U S PHYSICAL THERAPY INC /NV 10-Q

ITEM 1. FINANCIAL STATEMENTS. U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) September 30, 2020 December 31, 2019 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 30,129 $ 23,548 Patient accounts receivable, less allowance for doubtful accounts of $ 2,154 and $ 2,698 , respectively 39,439 46,228 Accounts receivable - other 9,878 9,823 Other current assets 3,198 5,787 Total current assets 82,644 85,386 Fixed assets: Furniture and equipment 55,411 54,942 Leasehold improvements 34,111 33,247 Fixed assets, gross 89,522 88,189 Less accumulated depreciation and amortization 68,048 66,099 Fixed assets, net 21,474 22,090 Operating lease right-of-use assets 78,784 81,586 Goodwill 336,946 317,676 Other identifiable intangible assets, net 54,060 52,588 Other assets 1,530 1,519 Total assets $ 575,438 $ 560,845 LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS, USPH SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS Current liabilities: Accounts payable - trade $ 1,060 $ 2,494 Accrued expenses 60,236 30,855 Current portion of operating lease liabilities 26,905 26,486 Current portion of notes payable 4,999 728 Total current liabilities 93,200 60,563 Notes payable, net of current portion 509 4,361 Revolving line of credit 7,000 46,000 Deferred taxes 8,570 10,071 Operating lease liabilities, net of current portion 60,137 60,258 Other long-term liabilities 349 141 Total liabilities 169,765 181,394 Redeemable non-controlling interests - temporary equity 139,801 137,750 U.S. Physical Therapy, Inc. (“USPH”) shareholders’ equity: Preferred stock, $ 0.01 par value, 500,000 shares authorized, no shares issued and outstanding - - Common stock, $ 0.01 par value, 20,000,000 shares authorized, 15,065,087 and 14,989,337 shares issued, respectively 151 150 Additional paid-in capital 93,195 87,383 Retained earnings 203,201 184,352 Treasury stock at cost, 2,214,737 shares ( 31,628 ) ( 31,628 ) Total USPH shareholders’ equity 264,919 240,257 Non-controlling interests - permanent equity 953 1,444 Total USPH shareholders’ equity and non-controlling interests 265,872 241,701 Total liabilities, redeemable non-controlling interests, USPH shareholders’ equity and non-controlling interests $ 575,438 $ 560,845 See notes to consolidated financial statements. 3 Table of Contents U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited) For the Three Months Ended For the Nine Months Ended September 30, 2020 September 30, 2019 September 30,2020 September 30, 2019 Net patient revenues $ 96,398 $ 104,392 $ 268,803 $ 324,405 Other revenues 12,531 12,859 36,700 35,450 Net revenues 108,929 117,251 305,503 359,855 Operating costs: Salaries and related costs 57,519 66,748 169,952 203,684 Rent, supplies, contract labor and other 19,695 22,166 62,915 67,236 Provision for doubtful accounts 1,279 962 3,379 3,408 Closure costs - lease and other 79 3 2,066 12 Closure costs - derecognition of goodwill - - 1,859 - Total operating costs 78,572 89,879 240,171 274,340 Gross profit 30,357 27,372 65,332 85,515 Corporate office costs 10,422 10,556 31,121 33,376 Operating income 19,935 16,816 34,211 52,139 Other income and expense: Relief Funds 390 - 8,349 - Gain on sale of partnership interest and clinics 18 - 1,091 5,823 Interest and other income, net 50 7 97 27 Interest expense - debt and other ( 351 ) ( 557 ) ( 1,431 ) ( 1,522 ) Total other income and expense 107 ( 550 ) 8,106 4,328 Income before taxes 20,042 16,266 42,317 56,467 Provision for income taxes 4,279 3,197 8,453 11,223 Net income 15,763 13,069 33,864 45,244 Less: net income attributable to non-controlling interests: Non-controlling interests - permanent equity ( 1,828 ) ( 1,643 ) ( 3,889 ) ( 4,982 ) Redeemable non-controlling interests - temporary equity ( 3,019 ) ( 2,379 ) ( 7,811 ) ( 8,152 ) ( 4,847 ) ( 4,022 ) ( 11,700 ) ( 13,134 ) Net income attributable to USPH shareholders $ 10,916 $ 9,047 $ 22,164 $ 32,110 Basic and diluted earnings per share attributable to USPH shareholders $ 0.61 $ 0.66 $ 1.80 $ 1.90 Shares used in computation - basic and diluted 12,847 12,774 12,829 12,750 Dividends declared per common share $ - $ 0.30 $ 0.32 $ 0.84 See notes to consolidated financial statements. 4 Table of Contents U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (unaudited) Nine Months Ended September 30, 2020 September 30, 2019 OPERATING ACTIVITIES Net income including non-controlling interests $ 33,864 $ 45,244 Adjustments to reconcile net income including non-controlling interests to net cash provided by operating activities: Depreciation and amortization 8,066 7,377 Provision for doubtful accounts 3,379 3,408 Equity-based awards compensation expense 5,325 5,262 Deferred income taxes ( 834 ) 3,680 Loss on sale of fixed assets 346 - Gain on sale of partnership interest ( 1,091 ) ( 5,823 ) Write-off of goodwill - closed clinics 1,859 - Other - 120 Changes in operating assets and liabilities: Decrease (increase) in patient accounts receivable 4,117 ( 8,171 ) Decrease(increase) in accounts receivable - other 730 ( 1,006 ) Decrease (increase) in other assets 5,404 ( 2,744 ) Increase (decrease) in accounts payable and accrued expenses 13,495 ( 440 ) Decrease in other long-term liabilities ( 58 ) ( 443 ) Net cash provided by operating activities 74,602 46,464 INVESTING ACTIVITIES Purchase of fixed assets ( 5,494 ) ( 7,428 ) Purchase of majority interest in businesses, net of cash acquired ( 15,322 ) ( 30,365 ) Purchase of redeemable non-controlling interest, temporary equity ( 3,087 ) ( 5,699 ) Purchase of non-controlling interest, permanent equity ( 184 ) ( 138 ) Proceeds on sale of redeemable non-controlling interest, temporary equity 54 11,601 Proceeds on sales of partnership interest and clinics 674 - Proceeds on sale of fixed assets 444 64 Net cash used in investing activities ( 22,915 ) ( 31,965 ) FINANCING ACTIVITIES Distributions to non-controlling interests, permanent and temporary equity ( 14,223 ) ( 10,862 ) Cash dividends paid to shareholders ( 4,110 ) ( 10,723 ) Proceeds from revolving line of credit 134,000 110,000 Payments on revolving line of credit ( 173,000 ) ( 97,000 ) Principal payments on notes payable ( 700 ) ( 1,409 ) Medicare Accelerated and Advance Payment Funds 12,924 - Other 3 ( 17 ) Net cash used in financing activities ( 45,106 ) ( 10,011 ) Net increase in cash and cash equivalents 6,581 4,488 Cash and cash equivalents - beginning of period 23,548 23,368 Cash and cash equivalents - end of period $ 30,129 $ 27,856 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 4,421 $ 9,458 Interest $ 1,202 $ 1,412 Non-cash investing and financing transactions during the period: Purchase of businesses - seller financing portion $ 796 $ 4,300 Purchase of business - payable to common shareholders of acquired business $ - $ 502 Purchase of redeemable non-controlling interest - notes payable $ 137 $ - Payable due to purchase of redeemable non-controlling interest $ 699 $ 283 Receivables related to sale of partnership interest $ 386 $ - Notes receivables related to sale of partnership interest $ 670 $ 2,780 See notes to consolidated financial statements. 5 Table of Contents U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN E QUITY (IN THOUSANDS) (unaudited) U.S.Physical Therapy, Inc. Common Stock Additional Retained Treasury Stock Total Shareholders’ Non-Controlling For the three months ended September 30, 2020 Shares Amount Paid-In Capital Earnings Shares Amount Equity Interests Total Balance June 30, 2020 15,058 $ 151 $ 91,258 $ 195,473 ( 2,215 ) $ ( 31,628 ) $ 255,254 $ 1,434 $ 256,688 Issuance of restricted stock, net of cancellations 7 - - - - - - - - Revaluation of redeemable non-controlling interest, net of tax - - - ( 3,207 ) - - ( 3,207 ) - ( 3,207 ) Compensation expense - equity-based awards - - 1,936 - - - 1,936 - 1,936 Distributions to non-controlling interest partners - permanent equity - - - - - - - ( 2,309 ) ( 2,309 ) Other - - 1 19 - - 20 - 20 Net income attributable to non-controlling interest - permanent equity - - - - - - - 1,828 1,828 Net income attributable to USPH shareholders - - - 10,916 - - 10,916 - 10,916 Balance September 30, 2020 15,065 $ 151 $ 93,195 $ 203,201 ( 2,215 ) $ ( 31,628 ) $ 264,919 $ 953 $ 265,872 U.S.Physical Therapy, Inc. Common Stock Additional Retained Treasury Stock Total Shareholders’ Non-Controlling For the nine months ended September 30, 2020 Shares Amount Paid-In Capital Earnings Shares Amount Equity Interests Total Balance December 31, 2019 14,989 $ 150 $ 87,383 $ 184,352 ( 2,215 ) $ ( 31,628 ) $ 240,257 $ 1,444 $ 241,701 Issuance of restricted stock, net of cancellations 76 1 - - - - 1 - 1 Revaluation of redeemable non-controlling interest, net of tax - - - 867 - - 867 - 867 Compensation expense - equity-based awards - - 5,325 - - - 5,325 - 5,325 Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans - - 486 - - - 486 - 486 Dividends paid to USPT shareholders - - - ( 4,110 ) - - ( 4,110 ) - ( 4,110 ) Distributions to non-controlling interest partners - permanent equity - - - - - - - ( 4,352 ) ( 4,352 ) Other - - 1 ( 72 ) - - ( 71 ) ( 28 ) ( 99 ) Net income attributable to non-controlling interest - permanent equity - - - - - - - 3,889 3,889 Net income attributable to USPH shareholders - - - 22,164 - - 22,164 - 22,164 Balance September 30, 2020 15,065 $ 151 $ 93,195 $ 203,201 ( 2,215 ) $ ( 31,628 ) $ 264,919 $ 953 $ 265,872 See notes to consolidated financial statements. 6 Table of Contents U.S.Physical Therapy, Inc. Common Stock Additional Retained Treasury Stock Total Shareholders’ Non-Controlling For the three months ended September 30, 2019 Shares Amount Paid-In Capital Earnings Shares Amount Equity Interests Total Balance June 30, 2019 14,989 $ 149 $ 84,125 $ 176,610 ( 2,215 ) $ ( 31,628 ) $ 229,256 $ 1,491 $ 230,747 Issuance of restricted stock, net of cancellations - - - - - - - - - Revaluation of redeemable non-controlling interest, net of tax - - - ( 679 ) - - ( 679 ) - ( 679 ) Compensation expense - equity-based awards - - 1,704 - - - 1,704 - 1,704 Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans - - - - - - - - - Purchase of non-controlling interest - - - - - - - - - Dividends paid to USPH shareholders - - - ( 3,832 ) - - ( 3,832 ) - ( 3,832 ) Purchase of partnership interests - redeemable non-controlling interests - - - - - - - - - Other - 1 ( 1 ) ( 11 ) - - ( 11 ) - ( 11 ) Distributions to non-controlling interest partners - permanent equity - - - - - - - ( 1,292 ) ( 1,292 ) Net income attributable to non-controlling interests - permanent equity - - - - - - - 1,643 1,643 Net income attributable to USPH shareholders - - - 9,047 - - 9,047 - 9,047 Balance September 30, 2019 14,989 $ 150 $ 85,828 $ 181,135 ( 2,215 ) $ ( 31,628 ) $ 235,485 $ 1,842 $ 237,327 U.S.Physical Therapy, Inc. Common Stock Additional Retained Treasury Stock Total Shareholders’ Non-Controlling For the nine months ended September 30, 2019 Shares Amount Paid-In Capital Earnings Shares Amount Equity Interests Total Balance December 31, 2018 14,899 $ 149 $ 80,028 $ 167,396 ( 2,215 ) $ ( 31,628 ) $ 215,945 $ 930 $ 216,875 Issuance of restricted stock, net of cancellations 90 - - - - - - - - Revaluation of redeemable non-controlling interest, net of tax - - - ( 7,929 ) - - ( 7,929 ) - ( 7,929 ) Compensation expense - equity-based awards - - 5,262 - - - 5,262 - 5,262 Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans - - 636 - - - 636 - 636 Purchase of non-controlling interest - - ( 97 ) - - - ( 97 ) ( 7 ) ( 104 ) Dividends paid to USPH shareholders - - - ( 10,723 ) - - ( 10,723 ) - ( 10,723 ) Purchase of partnership interests - redeemable non-controlling interests - - - 298 - - 298 - 298 Other - 1 ( 1 ) ( 17 ) - - ( 17 ) - ( 17 ) Distributions to non-controlling interest partners - permanent equity - - - - - - - ( 4,063 ) ( 4,063 ) Net income attributable to non-controlling interests - permanent equity - - - - - - 4,982 4,982 Net income attributable to USPH shareholders - - - 32,110 - - 32,110 - 32,110 Balance September 30, 2019 14,989 $ 150 $ 85,828 $ 181,135 ( 2,215 ) $ ( 31,628 ) $ 235,485 $ 1,842 $ 237,327 See notes to consolidated financial statements. 