Six Months Ended June 30,
		2021				2020
Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	32,583			$	30,807
Cash payments related to lease terminations		$	4,570			$	—
Right-of-use assets obtained in exchange for new operating lease liabilities:		$	12,638			$	7,789

 

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Average lease terms and discount rates as of June 30, 2021 and December 31, 2020 were as follows:

 

		June 30, 2021				December 31, 2020
Weighted-average remaining lease term:
Operating leases			6.5 years				6.7 years
Weighted-average discount rate:
Operating leases			6.5	%			6.5	%

Estimated undiscounted future lease payments under non-cancellable operating leases, along with a reconciliation of the undiscounted cash flows to operating lease liabilities, respectively, at June 30, 2021 were as follows (in thousands):

 

Year
2021 (remainder of year after June 30, 2021)		$	32,232
2022			65,708
2023			60,138
2024			53,020
2025			44,150
Thereafter			116,718
Total undiscounted future cash flows		$	371,966
Less: Imputed Interest			(72,458	)
Present value of future cash flows		$	299,508
Presentation on Balance Sheet
Current		$	48,273
Non-current		$	251,235

 

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