U S PHYSICAL THERAPY INC /NV 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We maintain an interest rate swap arrangement which is considered a derivative instrument. Our indebtedness as of December 31, 2022, was the outstanding balance of seller notes from our acquisitions of $6.4 million, and an outstanding balance on our Credit Agreement of $179.1 million, which includes a term note with a balance now of $148.1 million and $31.0 million drawn under our Revolving Facility. The Revolving Facility is subject to fluctuating interest rates. A 1% change in the interest rate would yield an additional $0.3 million of interest expense. See Note 10 to our consolidated financial statements included in Item 8. 37 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED INFORMATION Reports of Independent Registered Public Accounting Firm—Grant Thornton LLP (PCAOB ID Number 248 ) 39 Audited Financial Statements: Consolidated Balance Sheets as of December 31, 2022 and 2021 41 Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 42 Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020 43 Consolidated Statements of Changes in Equity for the years ended December 31, 2022, 2021 and 2020 44 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 45 Notes to Consolidated Financial Statements 46 38 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders U.S Physical Therapy, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of U.S Physical Therapy, Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2023 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Measurement of Patient Revenue Net of Contractual Adjustments As discussed in Note 2 to the consolidated financial statements, revenues are recognized in the period in which services are rendered. Net patient revenues (patient revenues less estimated contractual adjustments) are recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. The Company has agreements with third-party payors that provide for payments at amounts different from its established rates. Each month the Company estimates its contractual adjustment for each clinic based on the terms of third-party payor contracts and the historical collection and write-off experience of the clinic and applies a contractual adjustment reserve percentage to the gross accounts receivable balances. The Company then performs a comparison of cash collections to corresponding net revenues for the prior twelve months. We identified the measurement of contractual adjustments as a critical audit matter. The principal consideration for our determination that the measurement of contractual adjustments is a critical audit matter is that the estimate requires a high degree of auditor subjectivity in evaluating management’s assumptions related to projecting future collection patterns across the various clinic locations. Our audit procedures related to the Company’s measurement of contractual adjustments included the following, among others . • We tested the design and operating effectiveness of controls relating to billing and cash collections, net rate trend analysis by clinic and cash collections versus net revenue trend analysis. • For a sample of patient visits, we inspected and compared underlying documents for each transaction, which included gross billing rates and cash collected (net revenue). • For a sample of patient visits, we traced gross billings and net revenue to net revenue recorded in the general ledger and to each report used in determining and assessing the contractual adjustment calculation. • We compared cash collections to recorded net revenue over the twelve month period ended December 31, 2022 and again for the twelve month period ended in the first month subsequent to period end, to identify whether there were unusual trends that would indicate that the usage of historical collection patterns would no longer be reasonable to predict future collection patterns. Goodwill Impairment assessment – fair value of a reporting unit As discussed in Note 2 to the financial statements, goodwill is tested by the Company’s management for impairment at least annually or more frequently if events or circumstances indicate potential impairment. Goodwill is tested for impairment at the reporting unit level. For the year ended December 31, 2022, management prepared a quantitative impairment analysis for a reporting unit included in the industrial injury prevention services segment. The Company engaged a third-party valuation specialist for the estimation of fair values of the reporting unit. We identified the estimation of the fair value of this reporting unit as a critical audit matter. The principal consideration for our determination that the estimation of the fair value of this reporting unit is a critical audit matter is that there was high estimation uncertainty due to significant judgments with respect to assumptions used to project the future cash flows, including revenue growth rates, EBITDA and EBITDA margins, as well as the discount rate and the valuation methodologies applied by the third-party valuation specialist. Our audit procedures related to the estimation of the fair value of this reporting unit included the following, among others. • We tested the design and operating effectiveness of controls over management’s review of the assumptions used to project future cash flows, the selection of an appropriate discount rate, and valuation methodologies applied. • We utilized valuation specialists to evaluate: o The appropriateness of the methodologies applied, o the reasonableness of the discount rate, and o the qualifications of the third-party valuation specialist engaged by the Company based on their credentials and experience. • We assessed the reasonableness of assumptions applied by management in their future cash flows, including revenue growth rates, EBITDA, and EBITDA margins. