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, 2021 December 31, 2020 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 19,188 $ 32,918 Patient accounts receivable, less allowance for credit losses of $ 2,728 and $ 2,008 , respectively 46,456 41,906 Accounts receivable - other 10,093 9,039 Other current assets 3,687 3,773 Total current assets 79,424 87,636 Fixed assets: Furniture and equipment 58,179 55,426 Leasehold improvements 37,413 35,320 Fixed assets, gross 95,592 90,746 Less accumulated depreciation and amortization 73,556 69,081 Fixed assets, net 22,036 21,665 Operating lease right-of-use assets 92,952 81,595 Goodwill 374,047 345,646 Other identifiable intangible assets, net 60,086 56,280 Other assets 1,553 1,539 Total assets $ 630,098 $ 594,361 LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, USPH SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTEREST Current liabilities: Accounts payable - trade $ 1,532 $ 1,335 Accrued expenses 50,267 59,746 Current portion of operating lease liabilities 29,197 27,512 Current portion of notes payable 672 4,899 Total current liabilities 81,668 93,492 Notes payable, net of current portion 2,265 596 Revolving line of credit 33,000 16,000 Deferred taxes 6,682 7,779 Operating lease liabilities, net of current portion 71,209 61,985 Other long-term liabilities 6,440 4,539 Total liabilities 201,264 184,391 Redeemable non-controlling interest - temporary equity 138,217 132,340 Commitments and Contingencies 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, 15,126,345 and 15,066,282 shares issued, respectively 151 151 Additional paid-in capital 101,922 95,622 Retained earnings 219,338 212,015 Treasury stock at cost, 2,214,737 shares ( 31,628 ) ( 31,628 ) Total USPH shareholders’ equity 289,783 276,160 Non-controlling interest - permanent equity 834 1,470 Total USPH shareholders’ equity and non-controlling interest - permanent equity 290,617 277,630 Total liabilities, redeemable non-controlling interest, USPH shareholders’ equity and non-controlling interest - permanent equity $ 630,098 $ 594,361 See notes to consolidated financial statements. 3 Index U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited) Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30,2021 September 30, 2020 Net patient revenue $ 112,327 $ 96,398 $ 324,819 $ 268,803 Other revenue 13,566 12,531 40,370 36,700 Net revenue 125,893 108,929 365,189 305,503 Operating cost: Salaries and related costs 70,492 57,519 203,173 169,952 Rent, supplies, contract labor and other 24,239 19,695 68,075 62,915 Provision for credit losses 1,358 1,279 3,922 3,379 Closure costs - lease and other 5 79 20 2,066 Closure costs - derecognition of goodwill - - - 1,859 Total operating cost 96,094 78,572 275,190 240,171 Gross profit 29,799 30,357 89,999 65,332 Corporate office costs 12,867 10,422 35,815 31,121 Operating income 16,932 19,935 54,184 34,211 Other income and expense: Relief Funds - 390 - 8,349 Gain on sale of partnership interest and clinics - 18 - 1,091 Resolution of a payor matter 1,216 - 1,216 - Interest and other income, net 58 50 158 97 Interest expense - debt and other ( 268 ) ( 351 ) ( 751 ) ( 1,431 ) Total other income and expense 1,006 107 623 8,106 Income before taxes 17,938 20,042 54,807 42,317 Provision for income taxes 3,815 4,279 11,326 8,453 Net income $ 14,123 $ 15,763 $ 43,481 $ 33,864 Less: net income attributable to non-controlling interest: Redeemable non-controlling interest - temporary equity ( 2,605 ) ( 3,019 ) ( 8,669 ) ( 7,811 ) Non-controlling interest - permanent equity ( 1,509 ) ( 1,828 ) ( 4,194 ) ( 3,889 ) $ ( 4,114 ) $ ( 4,847 ) $ ( 12,863 ) $ ( 11,700 ) Net income attributable to USPH shareholders $ 10,009 $ 10,916 $ 30,618 $ 22,164 Basic and diluted earnings per share attributable to USPH shareholders $ 0.66 $ 0.61 $ 1.69 $ 1.80 Shares used in computation - basic and diluted 12,909 12,847 12,894 12,829 Dividends declared per common share $ 0.38 $ - $ 1.08 $ 0.32 See notes to consolidated financial statements. 4 Index U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (unaudited) Nine Months Ended September 30, 2021 September 30, 2020 OPERATING ACTIVITIES Net income including non-controlling interest $ 43,481 $ 33,864 Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities: Depreciation and amortization 8,519 8,066 Provision for credit losses 3,922 3,379 Equity-based awards compensation expense 6,280 5,325 Deferred income taxes 1,292 ( 834 ) Loss on sale of fixed assets 113 346 Gain on sale of partnership interest - ( 1,091 ) Derecognition (write-off) of goodwill - closed clinics - 1,859 Changes in operating assets and liabilities: (Increase) decrease in patient accounts receivable ( 7,513 ) 4,117 (Increase) decrease in accounts receivable - other ( 738 ) 730 (Increase) decrease in other assets ( 195 ) 5,404 Increase in accounts payable and accrued expenses 4,529 13,495 Increase (decrease) in other long-term liabilities 811 ( 58 ) Net cash provided by operating activities 60,501 74,602 INVESTING ACTIVITIES Purchase of fixed assets ( 5,996 ) ( 5,494 ) Purchase of majority interest in businesses, net of cash acquired ( 22,589 ) ( 15,322 ) Purchase of redeemable non-controlling interest, temporary equity ( 14,916 ) ( 3,087 ) Purchase of non-controlling interest, permanent equity ( 1,093 ) ( 184 ) Proceeds on sale of redeemable non-controlling interest, temporary equity 69 54 Proceeds on sales of partnership interest, clinics and fixed assets 136 1,118 Sales of non-controlling interest-permanent 131 - Net cash used in investing activities ( 44,258 ) ( 22,915 ) FINANCING ACTIVITIES Distributions to non-controlling interest, permanent and temporary equity ( 14,330 ) ( 14,223 ) Cash dividends paid to shareholders ( 13,934 ) ( 4,110 ) Proceeds from revolving line of credit 193,000 134,000 Payments on revolving line