Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.05pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.18pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.07pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
litigation+4
termination+3
volatility+3
fraud+2
suspension+2
Positive rising
effective+3
able+2
desired+1
Risk Factors (Item 1A)
17,417 words
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business. You should consider carefully the risks and uncertainties described below before deciding to invest in our common stock, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The following risks and uncertainties are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
delisted+1
terminated+1
resigned+1
suspended+1
absence+1
Positive rising
favorable+1
satisfaction+1
satisfied+1
stabilization+1
enable+1
MD&A (Item 7)
10,919 words
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of ATI Physical Therapy, Inc. and its subsidiaries (herein referred to as “we,” ”us,” “our,” "the Company," "ATI," "ATIP," or "the Parent") should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included elsewhere in this Annual Report.
We make statements in this discussion that are forward-looking and involve risks and uncertainties. These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of the Company. The forward-looking statements are based on our current views and assumptions, and actual results could differ materially from those anticipated in such forward-looking statements due to factors including, but not limited to, those discussed under “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A. “Risk Factors.”
Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Our forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement may no longer be accurate.
Certain amounts in this Management's Discussion and Analysis may not add due to rounding. All percentages have been calculated using unrounded amounts for the years ended December 31, 2024 and 2023 .
We are providing the following summary of the risk factors contained in our Form 10-K to enhance the readability and usefulness of our risk factor disclosures. This summary should be read in conjunction with the full risk factors contained in this Form 10-K and should not be relied upon as an exhaustive summary of the material risks facing our business. The order of presentation is not necessarily indicative of the level of risk that each factor poses to us.
• Our liquidity position raises substantial doubt about our ability to continue as a going concern;
• If we fail to comply with covenants related to our debt agreement or our Series A Senior Preferred Stock, it could result in the acceleration of some or all of our debt and preferred stock obligations;
• We depend upon reimbursement by governmental payors through Medicare and Medicaid;
• Growth in Medicaid expenditures is not anticipated;
• Payments we receive from Medicare and Medicaid are subject to potential retroactive reduction;
• We depend upon reimbursement by third-party payors;
• Payments from workers’ compensation payors may be reduced or eliminated;
• Our payor contracts are subject to renegotiation or termination;
• Billing disputes with third-party payors may decrease realized revenue and may lead to requests for recoupment of past amounts paid;
• We are subject to risks associated with public health crises, epidemics and pandemics;
• We may be adversely affected by natural disasters, pandemics and other catastrophic events;
• We are subject to increases in cost inflation and risks related to a potential recession;
• We operate in a competitive industry;
• We may not be able to attract or retain clinical or corporate talent;
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• We may be unable to use our net operating loss carryforwards to offset future taxable income;
• Rapid technological change presents us with significant risks and challenges;
• We may be unable to maintain high levels of service and patient satisfaction;
• Our current locations may become unattractive and attractive new locations may not be available for a reasonable price, if at all;
• We may incur closure costs and losses;
• Our ability to generate revenue is highly sensitive to the strength of the economies, demographics and populations of the local communities that we serve;
• Our financial results could vary significantly from quarter to quarter and are difficult to predict;
• As participants in Medicare and Medicaid programs, we are subject to various governmental laws and regulations;
• An adverse inspection, review, audit or investigation could result in fines, penalties and other sanctions, including license revocation or exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor networks;
• Our systems infrastructure may not adequately support our operations;
• The issuance of additional equity securities in the future would result in dilution to existing holders of our common stock;
• We may issue debt or debt securities convertible into equity securities that are senior to our common stock as to distributions or in liquidation;
• Future issuances of our common stock or securities convertible into or exchangeable for our common stock, as well as sales of our common stock in the public markets, or the perception of such issuances or sales, could depress the trading price of our common stock;
• The price and volume of our common stock have been volatile and fluctuates substantially;
• We may be subject to legal proceedings, which are expensive and could divert management attention;
• If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud which could subject us to regulatory sanctions, harm our business and operating results and cause the trading price of our common stock to decline; and
• Risks associated with our securities trading on the OTC Pink Open Market and termination of the registration of our common stock under Section 12(g) of the Exchange Act and the suspension of our reporting obligations under Section 15(d) of the Exchange Act.
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Risks Relating to Liquidity
Our liquidity position raises substantial doubt about our ability to continue as a going concern.
The Company has continued to generate negative operating cash flows and net losses. These results are, in part, due to the Company's current capital structure, including cash interest costs, and the Company's pace of visit volume and operating performance at the clinic level. The Company has continued to fund cash used in operations primarily from financing activities and expects to need additional liquidity to continue funding working capital requirements, necessary capital expenditures as well as to be available for general corporate purposes, including interest repayments. The Company is at risk of insufficient funding to meet its obligations as they become due within twelve months after the date that these consolidated financial statements are issued. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern.
On June 15, 2023, the Company completed a debt restructuring transaction under its 2022 Credit Agreement including: (i) a delayed draw new money financing in an aggregate principal amount of $25.0 million, comprised of (A) second lien paid-in-kind convertible notes (the “2L Notes”) and (B) shares of Series B Preferred Stock (as defined in Note 8 in the accompanying consolidated financial statements). The Company utilized the delayed draw of $25.0 million during the year ended December 31, 2024.
On October 2, 2024, the Company entered into the Second Amendment to Note Purchase Agreement, pursuant to which the Company issued $10.5 million of second lien paid-in-kind notes (the "Second Lien Loans"). Refer to Note 8 - Borrowings in the accompanying consolidated financial statements for more information about the Second Lien Loans.
On March 3, 2025, the Company entered into the Fourth Amendment to Note Purchase Agreement, pursuant to which the Company issued $26.0 million of Fourth Amendment 2L Notes. Refer to Note 8 - Borrowings in the accompanying consolidated financial statements for more information.
The Company plans to continue its efforts to improve its operating results and cash flow through increases to clinical staffing levels, improvements in clinician productivity, increases in patient visit volumes, referrals and rate per visit and controlling costs and capital expenditures. There can be no assurance that the Company's plan will be successful in any of these respects.
Future liquidity needs are expected to require additional sources of liquidity beyond operating results. Additional liquidity sources considered include but are not limited to:
• raising additional debt and/or equity capital,
• disposal of assets, and/or
• other strategic alternatives to improve its business, results of operations and financial condition.
There can be no assurances that the Company will be successful in accessing such alternative options or financing if or when needed. Furthermore, on March 17, 2025, the Company filed a Form 15 to terminate the registration of the Company's common stock and public warrants under Section 12(g) of the Exchange Act and suspend the Company's reporting obligations under Section 12(d) of the Exchange Act, which will limit its ability to raise equity capital through the public markets in the future. Failure to access such alternative options or financing, if or when needed, could have a material adverse impact on the Company's business, financial condition, results of operations and cash flows, and may lead to events including bankruptcy, reorganization or insolvency.
Management's plans have not been fully implemented and, as a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern.
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We may be unable to generate sufficient cash and may be required to take other actions, which may not be successful, to satisfy our obligations.
To the extent our operating cash flows, together with our cash on hand and access to our revolving credit facility, become insufficient to cover our liquidity and capital requirements, including funds for any future acquisitions and other corporate transactions, we may be required to seek third-party financing or an alternative liquidity or capital transaction. For example, the Company has continued to fund cash used in operations primarily from financing activities and expects to need additional liquidity to continue funding working capital requirements, necessary capital expenditures as well as to be available for general corporate purposes, including interest repayments. There can be no assurance that we would be able to obtain any required financing, or complete an alternative liquidity or capital transaction, on a timely basis or at all. Further, lenders and other financial institutions could require us to agree to more restrictive covenants, grant liens on our assets as collateral and/or accept other terms that are not commercially beneficial to us in order to obtain financing. Such terms could further restrict our operations and exacerbate any impact on our results of operations and liquidity.
We have outstanding indebtedness and may incur additional debt in the future.
We have outstanding indebtedness that could have detrimental consequences on our ability to obtain additional debt or other financing as needed for working capital, acquisition costs, other capital expenditures or general corporate purposes. We cannot be certain that cash flow from operations will be sufficient to allow us to pay principal and interest on the debt, support operations and meet other obligations. If we do not have the resources to meet our obligations, we may be required to refinance all or part of our outstanding debt, sell assets or borrow more money. We may not be able to do so on acceptable terms, in a timely manner, or at all. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. Defaults under our debt terms could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operations.
Certain of our borrowings and other obligations are based upon variable rates of interest, which could result in higher expense in the event of increases in interest rates.
Borrowings under the 2022 Credit Agreement are subject to variable rates of interest and subject us to interest rate risk. While the Company's variable borrowing rates decreased in 2024, during 2023 a rising interest rate environment was observed and interest rates may continue to rise again in the future. Such increases in interest rates would increase interest payment obligations under the 2022 Credit Agreement and could have a negative effect on our cash flow and/or financial condition.
At times, we have sought to reduce our exposure to interest rate fluctuations by entering into interest rate hedging arrangements. However, any hedging arrangements we enter into may not fully mitigate our interest rate risk, may prove disadvantageous or may create additional risks.
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Our outstanding indebtedness and our Series A Senior Preferred Stock contains covenants that may limit certain operating and financial decisions. Non-compliance with these covenants may result in the acceleration of our indebtedness which could lead to bankruptcy, reorganization or insolvency.
Our 2022 Credit Agreement contains restrictive and financial covenants, and the Certificate of Designation for our Series A Senior Preferred Stock contains provisions that impose significant operating and financial restrictions that may limit our ability to take actions that may be in our long-term best interest. Our 2022 Credit Agreement contains customary representations and warranties, events of default, reporting and other affirmative covenants and negative covenants including, but not limited to, requirements related to the delivery of independent audit reports without certain going concern qualifications, limitations on indebtedness, liens, investments, negative pledges, dividends, junior debt payments, fundamental changes and asset sales and affiliate transactions. The Second Lien Note Purchase Agreement, dated April 17, 2023, by and among the Company, Wilco Holdco, Inc., Wilco Intermediate Holdings, Inc., the Borrower (as defined below), the purchasers party thereto and Wilmington Savings Fund Society, FSB (as amended, the "Second Lien Note Purchase Agreement") includes affirmative and negative covenants (other than financial covenants) that are substantially consistent with the 2022 Credit Agreement, as well as customary events of default. Based on the terms of the 2023 Debt Restructuring (as defined below), the Company is temporarily relieved from the requirements related to the delivery of independent audit reports without a going concern explanatory paragraph until the report for the year ended December 31, 2025. The financial covenants also require us to maintain a secured net leverage ratio as of each fiscal quarter end.
In addition, the Certificate of Designation for our Series A Senior Preferred Stock contains provisions that may likewise impose significant operating and financial restrictions on our business. If an Event of Noncompliance (as defined in the Certificate of Designation) occurs, then the holders of a majority of the then outstanding shares of Series A Senior Preferred Stock (but excluding any shares of Series A Senior Preferred Stock then held by Advent International Corporation or its controlled affiliates) have the right to demand that the Company engage in a sale/refinancing process for the Series A Senior Preferred Stock.
Failure to comply with our 2022 Credit Agreement, Second Lien Note Purchase Agreement or the Certificate of Designation for our Series A Senior Preferred Stock could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operation. If we are unable to cure covenant defaults within any applicable grace periods or obtain waivers or acceptable refinancing, such defaults could result in the acceleration of some or all of our indebtedness, which could lead to bankruptcy, reorganization or insolvency.
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Risks Relating to our Business and Industry
We depend upon governmental payors through Medicare and Medicaid reimbursement and decreases in Medicare reimbursement rates may adversely affect our financial results.
A significant portion of our net patient revenue is derived from governmental third-party payors. In 2024, approximately 22.2% of our net patient revenue was derived from Medicare and Medicaid. In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. Additional reforms or other changes to these payment systems may be proposed or adopted, either by the U.S. Congress (“Congress”) or by the CMS, including bundled payments, outcomes-based payment methodologies and a shift away from traditional fee-for-service reimbursement. If revised regulations are adopted, the availability, methods and rates of Medicare reimbursements for services of the type furnished at our facilities could change. Some of these changes and proposed changes could adversely affect our business strategy, operations and financial results. The Medicare program reimburses outpatient rehabilitation providers based on the MPFS. In recent years, the physical therapy industry has observed reductions of Medicare reimbursement rates. Beginning in January 2023, the physical therapy industry observed a reduction of Medicare reimbursement rates of approximately 2.0%. In November 2023, the CMS released its final 2024 MPFS. The final fee schedule called for an approximate 3.4% reduction in the calendar year 2024 conversion factor which led to further reductions in reimbursement rates beginning in January 2024. On March 9, 2024 the Consolidated Appropriations Act (2024) was signed into law, which provided an approximate 1.7% of incremental relief to Medicare cuts for the remainder of 2024. The change in rate was not retroactive. As a result, the reimbursement rate reduction beginning on March 9, 2024 was approximately 1.7%. In November 2024, the CMS released its final 2025 MPFS. The final fee schedule called for an approximate 2.8% reduction in the calendar year 2025 conversion factor which led to further reductions in reimbursement rates beginning in 2025, unless revised or otherwise acted upon through a Congressional, executive or other federal measure.
Statutes, regulations and payment rules governing the delivery of therapy services to Medicare and Medicaid beneficiaries are complex and subject to interpretation. Compliance with such laws and regulations requires significant expense and management attention and can be subject to future government review and interpretation, as well as significant regulatory actions, including fines, penalties and exclusion from the Medicare and Medicaid programs if we are found to be in non-compliance. Any required actions to return to compliance, or any challenges to such regulatory actions, could be costly and time consuming and may not result in a favorable reversal of any such fines, penalties or exclusions.
Given the history of frequent revisions to the Medicare and Medicaid programs and their complexity, reimbursement rates and rules, we may not continue to receive reimbursement rates from Medicare or Medicaid that sufficiently compensate us for services or, in some instances, cover operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on our revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.
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We anticipate the federal and state governments to continue their efforts to contain growth in Medicaid expenditures, which could adversely affect our revenue and profitability.
Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led the federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending. We expect these state and federal efforts to continue for the foreseeable future. Furthermore, not all of the states in which we operate have elected to expand Medicaid as part of federal healthcare reform legislation. There can be no assurance that the program, on the current terms or otherwise, will continue for any particular period of time beyond the foreseeable future. Historically, state budget pressures have translated into reductions in state spending. In addition, an economic downturn, coupled with sustained unemployment, may also impact the number of enrollees in managed care programs as well as the profitability of managed care companies, which could result in reduced reimbursement rates. If Medicaid reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicaid program that are disadvantageous to our business, our business and results of operations could be materially and adversely affected.
Payments we receive from Medicare and Medicaid are subject to potential retroactive reduction.