7 Table of Contents U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of U.S. Physical Therapy, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated. The Company operates its business through two reportable business segments. The Company’s reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. The Company’s physical therapy operations consist of physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments. Prior to the second quarter of 2020, the Company operated as a single segment. All prior year segment information has been reclassified to conform to the 2020 segment presentation. See Note 12. Segment Information. Physical Therapy Operations The physical therapy operations segment primarily operates through subsidiary clinic partnerships, in which the Company generally owns a 1 % general partnership interest in all the Clinic Partnerships. Our limited partnership interests typically range from 49 % to 99 % in the Clinic Partnerships. The managing therapist of each clinic owns, directly or indirectly, the remaining limited partnership interest in most of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent, the Company operates some clinics, through wholly-owned subsidiaries, under profit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”). The Company continues to seek to attract for employment physical therapists who have established relationships with physicians and other referral sources, by offering these therapists a competitive salary and incentives based on the profitability of the clinic that they manage. For multi-site clinic practices in which a controlling interest is acquired by the Company, the prior owners typically continue on as employees to manage the clinic operations, retaining a non-controlling ownership interest in the clinics and receiving a competitive salary for managing the clinic operations. In addition, the Company has developed satellite clinic facilities as part of existing Clinic Partnerships and Wholly-Owned Facilities, with the result that a substantial number of Clinic Partnerships and Wholly-Owned Facilities operate more than one clinic location. On September 30, 2020, the Company acquired a 70 % interest in an entity which holds six -management contracts that have been in place for a number of years. Currently, these contracts have a five year term. The purchase price for the 70 % interest was approximately $ 4.2 million, with $ 3.7 million payable in cash and $ 0.5 million in notes payable. One of the notes payable of $ 0.2 million is payable, with any accrued interest at 5 % per annum, on September 30, 2021. The remaining note of $ 0.3 million was paid in November 2020. On February 27, 2020 , the Company acquired interests in a four -clinic physical therapy practice. The four clinics are operated in four separate partnerships. The Company’s interests in the four partnerships range from 10.0 % to 83.8 % , with an overall 65.0 % based on the initial purchase transaction. The aggregate purchase price was $ 11.9 million , of which $ 11.6 million was paid in cash and $ 0.3 million in the form of a seller note. The note accrues interest at 4.75 % per annum and the principal and interest is payable on February 2022. On September 30, 2019 , the Company acquired a 67 % interest in an eleven -clinic physical therapy practice. The purchase price for the 67 % interest was $ 12.4 million , of which $ 12.1 million was paid in cash and $ 0.3 million in the form of a seller note that was payable in two principal installments totaling $ 150,000 each. The first principal payment plus accrued interest was paid in September 2020 with the second installment to be paid in September 2021. The note accrues interest at 5.0 % per annum. During the nine months ended September 30, 2020, the Company sold 12 previously closed clinics. The aggregate sales price was $ 1.1 million, of which $ 0.7 million was paid in cash and $ 0.4 million in a note receivable, payable in two equal installments of principal and any accrued interest on June 15, 2021 and 2022. 8 Table of Contents As of September 30, 2020, the Company operated 550 clinics in 39 states. The Company also manages physical therapy facilities for third parties, primarily hospital and physicians, with 38 third-party facilities under management as of September 30, 2020. Clinic Partnerships For non-acquired Clinic Partnerships, the earnings and liabilities attributable to the non-controlling interests, typically owned by the managing therapist, directly or indirectly, are recorded within the balance sheets as non-controlling interests – permanent equity and within the income statements as net-income attributable to non-controlling interests – permanent equity . For acquired Clinic Partnerships with redeemable non-controlling interests, the earnings attributable to the redeemable non-controlling interests are recorded within the consolidated statements of income line item – net income attributable to non-controlling interests – redeemable non-controlling interests – temporary equity and the equity interests are recorded on the consolidated balance sheet as redeemable non-controlling interests – temporary interests . In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is not included in net income but charged directly to retained earnings and is included in the earnings per basic and diluted share calculation . Wholly-Owned Facilities For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due to the profit sharing therapists. The amount is expensed as compensation and included in operating costs – salaries and related costs. The respective liability is included in current liabilities – accrued expenses on the balance sheets. Industrial Injury Prevention Services In March 2017, the Company acquired a 55 % interest in the initial industrial injury prevention business. On April 30, 2018, the Company acquired a 65 % interest in another business in the industrial injury prevention sector. On April 30, 2018, the Company combined the two businesses. After the combination, the Company owned a 59.45 % interest in the combined business, Briotix Health, Limited Partnership (“Briotix Health”), the Company’s industrial injury prevention operation. On April 11, 2019, the Company acquired 100 % of a third company that is a provider of industrial injury prevention services. The acquired company specializes in delivering injury prevention and care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network in 45 states including onsite at eleven client locations. The business was then combined with Briotix Health increasing the Company’s ownership position in the partnership to approximately 76.0 %. Services provided in the industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance optimization, post offer employment testing, functional capacity evaluations, and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their contractors. The Company performs these services through Industrial Sports Medicine Professionals, consisting of both physical therapists and specialized certified athletic trainers (ATCs). The results of operations of the acquired clinics and businesses have been included in the Company’s consolidated financial statements since the date of their respective acquisition. 9 Table of Contents Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q. However, the statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes this report contains all necessary adjustments (consisting only of normal recurring adjustments) to present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented. For further information regarding the Company’s accounting policies, please read the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on February 28, 2020 (“2019 Annual Report”). The Company believes, and the Chief Executive Officer, Chief Financial Officer and Corporate Controller have certified, that the financial statements included in this report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented. Operating results for the three months and nine months ended September 30, 2020 are not necessarily indicative of the results the Company expects for the entire year. The Company included the following Risk Factor which should be read in conjunction with the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020. We are subject to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (“COVID-19”). Our operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19) that has spread globally. Since February, the continued spread has led to disruption and volatility in the global capital markets, which increases the cost of, and adversely impacts access to, capital and increases economic uncertainty. The pandemic has caused an economic slowdown of potentially extended duration, and it is possible that it could cause a global recession. COVID-19 is having, and will continue to have, an adverse impact on our operations and supply chains, including an increase in cancellations of physical therapy patient appointments and a decline in the scheduling of new or additional patient appointments. Due to these impacts and measures, we have experienced, and will continue to experience, significant and unpredictable reductions and cancellations of our patient visits. Impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interests (minority interests) As described in Note 6, the redeemable non-controlling interests in our partnerships are held by our partners. Upon the occurrence of certain events, such as retirement or other termination of employment, partners from acquired partnerships may have the right to exercise a “put” to cause the Company to purchase their redeemable non-controlling interests. Depending on the amount and timing of the exercise of any “put” rights, the funds required could have an adverse impact on the Company’s capital structure. Impact of COVID-19 As previously disclosed in a series of filings with the SEC and further described in detail in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 filed with the SEC on May 21, 2020 and August 7, 2020, respectively, the Company’s results have been negatively impacted by the effects of the COVID-19 pandemic. Management has taken a number of steps to reduce costs, make up for operating losses incurred in March and April, and increase profits. The Company continues to experience somewhat lower physical therapy patient volumes; however revenues improved significantly in the 2020 third quarter compared to the 2020 second quarter. The Company’s average physical therapy patient volumes per day per clinic were 26.2 , 18.9 , and 25.8 , respectively, in the first three quarters of 2020. The Company’s industrial injury prevention business has been less affected by the pandemic and is currently running at slightly less than its pre-COVID-19 levels . 