of credit ( 176,000 ) ( 173,000 ) Principal payments on notes payable ( 4,662 ) ( 700 ) (Payment) receipt of Medicare Accelerated and Advance Funds ( 14,054 ) 12,924 Short swing profit settlement 20 - Other ( 13 ) 3 Net cash used in financing activities ( 29,973 ) ( 45,106 ) Net (decrease) increase in cash and cash equivalents ( 13,730 ) 6,581 Cash and cash equivalents - beginning of period 32,918 23,548 Cash and cash equivalents - end of period $ 19,188 $ 30,129 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 10,777 $ 4,421 Interest $ 1,195 $ 1,202 Non-cash investing and financing transactions during the period: Purchase of businesses - seller financing portion $ 1,800 $ 796 Purchase of redeemable non-controlling interest - notes payable $ 1,302 $ 137 Notes payable due to purchase of non-controlling interest, permanent equity $ - $ 699 Receivables related to sale of partnership interest $ - $ 386 Note receivables related to sale of partnership interest $ 914 $ 670 See notes to consolidated financial statements. 5 Index U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (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 , 2021 Shares Amount Paid-In Capital Earnings Shares Amount Equity Interest Total Balance June 30, 2021 15,121 $ 151 $ 99,039 $ 216,286 ( 2,215 ) $ ( 31,628 ) $ 283,848 $ 963 $ 284,811 Issuance of restricted stock, net of cancellations 5 - - - - - - - - Revaluation of redeemable non-controlling interest, net of tax - - - ( 1,542 ) - - ( 1,542 ) - ( 1,542 ) Compensation expense - equity-based awards - - 2,877 - - - 2,877 - 2,877 Purchase of non-controlling interest - - - ( 619 ) - - ( 619 ) ( 49 ) ( 668 ) Sale of non-controlling interest, net of purchases - - - 130 - - 130 131 261 Dividends paid to USPT shareholders - - - ( 4,906 ) - - ( 4,906 ) - ( 4,906 ) Distributions to non-controlling interest partners - permanent equity - - - - - - - ( 1,730 ) ( 1,730 ) Other - - 6 ( 20 ) - - ( 14 ) 10 ( 4 ) Net income attributable to non-controlling interest - permanent equity - - - - - - - 1,509 1,509 Net income attributable to USPH shareholders - - - 10,009 - - 10,009 - 10,009 Balance September 30 , 2021 15,126 $ 151 $ 101,922 $ 219,338 ( 2,215 ) $ ( 31,628 ) $ 289,783 $ 834 $ 290,617 U.S.Physical Therapy, Inc. Common Stock Additional Retained Treasury Stock Total Shareholders’ Non-Controlling For the nine months ended September 30 , 2021 Shares Amount Paid-In Capital Earnings Shares Amount Equity Interest Total Balance December 31, 2020 15,065 $ 151 $ 95,622 $ 212,015 ( 2,215 ) $ ( 31,628 ) $ 276,160 $ 1,470 $ 277,630 Issuance of restricted stock, net of cancellations 61 - - - - - - - - Revaluation of redeemable non-controlling interest, net of tax - - - ( 8,852 ) - - ( 8,852 ) - ( 8,852 ) Compensation expense - equity-based awards - - 6,280 - - - 6,280 - 6,280 Purchase of non-controlling interest - - - ( 619 ) - - ( 619 ) ( 49 ) ( 668 ) Sale of non-controlling interest, net of purchases - - - 130 - - 130 131 261 Dividends paid to USPT shareholders - - - ( 13,934 ) - - ( 13,934 ) - ( 13,934 ) Distributions to non-controlling interest partners - permanent equity - - - - - - - ( 4,912 ) ( 4,912 ) Short swing profit settlement - - 20 - - - 20 - 20 Other - - - ( 20 ) - - ( 20 ) - ( 20 ) Net income attributable to non-controlling interest - permanent equity - - - - - - - 4,194 4,194 Net income attributable to USPH shareholders - - - 30,618 - - 30,618 - 30,618 Balance September 30 , 2021 15,126 $ 151 $ 101,922 $ 219,338 ( 2,215 ) $ ( 31,628 ) $ 289,783 $ 834 $ 290,617 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 Interest 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 Interest 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 Index U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2021 (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 the 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 current segment presentation. See Note 11 - 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 and limited partnership interests typically ranging 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 June 30, 2021, the Company acquired a 65 % interest in an eight -clinic physical therapy practice with the practice founder retaining 35 % . The purchase price was approximately $ 10.3 million, of which $ 9.0 million was paid in cash, $ 1.0 million is payable based on the achievement of certain business criteria and $ 0.3 million is in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest is payable on June 30, 2023. Additionally, the Company has an obligation to pay an additional amount up to $ 0.8 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met. The Company recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair value each reporting date. On March 31, 2021 , the Company acquired a 70 % interest in a five -clinic physical therapy practice with the practice founder retaining 30 % . When acquired, the practice was developing a sixth clinic which has been completed. The purchase price for the 70 % interest was approximately $ 12.0 million, of which $ 11.7 million was paid in cash and $ 0.3 million in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest is payable on March 31, 2023 . On November 30, 2020 , the Company acquired a 75 % interest in a three -clinic physical therapy practice. The purchase price for the 75 % interest was $ 8.9 million (net of cash acquired), of which $ 8.6 million was paid in cash and $ 0.3 million in the form of a note payable that is payable in two principal installments totaling $ 162,500 each. The first principal payment plus accrued interest is due to be paid in November 2021 with the second installment to be paid in November 2022 . The note accrues interest at 3.25 % per annum. 