Payments we receive from Medicare and Medicaid can be retroactively adjusted during the claims settlement process or as a result of post-payment audits. Payors may disallow our requests for reimbursement, or recoup amounts previously reimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursable because the documentation provided was inadequate or because certain services were not covered or were deemed medically unnecessary. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue, and the costs associated with complying with audits and investigations by regulatory and governmental authorities, could adversely affect our financial condition and results of operations.
Additionally, from time to time we become aware, either based on information provided by third-parties and/or the results of internal reviews, of payments from payor sources that were either wholly or partially in excess of the amount that we should have been paid for the services provided. We are also subject to regular post-payment inquiries, investigations and audits of the claims we submit to Medicare and Medicaid for payment for our services. These post-payment reviews have increased as a result of government cost-containment initiatives. Overpayments may result from a variety of factors, including insufficient documentation to support the services rendered or the medical necessity of such services, or other failures to document the satisfaction of the necessary conditions of payment. We are required by law in most instances to refund the full amount of the overpayment after becoming aware of it, and failure to do so within requisite time limits imposed by applicable law could lead to significant fines and penalties being imposed on us. Furthermore, initial billing of and payments for services that are unsupported by the requisite documentation and satisfaction of any other conditions of payment, regardless of our awareness of the failure at the time of the billing or payment, could expose us to significant fines and penalties. We and/or certain of our operating companies could also be subject to exclusion from participation in the Medicare or Medicaid programs in some circumstances, in addition to any monetary or other fines, penalties or sanctions that we may incur under applicable federal and/or state law. Our repayment of any overpayments, as well as any related fines, penalties or other sanctions that we may be subject to, and any costs incurred in responding to requests for records or pursuing the reversal of payment denials, could be significant and could have a material and adverse effect on our results of operations and financial condition.
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From time to time we are also involved in various external governmental investigations, subpoenas, audits and reviews, including in connection with our claims for reimbursement and associated payments. Reviews, audits and investigations of this sort can lead to governmental subpoenas or other actions, which can result in the assessment of damages, civil or criminalfines or penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion from participation in government programs. Failure to comply with applicable laws, regulations and rules could have a material and adverse effect on our results of operations and financial condition. Furthermore, becoming subject to these governmental subpoenas, investigations, audits and reviews can require us to incur significant legal and document production expenses as we cooperate with the governmental authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues.
We depend upon reimbursement by third-party payors.
A significant portion of our revenue is derived from third-party payors. In 2024, approximately 58.7% of our net patient revenue was derived from commercial payors. These private third-party payors attempt to control healthcare costs by contracting with healthcare providers to obtain services on a discounted basis. We believe that this trend may continue and may limit reimbursement for healthcare services in the future. In addition, Company claims are closely scrutinized, and failure to submit accurate and complete clinical documentation, including specific documentation by the service provider, could result in adverse actions taken by the payor. Further, if insurers or managed care companies from whom we receive substantial payments were to reduce the amounts they pay for services, our profit margins may decline, or we may lose patients if we choose not to renew our contracts with these insurers at lower rates. In addition, in certain geographical areas, our clinics must be approved as providers by key health maintenance organizations and preferred provider plans. Failure to obtain or maintain these approvals would adversely affect our financial results.
If payments from workers’ compensation payors are reduced or eliminated, our revenue and profitability could be adversely affected.
In 2024, approximately 11.8% of our net patient revenue was derived from workers’ compensation payors. State workers’ compensation laws and regulations vary and changes to state laws could result in decreased reimbursement by third-party payors for physical therapy services, which could have an adverse impact on our revenue. Further, payments received under certain workers’ compensation arrangements may be based on pre-determined state fee schedules, which may be impacted by changes in state funding. Any modification to such schedules that reduces our ability to receive payments from workers’ compensation payors could be significant and could have a material adverse effect on our results of operations and financial condition. We may continue to experience unfavorable changes in rates and payor and service mix shifts toward lower reimbursing payor classes as opposed to higher reimbursing classes such as workers' compensation and auto personal injury. These changes may reflect longer term trends in our markets. Adverse changes in payor mix and/or payor rates are likely to adversely affect our results of operations in future periods, which effects may be material.
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Our payor contracts are subject to renegotiation or termination, which could result in a decrease in our revenue or profits.
The majority of our payor contracts are subject to termination by either party. Such contracts are routinely amended (sometimes through unilateral action by payors with respect to payment policies), renegotiated, subjected to bidding processes with our competitors, or terminated altogether. Oftentimes in the renegotiation process, certain lines of business may not be renewed or a payor may enlarge its provider network or otherwise change the way it conducts its business in a way that adversely impacts our revenue. In other cases, a payor may reduce its provider network in exchange for lower payment rates. Our revenue from a payor may also be adversely affected if the payor alters its utilization management expectations and/or administrative procedures for payments and audits, changes its order of preference among the providers to which it refers business or imposes a third-party administrator, network manager or other intermediary.
Billing disputes with third-party payors may decrease realized revenue and may lead to requests for recoupment of past amounts paid.
From time to time, payors dispute our billing or coding for services provided and we deal with requests for recoupment from third-party payors in the ordinary course of business. Third-party payors may decide to deny payment or recoup payment for services that they contend to have been not medically necessary, against their coverage determinations, or for which they have otherwise overpaid, and we may be required to refund reimbursements already received. Claims for recoupment also require the time and attention of our management and other key personnel, which can serve as a distraction from operating our business.
If a third-party payor successfullychallenges a payment to us for prior services provided was in breach of contract or otherwise contrary to policy or law, they may recoup payment, of which amounts could be significant and would impact our operating results and financial condition. We may also decide to negotiate and settle with a third-party payor in order to resolve an allegation of overpayment. In the past, we have negotiated and settled these types of claims with third-party payors in order to avoid the costs of potential litigation. We may be required to resolve further disputes in the future. We can provide no assurance that we will not receive similar claims for recoupment from other third-party payors in the future. Any of these outcomes, including recoupment or reimbursements, could have a material and adverse effect on our business, operating results, and financial condition.
We are subject to risks associated with public health crises, epidemics and pandemics.
Our operations expose us to risks associated with public health crises, epidemics and pandemics, such as the COVID-19 pandemic that spread globally beginning in early 2020.
The COVID-19 pandemic had a material and adverse impact on our operations, including restrictions on the operation of physical locations, cancellations of physical therapy patient appointments, clinical staff unavailable to work due to sickness or exposure and a decline in the scheduling of new or additional patient appointments. Due to these impacts and measures, we experienced significant and unpredictable reductions and cancellations of patient visits. Additionally, the related global, national and regional policy response led to disruption and volatility in the global capital markets, which increased economic uncertainty and the cost of, and adversely impacted access to, capital. The COVID-19 pandemic caused economic impacts with extended duration such as elevated wage inflation, inflation in the cost of goods, services and other operating inputs, changes in the market interest rate environment and other economic impacts.
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Any future public health crisis, pandemic, or epidemic could cause any of the impacts described above to recur or could cause other unpredictable events, including events that could impact our ability to access funds from financial institutions and capital markets on terms favorable to us, or at all. Such public health crises, epidemics, pandemics or other similar outbreaks could have a material adverse effect on our business, financial condition, results of operations and cash flows, could cause significant volatility in the trading prices of our securities, and may also heighten the other risks described in this Item 1A. Risk Factors .
We are subject to increases in the cost inflation necessary for the provision of our services and we may not be able to fully offset this cost inflation on a timely basis or at all.
Many of the components of our cost of services are subject to price increases that are attributable to factors beyond our control, including but not limited to, costs of clinician services and other professional services, contract labor, janitorial services, support staff services and clinic supplies. In the latter part of 2021 and continuing through 2024, input costs have increased materially and at a historically high rate. The pressures of input cost inflation may continue. To the extent we are unable to offset present and future input cost increases, our operating results could be materially and adversely affected.
We operate in a competitive industry, and if we are not able to compete effectively, our business, financial condition and results of operations may be harmed.
Current or potential patients may seek competitive services in lieu of our services. We face competition from a range of entities, some of which have superior resources or other competitive advantages. If we are unable to compete successfully in the physical therapy industry, our business, financial condition and results of operations could be materially adversely affected.
The outpatient physical therapy market is rapidly evolving and highly competitive, and subject to vertical integration. Such vertical integration could reduce the market opportunity for our services. Competition may intensify in the future as existing competitors and new entrants introduce new physical therapy services and platforms. We currently face competition from a range of companies, including other incumbent providers of physical therapy consultation services, that are continuing to grow and enhance their service offerings and develop more sophisticated and effective service platforms. In addition, since there are limited capital expenditures required for providing physical therapy services, there are few financial barriers to enter the industry. Other companies could enter the healthcare industry in the future and divert some or all of our business. Competition from specialized physical therapy service providers, healthcare providers, hospital systems and other parties may result in continued pricing and volume pressures, which would be likely to lead to price and volume declines in certain of our services, all of which could negatively impact our sales, profitability and market share.
Referrals and other methods of driving patient volumes are important to our profitability. We have implemented and are implementing strategies to improve our level of referrals, and if these measures are not successful, or if we are not able to successfully capture referrals or visit demand, it could lead to a decline in patient volumes and revenues, which could negatively impact our profitability and market share.
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Some competitors may have greater name recognition, longer operating histories and significantly greater resources than us. Further, our current or potential competitors may be acquired by third-parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than us to new or changing opportunities, technologies, standards or client requirements and may have the ability to initiate or withstand substantial price competition. In addition, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their services in the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, a larger client base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources or larger sales forces than ours, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain geographies or segments of the physical therapy market, which could create additional price and volume pressure. As we expand into new geographical areas, we may encounter competitors with stronger relationships or recognition in the community in such new areas, which could give those competitors an advantage in obtaining new patients or retaining existing ones.
We also compete for physical therapists and the impacts of hiring and attrition has had and may continue to have adverse effects on our business, financial condition, results of operations, as well as our ability to open new clinics. We have taken and are continuing to take actions to increase hiring, reduce attrition and optimize clinician hours based on available workforce, but the impact of hiring and attrition has impacted overall profitability through wage inflation, greater benefits, and increases in other employee costs, as well as required a higher use of contract labor in difficult to staff markets. These labor market dynamics and level of competition are likely to continue. The ultimate impact on our business and industry remains difficult to predict, but may have a material adverse impact on our results of operations, cash flows and financial condition.
Moreover, we expect that competition will continue to increase as a result of consolidation in the healthcare industry. Many healthcare industry participants are consolidating to create integrated healthcare systems with greater market power, including, in some cases, integrating physical therapy services with their core medical practices. As provider networks and managed care organizations consolidate, thus decreasing the number of market participants, competition to provide services like ours may become more intense, and the importance of establishing and maintaining relationships with key industry participants will become greater.
Rapid technological change presents us with significant risks and challenges.
The healthcare market is characterized by rapid technological change, changing consumer requirements, short product lifecycles and evolving industry standards. Our success will depend on our ability to enhance our brands with next-generation technologies and to develop, acquire and market new services to access new consumer populations. Moreover, we may not be successful in developing, using, selling or maintaining new technologies effectively or adapting solutions to evolving client requirements or emerging industry standards, and, as a result, our business, financial condition and results of operations could be materially adversely affected. In addition, we have limited insight into trends that might develop and later affect our business, and which could lead to errors in our analysis of available data or in predicting and reacting to relevant business, legal and regulatory trends and healthcare reform. Further, there can be no assurance that technological advances by one or more of our current or future competitors will not result in our present or future solutions and services becoming uncompetitive or obsolete. If any of these events occur, it could harm our business.
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Inability to maintain high levels of service and patient satisfaction could adversely affect our business.
Failure to retain and attract sufficient numbers of qualified personnel could strain our human resources department and impede our growth or result in ineffective growth. In addition, if demand for our services increases, we need to increase our patient services and other personnel, as well as our network of partners, to provide personalized patient service. If we are not able to continue to provide high quality physical therapy services with high levels of patient satisfaction, our reputation, as well as our business, results of operations and financial condition could be adversely affected.
Our current locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all, which could adversely affect our business.
The success of any of our clinics depends in substantial part on their locations. There can be no assurance that the current locations will continue to be attractive as demographic patterns and trade areas change. For example, neighborhood or economic conditions where our clinics are located could decline in the future, thus resulting in potentially reduced patient visits. In addition, rising real estate prices in some areas may restrict our ability to lease new desirable locations or increase the cost of operating in such locations. If desirable locations cannot be obtained at reasonable prices, our ability to execute our growth strategies could be adversely affected, and we may be impacted by declines in patient visits as a result of the deterioration of certain locations, each of which could materially and adversely affect our business and results of operations.
We may continue to close clinics and incur closure costs and losses.
The competitive, economic or reimbursement conditions in the markets in which we operate, in addition to labor market conditions and liquidity considerations, may require us to reorganize or close certain clinics. Any clinic closures, reorganization or related business disruptions may have a material and adverse effect on our results of operations. In each of fiscal years 2024 and 2023, we closed or sold 35 and 40 clinics, respectively. In the event a clinic is reorganized or closed, we may incur losses and closure costs, including, but not limited to, lease obligations, severance and write-down or write-off of goodwill, intangible assets or other assets.
We may determine to sell one or more of our clinics, and any such divestiture could adversely affect our continuing business.
We periodically evaluate our various businesses, services lines and clinics and may, as a result, consider the divestiture, wind down or exit of one or more of those clinics. Divestitures have inherent risks, including the inability to find potential buyers with favorable terms, the expense of selling the service line or clinic, the possibility that any anticipated sale will be delayed or will not occur and the potential delay or failure to realize the perceived strategic or financial merits of the divestment.
Our ability to generate revenue is highly sensitive to the strength of the economies in which we operate and the demographics and populations of the local communities that we serve.
Our revenues depend upon a number of factors, including, among others, the size and demographic characteristics of local populations and the economic condition of the communities that our locations serve. In the case of an economic downturn in a market, the utilization of physical therapy services by the local population of such market, and our resulting revenues and profitability in that market, could be adversely affected. Our revenues could also be affected by negative trends in the general economy that affect consumer spending, such as a recession or similar economic downturn. Furthermore, significant demographic changes in, or significant outmigration from, the neighborhoods where our clinics are located could reduce the demand for our services, all of which could materially and adversely affect our business and results of operations.
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Risks Relating to Our Operations
We depend upon the cultivation and maintenance of relationships with the physicians and other referral sources in our markets.