10 Table of Contents In March, with the onset of the COVID-19 pandemic, the Company began to furlough or terminate approximately 40 % of its 5,500 full and part-time workforce. Since early May, appoximately 1,200 of the furloughed employees have returned to work on a full or part-time basis. As of the filing of this quarterly report, the Company continues to experience lower physical therapy revenues; however the Company has seen recent improvements. As stay at home orders and other restrictions have been lifted, we have seen our physical therapy volumes trending upwards. Should stay at home orders or other restrictions be reenacted, we could see the Company’s patient volume and revenues decline again. We have put preparedness plans in place at our facilities to maintain continuity of operations, while also taking steps to keep employees and patients safe. In line with recommendations to reduce large gatherings and increase social distancing, we have, where practical, transitioned a large number of office-based employees to a remote work environment. In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits associated with the retention of employees. The Company has received, or expects to receive, a number of benefits under the CARES Act including, but not limited to: • The CARES Act allowed for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program (“MAAPP funds”) during the COVID-19 pandemic. Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided. The Company applied for and received approval to receive from Centers for Medicare & Medicaid Services (“CMS”) in April 2020. The Company will record these payments as a liability until all performance obligations have been met as the payments were made on behalf of patients before services were provided. Currently, MAAPP funds received are required to be applied to future Medicare billings commencing in August 2021, with all such remaining amounts required to be repaid by January 2024. Beginning January 2024, any unpaid balance will begin accruing interest. The Company currently intends to repay funds prior to August 2021. Included in cash and cash equivalents and accrued liabilities at September 30, 2020 is $ 12.9 million of MAAPP funds. • The Company elected to defer depositing the employer’s share of Social Security taxes for payments due from March 27, 2020 through December 31, 2020, interest-free and penalty-free. As of September 30, 2020, included in accrued liabilities is $ 4.9 million related to these deferred payments. • The CARES Act provided additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $ 100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19. Through September 30, 2020, the Company’s consolidated subsidiaries received approximately $ 8.3 million of payments under the CARES Act (“Relief Funds”). In accordance with GAAP, these payments have been recorded as Other income – Relief Funds. For the three and nine months ended September 30, 2020, the Company has recognized approximately $ 0.4 million and $ 8.3 million, respectively, as Other income – Relief Funds on the accompanying consolidated statements of income. These funds are not required to be repaid upon attestation and compliance with certain terms and conditions, which could change materially based on evolving grant compliance provisions and guidance provided by the U.S. Department of Health and Human Services. Currently, the Company can attest to and comply with the terms and conditions. The Company will continue to monitor the evolving guidelines and may record adjustments as additional information is released. 11 Table of Contents Significant Accounting Policies Cash Equivalents The Company maintains its cash and cash equivalents at financial institutions. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The combined account balances at several institutions typically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related on deposits in excess of FDIC insurance coverage. Management believes that the risk is not significant. Long-Lived Assets Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for furniture and equipment range from three to eight years and for purchased software from three to seven years . Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets, which is generally three to five years . The Company did no t note an impairment to long-lived assets during this quarter . Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company reviews property and equipment and intangible assets with finite lives for impairment upon the occurrence of certain events or circumstances which indicate that the amounts may be impaired. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company did no t note an impairment to long-lived assets during this quarter. Goodwill Goodwill represents the excess of the amount paid and fair value of the non-controlling interests over the fair value of the acquired business assets, which include certain identifiable intangible assets. Historically, goodwill has been derived from acquisitions and, prior to 2009, from the purchase of some or all of a particular local management’s equity interest in an existing clinic. Effective January 1, 2009, if the purchase price of a non-controlling interest by the Company exceeds or is less than the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital. Goodwill and other indefinite-lived intangible assets are not amortized, but are instead subject to periodic impairment evaluations. The fair value of goodwill and other identifiable intangible assets with indefinite lives are evaluated for impairment at least annually and upon the occurrence of certain events, and are written down to fair value if considered impaired. These events or conditions include, but are not limited to: a significant adverse change in the business environment, regulatory environment, or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. The occurrence of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge. The Company is first required to assess qualitatively if it can conclude whether goodwill is more likely than not impaired. If goodwill is more likely than not impaired, the Company is then required to complete a quantitative analysis of whether a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considers relevant events or circumstances that affect the fair value or carrying amount of a reporting unit. The Company considers both the income and market approach in determining the fair value of its reporting units when performing a quantitative analysis. To determine the fair values of its tradenames, the Company uses a relief from royalty income approach. Based on the current economic conditions and the decline in patient visits due to the pandemic, the Company evaluated whether events or circumstances indicated that it was more likely than not that the fair value of the reporting units were reduced below their carrying value as of September 30, 2020. As a result of the assessment, the Company determined that it was not more likely than not that goodwill and tradenames of the reporting units was impaired as of September 30, 2020. 12 Table of Contents As the Company did not note an impairment, no additional disclosures were deemed to be required by management. The Company also considered the impact of these judgments and estimates as they pertain to the disclosure requirements for such items within this Form 10-Q and risks and uncertainties discussions and believes that such disclosure is adequate. Due to the uncertainty of the current economic conditions resulting from the COVID-19 pandemic, the Company will continue to review its carrying amounts of goodwill and other intangibles. For the nine months ended September 30, 2020, the Company derecognized (wrote-off) goodwill in the amount of $ 1.9 million related to closed clinics due to COVID- 19. The Company will continue to monitor for any triggering events or other indicators of impairment. Redeemable Non-Controlling Interests The non-controlling interests that are reflected as redeemable non-controlling interests in the consolidated financial statements consist of those that the owners and the Company have certain redemption rights, whether currently exercisable or not, and which currently, or in the future, require that the Company purchase or the owner sell the non-controlling interest held by the owner, if certain conditions are met. The purchase price is derived at a predetermined formula based on a multiple of trailing twelve months earnings performance as defined in the respective limited partnership agreements. The redemption rights can be triggered by the owner or the Company at such time as both of the following events have occurred: 1) termination of the owner’s employment, regardless of the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction, typically three to five years , as defined in the limited partnership agreement. The redemption rights are not automatic or mandatory (even upon death) and require either the owner or the Company to exercise its rights when the conditions triggering the redemption rights have been satisfied. On the date the Company acquires a controlling interest in a partnership, and the limited partnership agreement for such partnership contains redemption rights not under the control of the Company, the fair value of the non-controlling interest is recorded in the consolidated balance sheet under the caption – Redeemable non-controlling interests – temporary equity. Then, in each reporting period thereafter until it is purchased by the Company, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial carrying value, based on the predetermined formula defined in the respective limited partnership agreement. As a result, the value of the non-controlling interest is not adjusted below its initial carrying value. The Company records any adjustments in the redemption value, net of tax, directly to retained earnings and they are not reflected in the consolidated statements of income. Although the adjustments are not reflected in the consolidated statements of income, current accounting rules require that the Company reflects the adjustments, net of tax, in the earnings per share calculation. The amount of net income attributable to redeemable non-controlling interest owners is included in consolidated net income on the face of the consolidated statements of net income. Management believes the redemption value (i.e. the carrying amount) and fair value are the same. Non-Controlling Interests The Company recognizes non-controlling interests, in which the Company has no obligation but the right to purchase the non-controlling interests, as permanent equity in the consolidated financial statements separate from the parent entity’s equity. The amount of net income attributable to non-controlling interests is included in consolidated net income on the face of the statements of net income. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the non-controlling equity investment on the deconsolidation date. When the purchase price of a non-controlling interest by the Company exceeds the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital. Additionally, operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest partner. 13 Table of Contents Revenue Recognition Revenues are recognized in the period in which services are rendered. See Note 3- Revenue Recognition, for further discussion of revenue recognition. Allowance for Doubtful Accounts The Company determines allowances for doubtful accounts based on the specific agings and payor classifications at each clinic. The provision for doubtful accounts is included in operating costs in the consolidated statements of net income. Net accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for doubtful accounts, includes only those amounts the Company estimates to be collectible. Income Taxes Income taxes are accounted for under the asset and liability method. 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 their respective tax bases and operating loss and tax credit carryforwards. 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 rates is recognized in income in the period that includes the enactment date. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. On March 27, 2020, CARES Act was enacted. The CARES Act includes changes to certain tax law related to net operating losses and the deductibility of interest expense and depreciation. ASC 740, Income Taxes requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. The legislation had no effect on the Company’s deferred income taxes and current income taxes payable during the nine months ended September 30, 2020 . The Company did no t have any accrued interest or penalties associated with any unrecognized tax benefits no r was any interest expense recognized during the nine months ended September 30, 2020 . The Company records any interest or penalties, if required, in interest and other expense, as appropriate. Fair Value of Financial Instruments The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and notes payable approximate their fair values due to the short-term maturity of these financial instruments. The carrying amount under the Amended Credit Agreement and the redemption value of Redeemable non-controlling interests approximate the respective fair values. The fair value of the Company’s redeemable non-controlling interests is determined based on “Level 3” inputs. The interest rate on the Amended Credit Agreement, which is tied to LIBOR, is set at various short-term intervals, as detailed in the Amended Credit Agreement. Segment Reporting Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by chief operating decision makers in determining the allocation of resources and in assessing performance. The Company currently operates through two segments: physical therapy operations and industrial injury prevention services. 14 Table of Contents Use of Estimates In preparing the Company’s consolidated financial statements, management makes certain estimates and assumptions, especially in relation to, but not limited to, goodwill impairment, tradenames, allocations of purchase price, allowance for receivables, tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and related disclosures. Actual results may differ from these estimates. Self-Insurance Program The Company utilizes a self-insurance plan for its employee group health insurance coverage administered by a third party. Predetermined loss limits have been arranged with an insurance company to minimize the Company’s maximum liability and cash outlay. Accrued expenses include the estimated incurred but unreported costs to settle unpaid claims and estimated future claims. Management believes that the current accrued amounts are sufficient to pay claims arising from self-insurance claims incurred through September 30, 2020 . Restricted Stock Restricted stock issued to employees and directors is subject to continued employment or continued service on the board, respectively. Generally, restrictions on the stock granted to employees lapse in equal annual installments on the following four anniversaries of the date of grant. For those shares granted to directors, the restrictions will lapse in equal quarterly installments during the first year after the date of grant. For those granted to officers, the restrictions will lapse in equal quarterly installments during the four years following the date of grant. Compensation expense for grants of restricted stock is recognized based on the fair value per share on the date of grant amortized over the vesting period. The Company recognizes any forfeitures as they occur. The restricted stock issued is included in basic and diluted shares for the earnings per share computation. Recently Adopted Accounting Guidance In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments – Credit Losses, which added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, including trade receivables. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. The standard is required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption. The Company has completed the adoption of the standard on January 1, 2020. The financial instruments subject to ASU 2016 - 13 are the Company’s accounts receivable derived from contracts with customers. A significant portion of the Company’s accounts receivable are from highly-solvent, creditworthy payors including governmental programs such as Medicare and Medicaid, and highly regulated commercial insurers. The Company’s estimate of expected credit losses as of January 1, 2020, using its expected credit loss evaluation process, resulted in no adjustments to the allowance for credit losses and no cumulative-effect adjustment to retained earnings on the adoption date of the standard. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. ASU 2017-04 is effective prospectively for fiscal years, and the interim periods within those years, beginning after December 15, 2019. The Company completed the adoption of the standard effective January 1, 2020 and there was no impact to goodwill from the Company’s adoption of this change. Recently Issued Accounting Guidance In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The new guidance was effective upon issuance, and the Company is allowed to elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this standard will have on its combined financial statements. 15 Table of Contents In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The objective of ASU 2019-12 is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and early adoption is permitted. We are currently evaluating the impact this guidance may have on our consolidated financial statements and related footnote disclosures. 2. ACQUISITIONS OF BUSINESSES On September 30, 2020, the Company acquired a 70 % interest in an entity which holds six -management contracts that have been in place for a number of years. Currently, these contracts have a five year remaining term. The purchase price for the 70 % interest was approximately $ 4.2 million, with $ 3.7 million payable in cash and $ 0.5 million in notes payable. One of the notes payable of $ 0.2 million is payable, with any accrued interest at 5 % per annum, on September 30, 2021. The remaining note of $ 0.3 million was paid in November 2020. On February 27, 2020, the Company acquired interests in a four -clinic physical therapy practice. The four clinics are in four separate partnerships. The Company’s interests in the four partnerships range from 10.0 % to 83.8 %, with an overall 65.0 % based on the initial purchase transaction.The aggregate purchase price was $ 11.9 million, of which $ 11.6 million was paid in cash and $ 0.3 million in the form of a seller note. The note accrues interest at 4.75 % per annum and the principal and interest is payable on February 2022. The purchase price plus the fair value of the non-controlling interests for the acquisitions in 2020 was allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, i.e. tradenames, referral relationships and non-compete agreements, and liabilities assumed based on the estimated fair values at the acquisition date, with the amount in excess of fair values being recorded as goodwill. The Company is in the process of completing its formal valuation analysis of the acquisitions, to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates used at September 30, 2020 based on additional information obtained and completion of the valuation of the identifiable intangible assets. Changes in the estimated valuation of the tangible assets acquired, the completion of the valuation of identifiable intangible assets and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount can be reasonably estimated, will likely result in adjustments to goodwill. The Company does not expect the adjustments to be material. For the acquisitions in 2020, the values assigned to the referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For referral relationships, the amortization period is 11.0 years. For non-compete agreements, the amortization period is 6.0 years. The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisition. 