7 Index 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. The purchase price for the 70 % interest was approximately $ 4.2 million, of which $ 3.7 million was paid in cash and $ 0.5 million in the form of two notes payable. One of the notes payable of $ 0.3 million was paid in November 2020. The remaining note payable of $ 0.2 million was paid on September 30, 2021 . 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 note payable. The note accrues interest at 4.75 % per annum and the principal and interest is payable in February 2022 . During the nine months ended September 30, 2021 , the Company sold two clinics. The aggregate sales price of $ 0.1 million was paid to the Company in cash. As of September 30, 2021 , the Company operated 579 clinics in 39 states. The Company also manages physical therapy facilities for third parties, primarily hospital and physicians, with 35 third -party facilities under management as of September 30, 2021 . 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 interest – permanent equity and within the income statements as net income attributable to non-controlling interest – permanent equity . For acquired Clinic Partnerships with redeemable non-controlling interest, the earnings attributable to the redeemable non-controlling interest are recorded within the consolidated statements of income line item – net income attributable to non-controlling interest – redeemable non-controlling interest – temporary equity and the equity interest is recorded on the consolidated balance sheet as redeemable non-controlling interest – temporary equity . 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 cost – 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 services 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 services 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 %. 8 Index On September 30, 2021, the Company acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The business generates more than $ 2.0 million in annual revenue. USPH acquired the company’s assets at a purchase price of approximately $ 3.3 million (which includes the obligation to pay an amount up to $ 0.6 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met), and contributed those assets to industrial injury prevention services subsidiary. The initial purchase price, not inclusive of the $ 0.6 million contingent payment, was approximately $ 2.7 million, of which $ 2.4 million was paid in cash, and $ 0.3 million is in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest is payable on September 30, 2023. Subsequent to this acquisition and the purchase of the redeemable non-controlling interest of one of the limited partners in the third quarter of 2021, the Company’s ownership in Briotix Health is approximately 85 %. 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). 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, 2020 filed with the Securities and Exchange Commission on March 1, 2021 . 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, 2021 are not necessarily indicative of the results the Company expects for the entire year. 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 first three quarters of 2020 and our Annual Report on Form 10 -K for the year ended December 31, 2020, the Company’s results were negatively impacted by the effects of the COVID -19 pandemic in 2020. For 2021 periods as compared to 2020 periods, the increase in revenues and expenses are primarily due to the Company returning to and now exceeding pre-pandemic results. The Company has 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, the Company has continued to allow a large number of office-based employees to work remotely. The Company is monitoring the situation and will adjust work environments accordingly. In March 2020 in response to the COVID -19 pandemic, the federal government approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). 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. 9 Index In 2020, the Company received 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 Payment 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 from Centers for Medicare & Medicaid Services (“CMS”) in April 2020. The Company recorded these payments as a liability; however, during the first quarter of 2021, the Company repaid the MAAPP Funds of $ 14.1 million rather than applying them to future services performed . • 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, 2021 included in accrued liabilities is $ 4.1 million and in other long-term liabilities is $ 4.2 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 . In 2020 , the Company’s consolidated subsidiaries received approximately $ 13.5 million in payments under the CARES Act (“Relief Funds”). In accordance with GAAP, these payments were recorded as Other income – Relief Funds. 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. There were no Relief Funds received in the nine months ended September 30, 2021. 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 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 the nine months ended September 30, 2021 . Goodwill Goodwill represents the excess of the amount paid and fair value of the non-controlling interest 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. 