Our success is partially dependent upon referrals from physicians in the communities our clinics serve and our ability to maintain good relationships with these physicians and other referral sources. Physicians referring patients to our clinics are free to refer their patients to other therapy providers or to their own physician-owned therapy practices. If we are unable to successfully cultivate and maintain strong relationships with such physicians and other referral sources (including as a result of negative publicity (whether true or not)), our business may be negatively impacted and our net revenues may decline. In addition, our relationships with referral sources are subject to extensive laws and regulations, and if those relationships with referral sources are found to be in violation of those requirements, we may be subject to significant civil, criminal and/or administrative penalties, exclusion from participation in government programs, such as Medicare and Medicaid, and/or reputational harm.
The impacts of weather, natural disasters, climate change and other catastrophic events may adversely affect our revenues and results of operations.
We operate our business in regions that normally experience snow and ice during the winter months, and that are subject to severe weather and natural disasters, including hurricanes, floods, fires, earthquakes and other catastrophic events. A significant number of our clinics are located in states that are subject to periodic winter storms, hurricanes and other severe storm systems which have negatively impacted clinic operations in the past. Any natural disaster or impacts from climate change could adversely affect our ability to conduct business and provide services to our customers, and the insurance we maintain may not be adequate to cover losses resulting from any business interruption resulting from a natural disaster or other catastrophic event.
Future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.
We have historically acquired outpatient physical therapy clinics and it is an important part of our long-term growth strategy. Failure to successfully identify and complete acquisitions would likely result in slower growth. Even if we are able to identify appropriate acquisition targets, we may not be able to execute transactions on favorable terms or integrate targets in a manner that allows us to fully realize the anticipated benefits of these acquisitions. Acquisitions may involve significant cash expenditures, potential debt incurrence and operational losses, dilutive issuances of equity securities and expenses that could have an adverse effect on our financial condition and results of operations. Acquisitions also involve numerous risks, including:
• the difficulty and expense of integrating acquired personnel into our business;
• the diversion of management's time from existing operations;
• the potential loss of key employees of acquired companies and existing customers of the acquired companies that may not be familiar with our brand or services;
• the difficulty of assignment and/or procurement of managed care contractual arrangements; and
• the assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations.
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Failure of our third-party customer service and technical support providers to adequately address customers’ requests could harm our business and adversely affect our financial results.
Our customers rely on our customer service support organization to resolve issues with our services. We outsource a portion of our customer service and technical support activities to third-party service providers. We depend on these third-party customer service and technical support representatives working on our behalf, and expect to continue to rely on third-parties in the future. This strategy presents risks to the business due to the fact that we may not be able to influence the quality of support as directly as we would be able to do if our own employees performed these activities. Our customers may react negatively to providing information to, and receiving support from, third-party organizations, especially if these third-party organizations are based overseas. If we encounter problems with our third-party customer service and technical support providers, our reputation may be harmed, our ability to sell our services could be adversely affected, and we could lose customers and associated revenue.
Our systems infrastructure may not adequately support our operations.
We believe our future success will depend in large part on establishing an efficient and productive IT systems infrastructure that is able to provide operational intelligence and support our platform. Our systems infrastructure is designed to address interoperability challenges across the healthcare continuum and any failure of our systems infrastructure to identify efficiencies or productivity may impact the execution of our strategies and have a significant impact on our business and operating results. Our inability to continue improving our clinical systems and data infrastructure could impact our ability to perform and continue improving outcomes for patients.
Failure by us 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.
The collection of accounts receivable requires constant focus and involvement by management, as well as ongoing enhancements of information systems and billing center operating procedures. There can be no assurance that we will be able to improve upon or maintain our current levels of collectability and days sales outstanding in future periods. Further, some of our patients or payors may experience financial difficulties, or may otherwise fail to pay accounts receivable when due, resulting in increased write-offs. If we are unable to properly bill and collect our accounts receivable, our financial condition and results of operations will be adversely affected. In addition, from time to time we are involved in disputes with various parties, including our payors and their intermediaries regarding their performance of various contractual or regulatory obligations. These disputes sometimes lead to legal and other proceedings and cause us to incur costs or experience delays in collections, increases in our accounts receivable or loss of revenue. In addition, in the event such disputes are not resolved in our favor or cause us to terminate our relationships with such parties, there may be an adverse impact on our financial condition and results of operations.
Legal and Regulatory Risks Relating to Our Business
Our operations are subject to extensive regulation.
Our operations are subject to extensive federal, state and local government laws and regulations, which may impact:
• facility and professional licensure/permits;
• conduct of operations, including financial relationships among healthcare providers, Medicare fraud and abuse, and physician self-referral;
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• addition of facilities and services; and
• coding, billing and payment for services.
In recent years, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to the healthcare industry, and physical therapy providers, in particular, have been subject to increased enforcement. We believe we are in substantial compliance with all laws, but differing interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make changes in our methods of operations, facilities, equipment, personnel, services and capital expenditure programs and increase our operating expenses. If we fail to comply with these extensive laws and government regulations, we could become ineligible to receive government program reimbursement, suffer civil or criminalpenalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations. For a more complete description of certain of these laws and regulations, refer to "Governmental Regulations and Supervision" within Part I, Item 1. Business.
In conducting our business, we are required to comply with applicable state laws regarding fee-splitting and professional corporation laws.
The laws of some states restrict or prohibit the “corporate practice of medicine,” meaning business corporations cannot provide medical services through the direct employment of medical providers, or by exercising control over medical decisions by medical providers. In some states, such restrictions explicitly apply to physical therapy services; in others, those restrictions have been interpreted to apply to physical therapy services or are not fully developed.
Specific restrictions with respect to enforcement of the corporate practice of medicine or physical therapy vary from state to state and certain states in which we operate may present higher risk than others. Each state has its own professional entity laws and unique requirements for entities that provide professional services. Further, states impose varying requirements on the licenses that the stockholders, directors, officers, and professional employees of professional corporations must possess.
Many states also have laws that prohibit non-physical therapy entities, individuals or providers from sharing in or splitting professional fees for patient care (“fee-splitting”). Generally, these laws restrict business arrangements that involve a physical therapist sharing professional fees with a referral source, but in some states, these laws have been interpreted to extend to management agreements between physical therapists and business entities under some circumstances.
Such laws and regulations vary from state to state and are enforced by governmental, judicial, law enforcement or regulatory authorities with broad discretion. Accordingly, we cannot be certain that our interpretation of certain laws and regulations is correct with respect to how we have structured our operations, service agreements and other arrangements with physical therapists in the states in which we operate.
The enforcement environment in any state in which we operate could also change, leading to increased enforcement of existing laws and regulations. If a court or governing body determines that we, or the physical therapists whom we support, have violated any of the fee-splitting laws or regulations, or if new fee-splitting laws or regulations are enacted, we or the physical therapists whom we support could be subject to civil or criminalpenalties, our contracts could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure our contractual arrangements with our licensed providers of physical therapy (which may not be completed on a timely basis, if at all, and may result in terms materially less favorable to us), all of which may have a material adverse effect on our business.
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We face inspections, reviews, audits and investigations under federal and state government programs and payor contracts. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits, subpoenas and investigations to verify our compliance with these programs and applicable laws and regulations. Payors may also reserve the right to conduct audits. We also periodically conduct reviews of our regulatory compliance. While our facilities intend to comply with the federal requirements for properly billing, coding and documenting claims for reimbursement, there can be no assurance that these audits will determine that all applicable requirements are fully met at the facilities that are reviewed.
We may be subject to various external governmental investigations, subpoenas, audits and reviews. Certain adverse governmental investigations, subpoenas, audits and reviews may require us to refund amounts we have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations, which could have a material adverse effect on our business and operating results. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, subpoenas, audits or investigations could be significant. An adverse inspection, review, audit or investigation could result in:
• refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from payors;
• state or federal agencies imposing fines, penalties and other sanctions on us;
• temporary suspension of payment for new patients;
• decertification or exclusion from participation in the Medicare or Medicaid programs or one or more payor networks;
• self-disclosure of violations to applicable regulatory authorities;
• damage to our reputation; and
• loss of certain rights under, or termination of, our contracts with payors.
Our facilities are subject to extensive federal and state laws and regulations relating to the privacy of individually identifiable information.
HIPAA required the Health and Human Services Department to adopt standards to protect the privacy and security of individually identifiable health-related information. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information. The regulations also provide patients with significant rights related to understanding and controlling how their health information is used or disclosed. The security regulations require healthcare providers to implement administrative, physical and technical practices to protect the security of individually identifiable health information that is maintained or transmitted electronically. HITECH, which was signed into law in 2009, enhanced the privacy, security and enforcement provisions of HIPAA by, among other things establishing security breach notification requirements, allowing enforcement of HIPAA by state attorneys general and increasing penalties for HIPAA violations. Violations of HIPAA or HITECH could result in civil or criminalpenalties.
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In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient and consumer privacy concerns, including unauthorized access or theft of personal information. State statutes and regulations vary from state to state. Lawsuits, including class actions and actions by state attorneys general, directed at companies that have experienced a privacy or security breach also can occur.
We have established policies and procedures in an effort to ensure compliance with these privacy related requirements. However, if there is a breach of these privacy related requirements, we may be subject to various penalties and damages and may be required to incur costs to mitigate the impact of the breach on affected individuals.
Our business may be adversely impacted by healthcare reform efforts, including repeal of or significant modifications to the ACA.
In recent years, Congress and certain state legislatures have considered and passed a number of laws that are intended to result in significant changes to the healthcare industry. However, there is significant uncertainty regarding the future of the Patient Protection and Affordable Care Act (“ACA”), the most prominent of these reform efforts. The law has been subject to legislative and regulatory changes and court challenges, and certain members of the U.S. government have stated their intent to repeal or make additional significant changes to the ACA, its implementation or its interpretation. In 2017, the Tax Cuts and Jobs Acts was enacted, which, effective January 1, 2019, among other things, removed penalties for not complying with ACA’s individual mandate to carry health insurance. Because the penalty associated with the individual mandate was eliminated, a federal judge in Texas ruled in December 2018 that the entire ACA was unconstitutional. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals upheld the lower court’s finding that the individual mandate is unconstitutional and remanded the case back to the lower court to reconsider its earlier invalidation of the full ACA. On March 2, 2020, the United States Supreme Court (the “Supreme Court”) granted the petitions for writs of certiorari to review this case and on June 17, 2021, the Supreme Court dismissed this case without specifically ruling on the constitutionality of the ACA. These and other efforts to challenge, repeal or replace the ACA may result in reduced funding for state Medicaid programs, lower numbers of insured individuals, and reduced coverage for insured individuals. There is uncertainty regarding whether, when and how the ACA will be further changed or challenged, what alternative provisions, if any, will be enacted, and the impact of alternative provisions on providers and other healthcare industry participants. Government efforts to repeal or change the ACA or to implement alternative reform measures could cause our revenues to decrease to the extent such legislation reduces Medicaid and/or Medicare reimbursement rates.
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Our failure to comply with labor and employment laws could result in monetary fines and penalties.
Worker health and safety (Occupational Safety and Health Administration and similar state and local agencies); family medical leave (the Family Medical Leave Act), wage and hour laws and regulations, equal employment opportunity and non-discrimination requirements, among other laws and regulations relating to employment, apply to us. Failure to comply with such laws and regulations could result in the imposition of consent orders or civil and criminalpenalties, including fines, which could damage our reputation and have an adverse effect on our results of operations or financial condition. The regulatory framework for privacy issues is rapidly evolving and future enactment of more restrictive laws, rules or regulations and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our business, and noncompliance could result in regulatory penalties and significant legal liability.
We have been and may continue to be involved in legal proceedings; damage to our reputation or our failure to adequately insure againstlosses, including from substantial claims and litigation, could have an adverse impact on our operations, financial condition or prospects.
From time to time, we are party to legal proceedings, governmental audits and investigations that arise in the ordinary course of our business. There is an inherent risk of liability in the provision of healthcare services. We are also subject to actual and potential claims, lawsuits and investigations outside of the ordinary course of business. Refer to Note 17 - Commitments and Contingencies in our consolidated financial statements included in Part II, Item 8 of this Form 10-K for examples of claims to which we are subject.
Such claims, legal proceedings, governmental audits and investigations may involve large claims and significant costs to defend. In such cases, coverage under our insurance programs would not be adequate to protect us. Additionally, our insurance policies are subject to annual renewal and our insurance premiums could be subject to material increases in the future. We cannot ensure that we will be able to maintain our insurance on acceptable terms in the future, or at all. A successful claim in excess of, or not covered by, our insurance policies could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity. Even where our insurance is adequate to cover claimsagainst us, damage to our reputation in the event of a judgment against us, or continued increases in our insurance costs, could have an adverse effect on our business, financial condition, results of operations, cash flow, capital resources, liquidity, or prospects.
Risks Relating to Our Human Resources
Our facilities face competition for experienced physical therapists and other clinical providers and clinical staff that may increase labor costs and reduce profitability.
Our ability to retain and attract clinical talent is critical to our ability to provide high quality care to patients and successfully cultivate and maintain strong relationships in the communities we serve. If we cannot recruit and retain our base of experienced and clinically skilled therapists and other clinical providers, management and support personnel, our business may decrease and our revenues may decline and/or operating margins may decrease as a result of increased hiring, training and retention costs or higher use of contract labor in difficult to staff markets. We compete with other healthcare providers in recruiting and retaining qualified management, physical therapists and other clinical staff and support personnel responsible for the daily operations of our business, financial condition and results of operations and have observed a competitive labor market that is currently subject to inflationary and other pressure on wages. While we attempt to manage overall labor costs in the most efficient way, our efforts to manage them may have limited effectiveness and may lead to increased turnover, reduced profitability and other challenges.
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Our ability to attract and retain talented executives and corporate employees.
We are dependent on our ability to retain and attract corporate talent. In recent years, we experienced significant turnover in our senior management team and across our corporate organization. Our business may be adversely affected by the transitions in our senior management team, and turnover at the senior management level may create instability within the Company, which could disrupt and impede our day-to-day operations, internal controls and our ability to fully implement our business plan and initiatives. In addition, management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution, and our results of operations and financial condition could be negatively impacted as a result. We compete for corporate talent within the healthcare industry and more broadly. Competition for such personnel is intense, and we may not be able to attract, assimilate or retain other highly qualified corporate personnel in the future. The inability to attract and retain the necessary personnel could cause increased employee turnover and harm to our business, results of operations, cash flow and financial condition.
Our share-based compensation incentives may not be effective in attracting, retaining and motivating key personnel and employees.
In light of our low market capitalization, low share price and the termination of the Company's registration of its common stock, our non-cash share-based compensation incentives may not be effective in attracting, retaining and motivating our senior management team, key personnel and employees. If our share-based compensation incentives are not effective, the Company may need to explore alternative cash or non-cash compensation to retain senior management, key personnel and employees, which may lead to incurring higher compensation costs or may otherwise prove less effective. The inability to appropriately compensate and motivate the necessary personnel could cause increased employee turnover and harm to our business, results of operations, cash flow and financial condition.