16 Table of Contents The purchase price for the 2020 acquisitions has been preliminarily allocated as follows (in thousands): Physical Therapy Operations Cash paid, net of cash acquired $ 15,322 Seller note 796 Total consideration $ 16,118 Estimated fair value of net tangible assets acquired: Total current assets $ 778 Total non-current assets 400 Total liabilities ( 469 ) Net tangible assets acquired $ 709 Referral relationships 1,600 Non-compete 750 Tradename 1,500 Goodwill 19,824 Fair value of non-controlling interest (classified as redeemable non-controlling interests) ( 8,265 ) $ 16,118 On September 30, 2019, the Company acquired a 67 % interest in an eleven -clinic physical therapy practice. The purchase price for the 67 % interest was $ 12.4 million, of which $ 12.1 million was paid in cash and $ 0.3 million in the form of a seller note that is payable in two principal installments totaling $ 150,000 each, plus accrued interest. The first principal payment and accrued interest was paid in September 2020 and the second payment plus accrued interest remains due to be paid in September 2021. The note accrues interest at 5.0 % per annum. On April 11, 2019, the Company acquired a company that is a provider of industrial injury prevention services. The acquired company specializes in delivering injury prevention and care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network of 45 states including onsite at eleven client locations. The business was then combined with Briotix Health, the Company’s industrial injury prevention operation, increasing the Company’s ownership position in the Briotix Health partnership to approximately 76.0 %. The purchase price for the acquired company was $ 22.9 million ($ 23.6 million less cash acquired of $ 0.7 million), which consisted of $ 18.9 million in cash, (of which $ 0.5 million will be paid to certain shareholders), and a $ 4.0 million seller note. The note accrues interest at 5.5 % and the principal and accrued interest is payable, on April 9, 2021. The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisition. For the 2019 acquisitions, a majority of total current assets primarily represents accounts receivable. Total non-current assets are fixed assets and equipment used in the practice. 17 Table of Contents The purchase price for the 2019 acquisitions has been allocated as follows (in thousands): IIPS* Physical Therapy Operations Total Cash paid, net of cash acquired $ 18,428 $ 12,170 $ 30,598 Payable to shareholders of seller 485 - 485 Seller note 4,000 300 4,300 Total consideration $ 22,913 $ 12,470 $ 35,383 Estimated fair value of net tangible assets acquired: Total current assets $ 1,641 $ 650 $ 2,291 Total non-current assets 848 3,019 3,867 Total liabilities ( 2,978 ) ( 2,816 ) ( 5,794 ) Net tangible assets acquired $ ( 489 ) $ 853 $ 364 Referral relationships 3,400 2,600 6,000 Non-compete 250 270 520 Tradename 1,300 740 2,040 Goodwill 18,452 14,237 32,689 Fair value of non-controlling interest (classified as redeemable non-controlling interests) - ( 6,230 ) ( 6,230 ) $ 22,913 $ 12,470 $ 35,383 * Industrial injury prevention services The purchase prices plus the fair value of the non-controlling interests for the acquisitions in 2019 were allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, i.e. trade names, referral relationships and non-compete agreements, and liabilities assumed based on the fair values at the acquisition date, with the amount exceeding the fair values being recorded as goodwill. The Company has completed its formal valuation analyses for the acquisitions in 2019. For the acquisitions in 2019, the values assigned to the referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For referral relationships, the weighted average amortization period was 11.0 years at December 31, 2019. For non-compete agreements, the weighted average amortization period was 6.0 years at December 31, 2019. The values assigned to tradenames are tested annually for impairment. The consideration paid for each of the acquisitions was derived through arm’s length negotiations. Funding for the cash portions was derived from proceeds from the Company’s revolving credit facility. The results of operations of the acquisitions have been included in the Company’s consolidated financial statements since their respective date of acquisition. Unaudited proforma consolidated financial information for the acquisitions in the 2020 and 2019 acquisitions have not been included as the results, individually and in the aggregate, were not material to current operations. During 2019, the Company acquired additional interests in four partnerships which are included in non-controlling interest. The additional interests purchased in each of the partnerships ranged from 1 % and 55 %. Also in 2019, the Company sold a 1 % interest in a partnership. The net after tax difference between the payments and the portion of undistributed earnings of $ 196,000 was credited to additional paid-in capital. 18 Table of Contents 3 . REVENUE RECOGNITION Categories Revenues are recognized in the period in which services are rendered. Net patient revenues consists of revenues for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Net patient revenues (patient revenues less estimated contractual adjustments) are recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There is an implied contract between us and the patient upon each patient visit. Generally, this occurs as the Company provides physical and occupational therapy services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience. Management contract revenues, which are included in other revenues in the consolidated statements of net income, are derived from contractual arrangements whereby the Company manages a clinic owned by a third party. The Company does not have any ownership interest in these clinics. Typically, revenues are determined based on the number of visits conducted at the clinic and recognized at the point in time when services are performed. Costs, typically salaries for our employees, are recorded when incurred. Revenues from the industrial injury prevention services segment, which are also included in other revenues in the consolidated statements of net income, are derived from onsite services the Company provides to clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization. Revenue from the industrial injury prevention services segment is recognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to the consideration the Company expects to receive in exchange for providing injury prevention services to its clients. The revenue is determined and recognized based on the number of hours and respective rate for services provided in a given period. Additionally, other revenues include services the Company provides on-site, such as schools, for physical or occupational therapy services, and fees from athletic trainers. Contract terms and rates are agreed to in advance between the Company and the third parties. Services are typically performed over the contract period and revenue is recorded at the point of service. If the services are paid in advance, revenue is recorded as a liability over the period of the agreement and recognized at the point in time, when the services are performed. The Company determines allowances for doubtful accounts based on the specific agings and payor classifications at each clinic. The provision for doubtful accounts is included in clinic operating costs in the statements of net income. Patient accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for doubtful accounts, includes only those amounts the Company estimates to be collectible. The following table details the revenue related to the various categories (in thousands): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Net patient revenues $ 96,398 $ 104,392 $ 268,803 $ 324,405 Management contract revenues 2,004 2,174 5,744 6,534 Other revenues 512 737 1,407 1,780 Physical therapy operations $ 98,914 $ 107,303 $ 275,954 $ 332,719 Industrial injury prevention services revenues 10,015 9,948 29,549 27,136 $ 108,929 $ 117,251 $ 305,503 $ 359,855 19 Table of Contents Medicare Reimbursement The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (‘‘MPFS’’). For services provided in 2019, a 0.25 % increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 2025, a 0.0 % update will be applied each year to the fee schedule payment rates, before applying the mandatory budget neutrality adjustment. However, in the 2021 MPFS Final Rule, CMS proposed an increase to the code values for office/outpatient evaluation and management (E/M) codes and cuts to other codes to maintain budget neutrality of the MPFS. This change in code valuations would be effective January 1, 2021. Under the proposal, physical/occupational therapy services could see code reductions that may result in an estimated 9 % decrease in payment. In announcing this possible reduction in the applicable physical/occupational therapy codes, CMS indicated that it would further consider and address industry and provider concerns before finalizing the 2021 code values. Our physical therapists and occupational therapists are able to provide services to patients on a remote basis, using a variety of technologies. This has been particularly helpful during the COVID-19 pandemic, as some patients are reluctant to travel. Reimbursement and coverage for these services vary among payors. Since March 1, 2020, CMS provided a temporary waiver to allow physical therapists and occupational therapists (and their respective assistants) to perform and be reimbursed for the full scope of services performed remotely as “telehealth visits”. The foregoing telehealth temporary waiver will continue until the end of the COVID-19 pandemic as determined by the U.S. Department of Health and Human Services. They have the authority to extend the public health emergency, which it did on July 23, 2020 and then again on October 23, 2020. Beginning in 2021, payments to individual therapists (Physical/Occupational Therapist in Private Practice) paid under the fee schedule may be subject to adjustment based on performance in the Merit Based Incentive Payment System (“MIPS”), which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements, a provider's performance is assessed according to established performance standards each year and then is used to determine an adjustment factor that is applied to the professional's payment for the corresponding payment year. The provider’s MIPS performance in 2019 will determine the payment adjustment in 2021. Each year from 2019 through 2024, professionals who receive a significant share of their revenues through an alternate payment model (“APM”), (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5 % bonus in the corresponding payment year. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors. The specifics of the MIPS and APM adjustments will be subject to future notice and comment rule-making. The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the next ten years , and requires automatic reductions in federal spending by approximately $ 1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2 % cap. On April 1, 2013, a 2 % reduction to Medicare payments was implemented. The Bipartisan Budget Act of 2015, enacted on November 2, 2015, extended the 2 % reductions to Medicare payments through fiscal year 2025. The Bipartisan Budget Act of 2018, enacted on February 9, 2018, extended the 2 % reductions to Medicare payments through fiscal year 2027. The CARES Act temporarily suspended the 2 % payment adjustment, effective for claims with dates of service from May 1, 2020 through December 31, 2020. Historically, the total amount paid by Medicare in any one year for outpatient physical therapy, occupational therapy, and/or speech-language pathology services provided to any Medicare beneficiary was subject to an annual dollar limit (i.e., the ‘‘Therapy Cap’’ or ‘‘Limit’’). As a result of Bipartisan Budget Act of 2018, the Therapy Caps have been eliminated, effective as of January 1, 2018. Under the Middle Class Tax Relief and Job Creation Act of 2012 (‘‘MCTRA’’), since October 1, 2012, patients who met or exceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $ 3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $ 3,700 threshold is applied to the Occupational Therapy. The MACRA directed CMS to modify the manual medical review process such that those reviews will no longer apply to all claims exceeding the $ 3,700 threshold and instead will be determined on a targeted basis based on a variety of factors that CMS considers appropriate. The Bipartisan Budget Act of 2018 extends the targeted medical review indefinitely, but reduces the threshold to $ 3,000 through December 31, 2027. For 2028, the threshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequent years the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year. 20 Table of Contents CMS adopted a multiple procedure payment reduction (‘‘MPPR’’) for therapy services in the final update to the MPFS for calendar year 2011. The MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100 % of the practice expense component of the Relative Value Unit (‘‘RVU’’) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. Since 2013, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 50 %. In addition, the MCTRA directed CMS to implement a claims-based data collection program to gather additional data on patient function during the course of therapy in order to better understand patient conditions and outcomes. All practice settings that provide outpatient therapy services are required to include this data on the claim form. Since 2013, therapists have been required to report new codes and modifiers on the claim form that reflect a patient’s functional limitations and goals at initial evaluation, periodically throughout care, and at discharge. Reporting of these functional limitation codes and modifiers are required on the claim for payment. Medicare claims for outpatient therapy services furnished by therapy assistants on or after January 1, 2020 must include a modifier indicating the service was furnished by a therapy assistant. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapy assistant will be paid at an amount equal to 85 % of the payment amount otherwise applicable for the service. Contractual Allowances Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in Company clinics. The Company estimates contractual allowances based on its interpretation of the applicable regulations, payor contracts and historical calculations. Each month the Company estimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on the Company’s historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow the Company to provide the necessary detail and accuracy with its collectability estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from the Company’s estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. The Company’s billing system does not capture the exact change in its contractual allowance reserve estimate from period to period in order to assess the accuracy of its revenues and hence its contractual allowance reserves. Management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, historically the difference between net revenues and corresponding cash collections has generally reflected a difference within approximately 1 % of net revenues. Additionally, analysis of subsequent periods’ contractual write-offs on a payor basis reflects a difference within approximately 1 % between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, the Company believes that a change in the contractual allowance reserve estimate would not likely be more than 1 % at September 30, 2020. A contract’s transaction price is allocated to each distinct performance obligation and recognized when, or as, the performance obligation is satisfied. To determine the transaction price, the Company includes the effects of any variable consideration, such as the probability of collecting that amount. The Company applies established rates to the services provided, and adjusts for the terms of payor contracts, as applicable. These contracted amounts are different from the Company’s established rates. The Company has established a “contractual allowance” for this difference. The allowance is based on the terms of payor contracts, historical and current reimbursement information and current experience with the clinic and partners. The Company’s established rates less the contractual allowance is the revenue that is recognized in the period in which the service is rendered. This revenue is deemed the transaction price and stated as “Net Patient Revenue” on the Company’s consolidated statements of income. 21 Table of Contents The Company’s performance obligations are satisfied at a point in time. After the clinic has provided services and satisfied its obligation to the customer for the reimbursement rates stipulated in the payor contracts (i.e. the transaction price), the Company recognizes the revenue, net of contractual allowances, in the period in which the services are rendered. The Company recognizes the full amount of revenue and reports the contractual allowances as a contra (or offset) revenue account to report a net revenue number based on the expected collections. 4 . OTHER INCOME Sale of clinics The Company recognized a gain of $ 1.1 million in the first nine months of 2020 , included in other income, resulting from the sale of 12 previously closed clinics. Receipts of Relief Funds The Company’s consolidated subsidiaries received approximately $ 8.3 million of payments under the Provider Relief Fund as of September 30, 2020. Under the Company’s accounting policy, these payments have been recorded as other income – Relief Funds. For the three and nine months ended September 30, 2020, the Company has recognized approximately $ 0.4 million and $ 8.3 million, respectively, as other income – Relief Funds on the accompanying condensed consolidated statements of income. These funds are not required to be repaid upon attestation and compliance with certain terms and conditions, which could change materially based on evolving grant compliance provisions and guidance provided by the U.S. Department of Health and Human Services. Currently, the Company can attest to and comply with the terms and conditions. The Company will continue to monitor the evolving guidelines and may record adjustments as additional information is released. 5. EARNINGS PER SHARE In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest (see Note 6 – Redeemable Non-Controlling Interest), net of tax, charged directly to retained earnings is included in the earnings per basic and diluted share calculation. The following table provides a detail of the basic and diluted earnings per share computation (in thousands, except per share data). Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Computation of earnings per share - USPH shareholders: Net income attributable to USPH shareholders $ 10,916 $ 9,047 $ 22,164 $ 32,110 Credit (charges) to retained earnings: Revaluation of redeemable non-controlling interest ( 4,298 ) ( 922 ) 1,175 ( 10,752 ) Tax effect at statutory rate (federal and state) of 26.25 % 1,228 242 ( 308 ) 2,822 $ 7,846 $ 8,367 $ 23,031 $ 24,180 Earnings per share (basic and diluted) $ 0.61 $ 0.66 $ 1.80 $ 1.90 Shares used in computation: Basic and diluted earnings per share - weighted-average shares 12,847 12,774 12,829 12,750 6. REDEEMABLE NON-CONTROLLING INTEREST Since October 2017, when the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic business (referred to as “Therapy Practice”), these Acquisitions occur in a series of steps which are described below. 1. Prior to the Acquisition, the Therapy Practice exists as a separate legal entity (the “Seller Entity”). The Seller Entity is owned by one or more individuals (the “Selling Shareholders”) most of whom are physical therapists that work in the Therapy Practice and provide physical therapy services to patients. 2. In conjunction with the Acquisition, the Seller Entity contributes the Therapy Practice into a newly-formed limited partnership (“NewCo”), in exchange for one hundred percent ( 100 %) of the limited and general partnership interests in NewCo. Therefore, in this step, NewCo becomes a wholly-owned subsidiary of the Seller Entity. 22 Table of Contents 3. The Company enters into an agreement (the “Purchase Agreement”) to acquire from the Seller Entity a majority (ranges from 50 % to 90 %) of the limited partnership interest and in all cases 100 % of the general partnership interest in NewCo. The Company does not purchase 100 % of the limited partnership interest because the Selling Shareholders, through the Seller Entity, want to maintain an ownership percentage. The consideration for the Acquisition is primarily payable in the form of cash at closing and a small, two-year note in lieu of an escrow (the “Purchase Price”). The Purchase Agreement does not contain any future earn-out or other contingent consideration that is payable to the Seller Entity or the Selling Shareholders. 4. The Company and the Seller Entity also execute a partnership agreement (the “Partnership Agreement”) for NewCo that sets forth the rights and obligations of the limited and general partners of NewCo. After the Acquisition, the Company is the general partner of NewCo. 5. As noted above, the Company does not purchase 100 % of the limited partnership interests in NewCo and the Seller Entity retains a portion of the limited partnership interest in NewCo (“Seller Entity Interest”). 