10 Index 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 or conditions, 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 evaluates indefinite lived tradenames using the relief from royalty method in conjunction with its annual goodwill impairment test. The Company operates a two segment business which is made up of various clinics within partnerships, and the other is industrial injury prevention services business. The partnerships are components of regions and are aggregated to the operating segment level for the purpose of determining the Company’s reporting units when performing its annual goodwill impairment test (there were six regions in both 2020 and 2019 in the physical therapy operations segment). In addition to the six regions mentioned prior, the impairment analysis included a separate analysis for the industrial injury prevention services business, as a separate reporting unit. As part of the impairment analysis, 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. An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other identifiable intangible assets, exceeds the estimated fair value of the reporting unit. The evaluation of goodwill in 2020 and 2019 did not result in any goodwill amounts that were deemed impaired. During 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. Redeemable Non-Controlling Interest The non-controlling interests that are reflected as redeemable non-controlling interest 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. 11 Index 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 interest – 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 the adjustments 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 Interest 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 interest 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. Revenue Recognition Revenues are recognized in the period in which services are rendered. See Note 3- Revenue Recognition, for further discussion of revenue recognition. Provision for Credit Losses T he Company determines provisions for credit losses based on the specific agings and payor classifications at each clinic. The provision for credit losses is included in operating cost 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 provisions for credit losses, 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. 12 Index 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 , the 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, 2021 . 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, 2021. 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, contingent earn-out payments, 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 interest approximate the respective fair values. The fair value of the Company’s redeemable non-controlling interest is determined based on “Level 3 ” inputs. The interest rate on the Amended Credit Agreement is tied to the London Interbank Offered Rate (“LIBOR”). Provisions within the agreement currently provide the Company with the ability to replace LIBOR with a different reference rate in the event LIBOR ceases to exist . 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. Use of Estimates I n preparing the Company’s consolidated financial statements, management makes certain estimates and assumptions, especially in relation to, but not limited to, goodwill impairment, tradenames and other intangible assets, allocations of purchase price, provision for credit losses, 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, 2021. 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. 13 Index 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 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 LIBOR 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 . Borrowings under the Amended Credit Agreement bear interest based on LIBOR or an alternate base rate. Provisions within the agreement currently provide the Company with the ability to replace LIBOR with a different reference rate in the event LIBOR ceases to exist. In August 2020 , the FASB issued ASU 2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20 ) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40 ): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. As part of this update, convertible instruments are to be included in diluted earnings per share using the if-converted method, rather than the treasury stock method. Further, contracts which can be settled in cash or shares, excluding liability-classified share-based payment awards, are to be included in diluted earnings per share on an if-converted basis if the effect is dilutive, regardless of whether the entity or the counterparty can choose between cash and share settlement. The share-settlement presumption may not be rebutted based on past experience or a stated policy. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021 . The Company plans to adopt this pronouncement as of January 1, 2022 . The use of either the modified retrospective or fully retrospective method of transition is permitted. The Company is currently evaluating the impact of the adoption of ASU 2020-06 on the Company’s consolidated financial statements . 14 Index 2. ACQUISITIONS OF BUSINESSES On September 30, 2021, the Company acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The business generates more than $ 2.0 million in annual revenue. USPH acquired the company’s assets at a purchase price of approximately $ 2.7 million and contributed those assets to industrial injury prevention services subsidiary. The initial purchase price (not inclusive of the $ 0.6 million contingent payment in conjunction with the acquisition if specified future operational objectives are met) was paid in cash of $ 2.4 million and $ 0.3 million in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest is payable on September 30, 2023. On June 30, 2021, the Company acquired a 65 % interest in an eight -clinic physical therapy practice with the practice founder retaining 35 %. The purchase price was approximately $ 10.3 million, of which $ 9.0 million was paid in cash, $ 1.0 million is payable based on the achievement of certain business criteria and $ 0.3 million is in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest is payable on June 30, 2023. Additionally, the Company has an obligation to pay an additional amount up to $ 0.8 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met. The Company recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair value each reporting date. On March 31, 2021, the Company