We face licensing and credentialing barriers, and associated variability across states is a risk to timely delivery of productive talent.
The scope of licensing laws differs from state to state, and the application of such laws to the activities of physical therapists and other clinical providers is often unclear. Given the nature and scope of the solutions and services that we provide, we are required to maintain physical therapy licenses and registrations for us and our providers in certain jurisdictions and to ensure that such licenses and registrations are in good standing. These licenses require us and our providers to comply with the rules and regulations of the governmental bodies that issued such licenses. Our providers are also required to be credentialed with payors prior to providing services to health plan patients, and completion of the credentialing process, if delayed, may delay our ability to provide services to health plan patients. Our providers’ failure to comply with such rules and regulations could result in significant administrative penalties or the suspension of a license or the loss of a license, as well as credentialing delays, all of which could negatively impact our business.
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Risks Relating to Our Information Technology
We rely on information technology in critical areas of our operations, and a disruption relating to such technology could harm our financial condition.
We rely on IT systems in critical areas of our operations, including our EMR system and systems supporting revenue cycle management, and financial and operational reporting, among others. We have legacy IT systems that IT is continuing to upgrade and modernize. If one of these systems were to fail or cause operational or reporting interruptions, or if we decide to change these systems or hire outside parties to provide these systems, we may fail to execute on such system changes or sufferdisruptions, which could have a material adverse effect on our operation, results of operations and financial condition. In addition, we may underestimate the costs, complexity and time required to develop and implement new systems.
We use software vendors and network and cloud providers in our business and if they cannot deliver or perform as expected or if our relationships with them are terminated or otherwise change, it could have a material adverse effect on our business, financial condition and results of operations.
Our ability to provide our services and support our operations requires that we work with certain third-party providers, including software vendors and network and cloud providers, and depends on such third-parties meeting our expectations in timeliness, quality, quantity and economics. Our third-party suppliers may be unable to meet such expectations due to a number of factors. We might incur significant additional liabilities if the services provided by these third-parties do not meet our expectations, if they terminate or refuse to renew their relationships with us or if they were to offer their services on less advantageous terms. We rely on internally developed software applications and systems to conduct our critical operating and administrative functions. We also depend on our software vendors to provide long-term software maintenance support for our information systems. In addition, while there are backup systems in many of our operating facilities, we may experience an extended outage of network services supplied by these vendors or providers that could impair our ability to deliver our solutions, which could have a material adverse effect on our business, financial condition and results of operations.
We are a target of attempted cyber and other security threats and must continuously monitor and develop our IT networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact or which may cause a violation of HIPAA or HITECH and subject us to potential legal and reputational harm.
In the normal course of business, our IT systems hold sensitive patient information including patient demographic data, eligibility for various medical plans including Medicare and Medicaid and protected health information subject to HIPAA and HITECH. We also contract with third-party vendors to maintain and store our patients’ individually identifiable health information. Numerous state and federal laws and regulations address privacy and information security concerns resulting from our access to our patients’ and employees’ personal information. Additionally, we utilize those same systems to perform our day-to-day activities, such as receiving referrals, assigning clinicians to patients, documenting medical information and maintaining an accurate record of all transactions.
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While we have not experienced any known, material attacks on our IT systems that have compromised patient data, our IT systems and those of our vendors that process, maintain and transmit such data are subject to computer viruses, cyber-attacks, including ransomware attacks, or breaches. We maintain our IT systems with safeguard protection against cyber-attacks including active intrusion protection, firewalls and virus detection software. We adhere to (and require our third-party vendors to adhere to) policies and procedures designed to ensure compliance with HIPAA and HITECH regulations. We have developed and tested a response plan in the event of a successful attack and maintain commercial insurance related to a cyber-attack. However, these safeguards do not ensure that a significant cyber-attack could not occur. A successful attack on our or our third-party vendors’ IT systems could have significant consequences to the business, including liability for compromised patient information, business interruption, significant civil and criminalpenalties, lawsuits, reputational harm and increased costs to us, any of which could have a material adverse effect on our financial condition and results of operations.
In addition, insider or employee cyber and security threats are increasingly a concern for all large companies, including us. Our future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of protected health information, other confidential data or proprietary business information, operational or business delays resulting from the disruption of IT systems and subsequent mitigation activities, or regulatory action taken as a result of such incidents. We provide our employees with training and regular reminders on important measures they can take to prevent breaches. We routinely identify attempts to gainunauthorized access to our systems. However, given the rapidly evolving nature and proliferation of cyber threats, there can be no assurance our training and network security measures or other controls will detect, prevent or remediate security or data breaches in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems and operations. Accordingly, we may be vulnerable to losses associated with the improper functioning, security breach, or unavailability of our information systems, as well as any systems used in acquired company operations.
Risks Relating to Our Accounting and Financial Policies
We currently outsource, and from time to time in the future may outsource, a portion of our internal business functions to third-party providers. Outsourcing these functions has significant risks, and our failure to manage these risks successfully could materially adversely affect our business, results of operations and financial condition.
We currently, and from time to time in the future, may outsource portions of our internal business functions, including billing and administrative functions relating to revenue cycle management, to third-party providers. These third-party providers may not comply on a timely basis with all of our requirements, or may not provide us with an acceptable level of service. In addition, reliance on third-party providers could have significant negative consequences, including significant disruptions in our operations and significantly increased costs to undertake such operations, either of which could damage our relationships with our customers. We could experience a reduction in revenue due to inability to collect from patients, overpayments, claim denials, recoupments or governmental and third-party audits all of which may impact our profitability and cash flow.
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If our estimates or judgments relating to our accounting policies prove to be incorrect, our results of operations could be adversely affected.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes included elsewhere in this Form 10-K. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant estimates and judgments used in preparing financial statements include those related to the determination of the revenue transaction price for current transactions and estimation of expected collections on our accounts receivable, assumptions and estimates related to realizability of deferred tax assets, assumptions and estimates related to the valuation of goodwill and intangible assets, among others. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors.
The 2L Notes are accounted for as liabilities at fair value and the changes in value could have a material effect on our financial results.
The 2L Notes are accounted for as a liability in the Company's consolidated balance sheets. The Company has made an irrevocable election to account for the 2L Notes under the fair value option in accordance with Accounting Standards Codification ("ASC") Topic 825, Financial Instruments , in lieu of bifurcating certain features in the Second Lien Note Purchase Agreement. As such, the 2L Notes are initially recorded as a liability at estimated fair value and are subject to re-measurement at each balance sheet date with changes in fair value recognized in the Company's consolidated statements of operations.
As a result of the recurring fair value measurement, our financial statements and results of operations may materially fluctuate quarterly, based on factors which are outside of our control. Due to the recurring fair value measurement, we expect to recognize non-cash gains or losses each reporting period and the amount of such gains or losses could be material and variable.
The IPO Warrants, Earnout Shares and Vesting Shares are accounted for as liabilities and the changes in value of these share-based instruments could have a material effect on our financial results.
The Company accounts for its outstanding Public Warrants and Private Placement Warrants assumed as part of the business combination transaction on June 16, 2021 between Wilco Holdco, Inc. and FAII (the "Business Combination") and the potential Earnout Shares and Vesting Shares in accordance with the guidance contained in ASC Topic 815-40, Derivatives and Hedging - Contracts on an Entity’s Own Equity . As such, these share-based instruments are accounted for as derivative liabilities and are subject to re-measurement at each balance sheet date. Changes in fair value are reported in earnings as a non-cash gain or loss in the Company’s consolidated statements of operations.
As a result of the recurring fair value measurement, our financial statements and results of operations may materially fluctuate quarterly, based on factors which are outside of our control. Due to the recurring fair value measurement, we expect to recognize non-cash gains or losses on these share-based instruments each reporting period and the amount of such gains or losses could be material and variable.
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Impairments of our goodwill or other intangible assets may be material and have a material adverse effect on our business, financial condition, and results of operations.
As of December 31, 2024, we had $289.7 million of goodwill and $245.5 million of trade name and other intangible assets recorded on our consolidated balance sheet, which represent a significant portion of our total assets. We test such assets for impairment at least annually during the fourth quarter of each year or on an interim basis whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment may result from, among other things, increased attrition, adverse market conditions, adverse changes in applicable laws or regulations, including changes that affect the services we offer, lower visit volumes, lower revenue reimbursement rates, compressed operating margins and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets.
Impairments of all or part of our goodwill or other identifiable assets may have a material adverse effect on our business, financial condition or results of operations. Refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 5 - Goodwill, Trade Name and Other Intangible Assets to our consolidated financial statements included in Part II, Item 8, of this Form 10-K for further discussion of our goodwill and intangible assets.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred significant cumulative net taxable losses in the past. Our deferred tax assets as of December 31, 2024 include tax effected federal net operating losses ("NOLs") of $89.5 million and tax effected state NOLs of $45.0 million. Our unused NOLs generally carry forward to offset future taxable income, if any, until such unused losses expire, if subject to expiration. The earliest net operating loss will expire by statute in 2025 for state net operating losses, and in 2036 for federal net operating losses. We may be unable to use these NOLs to offset income before such unused NOLs expire.
In addition, if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage-point cumulative change in the equity ownership of certain stockholders over a rolling three-year period) under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset future taxable income or taxes may be limited. This limitation is based in part on the pre-change equity value of the corporation, with a lower equity value resulting in a lower and more severelimitation.
On June 15, 2023, we experienced an ownership change for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. The net operating losses and interest expense carryovers in existence as of the date of the ownership change remain available to offset future taxable income during the carryforward periods based on limitations under Section 382. We may experience an additional “ownership change” as a result of future changes in our stock ownership (including the impact of issuance or conversion of new shares, or other transactions or events impacting our stock ownership), some of which changes may not be within our control. If we are unable to use NOL carryforwards before they expire or they become subject to limitation, it could have a material adverse effect on our business, financial condition and results of operations.
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If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal control over financial reporting, this may result in material misstatements of our consolidated financial statements or failure to meet our periodic reporting obligations.
We are required to produce consolidated financial statements in accordance with the requirements of U.S. GAAP. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. We are required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting. As a non-accelerated filer as defined by Rule 12b-2 of the Exchange Act, our independent registered public accounting firm is not required to issue an annual report that addresses the effectiveness of the Company's internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 until we are no longer a non-accelerated filer.
We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with applicable law, or our independent registered public accounting firm may not be able to issue an unqualified attestation report if we conclude that our internal control over financial reporting is not effective. We have found material weaknesses in our internal control over financial reporting in the past and cannot assure that in the future we will not find additional material weaknesses. If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide us with an unqualified attestation report on our internal control, we could be required to take costly and time-consuming corrective measures, be required to restate the affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in us and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.
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Risks Relating to Ownership of Our Common Stock
We have deregistered our common stock under the Exchange Act, which could negatively affect the liquidity and trading prices of our common stock.
On March 17, 2025, we filed with the SEC a Form 15, Notice of Termination of Registration and Suspension of Duty to File, to voluntarily deregister our common stock and public warrants and suspend our reporting obligations under the Exchange Act. The deregistration of our common stock and public warrants under the Exchange Act will become effective 90 days after the date on which the Form 15 was filed. We are eligible to deregister under the Exchange Act because our common stock and public warrants are held of record by fewer than 300 persons. Deregistering our common stock could negatively affect the liquidity, trading volume and trading prices of our common stock. Further, after this report, we are no longer required to file information with the SEC or provide certain information to our stockholders under the Exchange Act, including without limitation through the filing of Forms 10-K, 10-Q and 8-K, and many provisions of the Exchange Act will become inapplicable to us.
There can be no assurance of an active, liquid and orderly trading market for our common stock or that investors will be able to sell their shares of common stock.
Our common stock is currently quoted on the OTC Pink Open Market under the symbol “ATIP.” There is only a limited, liquid public trading market for our common stock. There can be no assurance that a liquid market for our common stock will continue. Market liquidity will depend on the perception of our business and any steps that our management might take to bring public awareness of our business to the investing public within the parameters of the federal securities laws. There is no assurance that any such awareness will be generated or sustained. Therefore, investors may not be able to liquidate their investment or liquidate it at a price paid by investors equal to or greater than their initial investment in our common stock. Moreover, holders of our common stock may not find purchasers for their shares should they decide to sell the common stock held by them at any particular time, if ever. Our common stock should be purchased only by investors who have no immediate need for liquidity in their investment and who can hold our common stock, possibly for a prolonged period of time.
Further, Rule 15c2-11, promulgated under the Exchange Act, ensures that broker-dealers, in their role as professional gatekeepers to the over-the-counter-market, where our common stock is quoted for trading, do not publish quotations for an issuer's security when current issuer information is not publicly available, subject to certain exceptions. Companies trading on the OTC Pink Open Market must generally have current information be available for broker-dealers to be able to publish quotations for their common stock. As a result, the market liquidity for our securities could be severelyadversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market unless we make current information regarding our company available as required by the Rule. As we do not plan to be current on our reporting requirements, we could be removed from quotation on the OTC Pink Open Market, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in a secondary market.
Our common stock may be considered a “penny stock” and may be difficult to sell.
The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and, therefore, it may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares, and also hamper our ability to raise funds in the primary market for our shares of common stock.
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The market for penny stocks has experienced numerous frauds and abuses, which could adversely impact investors in our common stock.
OTC Pink Open Market securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTC Pink Open Market reporting and compliance requirements are less stringent than those of the established stock exchanges such as NYSE.
Patterns of fraud and abuse include:
• Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
• Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
• “Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
• Excessive and undisclosed bid-ask differentials and mark-ups by selling broker-dealers; and
• Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitablecollapse of those prices with consequent investor losses.
Our stock price and trading volume on the OTC Pink Open Market is volatile, which could result in rapid and substantial losses for our stockholders, who may lose all or part of their investment.
The trading price of our common stock is volatile. An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock or cause it to be highly volatile or subject to wide fluctuations. You may not be able to resell your shares at an attractive price due to a number of factors such as those listed in “ Risks Relating to Our Business and Industry ” and the following:
• results of operations that vary from the expectations of securities analysts and investors;
• changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors or other unexpectedadverse developments in our financial results, guidance or other forward-looking information, or industry, geographical or market sector trends;
• declines in the market prices of stocks generally;
• strategic actions by us or our competitors;
• announcements by us or our competitors of significant contracts, acquisitions, joint ventures, other strategic relationships or capital commitments;
• any significant change in our management;
• changes in general economic, political or market conditions or trends in our industry or markets;
• changes in business or regulatory conditions, including new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
• future sales of our common stock or other securities;
• investor perceptions or the investment opportunity associated with our common stock relative to other investment alternatives;
• the public's response to press releases or other public announcements by us or third-parties, including our future filings with the SEC, if any;
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• our liquidity position and the potential risks relating to refinancing, alternative liquidity arrangements or capital transactions;
• failure to comply with covenants related to our debt agreement or our Series A Senior Preferred Stock;
• litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;
• guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;
• the development and sustainability of an active trading market for our stock;
• actions by institutional or activist stockholders;
• changes in accounting standards, policies, guidelines, interpretations or principles; and
• other events or factors, including those resulting from natural disasters, war, acts of terrorism, health pandemics or responses to these events.