6. In most cases, some or all of the Selling Shareholders enter into an employment agreement (the “Employment Agreement”) with NewCo with an initial term that ranges from three to five years (the “Employment Term”), with automatic one-year renewals, unless employment is terminated prior to the end of the Employment Term. As a result, a Selling Shareholder becomes an employee (“Employed Selling Shareholder”) of NewCo. The employment of an Employed Selling Shareholder can be terminated by the Employed Selling Shareholder or NewCo, with or without cause, at any time. In a few situations, a Selling Shareholder does not become employed by NewCo and is not involved with NewCo following the closing; in those situations, such Selling Shareholders sell their entire ownership interest in the Seller Entity as of the closing of the Acquisition. 7. The compensation of each Employed Selling Shareholder is specified in the Employment Agreement and is customary and commensurate with his or her responsibilities based on other employees in similar capacities within NewCo, the Company and the industry. 8. The Company and the Selling Shareholder (including both Employed Selling Shareholders and Selling Shareholders not employed by NewCo) execute a non-compete agreement (the “Non-Compete Agreement”) which restricts the Selling Shareholder from engaging in competing business activities for a specified period of time (the “Non-Compete Term”). A Non-Compete Agreement is executed with the Selling Shareholders in all cases. That is, even if the Selling Shareholder does not become an Employed Selling Shareholder, the Selling Shareholder is restricted from engaging in a competing business during the Non-Compete Term. 9. The Non-Compete Term commences as of the date of the Acquisition and expires on the later of : a. Two years after the date an Employed Selling Shareholders’ employment is terminated (if the Selling Shareholder becomes an Employed Selling Shareholder) or b. Five to six years from the date of the Acquisition, as defined in the Non-Compete Agreement, regardless of whether the Selling Shareholder is employed by NewCo. 10. The Non-Compete Agreement applies to a restricted region which is defined as a 15-mile radius from the Therapy Practice. That is, an Employed Selling Shareholder is permitted to engage in competing businesses or activities outside the 15-mile radius (after such Employed Selling Shareholder no longer is employed by NewCo) and a Selling Shareholder who is not employed by NewCo immediately is permitted to engage in the competing business or activities outside the 15-mile radius. The Partnership Agreement contains provisions for the redemption of the Seller Entity Interest, either at the option of the Company (the “Call Right”) or at the option of the Seller Entity (the “Put Right”) as follows: 1. Put Right a. In the event that any Selling Shareholder’s employment is terminated under certain circumstances prior to a specified date (the “Specified Date”), the Seller Entity thereafter may have an irrevocable right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below. b. In the event that any Selling Shareholder is not employed by NewCo as of the Specified Date and the Company has not exercised its Call Right with respect to the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, Seller Entity thereafter shall have the Put Right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below. 23 Table of Contents c. In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the Specified Date, the Seller Entity shall have the Put Right, and upon the exercise of the Put Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below. 2. Call Right a. If any Selling Shareholder’s employment by NewCo is terminated prior to the Specified Date, the Company thereafter shall have an irrevocable right to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, in each case at the purchase price described in “3” below. b. In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after Specified Date, the Company shall have the Call Right, and upon the exercise of the Call Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below. 3. For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’s trailing twelve months of earnings before interest, taxes, depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”). NewCo’s earnings are distributed monthly based on available cash within NewCo; therefore, the undistributed earnings amount is small, if any. 4. The Purchase Price for the initial equity interest purchased by the Company is also based on the same specified multiple of the trailing twelve-month earnings that is used in the Put Right and the Call Right noted above. 5. The Put Right and the Call Right do not have an expiration date, and the Seller Entity Interest is not required to be purchased by the Company or sold by the Seller Entity unless either the Put Right and the Call Right is exercised. 6. The Put Right and the Call Right never apply to Selling Shareholders who do not become employed by NewCo, since the Company requires that such Selling Shareholders sell their entire ownership interest in the Seller Entity at the closing of the Acquisition. An Employed Selling Shareholder’s ownership of his or her equity interest in the Seller Entity predates the Acquisition and the Company’s purchase of its partnership interest in NewCo. The Employment Agreement and the Non-Compete Agreement do not contain any provision to escrow or “claw back” the equity interest in the Seller Entity held by such Employed Selling Shareholder, nor the Seller Entity Interest in NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even if the Employed Selling Shareholder is terminated for “cause” by NewCo, such Employed Selling Shareholder does not forfeit his or her right to his or her full equity interest in the Seller Entity and the Seller Entity does not forfeit its right to any portion of the Seller Entity Interest. The Company’s only recourse against the Employed Selling Shareholder for breach of either the Employment Agreement or the Non-Compete Agreement is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements with an Employed Selling Shareholder that would result in a forfeiture of the equity interest held in the Seller Entity or of the Seller Entity Interest. 24 Table of Contents For the three and nine months ended September 30, 2020 , the following table details the changes in the carrying amount (fair value) of the redeemable non-controlling interests (in thousands): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Beginning balance $ 136,728 $ 133,366 $ 137,750 $ 133,943 Operating results allocated to redeemable non-controlling interest partners 3,019 2,379 7,811 8,152 Distributions to redeemable non-controlling interest partners ( 6,206 ) ( 1,636 ) ( 9,871 ) ( 6,799 ) Changes in the fair value of redeemable non-controlling interest 4,297 922 ( 1,175 ) 10,752 Purchases of redeemable non-controlling interest - ( 1,459 ) ( 3,224 ) ( 6,344 ) Acquired interest 1,794 6,230 8,265 6,230 Reduction of non-controlling interest due to sale of USPH partnership interest - - - ( 6,132 ) Sales of redeemable non-controlling interest - temporary equity 160 - 724 2,870 Notes receivable related to sales of redeemable non-controlling interest - temporary equity ( 125 ) - ( 670 ) ( 2,870 ) Adjustments in notes receivable related to the the sales of redeemable non-controlling interest - temporary equity 134 - 191 - Other - ( 1 ) - ( 1 ) Ending balance $ 139,801 $ 139,801 $ 139,801 $ 139,801 The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interests (in thousands): September 30, 2020 September 30, 2019 Contractual time period has lapsed but holder's employment has not been terminated $ 69,949 $ 40,958 Contractual time period has not lapsed and holder's employment has not been terminated 69,852 98,843 Holder's employment has terminated and contractual time period has expired - - Holder's employment has terminated and contractual time period has not expired - - $ 139,801 $ 139,801 7. GOODWILL The changes in the carrying amount of goodwill consisted of the following (in thousands): Nine Months Ended Year Ended September 30, 2020 December 31, 2019 Beginning balance $ 317,676 $ 293,525 Goodwill acquired 19,824 31,330 Goodwill related to partnership interest sold - ( 7,325 ) Goodwill write-off related to closed clinics ( 1,859 ) - Goodwill adjustments for purchase price allocation of businesses acquired in prior year 1,305 146 Ending balance $ 336,946 $ 317,676 The derecognition (write-off) o f goodwill in the amount of $ 1.9 million was related to certain clinics that have been permanently closed. 8. INTANGIBLE ASSETS, NET Intangible assets, net as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands): September 30, 2020 December 31, 2019 Tradenames $ 31,490 $ 32,049 Referral relationships, net of accumulated amortization of $ 13,811 and $ 11,677 , respectively 20,833 18,367 Non-compete agreements, net of accumulated amortization of $ 5,837 and $ 5,424 , respectively 1,737 2,172 $ 54,060 $ 52,588 Tradenames, referral relationships and non-compete agreements are related to the businesses acquired. The value assigned to tradenames has an indefinite life and is tested at least annually for impairment using the relief from royalty method in conjunction with the Company’s annual goodwill impairment test. The value assigned to referral relationships is being amortized over their respective estimated useful lives which range from six to thirteen years . Non-compete agreements are amortized over the respective term of the agreements which range from five to six years . 25 Table of Contents The following table details the amount of amortization expense recorded for intangible assets for the three months and nine months ended September 30, 2020 and 2019 (in thousands): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Referral relationships $ 684 $ 593 $ 2,133 $ 1,707 Non-compete agreements 150 172 414 510 $ 834 $ 765 $ 2,547 $ 2,217 Based on the balance of referral relationships and non-compete agreements as of September 30, 2020, the expected amount to be amortized in 2020 and thereafter by year is as follows (in thousands): Referral Relationships Non-Compete Agreements Years Annual Amount Years Annual Amount Ending December 31, Ending December 31, 2020 (excluding the nine months ended September 30, 2020) $ 685 2020 (excluding the nine months ended September 30, 2020) $ 150 2021 $ 2,737 2021 $ 552 2022 $ 2,689 2022 $ 375 2023 $ 2,581 2023 $ 305 2024 $ 2,417 2024 $ 250 Thereafter $ 9,724 Thereafter $ 105 9. ACCRUED EXPENSES Accrued expenses as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands): September 30, 2020 December 31, 2019 Salaries and related costs $ 26,834 $ 19,340 Credit balances due to patients and payors 6,823 4,303 Group health insurance claims 1,741 2,277 Closure costs 1,654 116 Federal and state income taxes payable 3,831 - MAAPP funds payable 12,924 - Deferred employer payroll taxes - CARES ACT 4,879 - Other 1,550 4,819 Total $ 60,236 $ 30,855 See Note – 1 Basis of Presentation and Significant Accounting Policies – Impact of COVID-19 for a discussion of CARE Act and MAAPP funds. Closure costs consist primarily of remaining lease commitments related to closed clinics. 