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2004. Houston, Texas February 28, 2023 39 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders U.S. Physical Therapy, Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of U.S. Physical Therapy, Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated February 28, 2023 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Houston, Texas GRANT THORNTON LLP February 28, 2023 40 Table of Contents U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 31,594 $ 28,567 Patient accounts receivable, less allowance for credit losses of $ 2,829 and $ 2,768 , respectively 51,934 46,272 Accounts receivable - other 16,671 16,144 Other current assets 11,067 4,183 Total current assets 111,266 95,166 Fixed assets: Furniture and equipment 62,074 58,743 Leasehold improvements 42,877 39,194 Fixed assets, gross 104,951 97,937 Less accumulated depreciation and amortization 80,203 74,958 Fixed assets, net 24,748 22,979 Operating lease right-of-use assets 103,004 96,427 Investment in unconsolidated affiliate 12,131 12,215 Goodwill 494,101 434,679 Other identifiable intangible assets, net 108,755 86,382 Other assets 4,149 1,578 Total assets $ 858,154 $ 749,426 LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, USPH SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTEREST Current liabilities: Accounts payable - trade $ 3,300 $ 3,268 Accounts payable - due to seller of acquired business 3,204 3,203 Accrued expenses 37,413 45,705 Current portion of operating lease liabilities 33,709 30,475 Current portion of term loan and notes payable 7,863 830 Total current liabilities 85,489 83,481 Notes payable, net of current portion 1,913 3,587 Revolving line of credit 31,000 114,000 Term Loan, net of current portion and deferred financing costs 142,918 - Deferred taxes 21,303 14,385 Operating lease liabilities, net of current portion 77,934 74,185 Other long-term liabilities 13,029 7,345 Total liabilities 373,586 296,983 Redeemable non-controlling interest - temporary equity 167,515 155,262 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, 15,216,326 and 15,126,160 shares issued, respectively 152 151 Additional paid-in capital 110,317 102,688 Accumulated other comprehensive gain 4,004 - Retained earnings 232,948 224,395 Treasury stock at cost, 2,214,737 shares ( 31,628 ) ( 31,628 ) Total USPH shareholders’ equity 315,793 295,606 Non-controlling interest - permanent equity 1,260 1,575 Total USPH shareholders’ equity and non-controlling interest - permanent equity 317,053 297,181 Total liabilities, redeemable non-controlling interest, USPH shareholders’ equity and non-controlling interest - permanent equity $ 858,154 $ 749,426 See notes to consolidated financial statements. 41 Table of Contents U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Net patient revenue $ 464,590 $ 438,330 $ 373,340 Other revenue 88,554 56,692 49,629 Net revenue 553,144 495,022 422,969 Operating cost: Salaries and related costs 319,191 278,469 235,629 Rent, supplies, contract labor and other 116,381 94,066 88,267 Provision for credit losses 5,548 5,305 4,623 Total operating cost 441,120 377,840 328,519 Gross profit 112,024 117,182 94,450 Goodwill impairment 9,112 - - Corporate office costs 46,111 46,533 42,037 Operating income 56,801 70,649 52,413 Other income and expense Relief Funds - 4,597 13,501 Gain on sale of partnership interest and clinics - - 1,091 Settlement of a legal matter - ( 2,635 ) - Resolution of a payor matter - 1,216 - Change in fair value of contingent earn-out consideration 2,520 - - Equity in earnings of unconsolidated affiliate 1,175 112 - Interest and other income, net 859 199 142 Change in revaluation of put-right liability ( 5 ) - - Interest expense - debt and other ( 5,779 ) ( 942 ) ( 1,634 ) Total other income and expense ( 1,230 ) 2,547 13,100 Income before taxes 55,571 73,196 65,513 Provision for income taxes 12,164 15,272 13,022 Net income 43,407 57,924 52,491 Less: net income attributable to non-controlling interest: Redeemable non-controlling interest - temporary equity ( 6,902 ) ( 11,358 ) ( 11,175 ) Non-controlling interest - permanent equity ( 4,347 ) ( 5,735 ) ( 6,122 ) ( 11,249 ) ( 17,093 ) ( 17,297 ) Net income attributable to USPH shareholders $ 32,158 $ 40,831 $ 35,194 Basic and diluted earnings per share attributable to USPH shareholders $ 2.25 $ 2.41 $ 2.48 Shares used in computation - basic and diluted 12,985 12,898 12,835 Dividends declared per common share $ 1.64 $ 1.46 $ 0.32 See notes to consolidated financial statements. 42 Table of Contents U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Net income $ 43,407 $ 57,924 $ 52,491 Other comprehensive income Unrealized gain on cash flow hedge 5,378 - - Tax effect at statutory rate (federal and state) of 25.55 % ( 1,374 ) - - Comprehensive income $ 47,411 $ 57,924 $ 52,491 Comprehensive income attributable to non-controlling interest ( 11,249 ) ( 17,093 ) ( 17,297 ) Comprehensive income attributable to USPH shareholders $ 36,162 $ 40,831 $ 35,194 See notes to consolidated financial statements. 43 Table of Contents U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands) U.S. Physical Therapy, Inc. Common Stock Additional Accumulated Other Retained Treasury Stock Total Shareholders’ Non-Controlling Shares Amount Paid-In Capital Comprehensive Loss Earnings Shares Amount Equity Interests Total Balance January 1, 2020 14,989 $ 150 $ 87,383 $ - $ 184,352 ( 2,215 ) $ ( 31,628 ) $ 240,257 $ 1,444 $ 241,701 Issuance of restricted stock, net of cancellations 77 1 - - - - - 1 - 1 Revaluation of redeemable non-controlling interest, net of tax - - - - ( 3,415 ) - - ( 3,415 ) - ( 3,415 ) Compensation expense - equity-based awards - - 7,917 - - - - 7,917 - 7,917 Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans - - 486 - - - - 486 - 486 Purchase of partnership interests - non-controlling interest - - - - - - - - ( 168 ) ( 168 ) Sale of non-controlling interest, net of purchases and tax - - ( 164 ) - - - - ( 164 ) - ( 164 ) Dividends paid to USPH shareholders - - - - ( 4,110 ) - - ( 4,110 ) - ( 4,110 ) Distributions to non-controlling interest partners - permanent equity - - - - - - - - ( 5,928 ) ( 5,928 ) Deferred taxes related to redeeemable non-controlling interest - temporary equity - - - - - - - - - - Other - - - - ( 6 ) - - ( 6 ) - ( 6 ) Net income attributable to non-controlling interest - permanent equity - - - - - - - - 6,122 6,122 Net income attributable to USPH shareholders - - - - 35,194 - - 35,194 - 35,194 Balance December 31, 2020 15,066 $ 151 $ 95,622 $ - $ 212,015 ( 2,215 ) $ ( 31,628 ) $ 276,160 $ 1,470 $ 277,630 U.S. Physical Therapy, Inc. Common Stock Additional Accumulated Other Retained Treasury Stock Total Shareholders’ Non-Controlling Shares Amount Paid-In Capital Comprehensive Gain Earnings Shares Amount Equity Interests Total Balance Jan 1, 2021 15,066 $ 151 $ 95,622 $ - $ 212,015 ( 2,215 ) $ ( 31,628 ) $ 276,160 $ 1,470 $ 277,630 Issuance of restricted stock, net of cancellations 60 - - - - - - - - - Revaluation of redeemable non-controlling interest, net of tax - - - - ( 9,686 ) - - ( 9,686 ) - ( 9,686 ) Compensation expense - equity-based awards - - 7,867 - - - - 7,867 - 7,867 Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans - - - - - - - - - - Purchase of partnership interests - non-controlling interest - - ( 918 ) - - - - ( 918 ) ( 60 ) ( 978 ) Sale of non-controlling interest, net of purchases and tax - - 96 - - - - 96 2 98 Dividends paid to USPH shareholders - - - - ( 18,765 ) - - ( 18,765 ) - ( 18,765 ) Distributions to non-controlling interest partners - permanent equity - - - - - - - - ( 5,572 ) ( 5,572 ) Short swing profit settlement - - 20 - - - - 20 - 20 Other - - 1 - - - - 1 - 1 Net income attributable to non-controlling interest - permanent equity - - - - - - - - 5,735 5,735 Net income attributable to USPH shareholders - - - - 40,831 - - 40,831 - 40,831 Balance December 31, 2021 15,126 $ 151 $ 102,688 $ - $ 224,395 ( 2,215 ) $ ( 31,628 ) $ 295,606 $ 1,575 $ 297,181 U.S. Physical Therapy, Inc. Common Stock Additional Accumulated Other Retained Treasury Stock Total Shareholders’ Non-Controlling Shares Amount Paid-In Capital Comprehensive Gain Earnings Shares Amount Equity Interests Total Balance Jan 1, 2022 15,126 $ 151 $ 102,688 $ - $ 224,395 ( 2,215 ) $ ( 31,628 ) $ 295,606 $ 1,575 $ 297,181 Issuance of restricted stock, net of cancellations 90 1 - - - - - 1 - 1 Revaluation of redeemable non-controlling interest, net of tax - - - - ( 2,896 ) - - ( 2,896 ) - ( 2,896 ) Compensation expense - equity-based awards - - 7,264 - - - - 7,264 - 7,264 Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans - - 707 - - - - 707 - 707 Purchase of partnership interests - non-controlling interest - - ( 353 ) - - - - ( 353 ) ( 101 ) ( 454 ) Sale of non-controlling interest, net of purchases - - - - - - - - - - Dividends paid to USPT shareholders - - - - ( 21,321 ) - - ( 21,321 ) - ( 21,321 ) Distributions to non-controlling interest partners - permanent equity - - - - - - - - ( 5,246 ) ( 5,246 ) Deferred taxes related to redeeemable non-controlling interest - temporary equity - - - - 613 - - 613 - 613 Other - - 11 - ( 1 ) - - 10 685 695 Net income attributable to non-controlling interest - permanent equity - - - - - - - - 4,347 4,347 Net income attributable to USPH shareholders - - - - 32,158 - - 32,158 - 32,158 Other comprehensive gain - - - 4,004 - - - 4,004 - 4,004 Balance December 31, 2022 15,216 $ 152 $ 110,317 $ 4,004 $ 232,948 ( 2,215 ) $ ( 31,628 ) $ 315,793 $ 1,260 $ 317,053 See notes to consolidated financial statements. 44 Table of Contents U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 December 31, 2021 December 31, 2020 OPERATING ACTIVITIES Net income including non-controlling interest and earnings from unconsolidated affiliates, net $ 43,407 $ 57,924 $ 52,491 Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities: Depreciation and amortization 14,743 11,591 10,533 Provision for credit losses 5,548 5,305 4,623 Equity-based awards compensation expense 7,264 7,867 7,917 Deferred income taxes 4,309 5,688 ( 258 ) Gain on sale of partnership interest - - ( 1,091 ) Derecognition (write-off) of goodwill - closed clinics - - 1,859 Change in revaluation of put-right liability 5 - - Change in fair value of contingent earn-out consideration ( 2,520 ) - - (Gain) loss on sale of clinics and fixed assets ( 643 ) - - Impairment of Goodwill 9,112 - - Earnings in unconsolidated affiliate ( 1,175 ) ( 112 ) - Other ( 83 ) ( 134 ) 281 Changes in operating assets and liabilities: Increase in patient accounts receivable ( 10,279 ) ( 9,417 ) 899 (Increase) decrease in accounts receivable - other ( 307 ) ( 1,538 ) 1,661 (Decrease) increase in other assets ( 5,940 ) ( 633 ) 4,161 (Decrease) Increase in accounts payable and accrued expenses ( 7,755 ) 4,657 12,427 (Decrease) increase in other long-term liabilities 2,851 ( 4,792 ) 4,492 Net cash provided by operating activities 58,537 76,406 99,995 INVESTING ACTIVITIES Purchase of fixed assets ( 8,248 ) ( 8,201 ) ( 7,639 ) Purchase of majority interest in businesses, net of cash acquired ( 59,788 ) ( 86,823 ) ( 23,907 ) Purchase of redeemable non-controlling interest, temporary equity ( 14,987 ) ( 28,465 ) ( 20,385 ) Purchase of non-controlling interest, permanent equity ( 280 ) ( 1,274 ) ( 238 ) Proceeds on sale of partnership interest - redeemable non-controlling interest 402 69 127 Sales of partnership interest, clinics and fixed assets 373 275 839 Distributions from unconsolidated affiliate 1,259 152 - Sale of non-controlling interest - permanent - 131 - Net cash used in investing activities ( 81,269 ) ( 124,136 ) ( 51,203 ) FINANCING ACTIVITIES Distributions to non-controlling interest, permanent and temporary equity ( 15,348 ) ( 16,931 ) ( 18,331 ) Cash dividends paid to shareholders ( 21,321 ) ( 18,765 ) ( 4,110 ) Proceeds from revolving line of credit 101,000 316,000 214,000 Proceeds from term loan 150,000 - - Payments on revolving line of credit ( 184,000 ) ( 218,000 ) ( 244,000 ) Payments on term loan ( 1,875 ) - - Principal payments on notes payable ( 930 ) ( 4,899 ) ( 1,037 ) (Payment) receipt of Medicare Accelerated and Advance Funds - ( 14,054 ) 14,054 Payment of deferred financing costs ( 1,779 ) - - Other 12 28 2 Net cash provided by (used in) financing activities 25,759 43,379 ( 39,422 ) Net decrease in cash and cash equivalents 3,027 ( 4,351 ) 9,370 Cash and cash equivalents - beginning of period 28,567 32,918 23,548 Cash and cash equivalents - end of period $ 31,594 $ 28,567 $ 32,918 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 7,615 $ 12,214 $ 7,677 Interest paid $ 5,687 $ 1,352 $ 1,202 Non-cash investing and financing transactions during the period: Purchase of businesses - seller financing portion $ 1,574 $ 3,050 $ 1,121 Notes payable related to purchase of redeemable non-controlling interest, temporary equity $ 1,074 $ 1,759 $ 136 Notes payable related to purchase of non-controlling interest, permanent equity $ 296 $ - $ 699 Notes receivable related to sale of partnership interest - redeemable non-controlling interest $ 1,580 $ 914 $ - Notes receivable related to sale of partnership interest $ - $ - $ 994 See notes to consolidated financial statements. 