acquired a 70 % interest in a five -clinic physical therapy practice with the practice founder retaining 30 % . When acquired, the practice was developing a sixth clinic which has been completed. The purchase price for the 70 % interest was approximately $ 12.0 million, of which $ 11.7 million was paid in cash and $ 0.3 million in the form of a note payable. The note accrues interest at 3.25 % per annum and the principal and interest is payable on March 31, 2023. The purchase price plus the fair value of the non-controlling interest for the acquisitions in 2021 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, 2021 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 2021, the estimated 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 12.0 years. For non-compete agreements, the amortization period is 6.0 years. T he results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisitio n. 15 Index T he purchase price for the 2021 acquisitions has been preliminarily allocated as follows (in thousands) : Cash paid, net of cash acquired $ 22,589 Seller note 800 Payable 1,000 Total consideration $ 24,389 Estimated fair value of net tangible assets acquired: Total current assets $ 1,194 Total non-current assets 6,547 Total liabilities ( 7,559 ) Net tangible assets acquired $ 182 Referral relationships 3,424 Non-compete 562 Tradename 1,577 Goodwill 29,363 Fair value of non-controlling interest (classified as redeemable non-controlling interest) ( 10,719 ) $ 24,389 On November 30, 2020, the Company acquired a 75 % interest in a three -clinic physical therapy practice. The purchase price for the 75 % interest was $ 8.9 million (net of cash acquired), of which $ 8.6 million was paid in cash and $ 0.3 million in the form of a note payable that is payable in two principal installments totaling $ 162,500 each. The first principal payment plus accrued interest will be paid in November 2021 with the second installment to be paid in November 2022. The note accrues interest at 3.25 % per annum. 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. The purchase price for the 70 % interest was approximately $ 4.2 million, of which $ 3.7 million was paid in cash and $ 0.5 million in the form of two notes payable. One of the notes payable of $ 0.3 million was paid in November 2020. The remaining note payable of $ 0.2 million was paid on September 30, 2021. 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 note payable. The note accrues interest at 4.75 % per annum and the principal and interest is payable on February 2022. T he 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 2021 and 2020 acquisitions, a majority of total current assets primarily represents accounts receivable. Total non-current assets are fixed assets and equipment used in the practic e. 16 Index The purchase price for the 2020 acquisitions has been allocated as follows (in thousands): Cash paid, net of cash acquired $ 23,911 Seller note 1,121 Total consideration $ 25,032 Estimated fair value of net tangible assets acquired: Total current assets $ 1,271 Total non-current assets 196 Total liabilities ( 556 ) Net tangible assets acquired $ 911 Referral relationships 5,520 Non-compete 500 Tradename 1,890 Goodwill 27,509 Fair value of non-controlling interest (classified as redeemable non-controlling interest) ( 11,298 ) $ 25,032 The purchase prices plus the fair value of the non-controlling interests for the acquisitions in 2020 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. 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 weighted average amortization period w as 13.0 years at December 31, 2020. For non-compete agreements, the weighted average amortization period was 6.0 years at December 31, 2020. 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 2021 and 2020 have not been included, as the results, individually and in the aggregate, were not material to current operations. 17 Index 3 . REVENUE RECOGNITION Categories Revenues are recognized in the period in which services are rendered. Net patient revenue consists of revenue 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 revenue (patient revenue less estimated contractual adjustments) is 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. 18 Index Management contract revenue, which is included in other revenue in the consolidated statements of net income, is 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, revenue is 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. Revenue from the industrial injury prevention services segment, which is also included in other revenue in the consolidated statements of net income, is 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. Revenue is 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 revenue includes 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 credit losses based on the specific agings and payor classifications at each clinic. The provision for credit losses is included in clinic operating cost in the statements of net income. Patient accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and provision for credit losses, 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, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Net patient revenue $ 112,327 $ 96,398 $ 324,819 $ 268,803 Other revenue 759 512 2,222 1,407 Physical therapy operations $ 113,086 $ 96,910 $ 327,041 $ 270,210 Management contract revenue 2,313 2,004 7,611 5,744 Industrial injury prevention services revenue 10,494 10,015 30,537 29,549 $ 125,893 $ 108,929 $ 365,189 $ 305,503 19 Index Medicare Reimbursement The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). For services provided in 2017 through 2019, a 0.5 % increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 2025 no adjustment is expected to be applied each year to the fee schedule payment rates, before applying the