10. NOTES PAYABLE AND AMENDED CREDIT AGREEMENT Amounts outstanding under the Amended Credit Agreement (as defined below) and notes payable as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands): September 30, 2020 December 31, 2019 Credit Agreement average effective interest rate of 2.5 % inclusive of unused fee $ 7,000 $ 46,000 Various notes payable with $ 4,999 plus accrued interest due in the next year, interest accrues in the range of 3.25 % through 5.50 % per annum 5,508 5,089 $ 12,508 $ 51,089 Less current portion ( 4,999 ) ( 728 ) Long term portion $ 7,509 $ 50,361 26 Table of Contents Effective December 5, 2013, the Company entered into an Amended and Restated Credit Agreement with a commitment for a $ 125.0 million revolving credit facility. This agreement was amended in August 2015, January 2016, March 2017 and November 2017 (hereafter referred to as “Amended Credit Agreement”). The Amended Credit Agreement is unsecured and has loan covenants, including requirements that the Company comply with a consolidated fixed charge coverage ratio and consolidated leverage ratio. Proceeds from the Amended Credit Agreement may be used for working capital, acquisitions, purchases of the Company’s common stock, dividend payments to the Company’s common stockholders, capital expenditures and other corporate purposes. The pricing grid which is based on the Company’s consolidated leverage ratio with the applicable spread over LIBOR ranging from 1.25 % to 2.0 % or the applicable spread over the Base Rate ranging from 0.1 % to 1 %. Fees under the Amended Credit Agreement include an unused commitment fee ranging from 0.25 % to 0.3 % depending on the Company’s consolidated leverage ratio and the amount of funds outstanding under the Amended Credit Agreement. The January 2016 amendment to the Amended Credit Agreement increased the cash and noncash consideration that the Company could pay with respect to acquisitions permitted under the Amended Credit Agreement to $ 50.0 million for any fiscal year, and increased the amount the Company may pay in cash dividends to its shareholders in an aggregate amount not to exceed $ 10.0 million in any fiscal year. The March 2017 amendment, among other items, increased the amount the Company may pay in cash dividends to its shareholders in an aggregate amount not to exceed $ 15.0 million in any fiscal year. The November 2017 amendment, among other items, adjusted the pricing grid as described above, increased the aggregate amount the Company may pay in cash dividends to its shareholders to an amount not to exceed $ 20.0 million and extended the maturity date to November 30, 2021 . As of September 30, 2020, $ 7.0 million was outstanding on the Amended Credit Agreement, resulting in $ 118.0 million of availability. As of September 30, 2020, the Company was in compliance with all of the covenants contained in the Amended Credit Agreement. Given the uncertainty inherent in operating results due to the COVID-19 pandemic, the Company continues to closely monitor covenant compliance. The Company is currently in negotiations with its lender to renew the Amended Credit Agreement . The Company generally enters into various notes payable as a means of financing a portion of its acquisitions and purchases of non-controlling interests. In a recent acquisition on September 30, 2020, the Company entered into a notes payable in the amount of $ 0.5 million. One of the notes payable of $ 0.2 million is payable, with any accrued interest at 5 % per annum, on September 30, 2021. The remaining note of $ 0.3 million was paid in November 2020. Interest accrues at the rate of 5.0 % per annum. In conjunction with the acquisitions on February 27, 2020 , the Company entered into a note payable in the amount of $ 300,000 payable in February 2022 plus accrued interest. During the quarter ended September 30, 2020, the Company entered into various notes payable as a means of financing a portion of its acquisition of partner’s non-controlling interest in the amount of $ 0.2 million. Interest accrues at the rate of 4.75 % per annum. In conjunction with the 2019 acquisitions, the Company entered into notes payable in the aggregate amount of $ 4.8 million of which an aggregate principal payment of $ 4.6 million is due in 2021, and $ 0.2 million is due in 2022. Interest accrues in the range of 3.25 % to 5.50 % per annum and is payable with each principal installment. Subsequent aggregate annual payments of principal required pursuant to the Amended Credit Agreement and outstanding notes payable at September 30, 2020 are as follows (in thousands): During the twelve months ended September 30, 2021 $ 4,999 During the twelve months ended September 30, 2022 7,509 $ 12,508 The outstanding amounts under the Amended Credit Agreement facility (balance at September 30, 2020 of $ 7.0 million) mature on November 30, 2021 . 11. LEASES The Company has operating leases for its corporate offices and operating facilities. The Company determines if an arrangement is a lease at the inception of a contract. Effective January 1, 2019, right-of-use assets and operating lease liabilities are included in its consolidated balance sheet. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent net present value of the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at commencement date based on the net present value of the fixed lease payments over the lease term. The Company’s operating lease terms are generally five years or less. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating fixed lease expense is recognized on a straight-line basis over the lease term. 27 Table of Contents In accordance with ASC 842, the Company records on its consolidated balance sheet leases with a term greater than 12 months. The Company has elected, in compliance with current accounting standards, not to record leases with an initial terms of 12 months or less in the consolidated balance sheet. ASC 842 requires the separation of the fixed lease components from the variable lease components. The Company has elected the practical expedient to account for separate lease components of a contract as a single lease cost thus causing all fixed payments to be capitalized. Non-lease and variable cost components are not included in the measurement of the right-of-use assets or operating lease liabilities. The Company also elected the package of practical expedients permitted within ASC 842, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage are not included in the right-of- use assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense. For the three months and nine months ended September 30, 2020, the components of lease expense were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Operating lease cost $ 7,470 $ 7,708 $ 23,097 $ 15,295 Short-term lease cost 389 297 898 668 Variable lease cost 1,436 1,547 4,482 3,128 Total lease cost * $ 9,295 $ 9,552 $ 28,477 $ 19,091 * Sublease income was immaterial Lease cost is reflected in the consolidated statement of net income in the line item – rent, supplies, contract labor and other. Supplemental information related to leases was as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) $ 7,696 $ 7,686 $ 22,041 $ 15,392 Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands) * $ 3,162 $ 8,629 $ 22,238 $ 98,514 * Includes the right-of-use assets obtained in exchange for lease liabilities of $ 82.6 million which were recognized upon adoption of ASC Topic 842 at January 1, 2019. The aggregate future lease payments for operating leases as of September 30, 2020 were as follows (in thousands): Fiscal Year Amount 2020 (excluding the nine months ended September 30, 2020) $ 7,994 2021 27,451 2022 21,506 2023 15,566 2024 9,847 2025 and therafter 10,504 Total lease payments $ 92,868 Less: imputed interest 5,826 Total operating lease liabilities $ 87,042 Average lease terms and discount rates were as follows: Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Weighted-average remaining lease term - Operating leases 4.1 4.1 Weighted-average discount rate - Operating leases 3.2 % 3.2 % 28 Table of Contents 12. SEGMENT INFORMATION The Company’s reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Included in the physical therapy operations segment are revenues from management contract services and other services which include services the Company provides on-site, such as schools for athletic trainers. The Company evaluates performance of the segments based on gross profit. The Company has provided additional information regarding its reportable segments which contributes to the understanding of the Company and provides useful information. The following table summarizes selected financial data for the Company’s reportable segments. Prior year results presented herein have been changed to conform to the current presentation. Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 (in thousands) (in thousands) Net operating revenues: Physical therapy operations $ 98,914 $ 107,303 $ 275,954 $ 332,719 Industrial injury prevention services 10,015 9,948 29,549 27,136 Total Company $ 108,929 $ 117,251 $ 305,503 $ 359,855 Gross profit: Physical therapy operations (excluding closure costs) $ 27,568 $ 25,399 $ 61,546 $ 79,009 Industrial injury prevention services 2,868 1,976 7,711 6,518 $ 30,436 $ 27,375 $ 69,257 $ 85,527 Physical therapy operations - closure costs 79 3 3,925 12 Gross profit $ 30,357 $ 27,372 $ 65,332 $ 85,515 Total Assets: Physical therapy operations $ 524,658 $ 512,657 Industrial injury prevention services 50,780 48,188 Total Company $ 575,438 $ 560,845 13. COMMON STOCK From September 2001 through December 31, 2008, the Board authorized the Company to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of the Company’s common stock. In March 2009, the Board authorized the repurchase of up to 10 % or approximately 1,200,000 shares of its common stock (“March 2009 Authorization”). The Amended Credit Agreement permits share repurchases of up to $ 15,000,000 , subject to compliance with covenants. The Company is required to retire shares purchased under the March 2009 Authorization. Under the March 2009 Authorization, the Company has purchased a total of 859,499 shares. There is no expiration date for the share repurchase program. There are currently an additional estimated 172,652 shares (based on the closing price of $ 86.88 on September 30, 2020) that may be purchased from time to time in the open market or private transactions depending on price, availability and the Company’s cash position. The Company did no t purchase any shares of its common stock during the nine months ended September 30, 2020. 29 Table of Contents