45 Table of Contents U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2022, 2021 and 2020 1. Organization, Nature of Operations and Basis of Presentation 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 (“IIP”). 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 IIP 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 14 - Segment Information. During the last three years we completed the acquisitions of eleven multi-clinic practices and two industrial injury prevention businesses as detailed below. % Interest Number of Acquisition Date Acquired Clinics November 2022 Acquisition November 30, 2022 80 % 13 October 2022 Acquisition October 31, 2022 60 % 14 September 2022 Acquisition September 30, 2022 80 % 2 August 2022 Acquisition August 31, 2022 70 % 6 March 2022 Acquisition March 31, 2022 70 % 6 December 2021 Acquisition December 31, 2021 75 % 3 November 2021 Acquisition November 30, 2021 70 % * September 2021 Acquisition September 30, 2021 100 % * June 2021 Acquisition June 30, 2021 65 % 8 March 2021 Acquisition March 31, 2021 70 % 6 November 2020 Acquisition November 30, 2020 75 % 3 September 2020 Acquisition September 30, 2020 70 % ** February 2020 Acquisition February 27, 2020 65 % *** 4 * Industrial injury prevention services business ** The business includes six management contracts which have been in place for a number of years. As of the date acquired, the contracts had a remaining term of five years . *** The four clinics are in four separate partnerships. The Company’s interest in the four partnerships range from 10.0 % to 83.8 %, with an overall 65.0 % based on the initial purchase transaction. Physical Therapy Operations The physical therapy operations segment primarily operates through subsidiary clinic partnerships, in which the Company generally owns a 1 % general partnership interest in all the Clinic Partnerships. The Company’s limited partnership interests generally range from 65 % to 75 % (the range is 10 % - 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, retain a non-controlling ownership interest in the clinics and receive 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. 46 Table of Contents Besides the multi-clinic acquisitions referenced in the table above, during 2022 and 2021, we purchased the assets and business of three and seven physical therapy clinics, respectively, in separate transactions. During the year ended December 31, 2022, the Company sold five clinics. The aggregate sales price was $ 0.3 million. During the year ended December 31, 2021, we sold 2 clinics. The aggregate sales price was $ 0.1 million. During the year ended December 31, 2020, we sold 14 previously closed clinics. The aggregate sales price was $ 1.1 million of which $ 0.7 million was paid in cash and $ 0.4 million in a note receivable due in two equal installments of principal and any accrued interest. The first payment was received in June 2021 and the second payment was received in June 2022. 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 and income statements as non-controlling interest—permanent equity . For acquired Clinic Partnerships with redeemable non-controlling interests, the earnings attributable to the redeemable non-controlling interests are recorded within the consolidated balance sheets and income statements as redeemable non-controlling interest — temporary equity . Wholly-Owned Facilities For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due the clinic partners/directors. The amount is expensed as compensation and included in clinic operating costs—salaries and related costs. The respective liability is included in current liabilities— accrued expenses on the consolidated balance sheets. Industrial Injury Prevention Services Services provided in the IIP 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). Impact of COVID-19 Relief Funds 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 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. For the year ended December 31, 2021 and December 31, 2020, the Company recorded income of approximately $ 4.6 million and $ 13.5 million of payments respectively, under the CARES Act (“Relief Funds”). Under the Company’s accounting policy, 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 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. Medicare Accelerated and Advance Payment Program (“MAAPP Funds”) The CARES Act allowed for qualified healthcare providers to receive advanced payments under the existing MAAPP funds during the COVID-19 pandemic. Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided. The Company applied for and received approval to receive MAAPP Funds from Centers for Medicare & Medicaid Services in April 2020. The Company recorded the $ 14.1 million in advance payments received as a liability. During the quarter ended March 31, 2021, the Company repaid the MAAPP funds of $ 14.1 million rather than applying them to future services performed. 47 Table of Contents 2. 