mandatory budget neutrality adjustment. In the 2020 MPFS Final Rule, CMS revised coding, documentation guidelines, and increased the code values for office/outpatient evaluation and management (E/M) codes and cuts to other codes to maintain budget neutrality of the MPFS beginning in 2021. Under the 2021 MPFS Final Rule, CMS increased the values for the E/M office visit codes and cuts to other specialty codes to maintain budget neutrality. As a result, CMS projected a 9 % decrease in fee schedule payment rates for therapy services set to take effect in 2021. However, Congress intervened with passage of the Consolidated Appropriations Act, 2021 and reimbur sement for the codes applicable to physical/occupational therapy services provided by our clinics received an estimated 3.5 % decrease in the aggregate in payment from Medicare in calendar year 2021 as compared to 2020 . In the 2022 MPFS Final Rule published on November 2, 2021, there is an approximately 3.75 % reduction to Medicare payments for physical/occupational therapy services. This is due to the expiration of the additional funding to the conversion factor provided by Congress in 2021 under the Consolidated Appropriations Act, 2021. In addition, without regulatory or Congressional action, we expect the Medicare payment rates in 2023 to be equal to the rates in 2022. Further, without regulatory or Congressional action, we expect an additional approximately 3 % decrease in the aggregate payment from Medicare in calendar year 2024 as compared to 2023. 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, extends the 2 % reductions to Medicare payments through fiscal year 2027. The CARES Act suspended the 2 % payment reduction to Medicare payments for dates of service from May 1, 2020 through December 31, 2020. The Consolidated Appropriations Act, 2021 further suspended the 2 % payment reduction until March 31, 2021. On April 14, 2021, additional legislation was enacted that waived the 2 % payment reduction for the remainder of calendar 2021 . Absent further legislative action, the 2 % reduction will be implemented on January 1, 2022. 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. Therapists eligible to participate in MIPS include only those therapists who are enrolled with Medicare as private practice providers, and does not include therapists in facility-based providers, such as our clinics enrolled as certified rehabilitation agencies. Less than 3 % of the Company’s therapist providers currently participate in MIPS. 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. For those therapist providers who actually participated in MIPS during 2019, the resulting average payment adjustment was an increase of 1 % . 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 Index 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. In 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 %. Medicare claims for outpatient therapy services furnished by therapist assistants on or after January 1, 2020 must include a modifier indicating the service was furnished by a therapist assistant. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapist assistant will be paid at an amount equal to 85 % of the payment amount otherwise applicable for the service. Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. We believe that we are in compliance, in all material respects, with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on our financial statements as of September 30, 2021. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. For the three months ended September 30, 2021 and 2020, respectively, net patient revenue from Medicare were approximately $ 36.2 million and $ 27.5 million, respectively. For the nine months ended September 30, 2021 and 2020, respectively, net patient revenue from Medicare were approximately $ 98.3 million and $ 71.9 million, respectively. Given the history of frequent revisions to the Medicare program and its reimbursement rates and rules, we may not continue to receive reimbursement rates from Medicare that sufficiently compensate us for our services or, in some instances, cover our operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on our revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and, adversely, affect our business, financial condition and results of operations. 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 1.0 % to 1.5 % of net revenue. Additionally, analysis of subsequent periods’ contractual write-offs on a payor basis reflects a difference within approximately 1.0 % to 1.5 % 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 1.0 % to 1.5 % at September 30, 2021. 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 Index 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. EARNINGS PER SHARE In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest (see Note 5 – 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, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Computation of earnings per share - USPH shareholders: Net income attributable to USPH shareholders $ 10,009 $ 10,916 $ 30,618 $ 22,164 (Charges) credit to retained earnings: Revaluation of redeemable non-controlling interest ( 2,071 ) ( 4,297 ) ( 11,889 ) 1,175 Tax effect at statutory rate (federal and state) of 25.55 % and 26.25 %, respectively 529 1,228 3,038 ( 308 ) $ 8,467 $ 7,847 $ 21,767 $ 23,031 Earnings per share (basic and diluted) $ 0.66 $ 0.61 $ 1.69 $ 1.80 Shares used in computation: Basic and diluted earnings per share - weighted-average shares 12,909 12,847 12,894 12,829 5. 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. 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. 22 Index 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. 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. 