These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.
Volatility in our common stock price may subject us to securities litigation.
The market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigationagainst a company following periods of volatility in the market price of its securities. We have been and may, in the future, be the target of such litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.
Because there are no current plans to pay cash dividends on our common stock for the foreseeable future, you are unlikely to receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We intend to retain future earnings, if any, for future operations, expansion and debt repayment and there are no current plans to pay any cash dividends for the foreseeable future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our Board. We have no direct operations and no significant assets other than our ownership of our subsidiaries from whom we will depend on for distributions, and whose ability to pay dividends may be limited by covenants of our current and any future indebtedness we or our subsidiaries incur. As a result, you are unlikely to receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.
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We are a smaller reporting company and a non-accelerated filer, and the reduced disclosure requirements available to us may make our common stock less attractive to investors.
Under the SEC rules, smaller reporting companies (“SRCs”) may choose to comply with scaled financial and non-financial disclosure requirements in their annual and quarterly reports and registration statements relative to non-SRCs. In addition, companies that are not “accelerated filers” can take advantage of additional regulatory relief. Whether a company is an accelerated filer or a SRC is determined on an annual basis. As long as we qualify as a non-accelerated filer and/or a SRC and if we were again in the future to have SEC reporting obligations, we will be permitted to and we intend to rely on some or all of the accommodations available to such companies. These accommodations include, but are not limited to:
• Not being required to provide an auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act;
• Reduced financial disclosure obligations, including that SRCs need only provide two years of financial statements rather than three years;
• Reduced non-financial disclosure obligations, including regarding the description of their business, management’s discussion and analysis of financial condition and results of operations, market risk, executive compensation, transactions with related persons, and corporate governance;
• Reduced disclosures relating to executive compensation; and
• Later deadlines for the filing of annual and quarterly reports compared to accelerated filers.
If we were to have SEC reporting obligations again in the future, we will qualify as a SRC and non-accelerated filer for so long as (a) our public float is less than $75 million as of the last day of our most recently completed second fiscal quarter or (b) our public float is $75 million or more but less than $700 million and we reported annual revenues of less than $100 million for our most recently completed fiscal year.
We may choose to take advantage of some, but not all, of the available accommodations. We cannot predict whether investors will find our common stock less attractive if we rely on these accommodations or if these accommodations will make it more challenging for investors to analyze our results of operations and financial prospects. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.
Future issuances or sales, or the perception of future issuances or sales, by us or our stockholders of common stock or other voting securities or securities convertible into or exchangeable for our common stock in the public market or otherwise could cause the market price for our common stock to decline.
The issuance or sale of shares of common stock or other voting securities or securities convertible into or exchangeable for shares of common stock in the public market or otherwise, or the perception that such issuances or sales could occur, could harm the prevailing market price of shares of common stock. These issuances or sales, or the possibility that these issuances or sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that the Company deems appropriate. We currently have no effective registration statements under the Securities Act for the sale of registered securities in the open market.
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In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to ATI’s stockholders.
The 2L Notes are convertible into common stock, and the conversion of our 2L Notes into common stock would dilute the ownership interest of our existing stockholders and may adversely affect our stock price.
Pursuant to the terms of the Second Lien Note Purchase Agreement, holders of the 2L Notes may convert their 2L Notes into common stock at their option. Additionally, on or after March 3, 2027 and subject to certain conditions, the Company may, at its option, elect to convert a portion of the outstanding 2L Notes into the number of shares of common stock based on the Conversion Price then in effect. Any issuance by us of our common stock upon conversion of our 2L Notes will dilute the ownership interest of our existing stockholders and could have a dilutive effect on our earnings per share. On March 3, 2025, the Company entered into the Fourth Amendment to Note Purchase Agreement, pursuant to which the Conversion Price for the Company's outstanding 2L Notes was adjusted downward to $1.35 per share. The adjustment to the Conversion Price would lead to a more dilutive impact than the initial Conversion Price. Furthermore, any sales in the public market of our common stock issuable upon conversion of the 2L Notes could adversely affect prevailing market prices of our common stock. We currently have no effective registration statements under the Securities Act for the sale of registered securities in the open market.
The Series B Preferred Stock stapled to the 2L Notes provide voting rights which will dilute the voting interests of our existing stockholders.
Pursuant to the terms of the Second Lien Note Purchase Agreement, the Series B Preferred Stock represent voting rights only, with the number of votes being equal to the number of shares of common stock that each share of Series B Preferred Stock would convert into at a fixed conversion price, subject to certain adjustments that arise from adjustments to the 2L Notes Conversion Price (the "Voting Rights Conversion Price"). As a result, the voting rights associated with the Series B Preferred Stock will dilute the voting interests of our existing stockholders, for as long as such shares of Series B Preferred Stock remain outstanding. On March 3, 2025, the Company entered into the Fourth Amendment to Note Purchase Agreement, pursuant to which the Voting Rights Conversion Price for the Company's outstanding Series B Preferred Stock was adjusted downward to $1.35 per share. The adjustment to the Voting Rights Conversion Price would lead to a more dilutive impact than the initial Voting Rights Conversion Price.
Anti-takeover provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of our Third Amended and Restated Certificate of Incorporation, as amended, and our Amended and Restated Bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction deemed undesirable by our Board that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things:
• there is no cumulative voting with respect to the election of our Board;
• the ability of our Board to issue one or more series of preferred stock;
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• advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;
• certain limitations on convening special stockholder meetings;
• limiting the ability of stockholders to act by written consent;
• the ability of our Board to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a director in certain circumstances;
• providing that our Board is expressly authorized to adopt, amend, alter or repeal our bylaws;
• the removal of directors only for cause; and
• that certain provisions may be amended only by the affirmative vote of at least 65% (for amendments to the indemnification provisions) or 66.7% (for amendments to the provisions relating to the board of directors) of the shares of our common stock entitled to vote generally in the election of our directors.
These anti-takeover provisions could make it more difficult for a third-party to acquire us, even if the third-party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (“DGCL”), which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
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Our Amended and Restated Bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Our Amended and Restated Bylaws provide that, subject to limited exceptions, any (i) derivative action or proceeding brought on our behalf, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder or employee to us or our stockholders, (iii) action asserting a claim arising pursuant to any provision of the DGCL, our Third Amended and Restated Certificate of Incorporation, as amended, or our Amended and Restated Bylaws or (iv) action asserting a claim governed by the internal affairs doctrine shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware (the "Court of Chancery") or, if such court does not have subject matter jurisdiction thereof, another state or federal court located within the State of Delaware. Our Amended and Restated Bylaws also provide that, to the fullest extent permitted by law, the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of the Amended and Restated Bylaws described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. This exclusive forum provision does not apply to claims under the Exchange Act but does apply to other state and federal law claims including actions arising under the Securities Act. Section 22 of the Securities Act, however, creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such a forum selection provision as written in connection with claims arising under the Securities Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. If a court were to find these provisions of our Amended and Restated Bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
The Preferred Equityholders as a group have significant influence over us.
When considering the voting rights associated with the Series B Preferred Stock attached to the 2L Notes issued as part of the 2023 Debt Restructuring, the Preferred Equityholders as a group own more than 50.0% of our common stock votes. The Preferred Equityholders also have the ability to convert their 2L Notes into common stock, which could lead to the group owning an even greater percentage of our common stock. Furthermore, the Company's Board of Directors is fully declassified and all directors will be elected annually starting with the 2025 annual meeting.
As long as the Preferred Equityholders own or control a significant percentage of our outstanding voting power, they will have the ability to significantly influence all corporate actions requiring stockholder approval, including the election and removal of directors and the size of our Board, any amendment to our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets, subject to any applicable restrictions set forth in the Company's 2022 Credit Agreement. The Preferred Equityholders influence over our management could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common stock to decline or prevent stockholders from realizing a premium over the market price for our common stock.
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The Preferred Equityholders’ interests may not align with our interests as a company or the interests of our other stockholders. Accordingly, the Preferred Equityholders could cause us to enter into transactions or agreements of which other stockholders would not approve or make decisions with which other stockholders would disagree. These potential conflicts of interest could have a material adverse effect on our business, financial condition and results of operations if, among other things, attractive corporate opportunities are allocated by the Preferred Equityholders to themselves or their other affiliates.
If the Series A Senior Preferred Stock were to be redeemed, it may not be economically favorable to the Company and may lead to material adverse consequences for the Company and its other stakeholders.
The Company has the right to redeem the Series A Senior Preferred Stock, in whole or in part, at any time (subject to certain limitations on partial redemptions). Based on the voting rights associated with the Series B Preferred Stock attached to the 2L Notes issued as part of the 2023 Debt Restructuring, the Company determined that redemption of the Series A Senior Preferred Stock is no longer solely within the control of the Company. If the Series A Senior Preferred Stock were to be redeemed prior to certain dates, the Company would have to pay certain redemption price premiums related to early redemption, which could be greater than the stated value, may not be economically favorable to the Company and may lead to material adverse consequences for the Company or its other stakeholders.
There is currently no market for our Series I Warrants and Series II Warrants and a market for our Series I Warrants and Series II Warrants may not develop, which would adversely affect the liquidity and price of our Series I Warrants and Series II Warrants.
Our Series I Warrants and Series II Warrants are not listed or traded on any stock exchange and there is currently no market for our Series I Warrants and Series II Warrants. Warrantholders therefore have no access to trading price or volume information about prior market history on which to base their investment decision. Furthermore, an active trading market for our Series I Warrants and Series II Warrants may never develop or, if developed, it may not be sustained. You may be unable to sell your Series I Warrants and Series II Warrants unless a market can be established and sustained.
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All dollar amounts are presented in thousands, unless indicated otherwise.
Company Overview
We are a nationally recognized outpatient physical therapy provider in the United States specializing in outpatient rehabilitation and adjacent healthcare services, with 866 clinics located in 24 states (as well as 16 clinics under management service agreements) as of December 31, 2024. We operate with a commitment to providing our patients, medical provider partners, payors and employers with evidence-based, patient-centric care.
We offer a variety of services within our clinics, including physical therapy to treat spine, shoulder, knee and neck injuries or pain; work injury rehabilitation services, such as work conditioning and work hardening; hand therapy; and other specialized treatment services. Our Company’s team of professionals is dedicated to helping return patients to optimal physical health.
Physical therapy patients receive team-based care, standardized techniques and individualized treatment plans in an encouraging environment. To achieve optimal results, we use an extensive array of techniques including therapeutic exercise, manual therapy and strength training, among others. Our physical therapy model aims to deliver optimized outcomes and time to recovery for patients, insights and service satisfaction for referring providers and predictable costs and measurable value for payors.
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In addition to providing services to physical therapy patients at outpatient rehabilitation clinics, we provide services through our ATI Worksite Solutions (“AWS”) program, Management Service Agreements (“MSA”) and Sports Medicine arrangements. AWS provides an on-site team of healthcare professionals at employer worksites to promote work-related injuryprevention, facilitate expedient and appropriate return-to-work follow-up and maintain the health and well-being of the workforce. Our MSA arrangements typically include the Company providing management and physical therapy-related services to physician-owned physical therapy clinics. Sports Medicine arrangements provide certified healthcare professionals to various schools, universities and other institutions to perform on-site physical therapy and rehabilitation services.
Recent Developments
On December 3, 2024, the New York Stock Exchange ("NYSE") delisted the Company's Class A common stock from trading as a result of non-compliance with its requirement to maintain an average global market capitalization of at least $15.0 million over a period of 30 consecutive trading days. The Company's common stock is currently traded on the Over The Counter ("OTC") Pink Open Market under the ticker symbol "ATIP."
On December 17, 2024, the Company commenced a tender offer to purchase for cash up to 1,650,000 shares of its Class A common stock at a purchase price of $2.85 per share. The Company intended to fund the tender offer with proceeds from the issuance of $6.0 million in debt, contingent upon the satisfaction of conditions outlined in the Company's Third Amendment to Note Purchase Agreement, dated December 12, 2024. On January 16, 2025, the Company terminated the tender offer due to a condition not being satisfied and, as a result, the related debt issuance did not occur.
Effective January 10, 2025, Joseph Jordan resigned from his position as the Chief Financial Officer of the Company. Effective January 13, 2025, Scott Rundell, Vice President of Finance, has been appointed to serve as interim Chief Financial Officer of the Company.
On March 3, 2025 (the "Fourth Amendment Closing Date"), the Company entered into the Fourth Amendment to Note Purchase Agreement, pursuant to which the Company issued $26.0 million of 2L Notes (the "Fourth Amendment 2L Notes"). The Fourth Amendment 2L Notes will mature on August 24, 2028 and will bear interest at a rate of 8.0% per annum, payable quarterly in-kind in the form of additional Fourth Amendment 2L Notes. The Fourth Amendment 2L Notes are convertible into common stock of the Company at a price of $1.35 per share and were not issued with Series B Preferred Stock. Additionally, the Conversion Price for the Company's outstanding 2L Notes was adjusted to $1.35 per share, and the Voting Rights Conversion Price for the Company's outstanding Series B Preferred Stock was adjusted to $1.35 per share. Refer to Note 8 - Borrowings in the accompanying consolidated financial statements for more information.
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As of the Fourth Amendment Closing Date, certain funds managed by and affiliated with Knighthead Capital Management, LLC (collectively, “Knighthead”), Marathon Asset Management, L.P. (collectively, ”Marathon”), Advent International, L.P. (collectively “Advent”), Caspian Capital LP (collectively, “Caspian”), and Onex Corporation (collectively, “Onex” and together with Knighthead, Marathon, Advent, and Caspian, the “Significant Stockholders”) collectively hold, on an as converted basis and not including outstanding warrants, 128,372,300 shares of Common Stock, representing approximately 98.6% of the issued and outstanding shares of Common Stock. The Significant Stockholders (other than Advent) also collectively hold 100% in voting power of the Company’s outstanding Series B Preferred Stock. Such holdings, if aggregated by the Significant Stockholders, may enable such stockholders to consummate a “short-form merger” pursuant to Sections 253 or 267 of the Delaware General Corporation Law (the “DGCL”) without any action by the Company’s board of directors or by the Company’s other stockholders. While the Significant Stockholders have not determined that they will (and there is no agreement or understanding among them to) consummate a short-form merger, the Significant Stockholders (other than Advent) have each agreed, for a period of 12 months following the Fourth Amendment Closing Date, not to consent to, participate in or consummate any short-form merger of the Company or any of its affiliates pursuant to Sections 253 or 267 of the DGCL unless such short-form merger is at a price per share of Common Stock no lower than $2.85 per share, except as may otherwise be approved by the Company’s board of directors.