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 to amounts on deposit in excess of FDIC insurance coverage. Management believes that this risk is not significant. Long-Lived Assets Fixed assets are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. Estimated useful lives for furniture and equipment range from three to eight years and for software purchased from three to seven years . Leasehold improvements are amortized over the shorter of the related lease term or estimated useful lives of the assets, which is generally three to five years . Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company reviews property and equipment and intangible assets with finite lives for impairment upon the occurrence of certain events or circumstances that indicate the related 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. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill represents the excess of the amount paid and fair value of the non-controlling interests over the fair value of the acquired business assets, which include certain identifiable intangible assets. Historically, goodwill has been derived from acquisitions and, prior to 2009 , from the purchase of some or all of a particular local management’s equity interest in an existing clinic. Effective January 1, 2009 , if the purchase price of a non-controlling interest by the Company exceeds or is less than the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital. Goodwill and other indefinite-lived intangible assets are not amortized but are instead subject to periodic impairment evaluations. The fair value of goodwill and other identifiable intangible assets with indefinite lives are evaluated for impairment at least annually and upon the occurrence of certain events 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 in conjunction with our annual goodwill impairment test. The Company operates its business through two segments consisting of physical therapy clinics and industrial injury prevention services business. For purposes of goodwill impairment analysis, the segments are further broken down into reporting units. Reporting units within our physical therapy business are comprised of six regions primarily based on each clinic’s location. In addition to the six regions, in 2022 and 2021, the industrial injury prevention services businesses consisted of two reporting units. 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, it 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 2021 and 2020 did not result in any goodwill amounts that were deemed impaired. In 2022, the Company recorded a charge for goodwill impairment of $ 9.1 million related to one reporting unit in the industrial injury prevention services business. The impairment is related to a change in the reporting unit’s current and projected operating income as well as various market inputs based on current market conditions, including the higher interest rate environment. No impairment was recognized as a result of our annual assessment of goodwill and tradenames for the other seven reporting units. The Company also noted no impairment to long-lived assets for all reporting units. The Company will continue to monitor for any triggering events or other indicators of impairment. 48 Table of Contents Investment in unconsolidated affiliates Investments in unconsolidated affiliates in which the Company has less than a controlling interest, are accounted for under the equity method of accounting and, accordingly, are adjusted for capital contributions, distributions and the Company’s equity in net earnings or loss of the respective joint venture. Redeemable Non-Controlling Interest The non-controlling interest that is reflected as redeemable non-controlling interest in the consolidated financial statements consists of those in which the owners and the Company have certain redemption rights, whether currently exercisable or not, and which currently, or in the future, require that the Company purchase or the owner sell the non-controlling interest held by the owner, if certain conditions are met. The purchase price is derived at a predetermined formula based on a multiple of trailing twelve months earnings performance as defined in the respective limited partnership agreements. The redemption rights can be triggered by the owner or the Company at such time as both of the following events have occurred: 1) termination of the owner’s employment, regardless of the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction, typically three to five years , as defined in the limited partnership agreement. The redemption rights are not automatic or mandatory (even upon death) and require either the owner or the Company to exercise its rights when the conditions triggering the redemption rights have been satisfied. On the date the Company acquires a controlling interest in a partnership, and the limited partnership agreement for such partnership contains redemption rights not under the control of the Company, the fair value of the non-controlling interest is recorded in the consolidated balance sheet under the ca ption—Redeemab le non-controlling interests. 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 adjustment in the redemption value, net of tax, directly to retained earnings and 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 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 interest, in which the Company has no obligation but the right to purchase the non-controlling interest, as permanent equity in the consolidated financial statements separate from the parent entity’s equity. The amount of net income attributable to non-controlling interests is included in consolidated net income on the face of the statements of 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 In May 2014, March 2016, April 2016, and December 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively the “standards”), respectively, which supersede most of the current revenue recognition requirements (“ASC 606”). The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 49 Table of Contents The Company implemented the new standards beginning January 1, 2018, using a modified retrospective transition method. The principal change relates to how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common