23 Index 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, in almost all cases, 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 or 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. For the three and nine months ended September 30, 2021 and 2020 , the following table details the changes in the carrying amount (fair value) of the redeemable non-controlling interest (in thousands): Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Beginning balance $ 143,338 $ 136,728 $ 132,340 $ 137,750 Operating results allocated to redeemable non-controlling interest partners 2,605 3,019 8,669 7,811 Distributions to redeemable non-controlling interest partners ( 3,202 ) ( 6,206 ) ( 9,418 ) ( 9,871 ) Changes in the fair value of redeemable non-controlling interest 2,071 4,297 11,889 ( 1,175 ) Purchases of redeemable non-controlling interest ( 6,683 ) - ( 16,218 ) ( 3,224 ) Acquired interest - 1,794 10,719 8,265 Sales of redeemable non-controlling interest - temporary equity 664 160 983 724 Notes receivable related to sales of redeemable non-controlling interest - temporary equity ( 627 ) ( 125 ) ( 914 ) ( 670 ) Adjustments in notes receivable related to the the sales of redeemable non-controlling interest - temporary equity 51 134 167 191 Ending balance $ 138,217 $ 139,801 $ 138,217 $ 139,801 The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interest (in thousands): September 30 , 2021 September 30 , 2020 Contractual time period has lapsed but holder’s employment has not been terminated $ 54,683 $ 69,949 Contractual time period has not lapsed and holder’s employment has not been terminated 83,534 69,852 Holder’s employment has terminated and contractual time period has expired - - Holder’s employment has terminated and contractual time period has not expired - - $ 138,217 $ 139,801 24 Index 6. GOODWILL The changes in the carrying amount of goodwill consisted of the following (in thousands): Nine Months Ended Year Ended September 30, 2021 December 31, 2020 Beginning balance $ 345,646 $ 317,676 Goodwill acquired 29,363 28,540 Goodwill derecognition (write-off) related to closed clinics - ( 1,859 ) Goodwill adjustments for purchase price allocation of businesses acquired in prior year ( 962 ) 1,289 Ending balance $ 374,047 $ 345,646 The derecognition (write-off) o f goodwill in the amount of $ 1.9 million during the year 2020 was related to certain clinics that have been permanently closed. 7. INTANGIBLE ASSETS, NET Intangible assets, net as of September 30, 2021 and December 31, 2020 consisted of the following (in thousands): September 30, 2021 December 31, 2020 Tradenames $ 33,456 $ 32,317 Referral relationships, net of accumulated amortization of $ 16,934 and $ 14,522 , respectively 25,055 22,119 Non-compete agreements, net of accumulated amortization of $ 6,313 and $ 5,993 , respectively 1,575 1,844 $ 60,086 $ 56,280 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 . The following table details the amount of amortization expense recorded for intangible assets for the three and nine months ended September 30, 2021 and 2020 (in thousands) : Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Referral relationships $ 852 $ 684 $ 2,412 $ 2,133 Non-compete agreements 143 150 320 414 $ 995 $ 834 $ 2,732 $ 2,547 25 Index Based on the balance of referral relationships and non-compete agreements as of September 30, 2021, the expected amount to be amortized in 2021 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, 2021 (excluding the nine months ended September 30 , 2021 ) $ 828 2021 (excluding the nine months ended September 30 , 2021 ) $ 138 2022 $ 3,264 2022 $ 412 2023 $ 3,156 2023 $ 343 2024 $ 2,992 2024 $ 287 2025 $ 2,848 2025 $ 221 Thereafter $ 11,967 Thereafter $ 174 26 Index 8. ACCRUED EXPENSES Accrued expenses as of September 30, 2021 and December 31, 2020 consisted of the following (in thousands): September 30, 2021 December 31, 2020 Salaries and related costs $ 31,478 $ 24,646 Credit balances due to patients and payors 6,390 5,756 Group health insurance claims 1,839 2,113 Closure costs 686 1,333 Federal income taxes payable 3,977 5,715 MAAPP funds payable - 14,054 Deferred employer payroll taxes - CARES ACT 4,170 4,170 Other 1,727 1,959 Total $ 50,267 $ 59,746 See Note – 1 Basis of Presentation and Significant Accounting Policies – Impact of COVID-19 for a discussion of CARES Act and MAAPP funds. Closure costs consist primarily of remaining lease commitments related to closed clinics. 9. NOTES PAYABLE AND AMENDED CREDIT AGREEMENT Amounts outstanding under the Amended Credit Agreement (as defined below) and notes payable as of September 30, 2021 and December 31, 2020 consisted of the following (in thousands): September 30, 2021 December 31, 2020 Credit Agreement average effective interest rate of 2.6 % for both September 30, 2021 and December 31, 2020, (inclusive of unused fee) $ 33,000 $ 16,000 Various notes payable with $ 672 plus accrued interest due in the next year, interest accrues in the range of 3.25 % through 5.50 % per annum 2,937 5,495 $ 35,937 $ 21,495 Less current portion ( 672 ) ( 4,899 ) Long term portion $ 35,265 $ 16,596 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 and/or restated in August 2015, January 2016, March 2017, November 2017 and January 2021 (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 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 of 0.3 % of the amount of funds outstanding under the Amended Credit Agreement. The January 2021 amendment to the Amended Credit Agreement allows the cash and noncash consideration that the Company could pay with respect to acquisitions permitted under the Amended Credit Agreement to $ 50,000,000 for any fiscal year, and the amount the Company may pay in cash dividends to its shareholders in an aggregate amount not to exceed $ 50,000,000 in any fiscal year. The commitment remains at $ 125 million, however the accordion feature in the agreement was expanded to provide for capacity up to $ 150 million, and has a maturity date of November 30, 2025 . The Amended Credit Agreement is unsecured and includes certain financial covenants which include a consolidated fixed charge coverage ratio and a consolidated leverage ratio, as defined in the agreement. As of September 30 , 2021, $ 33.0 million was outstanding on the Amended Credit Agreement, resulting in $ 92.0 million of availability. As of September 30 , 2021, the Company was in compliance with all of the covenants contained in the Amended Credit Agreement. 