On March 17, 2025, the Company filed a Form 15 to terminate the registration of the Company's common stock and public warrants under Section 12(g) of the Exchange Act, and suspended the Company's reporting obligations under Section 15(d) of the Exchange Act. Therefore, the Company expects this Annual Report on Form 10-K to be its last filing with the SEC until such time as the Company is required to, or otherwise elects, to make filings with the SEC pursuant to SEC rules and regulations.
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Trends and Factors Affecting the Company’s Future Performance and Comparability of Results
During 2024, we observed the following trends in our operations:
• Improved patient visit volumes relative to 2023, primarily driven by higher clinician staffing.
• Stabilization in retention, continuing the trend observed in 2023, in what has been a tight labor market for available physical therapy and other healthcare providers in the workforce. The tight labor market has contributed to competition in hiring, attrition, clinical staffing level challenges, continued elevated use of contract labor and wage inflation in the physical therapy industry and at ATI.
• Improvement in rate per visit relative to 2023 primarily driven by favorable service mix shifts, favorable payor contracting and lower denials experience, partially offset by rate headwinds including unfavorable state mix shifts and Medicare rate cuts that became effective on January 1, 2024 and were partially mitigated beginning March 9, 2024.
Our ability to achieve our business plan depends upon a number of factors, including, but not limited to, the success of a number of continued steps being taken in an effort to increase clinical staffing levels, improve and sustain higher clinician productivity, control costs and capital expenditures, increase visit volumes and referrals, stabilize and improve rate per visit and obtain additional liquidity.
The Company has focused on attempting to increase its clinical staffing levels by hiring clinicians, optimizing clinician hours based on available workforce and attempting to reduce levels of clinician attrition. We have implemented a range of actions related to compensation, staffing levels, clinical and professional development and other initiatives in an effort to retain and attract therapists across our platform, which has increased our expectations for labor costs. While the Company continues to monitor hiring and retention risk, we observed stabilization in our retention levels during 2024 and 2023 in what has been a tight labor market for available physical therapy and other healthcare providers in the workforce. If we are unable to maintain and increase our clinical staffing levels it may impede our progress toward increasing visit volumes. In an effort to drive more volume and VPD (as defined below), in addition to focusing on clinical staffing levels and clinician productivity, we are working to establish relationships with new referral sources and strengthen relationships with our partner providers and existing referral sources across our geographic footprint.
Market and industry trends and factors
• Outpatient physical therapy services growth. Outpatient physical therapy continues to play a key role in treating musculoskeletal conditions for patients. According to the Centers for Medicare & Medicaid Services ("CMS"), musculoskeletal conditions impact individuals of all ages and include some of the most common health issues in the United States. As healthcare trends in the United States continue to evolve, with a growing focus on value-based care emphasizing up-front, conservative care to deliver better outcomes, quality healthcare services addressing such conditions in lower cost outpatient settings may continue increasing in prevalence.
• United States population demographics. The population of adults aged 65 and older in the United States is expected to continue to grow and thus expand the Company’s market opportunity. According to the U.S. Census Bureau, the population of adults over the age of 65 is expected to grow 23% from 2022 through 2030. As a significant portion of our net patient revenue is derived from governmental third-party payors, including Medicare, our patient base of adults aged 65 and older may increase in the coming years.
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• Federal funding for Medicare and Medicaid. Federal and state funding of Medicare and Medicaid and the terms of access to these reimbursement programs affect demand for physical therapy services. In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. In November 2023, the CMS released its final 2024 Medicare Physician Fee Schedule ("MPFS"). The final fee schedule called for an approximate 3.4% reduction in the calendar year 2024 conversion factor which led to further reductions in reimbursement rates beginning in January 2024. On March 9, 2024, the Consolidated Appropriations Act (2024) was signed into law, which provided an approximate 1.7% of incremental relief to Medicare cuts for the remainder of 2024. The change in rate was not retroactive. As a result, the reimbursement rate reduction beginning on March 9, 2024 was approximately 1.7%. In November 2024, the CMS released its final 2025 MPFS. The final fee schedule called for an approximate 2.8% reduction in the calendar year 2025 conversion factor which led to further reductions in reimbursement rates beginning in 2025, unless revised or otherwise acted upon through a Congressional, executive or other federal measure.
• Workers’ compensation funding. Payments received under certain workers’ compensation arrangements may be based on predetermined state fee schedules, which may be impacted by changes in state funding.
• Number of people with private health insurance. Physical therapy services are often covered by private health insurance. Individuals covered by private health insurance may be more likely to use physical therapy services because it helps offset the cost of such services. As the number of people with private health insurance coverage rises, demand for physical therapy services tends to also increase.
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Key Business Metrics
When evaluating the results of operations, management has identified a number of metrics that allow for specific evaluation of performance on a more detailed basis. See “ Results of Operations ” for further discussion on financial statement metrics such as net revenue, net income (loss), EBITDA and Adjusted EBITDA (each as defined below).
Patient visits
As the main operations of the Company are driven by physical therapy services provided to patients, management considers total patient visits at its owned and operated clinics to be a key volume measure of such services. In addition to total patient visits, management analyzes (1) average visits per day ("VPD") calculated as total patient visits divided by business days for the period, as this allows for comparability between time periods with an unequal number of business days, and (2) average VPD per clinic, calculated as average VPD divided by the average number of owned and operated clinics open during the period.
Net patient revenue per visit
The Company calculates net patient revenue per visit, its most significant reimbursement metric, by dividing net patient revenue in a period by total patient visits in the same period.
Clinics
To better understand geographical and location-based trends, the Company evaluates metrics based on the 866 clinics that it owns and operates and 16 managed clinic locations as of December 31, 2024. De novo clinics represent organic new clinics opened during the current period based on sophisticated site selection analytics. Acqui-novo clinics represent new clinics opened during the current period, that were existing clinic operations not previously owned by the Company, in a target geography that provides the Company with an immediate presence, available staff and referral relationships of the former owner within the surrounding areas. Acquired clinics represent new clinics from purchases of physical therapy practices. Same clinic revenue growth rate identifies revenue growth year over year on clinics that have been owned and operating for over one year. This metric is determined by isolating the population of clinics that have been open for at least 12 months and calculating the percentage change in revenue of this population between the current and prior comparable periods.
The following table presents selected operating and financial data that we believe are key indicators of our operating performance:
Year Ended
December 31, 2024
December 31, 2023
Number of clinics (end of period)
Number of clinics managed (end of period)
New clinics during the period
Business days
Average visits per day
Average visits per day per clinic
Total patient visits
Net patient revenue per visit
Same clinic revenue growth rate
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The following table provides a rollforward of activity related to the number of clinics during the corresponding periods:
Year Ended
December 31, 2024
December 31, 2023
Number of clinics (beginning of period)
Add: New clinics opened during the period
Less: Clinics closed/sold during the period
Number of clinics (end of period)
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Results of Operations
Year ended December 31, 2024 compared to year ended December 31, 2023
The following table summarizes the Company’s consolidated results of operations for the year ended December 31, 2024 and 2023:
Year Ended
December 31, 2024
December 31, 2023
Increase/(Decrease)
($ in thousands, except percentages)
% of Revenue
% of Revenue
Net patient revenue
Other revenue
Net revenue
Cost of services:
Salaries and related costs
Rent, clinic supplies, contract labor and other
Provision for doubtful accounts
Total cost of services
Selling, general and administrative expenses
Long-lived asset impairment charges
Operating income (loss)
Change in fair value of 2L Notes
Change in fair value of warrant liability and contingent common shares liability
Interest expense, net
Other expense, net
Loss before taxes
Income tax expense
Net loss
Net patient revenue. Net patient revenue for the year ended December 31, 2024 was $690.0 million compared to $636.1 million for the year ended December 31, 2023, an increase of approximately $53.9 million or 8.5%.
The increase in net patient revenue was primarily driven by increased visit volumes as a result of higher clinician staffing, favorable net patient revenue per visit in the current period and one more business day in the current period. Total patient visits increased by approximately 0.4 million visits, or 6.2%, driving an increase in average VPD of 1,363, or 5.8%. Net patient revenue per visit increased $2.26, or 2.1%, to $109.08 for the year ended December 31, 2024 compared to $106.82 for the year ended December 31, 2023. The increase in net patient revenue per visit during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily driven by favorable service mix shifts, favorable payor contracting, lower denials experience and certain favorable adjustments to transaction price based on collections experience, partially offset by unfavorable state mix shifts and Medicare rate cuts that became effective on January 1, 2024 and were partially mitigated beginning March 9, 2024.
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Other revenue. Other revenue for the year ended December 31, 2024 was $63.1 million compared to $62.9 million for the year ended December 31, 2023, an increase of $0.2 million or 0.3%. Other revenue remained relatively consistent year over year.
Salaries and related costs. Salaries and related costs for the year ended December 31, 2024 were $417.7 million compared to $382.4 million for the year ended December 31, 2023, an increase of approximately $35.4 million or 9.3%. Salaries and related costs as a percentage of net revenue was 55.5% and 54.7% for the year ended December 31, 2024 and 2023, respectively. The increase of $35.4 million was primarily driven by higher compensation and benefits due to higher number of clinicians and support staff and wage inflation. The increase as a percentage of revenue was primarily driven by higher compensation and benefits, partially offset by higher net revenue and higher clinician productivity during the year ended December 31, 2024.
Rent, clinic supplies, contract labor and other. Rent, clinic supplies, contract labor and other costs for the year ended December 31, 2024 were $216.0 million compared to $208.6 million for the year ended December 31, 2023, an increase of approximately $7.4 million or 3.6%. Rent, clinic supplies, contract labor and other costs as a percentage of net revenue was 28.7% and 29.8% for the year ended December 31, 2024 and 2023, respectively. The increase of $7.4 million was primarily driven by higher contract labor and third-party services costs, partially offset by a lower number of clinics during the year ended December 31, 2024. The decrease as a percentage of net revenue was primarily driven by higher net revenue and a lower number of clinics, partially offset by higher contract labor and third-party services costs during the year ended December 31, 2024.
Provision for doubtful accounts. Provision for doubtful accounts for the year ended December 31, 2024 was $15.8 million compared to $11.3 million for the year ended December 31, 2023, an increase of approximately $4.6 million or 40.7%. Provision for doubtful accounts as a percentage of net revenue was 2.1% and 1.6% for the year ended December 31, 2024 and 2023, respectively. The increase of $4.6 million was primarily driven by favorable cash collections during 2023 and returning to normal levels during the year ended December 31, 2024 and higher revenue associated with higher visit volumes. The increase as a percentage of net revenue was primarily driven by favorable cash collections during 2023 and returning to normal levels during the year ended December 31, 2024.
Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2024 were $99.7 million compared to $118.7 million for the year ended December 31, 2023, a decrease of $19.0 million or 16.0%. Selling, general and administrative expenses as a percentage of net revenue was 13.2% and 17.0% for the year ended December 31, 2024 and 2023, respectively. The decrease of $19.0 million was primarily due to lower debt and capital transaction costs, lower non-ordinary legal and regulatory costs and lower corporate insurance costs, partially offset by lower legal cost insurance reimbursements during the year ended December 31, 2024. The decrease as a percentage of net revenue was primarily driven by decreased costs related to the items noted above, as well as the impact of higher net revenue during the year ended December 31, 2024.
Long-lived asset impairment charges. Long-lived asset impairment charges for the year ended December 31, 2024 was $1.5 million compared to $5.6 million for the year ended December 31, 2023. The amount relates to the non-cash write-down of long-lived assets during the respective years.
Change in fair value of 2L Notes. Change in fair value of 2L Notes for the year ended December 31, 2024 and 2023 was a gain of $3.9 million and $24.5 million, respectively. The gain in each period relates to the decrease in the estimated fair value of the Company's 2L Notes primarily driven by decreases in the Company's share price during the respective years.
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Change in fair value of warrant liability and contingent common shares liability. Change in fair value of warrant liability and contingent common shares liability was a gain of $0.2 million for the year ended December 31, 2024 compared to a gain of $2.4 million for the year ended December 31, 2023. The gain in each period relates to the decrease in the estimated fair value of the Company’s IPO Warrants, Earnout Shares and Vesting Shares, primarily driven by decreases in the Company's share price during the respective years.
Interest expense, net. Interest expense, net for the year ended December 31, 2024 was $58.5 million compared to $61.0 million for the year ended December 31, 2023, a decrease of approximately $2.6 million or 4.2%. The decrease in interest expense was primarily driven by lower outstanding principal balances on the Company's Senior Secured Term Loan and lower interest rates under the Company's 2022 Credit Agreement, partially offset by lower cash flow hedge benefits and higher outstanding principal balances on the Company's Revolving Loans and Second Lien Loans (each as defined below) during the year ended December 31, 2024.
Other expense, net. Other expense, net for the year ended December 31, 2024 was $0.6 million compared to $1.8 million for the year ended December 31, 2023, a decrease in expense of approximately $1.2 million. The decrease was primarily driven by $0.8 million in higher gain on the change in fair value of the Company's non-designated derivative instrument during the year ended December 31, 2024 and the absence of $0.4 million in loss on debt extinguishment related to the 2023 Debt Restructuring.
Income tax expense. Income tax expense for the year ended December 31, 2024 was approximately $1.5 million compared to $2.6 million for the year ended December 31, 2023, a decrease in expense of approximately $1.1 million. The decrease was primarily driven by the difference in the effective tax rate and the difference in loss before taxes for the respective periods. During the year ended December 31, 2024 and 2023, valuation allowances were recognized against federal and state net operating losses and other tax attributes, such as interest disallowances, for which future realization is uncertain.
Net loss. Net loss for the year ended December 31, 2024 was $54.0 million compared to $66.1 million for the year ended December 31, 2023, a decrease in loss of approximately $12.1 million. The comparatively lower loss was primarily driven by margin on higher revenues, lower corporate costs and lower long-lived asset impairment charges, partially offset by a lower gain on the change in fair value of 2L Notes during the year ended December 31, 2024 as compared to the year ended December 31, 2023.