forms of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. There were no changes to revenues or other revenues upon implementation. Under the new standards, the Company’s estimate for unrealizable amounts will continue to be recognized as a reduction to revenue. The bad debt expense historically reported will not materially change. For ASC 606, there is an implied contract between us and the patient upon each patient visit. Separate contractual arrangements exist between us and third-party payors (e.g. insurers, managed care programs, government programs, workers’ compensation) which establish the amounts the third parties pay on behalf of the patients for covered services rendered. While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the patients covered by the third-party payors. The payor contracts do not indicate performance obligations for us, but indicate reimbursement rates for patients who are covered by those payors when the services are provided. At that time, the Company is obligated to provide services for the reimbursement rates stipulated in the payor contracts. The execution of the contract alone does not indicate a performance obligation. For self-paying customers, the performance obligation exists when we provide the services at established rates. The difference between the Company’s established rate and the anticipated reimbursement rate is accounted for as an offset to revenue — contractual allowance. Payments for services rendered are typically due 30 to 120 days after receipt of the invoice. The following table details the revenue related to the various categories (in thousands). Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Net patient revenue $ 464,590 $ 438,330 $ 373,340 Other revenue 3,407 2,939 2,020 Net patient revenue from physical therapy operations 467,997 441,269 375,360 Revenue from management contracts 8,095 9,853 8,410 Revenue from industrial injury prevention services 77,052 43,900 39,199 Total revenue $ 553,144 $ 495,022 $ 422,969 Patient revenue Net patient revenue consists of revenues for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Net patient revenues (patient revenues less estimated contractual adjustme nts, see – Contractual Adjustments , f or additional information) ar e 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. 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, the Centers for Medicare and Medicaid Services (“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 made 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 reimbursement 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, there was to be an approximately 3.75 % reduction to Medicare payments for physical/occupational therapy services. This was due to the expiration of the additional funding to the conversion factor provided by Congress in 2021 under the Consolidated Appropriations Act, 2021. However, this reduction was addressed in the Protecting Medicare and American Farmers from Sequester Cuts Act (“2021 Act”) signed into law on December 10, 2021. Based on various provisions in the 2021 Act, the Medicare rate reduction for 2022 was approximately 0.75 %. The 2021 Act did not address the 15 % reduction in Medicare payments for services performed by a physical or occupational therapist assistant, which began on January 1, 2022. 50 Table of Contents In the 2023 MPFS Proposed Rule published on July 7, 2022, CMS proposed a 4.5 % reduction in the Physician Fee Schedule conversion factor. However, this reduction was addressed in the Consolidated Appropriations Act, 2023 (“2023 Act”) signed into law on December 29, 2022. The provisions of the 2023 Act increase the conversion factor by 2.5 % for 2023 and by 1.25 % for 2024. This results in an overall reduction of approximately 2 % in the 2023 Physician Fee Schedule conversion factor for 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. In 2013, a 2 % reduction to Medicare payments was implemented. The Bipartisan Budget Act of 2015 extended the 2 % reductions to Medicare payments through fiscal year 2025. The Bipartisan Budget Act of 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, and the Consolidated Appropriations Act, 2021 further suspended the 2 % payment reduction through March 2021. In April 2021, additional legislation was enacted that waived the 2 % payment reduction for the remainder of calendar 2021. The 2021 Act included a three-month extension of the 2 % sequester relief applied to all Medicare payments through March 2022, followed by three months of 1 % sequester relief through June 30, 2022. Sequester relief ended on June 30, 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 determined the payment adjustment in 2021. For those therapist providers who actually participated in MIPS during 2019 and 2020, the resulting average payment adjustment in 2021 and 2022 was an increase of 1 %. The 2023 adjustment for those therapist providers who participated in MIPS during 2021 is expected to remain at an average 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. 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 are paid at an amount equal to 85 % of the payment amount otherwise applicable for the service. 51 Table of Contents Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that it is 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 the Company’s financial statements as of December 31, 2022. 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 years ended December 31, 2022 and 2021, respectively, net patient revenue from Medicare were approximately $ 154.9 million and $ 134.4 million, respectively. Other Revenue Management contract revenue, which is included in other revenue, is derived from contractual arrangements whereby the Company manages a clinic for third party owners. 