27 Index The Company generally enters into various notes payable as a means of financing a portion of its acquisitions and purchasing of non-controlling interests. In conjunction with these transactions in 2020 and 2021, the Company entered into notes payable in the aggregate amount of $ 3.2 million of which an aggregate principal payment of $ 0.5 million is due in 2021, $ 0.6 million is due in 2022 and $ 2.1 million is due in 2023. Interest accrues in the range of 3.25 % to 5.50 % per annum and is payable with each principal installment. The balance of the various notes payable entered into prior to 2020 was $ 0.1 million which will be paid in the last two months in 2021 . Subsequent aggregate annual payments of principal required pursuant to the Amended Credit Agreement and outstanding notes payable at September 30, 2021 are as follows (in thousands): During the twelve months ended September 30, 2022 $ 672 During the twelve months ended September 30, 2023 2,265 During the twelve months ended September 30, 2026 33,000 $ 35,937 The outstanding amount under the Amended Credit Agreement facility (balance at September 30 , 2021 of $ 33.0 million) matures on November 30, 2025 . 10. 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. 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. 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. 28 Index For the three months and nine months ended September 30, 2021, the components of lease expense were as follows (in thousands): Three Months Ended Nine Months Ended September 30 , 2021 September 30 , 2020 September 30 , 2021 September 30 , 2020 Operating lease cost $ 8,114 $ 7,470 $ 23,738 $ 23,097 Short-term lease cost 440 389 1,169 898 Variable lease cost 1,670 1,436 4,908 4,482 Total lease cost * $ 10,224 $ 9,295 $ 29,815 $ 28,477 * Sublease income was immaterial 29 Index 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 Nine Months Ended September 30, 2021 September 30, 2020 September 30 , 2021 September 30 , 2020 Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) $ 8,354 $ 7,696 $ 24,724 $ 22,041 Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands) $ 13,269 $ 3,162 $ 34,112 $ 22,238 The aggregate future lease payments for operating leases as of September 30, 2021 were as follows (in thousands): Fiscal Year Amount 2021 (excluding the nine months ended September 30 , 2021 ) $ 8,257 2022 30,684 2023 25,084 2024 18,462 2025 12,145 2026 and therafter 11,868 Total lease payments $ 106,500 Less: imputed interest 6,094 Total operating lease liabilities $ 100,406 Average lease terms and discount rates were as follows: Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30 , 2021 September 30 , 2020 Weighted-average remaining lease term - Operating leases 4.1 Years 4.1 Years 4.1 Years 4.1 Years Weighted-average discount rate - Operating leases 2.9 % 3.2 % 2.9 % 3.2 % 11. 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 is revenue from management contract services and other services which include services the Company provides on-site, such as athletic trainers for schools. 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. 30 Index 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net operating revenue: Net operating revenue: Physical therapy operations $ 113,086 $ 96,910 Physical therapy operations $ 327,041 $ 270,210 Industrial injury prevention services 10,494 10,015 Industrial injury prevention services 30,537 29,549 Total Company $ 123,580 $ 106,925 Total Company $ 357,578 $ 299,759 Gross profit: Gross profit: Physical therapy operations (less closure costs) (a non-GAAP measure) $ 27,128 $ 27,568 Physical therapy operations (less closure costs) (a non-GAAP measure) $ 82,078 $ 61,546 Industrial injury prevention services 2,676 2,868 Industrial injury prevention services 7,941 7,711 $ 29,804 $ 30,436 $ 90,019 $ 69,257 Physical therapy operations - closure costs 5 79 Physical therapy operations - closure costs 20 3,925 Gross profit $ 29,799 $ 30,357 Gross profit $ 89,999 $ 65,332 Total Assets: Total Assets: Physical therapy operations $ 583,785 $ 524,658 Physical therapy operations $ 583,785 $ 524,658 Industrial injury prevention services 46,313 50,780 Industrial injury prevention services 46,313 50,780 Total Company $ 630,098 $ 575,438 Total Company $ 630,098 $ 575,438 12. RELATED PARTY TRANSACTIONS Settlement of Short Swing Profit Claim In the nine months ended September 30, 2021, the Company recorded approximately $ 20 ,000 related to the short swing profit settlement remitted by a shareholder of our company under Section 16(b) of the Securities Exchange Act of 1934, as amended. The Company recognized the proceeds as an increase to additional paid-in capital in the consolidated balance sheets as of September 30, 2021 and consolidated statements of stockholders’ equity, as well as in cash provided by financing activities included in Other, in the consolidated statements of cash flows, for the nine months ended September 30, 2021. 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 135,624 shares (based on the closing price of $ 110.60 on September 30, 2021) 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, 2021. 14. RECLASSIFICATION OF PRIOR PERIOD PRESENTATION Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. 31 Index