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Non-GAAP Financial Measures
The following table reconciles the supplemental non-GAAP financial measures, as defined under the rules of the U.S. Securities and Exchange Commission ("SEC"), presented herein to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. EBITDA and Adjusted EBITDA are defined as net income (loss) from continuing operations calculated in accordance with GAAP, less net income attributable to non-controlling interests, plus the sum of income tax expense, interest expense, net, depreciation and amortization (“EBITDA”) and further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, long-lived asset impairment charges, change in fair value of 2L Notes, changes in fair value of warrant liability and contingent common shares liability, share-based compensation, non-ordinary legal and regulatory matters, legal cost insurance reimbursements, transaction costs, change in fair value of non-designated derivative instrument, non-recurring labor related credits, pre-opening de novo costs, and reorganization and severance costs (“Adjusted EBITDA”).
We present EBITDA and Adjusted EBITDA because they are key measures used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions. The Company believes EBITDA and Adjusted EBITDA are useful to investors for the purposes of comparing our results period-to-period and alongside peers and understanding and evaluating our operating results in the same manner as our management team and Board.
These supplemental measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. In addition, since these non-GAAP measures are not determined in accordance with GAAP, they are susceptible to varying calculations and may not be comparable to other similarly titled non-GAAP measures of other companies.
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EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The following is a reconciliation of net loss, the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA (each of which is a non-GAAP financial measure) for each of the periods indicated. For additional information on these non-GAAP financial measures, see “ Non-GAAP Financial Measures” above.
Year Ended
($ in thousands)
December 31, 2024
December 31, 2023
Net loss
Plus (minus):
Net income attributable to non-controlling interests
Interest expense, net
Income tax expense
Depreciation and amortization expense
EBITDA
Long-lived asset impairment charges (1)
Change in fair value of 2L Notes (2)
Changes in fair value of warrant liability and contingent common shares liability (3)
Share-based compensation (4)
Non-ordinary legal and regulatory matters (5)
Legal cost insurance reimbursements (6)
Transaction costs (7)
Change in fair value of non-designated derivative instrument (8)
Non-recurring labor related credits (9)
Loss on debt extinguishment (10)
Pre-opening de novo costs (11)
Reorganization and severance costs (12)
Adjusted EBITDA
(1) Represents non-cash charges related to the write-down of long-lived assets.
(2) Represents non-cash amounts related to the change in the estimated fair value of the 2L Notes. Refer to Notes 8 and 14 of the accompanying consolidated financial statements for further details.
(3) Represents non-cash amounts related to the change in the estimated fair value of IPO Warrants, Earnout Shares and Vesting Shares.
(4) Represents charges related to share-based compensation awards, which vary from period to period based on the timing of awards and vesting conditions.
(5) Represents non-ordinary course legal costs related to the previously disclosed ATIP stockholder class action complaints, derivative complaint and SEC matter. Refer to Note 17 of the accompanying consolidated financial statements for further details.
(6) Represents insurance reimbursements for legal costs incurred related to the previously disclosed ATIP stockholder class action complaints and derivative complaint. Refer to Note 17 of the accompanying consolidated financial statements for further details.
(7) Represents non-capitalizable debt and capital transaction costs.
(8) Represents non-cash amounts related to the change in estimated fair value of derivative not designated in a hedging relationship. Refer to Note 14 of the accompanying consolidated financial statements for further details.
(9) Represents realized benefit of labor related credit that was not previously considered probable and relates to prior years.
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(10) Represents charges related to the loss on debt extinguishment recognized as part of the 2023 Debt Restructuring. Refer to Note 8 of the accompanying consolidated financial statements for further details.
(11) Represents expenses associated with renovation, equipment and marketing costs relating to the start-up and launch of new locations incurred prior to opening.
(12) Represents severance costs related to discrete initiatives focused on reorganization and delayering of the Company’s labor model, management structure and support functions.
Liquidity and Capital Resources
Our principal sources of liquidity are borrowings under our 2022 Credit Agreement and Second Lien Note Purchase Agreement, proceeds from equity issuances and revenue from our operations. We have used these funds for our short-term and long-term capital needs, which include salaries, benefits and other employee-related expenses, rent, clinical supplies, outside services, capital expenditures, acquisitions, de novos, acqui-novos and debt service. Our capital expenditure, acquisition, de novo and acqui-novo spend depends on many factors, including, but not limited to, the targeted number of new clinic openings, patient volumes, clinician labor market, revenue growth rates, level of operating cash flows and overall liquidity position.
As of December 31, 2024 and December 31, 2023 , we had $39.1 million and $36.8 million in cash and cash equivalents, respectively. As of December 31, 2024, we had no available capacity under our revolving credit facility.
We make reasonable and appropriate efforts to collect accounts receivable, including payor amounts and applicable patient deductibles, co-payments and co-insurance, in a consistent manner for all payor types. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect.
For the year ended December 31, 2024, we had operating cash outflows of $19.2 million driven by items including net losses and payments related to interest expense and operating lease liabilities. Our ability to generate future operating cash flows depends on many factors, including clinical staffing levels and productivity, costs and capital expenditures, patient volumes, referrals, revenue reimbursement rates and revenue growth rates.
Liquidity and going concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business within twelve months after the date that these consolidated financial statements are issued.
As of December 31, 2024, the Company had $39.1 million in cash and cash equivalents with no available capacity under its revolving credit facility. The Company was in compliance with its minimum liquidity covenant under the 2022 Credit Agreement as of December 31, 2024.
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The Company has continued to generate negative operating cash flows and net losses. For the year ended December 31, 2024, the Company had cash flows used in operating activities of $19.2 million and net loss of $54.0 million. These results are, in part, due to the Company's current capital structure, including cash interest costs, and the Company's pace of visit volume and operating performance at the clinic level. The Company has continued to fund cash used in operations primarily from financing activities and expects to need additional liquidity to continue funding working capital requirements, necessary capital expenditures as well as to be available for general corporate purposes, including interest repayments. The Company is at risk of insufficient funding to meet its obligations as they become due within twelve months after the date that these consolidated financial statements are issued. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern.
On June 15, 2023 (the "Closing Date"), the Company completed a debt restructuring transaction under its 2022 Credit Agreement (the "2023 Debt Restructuring") including: (i) a delayed draw new money financing in an aggregate principal amount of $25.0 million, comprised of (A) second lien paid-in-kind convertible notes (the “2L Notes”) and (B) shares of Series B Preferred Stock (as defined in Note 8 in the accompanying consolidated financial statements). The Company utilized the delayed draw of $25.0 million during the year ended December 31, 2024.
On October 2, 2024, the Company entered into the Second Amendment to Note Purchase Agreement, pursuant to which the Company issued $10.5 million of second lien paid-in-kind notes (the "Second Lien Loans"). Refer to Note 8 - Borrowings in the accompanying consolidated financial statements for more information about the Second Lien Loans.
On March 3, 2025, the Company entered into the Fourth Amendment to Note Purchase Agreement, pursuant to which the Company issued $26.0 million of Fourth Amendment 2L Notes. Refer to Note 8 - Borrowings in the accompanying consolidated financial statements for more information.
The Company plans to continue its efforts to improve its operating results and cash flow through increases to clinical staffing levels, improvements in clinician productivity, increases in patient visit volumes, referrals and rate per visit and controlling costs and capital expenditures. There can be no assurance that the Company's plan will be successful in any of these respects.
Future liquidity needs are expected to require additional sources of liquidity beyond operating results. Additional liquidity sources considered include but are not limited to:
• raising additional debt and/or equity capital,
• disposal of assets, and/or
• other strategic alternatives to improve its business, results of operations and financial condition.
There can be no assurances that the Company will be successful in accessing such alternative options or financing if or when needed. Furthermore, on March 17, 2025, the Company filed a Form 15 to terminate the registration of the Company's common stock and public warrants under Section 12(g) of the Exchange Act and suspend the Company's reporting obligations under Section 15(d) of the Exchange Act, which will limit its ability to raise equity capital through the public markets in the future. Failure to access such alternative options or financing, if or when needed, could have a material adverse impact on the Company's business, financial condition, results of operations and cash flows, and may lead to events including bankruptcy, reorganization or insolvency.
Management's plans have not been fully implemented and, as a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern.
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The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
2023 Debt Restructuring Transaction
On the Closing Date, the Company completed the 2023 Debt Restructuring. On the Closing Date, certain previously executed agreements became effective, including (i) Amendment No. 2 to the Credit Agreement, (ii) a Second Lien Note Purchase Agreement and (iii) certain other definitive agreements relating to the 2023 Debt Restructuring.
As part of the 2023 Debt Restructuring, the Company exchanged a principal amount of $100.0 million of the $507.8 million then outstanding Senior Secured Term Loan for an equal amount of 2L Notes, which are convertible into shares of the Company's common stock, stapled with a number of shares of Series B Preferred Stock, which represent voting interests only. The exchange was consummated through the Intercreditor and Subordination Agreement and Second Lien Note Purchase Agreement.
Based on the results of the cash flow tests and requirements pursuant to Accounting Standards Codification ("ASC") Topic 470, Debt , the Company accounted for the impacts related to amounts held by HPS Investment Partners, LLC as a modification, and the impacts related to amounts held and exchanged by Onex Credit Partners, LLC (“Onex”), Knighthead Capital Management, LLC (“Knighthead”) and Marathon Asset Management, L.P. (“Marathon”) as an extinguishment. The Company recognized $0.4 million in loss on debt extinguishment within other expense, net in the consolidated statements of operations related to lenders treated under extinguishment accounting during the year ended December 31, 2023. The loss on debt extinguishment consisted of various offsetting components, including the derecognition of $4.3 million of unamortized deferred financing costs and original issue discount on the Senior Secured Term Loan and the recognition of $0.7 million of fair value premium at issuance on the 2L Notes, offset by the recognition of $2.8 million in delayed draw right assets related to the commitment provided by certain lenders and the recognition of $1.8 million of incremental original issue discount on the Senior Secured Term Loan.
2022 Credit Agreement
Effective February 24, 2022, ATI Holdings Acquisition, Inc. (the "Borrower"), an indirect subsidiary of the Company, entered into a credit agreement among the Borrower, Wilco Intermediate Holdings, Inc., as loan guarantor, Barclays Bank PLC, as administrative agent and issuing bank, and a syndicate of lenders (as amended, the "2022 Credit Agreement"). The 2022 Credit Agreement provided an initial $550.0 million credit facility (the "2022 Credit Facility") that was comprised of a $500.0 million senior secured term loan (the "Senior Secured Term Loan") and a $50.0 million "super priority" senior secured revolver (the "Revolving Loans") with a $10.0 million letter of credit sublimit. The 2022 Credit Agreement was subsequently amended as part of the 2023 Debt Restructuring, in which $100.0 million of the initial Senior Secured Term Loan principal was exchanged for 2L Notes.
The 2022 Credit Agreement contains provisions restricting payments from the Borrower to the Parent, except for payments specifically outlined, such as those related to reasonable and customary administrative expenses of the Parent up to $0.5 million; certain reasonable and customary indemnification claims; certain tax payments; customary fees and expenses related to debt or equity offerings, investments or acquisitions; certain salaries and related amounts for any directors, officers, employees or consultants of the Parent; payments related to certain transactions related to Parent capital stock not to exceed $5.0 million in cash in any fiscal year unless funded through certain other sources such as the sale, issuance or exercise of certain other capital stock or similar instruments; repayment or redemption of the Series A Senior Preferred Stock (as defined below) under certain conditions; and other categories outlined in the agreement. The 2022 Credit Agreement effectively results in restricted net assets of substantially all of the Parent's subsidiaries, which limits transferability to the Parent in the form of dividends, distributions, loans or advances.
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Senior Secured Term Loan
The Senior Secured Term Loan matures on February 24, 2028 and bears interest, at the Company's election, at a base interest rate of the Alternate Base Rate ("ABR"), as defined in the agreement, plus an applicable credit spread, or at a base interest rate of the Adjusted Term Secured Overnight Financing Rate ("SOFR"), as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio, as defined in the agreement.
As of December 31, 2024, the outstanding principal amount on the Senior Secured Term Loan was $410.0 million, of which $17.0 million was due to related parties and is primarily attributable to Onex. As of December 31, 2024, borrowings on the Senior Secured Term Loan bear interest, payable in cash, at 11.5%, consisting of 12-month SOFR, subject to a 1.0% floor, plus a credit spread of 7.25%.
Revolving Loans
The Revolving Loans are subject to a maximum borrowing capacity of $50.0 million and mature on February 24, 2027. Letters of credit on the Revolving Loans are subject to a $10.0 million sublimit and reduce the available borrowing capacity on the Revolving Loans. Borrowings on the Revolving Loans bear interest, at the Company's election, at a base interest rate of the ABR, as defined in the agreement, plus an applicable credit spread, or at a base interest rate of the Adjusted Term SOFR Rate, as defined in the agreement, plus an applicable credit spread. The credit spread is determined based on a pricing grid and the Company's Secured Net Leverage Ratio.
As of December 31, 2024, $44.3 million in Revolving Loans were outstanding and bearing interest, payable in cash, at a weighted average rate of 8.5%, consisting of 12-month SOFR plus a credit spread of approximately 4.3%. During the year ended December 31, 2024, the Company repaid approximately $25.3 million in Revolving Loans and drew an additional $31.2 million in Revolving Loans.
Letters of Credit
The Company had letters of credit totaling $5.7 million and $6.5 million under the letter of credit sub-facility on the Revolving Loans as of December 31, 2024 and December 31, 2023, respectively. The letters of credit auto-renew on an annual basis and are pledged to insurance carriers as collateral.
Second Lien Note Purchase Agreement and Designation of Series B Preferred Stock
2L Notes
As part of the 2023 Debt Restructuring, Knighthead, Marathon, and Onex collectively exchanged a principal amount of $100.0 million of Senior Secured Term Loan for $100.0 million of 2L Notes stapled with a number of shares of Series B Preferred Stock. Of the $100.0 million of 2L Notes issued, approximately $50.8 million were issued to Knighthead, $40.4 million were issued to Marathon, and $8.8 million were issued to Onex, all related parties. On the Closing Date, an additional $3.2 million of 2L Notes with stapled Series B Preferred Stock were issued among the same related parties as part of the First Amendment to the Second Lien Note Purchase Agreement. The terms of the issued 2L Notes and Series B Preferred Stock are the same as those that were subject to the exchange.
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The 2L Notes are subordinated in right of payment and lien priority to the 2022 Credit Facility and mature on August 24, 2028, unless earlier converted, accrue interest at an annual rate of 8.0% payable in-kind on a quarterly basis in the form of additional 2L Notes, and are convertible into shares of common stock, at the holder’s option, at a fixed conversion price, subject to certain adjustments in the agreement (the "Conversion Price"). The initial Conversion Price for the 2L Notes was $12.50 per share. On March 3, 2025, the Company entered into the Fourth Amendment to Note Purchase Agreement, pursuant to which the Conversion Price for the Company's outstanding 2L Notes was adjusted to $1.35 per share. Upon conversion of the 2L Notes, the Company shall deliver to the holder a number of shares of common stock equal to (i) the principal amount of such 2L Notes plus any accrued and unpaid interest divided by (ii) the Conversion Price then in effect.
As of December 31, 2024, of the 2L Notes principal outstanding and due to related parties, approximately $72.2 million, $55.9 million, $10.3 million, and $5.4 million were outstanding with Knighthead, Marathon, Onex, and Caspian Capital LP, respectively. As of December 31, 2023, of the 2L Notes principal outstanding and due to related parties, approximately $54.7 million, $43.6 million and $9.5 million were outstanding with Knighthead, Marathon, and Onex, respectively.
On March 3, 2025, the Company entered into the Fourth Amendment to Note Purchase Agreement, pursuant to which the Company issued $26.0 million of Fourth Amendment 2L Notes. Refer to Note 8 - Borrowings in the accompanying consolidated financial statements for more information.
Second Lien Loans
On October 2, 2024, the Company entered into the Second Amendment to Note Purchase Agreement, pursuant to which the Company issued $10.5 million of Second Lien Loans, of which half was issued to Knighthead and half was issued to Marathon. The Second Lien Loans mature on August 24, 2028 and bear interest at a rate of 17.0% per annum, payable quarterly in-kind in the form of additional Second Lien Loans. The Second Lien Loans are not convertible into common stock of the Company and were not issued with Series B Preferred Stock. As of December 31, 2024, the outstanding principal amount on the Second Lien Loans and due to related parties was $10.9 million, of which half was due to Knighthead and half was due to Marathon.
Refer to Note 8 - Borrowings in the accompanying consolidated financial statements for further information regarding the Company's borrowings.
Series A Senior Preferred Stock
The Company has outstanding shares of non-convertible preferred stock (the "Series A Senior Preferred Stock"). The Company is authorized to issue 1.0 million shares of Series A Senior Preferred Stock per the Certificate of Designation. As of December 31, 2024, there was 165,000 shares of Series A Senior Preferred Stock issued and outstanding with a par value of $0.0001 per share. As of December 31, 2024, the redemption value of the Series A Senior Preferred Stock was $246.2 million.
Refer to Note 11 - Mezzanine and Stockholders' Equity in the accompanying consolidated financial statements for further information regarding the Series A Senior Preferred Stock.
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Consolidated Cash Flows
The following table presents selected data from our consolidated statements of cash flows:
Year Ended
($ in thousands)
December 31, 2024
December 31, 2023
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year ended December 31, 2024 compared to year ended December 31, 2023
Net cash used in operating activities for the year ended December 31, 2024 was $19.2 million compared to $12.4 million for the year ended December 31, 2023, an increase of approximately $6.8 million. The increase was primarily the result of approximately $25.4 million higher net cash outflows from changes in current assets and current liabilities related to timing of collections and payments, as well as higher incentive compensation paid to employees during the year ended December 31, 2024 and $4.5 million higher cash outflows from operating leases, partially offset by margin on higher revenue with approximately $21.3 million lower net losses as adjusted for non-cash items such as long-lived asset impairment charges and changes in fair value of 2L Notes, warrant liability and contingent common shares liability during the year ended December 31, 2024.
Net cash used in investing activities for the year ended December 31, 2024 was $14.3 million compared to $17.4 million for the year ended December 31, 2023, a decrease of approximately $3.1 million. The decrease was driven by lower capital expenditures during the year ended December 31, 2024 primarily due to fewer clinic openings.
Net cash provided by financing activities for the year ended December 31, 2024 was $35.7 million compared to $16.6 million used for the year ended December 31, 2023, an increase in cash provided of approximately $52.3 million. The change was primarily driven by the issuance of $25.0 million in the form of 2L Notes under its delayed draw right, the issuance of $10.5 million in Second Lien Loans, and $19.4 million lower repayments on Revolving Loans during the year ended December 31, 2024.
Commitments and Contingencies
The Company may be subject to loss contingencies, such as legal proceedings and claims arising out of its business. The Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. During the year ended December 31, 2024, the Company recorded an accrued liability related to the outcomes of certain legal matters described in Note 17 - Commitments and Contingencies . As of December 31, 2024, the liability was released. Refer to Note 17 in our accompanying consolidated financial statements included elsewhere in this Annual Report for further information.
We enter into contractual obligations and commitments from time to time in the normal course of business, primarily related to our debt financing and operating leases. Refer to Notes 8 and 16 in our accompanying consolidated financial statements included elsewhere in this Annual Report for further information. Additionally, the Company has contractual commitments related to cloud computing and telecommunication service agreements. Refer to Note 17 in our accompanying consolidated financial statements included elsewhere in this Annual Report for further information.
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Off-Balance Sheet Arrangements
As of December 31, 2024 and December 31, 2023, the Company did not have any off-balance sheet arrangements.
Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of the Company’s consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. The Company’s management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company’s consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company’s financial position and results of operations.
Critical accounting estimates are those that the Company’s management considers the most important to the portrayal of the Company’s financial condition and results of operations because they require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting estimates in relation to its consolidated financial statements include those related to:
• Net patient revenue and accounts receivable
• Provision for doubtful accounts and allowance for doubtful accounts
• Realization of deferred tax assets
• Goodwill and intangible assets
Additional information related to our critical accounting estimates can be found in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies of our consolidated financial statements included elsewhere in this Annual Report.
Net patient revenue and accounts receivable
Net patient revenue
We provide an array of services to our patients including physical therapy, work conditioning, hand therapy, aquatic therapy, functional capacity evaluation, sports medicine and wellness programs. Net patient revenue consists of these physical therapy services.
Net patient revenue is recognized at an amount equal to the consideration the Company expects to receive from third-party payors, patients and others for services rendered when the performance obligations under the terms of the contract are satisfied.
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There is a contract between the Company and the patient upon each visit resulting in the Company’s performance obligation to provide services to the patient. Generally, the performance obligation is satisfied as the patient receives physical therapy services provided by the Company, as each service provided is distinct and future services rendered are not dependent on previously rendered services. The Company has separate contractual agreements (written or implied) with third-party payors (e.g., insurers, managed care programs, government programs, workers' compensation) that provide for payments to the Company at amounts different from its established rates; the difference between the Company's established rates and amounts paid by third-party payors represent explicit price concessions in the form of contractual allowances or denials allowances. While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the patients covered by the third-party payors. The payor contracts do not indicate performance obligations of the Company but indicate reimbursement rates for patients who are covered by those payors when the services are provided.
To determine the transaction price associated with the contract, the Company includes the estimated effects of any variable consideration, such as contractual allowances, denials allowances and implicit price concessions. When the Company has written payment contracts with third-party payors with negotiated prices for services (contracted payors), the Company determines the transaction price using the negotiated contractual rates to estimate contractual allowances as compared to established rates; additional variable consideration for denial allowances is estimated using a portfolio approach that incorporates whether or not the Company has historical differences from negotiated contractual rates due to non-compliance with contract provisions.
When the Company does not have written payment contracts with third-party payors (non-contracted payors), the Company determines the transaction price using a portfolio approach to estimate variable consideration for contractual allowances, denial allowances and implicit price concessions based on historical collections experience for claims with similar characteristics, such as location of service and type of third-party payor, in relation to its established rates.
For both contracted and non-contracted payors, any subsequent changes in estimate of the transaction price is recorded as a revenue adjustment. Management believes that calculating at the portfolio level would not differ materially from considering each patient account separately.
The Company continually reviews the transaction price estimation process to consider updates to laws and regulations and changes in third-party payor contractual terms that result from contract renegotiations and renewals. Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payors and government entities, which are often subject to interpretation, the Company may receive reimbursement for healthcare services that is different from the estimates, and such differences could be material.
In its evaluation of the transaction price, management assesses historical collection experience in relation to contracted rates, or for non-contracted payors, established rates. The practice of applying historical collection experience to determine the revenue transaction price for current transactions involves significant judgment and estimation. Management subsequently monitors the appropriateness of its estimates for claims on a date of service basis as cash collections on previous periods mature. Actual cash collections upon maturity may differ from the transaction price estimated upon initial recognition, and such differences could be material. If initial revenue recognition estimates increased or decreased by 100 basis points relative to an annual period, the impact to collections of the annual net patient revenue would be approximately $6.9 million. Management believes subsequent changes in estimate as a result of maturity of claims with dates of service in 2022 and 2023 have not been material to the consolidated statements of operations.
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The following table disaggregates net patient revenue for each associated payor class for the periods indicated below:
Year Ended
December 31, 2024
December 31, 2023
Commercial
Government
Workers’ Compensation
Other (1)
(1) Primarily comprised of net patient revenue from auto personal injury reimbursement.
Accounts receivable
The Company's accounts receivable are reported net of contractual allowances, denials allowances and allowances for doubtful accounts. The majority of accounts receivable are due from commercial insurance companies, workers' compensation plans, auto personal injuryclaims and government health programs, such as Medicare or Medicaid. The Company reports accounts receivable at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients.
The following table disaggregates accounts receivable, net associated with net patient revenue for each associated payor class as of:
December 31, 2024
December 31, 2023
Commercial
Government
Workers’ Compensation
Other (1)
(1) Primarily comprised of accounts receivable associated with net patient revenue from auto personal injury reimbursement which by its nature may have longer-term collection characteristics relative to other payor classes.
Provision for doubtful accounts and allowance for doubtful accounts
Provision for doubtful accounts
For contracted payors, the Company records an estimated provision for doubtful accounts using a portfolio approach based on historical collections experience for claims with similar characteristics, such as location of service and type of third-party payor, at the time net patient revenue is recognized. Any subsequent impairment of the related receivable is recorded as provision for doubtful accounts. The provision for doubtful accounts is included in cost of services in the consolidated statements of operations. When it is determined that a customer account is uncollectible, that balance is written off against the existing allowance.
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Allowance for doubtful accounts
The Company estimates the allowance for doubtful accounts based upon several factors, including the age of the outstanding receivables, the historical experience of collections, the impact of economic conditions and, in some cases, evaluating specific customer accounts for the ability to pay. Management judgment is used to assess the collectability of accounts and the ability of the Company’s customers to pay.
Realization of deferred tax assets
The Company accounts for income taxes in accordance with ASC Topic 740 ("ASC 740"), Income Taxes . Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in operations in the period that includes the enactment date.
We evaluate the realizability of deferred tax assets and reduce those assets using a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Among the factors used to assess the likelihood of realization are projections of future taxable income streams and the expected timing of the reversals of existing temporary differences. The judgments made at any point in time may be impacted by changes in tax codes, statutory tax rates or future taxable income levels. This could materially impact our assessment of the need for valuation allowance reserves and could cause our provision for income taxes to vary significantly from period to period.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill and indefinite-lived intangible assets under ASC Topic 350, Intangibles – Goodwill and Other , which requires the Company to test goodwill and other indefinite-lived assets for impairment annually or whenever events or circumstances indicate that impairment may exist.
The cost of acquired businesses is allocated first to its identifiable assets, both tangible and intangible, based on estimated fair values. Costs allocated to finite-lived identifiable intangible assets are generally amortized on a straight-line basis over the remaining estimated useful lives of the assets. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill.
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Goodwill and intangible assets with indefinite lives are not amortized but must be reviewed at least annually for impairment. If the impairment test indicates that the carrying value of the reporting unit exceeds its fair value, then a goodwill impairmentloss should be recognized in the consolidated statements of operations in an amount equal to the excess carrying value over fair value. If the impairment test indicates that the carrying value of an intangible asset exceeds its fair value, then an impairmentloss should be recognized in the consolidated statements of operations in an amount equal to the excess carrying value over fair value. Fair value is determined using valuation techniques based on estimates, judgments and assumptions the Company believes are appropriate in the circumstances. The Company completed the annual impairment analysis of goodwill during the fourth quarter of 2024 by estimating its fair value using an average of a discounted cash flow analysis and comparable public company analysis. The Company concluded that no goodwill impairment occurred during the year ended December 31, 2024. The key assumptions associated with determining the estimated fair value include projected revenue growth rates and EBITDA margins, the terminal growth rate, the discount rate and relevant market multiples. The Company completed the annual impairment analysis of the indefinite-lived intangible asset during the fourth quarter of 2024 by estimating its fair value using the relief from royalty method. The Company concluded that no indefinite-lived intangible asset impairment occurred during the year ended December 31, 2024. The key assumptions associated with determining the estimated fair value include projected revenue growth rates, the royalty rate, the discount rate and the terminal growth rate.
The Company has one reporting unit for purposes of the Company’s goodwill impairment tests. During the year ended December 31, 2023, the Company concluded that no goodwill or indefinite-lived intangible asset impairment occurred.
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 the indefinite-lived intangible asset 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 revenue growth rates and 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, including discount rates, relevant market multiples, company share price and other market factors, then our reporting unit or the indefinite-lived intangible asset might become impaired in the future, negatively impacting our operating results and financial position. Factors that could result in the cash flows being lower than the current estimates include decreased revenue caused by unforeseen changes in the healthcare market or the Company's business, or the inability to achieve the estimated operating margins in the forecasts due to unforeseen factors. Additionally, changes in the broader economic environments could cause changes to the estimated discount rates and comparable company valuation indicators which may impact the estimated fair values. Goodwill and indefinite-lived intangible assets associated with acquisitions that may occur in the future are recorded on the balance sheet at their estimated acquisition date fair values, and those amounts are more susceptible to impairment risk if business operating results or market conditions deteriorate.
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To further illustrate sensitivity of the valuation models, if we had changed the assumptions used to estimate the fair value of our goodwill reporting unit and trade name indefinite-lived intangible asset in our most recent quantitative analysis in 2024, these isolated changes, which are reasonably possible to occur, would have led to the following approximate increase/(decrease) in the aggregate fair value of the reporting unit under the discounted cash flow analysis or trade name indefinite-lived intangible asset (in thousands):
Discount rate
Terminal growth rate (1)
EBITDA margin
Royalty rate
50 basis points
100 basis points
100 basis points
50 basis points
Increase
Decrease
Increase
Decrease
Increase
Decrease
Increase
Decrease
Goodwill
Trade name
(1) An increase of 100 basis points to our assumed non-terminal revenue growth rates would result in approximately $55 million of an estimated increase to the fair value of our goodwill reporting unit, whereas a 100 basis point decrease would result in approximately $45 million of an estimated decrease to the fair value of our goodwill reporting unit.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2 - Basis of Presentation and Summary of Significant Accounting Policies in the accompanying consolidated financial statements.