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 a point in time when services are performed. Costs, typically salaries for the Company’s employees, are recorded when incurred. Revenue from the IIP business, 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 , post-offer employment testing and performance optimization. Revenue from the Company’s industrial injury prevention services business is recognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to the consideration the company expects to receive in exchange for providing injury prevention services to its clients. The revenue is determined and recognized based on the number of hours and respective rate for services provided in a given period. Additionally, other revenue from physical therapy operations includes services the Company provides on-site at locations such as schools and industrial worksites for physical or occupational therapy services, athletic trainers and gym membership fees. 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 contract liability over the period of the agreement and recognized at the point in time, when the services are performed. Contractual Allowances The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience. 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 for any fiscal year has generally reflected a difference within approximately 1 % to 1.5 % of net revenues. 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 % of gross billings included in accounts receivable each at December 31, 2022 and December 31, 2021. Allowance for Credit Losses The Company determines allowances for credit losses based on the specific agings and payor classifications at each clinic. The provision for credit losses is included in operating costs in the consolidated statements of income. Patient accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for credit losses, includes only those amounts the Company estimates to be collectible. 52 Table of Contents Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. 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 year ended December 31, 2022. The Company records interest or penalties in interest and other expense, in the consolidated statements of income. The Company did no t have any interest or penalties in each of the years ended December 31, 2022, 2021 and 2020. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation at the measurement date. • Level 1 - Quoted prices in active markets for identical assets or liabilities. • Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. • Level 3 - Unobservable inputs based on the Company’s own assumptions. 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 Credit Agreement approximates the fair value due to the proximity of the debt issue date and the balance sheet date and the variable component of interest on debt. The interest rate on the Credit Agreement is tied to the Secured Overnight Financing Rate (“SOFR”). The redeemable non-controlling interest included on the consolidated balance sheets and the put right associated with the potential future purchase of the separate company in the November 2021 acquisition are both marked to fair value on a recurring basis using Level 3 inputs. The redemption value of redeemable non-controlling interests approximates the fair value. The put right associated with the potential future purchase of the separate company in the November 2021 acquisition is determined using a Monte Carlo simulation model utilizing unobservable inputs such as asset volatility and discount rates. The unobservable inputs in the valuation include asset volatility of 25 % and a discount rate of 11.32 %. See Note 6 for the changes in the fair value of Redeemable non-controlling interest. There were no changes in the fair value of the put right associated with the potential future purchase of the separate company in the November 2021 acquisition for the year ended December 31, 2022. The valuations of the Company’s interest rate derivative is measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement. The fair value of the interest rate swap on December 31, 2022, was $ 5.4 million, of which $ 2.9 million has been included within Other current assets and $ 2.5 million has been included in Other assets in the accompanying Consolidated Balance Sheet. The impact of the interest rate swap on the accompanying Consolidated Statements of Comprehensive Income was an unrealized gain of $ 4.0 million, net of tax, for the year ended December 31, 2022. The consideration for some of the Company’s acquisitions include future payments that are contingent upon the occurrence of future operational objectives being met. The Company estimates the fair value of contingent consideration obligations through valuation models designed to estimate the probability of such contingent payments based on various assumptions and incorporating estimated success rates. These fair value measurements are based on significant inputs not observable in the market. Substantial judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period. The Company determined the fair value of its contingent consideration obligations to be $ 8.3 million and $ 3.5 million on December 31, 2022, and 2021. 53 Table of Contents 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 In preparing the Company’s consolidated financial statements, management makes certain estimates and assumptions, especially in relation to, but not limited to, goodwill impairment, tradenames, allocations of purchase price, allowance for receivables, tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and related disclosures. Actual results may differ from these estimates. Self-Insurance Program The Company utilizes a self-insurance plan for its employee group health and dental insurance coverage administered by a third party. Predetermined loss limits have been arranged with the 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 December 31, 2022. 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 restriction will lapse in equal quarterly installments during the four years following the date of grant. Compensation expense for grants of restricted stock is recognized based on the fair value per share on the date of grant amortized over the vesting period. The Company recognizes any forfeitures as they occur. The restricted stock issued is included in basic and diluted shares for the earnings per share computation. Recently Adopted Accounting Pronouncements 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. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)–Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The objective of ASU 2019-12 is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. The amendments in thi s ASU are effective for fiscal years beginning after December 15, 2020, and early adoption was permitted. The Company completed the adoption of ASU 2020-06 effective January 1, 2021 and there was no material impact on the Company’s financial statements. 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. 54 Table of Contents This pronouncement was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021.The Board specified that an entity should adopt the guidance at the beginning of its annual fiscal year. The Company adopted this pronouncement as of January 1, 2022. The use of either the modified retrospective or fully retrospective method of transition is permitted. The adoption of ASU 2020-06 did not have a material impact on the Company’s financial statements. 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 (as defined in Note 9) bear interest based on SOFR, an alternate base rate. 3. Earnings Per Share The computations of basic and diluted earnings per share for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands, except per share data): Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Computation of earnings per share - USPH shareholders: Net income attributable to USPH shareholders $ 32,158 $ 40,831 $ 35,194 Charges to retained earnings: Revaluation of redeemable non-controlling interest ( 3,890 ) ( 13,011 ) ( 4,632 ) Tax effect at statutory rate (federal and state) of 25.55 % 994 3,324 1,216 $ 29,262 $ 31,144 $ 31,778 Earnings per share (basic and diluted) $ 2.25 $ 2.41 $ 2.48 Shares used in computation: Basic and diluted earnings per share - weighted-average shares 12,985 12,898 12,835 55 Table of Contents 4. Acquisitions of Businesses During 2022, 2021 and 2020, the Company acquired a majority interest in the following businesses: % Interest Number of Acquisition Date Acquired Clinics November 2022 Acquisition November 30, 2022 80 % 13 October 2022 Acquisition October 31, 2022 60 % 14 September 2022 Acquisition September 30, 2022 80 % 2 August 2022 Acquisition August 31, 2022 70 % 6 March 2022 Acquisition March 31, 2022 70 % 6 December 2021 Acquisition December 31, 2021 75 % 3 November 2021 Acquisition November 30, 2021 70 % * September 2021 Acquisition September 30, 2021 100 % * June 2021 Acquisition June 30, 2021 65 % 8 March 2021 Acquisition March 31, 2021 70 % 6 November 2020 Acquisition November 30, 2020 75 % 3 September 2020 Acquisition September 30, 2020 70 % ** February 2020 Acquisition February 27, 2020 65 %*** 4 * Industrial injury prevention services business ** The business includes six management contracts which have been in place for a number of years. As of the date acquired, the contracts had a remaining term of five years . *** The four clinics are in four separate partnerships. The Company’s interest in the four partnerships range from 10.0 % to 83.8 %, with an overall 65.0 % based on the initial purchase transaction. On November 30, 2022, the Company acquired an 80 % interest in a thirteen -clinic physical therapy practice. The practice’s owners retained 20 % of the equity interests. The purchase price for the 80 % equity interest was approximately $ 25.0 million, of which $ 24.2 million was paid in cash and $ 0.8 million in the form of a note payable. As part of the acquisition, the Company agreed to additional contingent consideration up to $ 1.3 million if future operational objectives are met. The Company is currently evaluating the fair market value of this contingency. The note accrues interest at 7.0 % per annum and the principal and interest are payable on November 30, 2024. On October 31, 2022, the Company acquired an 60 % interest in a fourteen -clinic physical therapy practice. The practice’s owners retained 40 % of the equity interests. The purchase price for the 60 % equity interest was approximately $ 19.5 million, with additional contingent consideration valued at $ 8.3 million on December 31, 2022, to be paid at a later date based on the performance of the business. There is no maximum payout. The estimate of this contingent consideration will continue to be marked at fair value based on the practice’s operational results and updated market inputs. On September 30, 2022, the Company acquired an 80 % interest in a two -clinic physical therapy practice. The practice’s owners retained 20 % of the equity interests. The purchase price for the 80 % equity interest was approximately $ 4.2 million, of which $ 3.9 million was paid in cash and $ 0.3 million in the form of a note payable. The note accrues interest at 5.5 % per annum and the principal and interest are payable on September 30, 2024. On August 31, 2022, the Company acquired a 70 % interest in a six -clinic physical therapy practice. The practice’s owners retained 30 % of the equity interests. The purchase price for the 70 % equity interest was approximately $ 3.5 million, of which $ 3.3 million was paid in cash and $ 0.2 million in the form of a note payable. The note accrues interest at 5.5 % per annum and the principal and interest are payable on August 31, 2024. On March 31, 2022, the Company acquired a 70 % interest in a six -clinic physical therapy practice. The practice’s owners retained 30 % of the equity interests. The purchase price for the 70 % equity interest was approximately $ 11.5 million, of which $ 11.2 million was paid in cash and $ 0.3 million is in the form of a note payable. The note accrues interest at 3.5 % per annum and the principal and interest are payable on March 31, 2024. 56 Table of Contents The purchase price for the 2022 acquisitions has been preliminarily allocated as follows (in thousands): Physical Therapy Operations Cash paid, net of cash acquired $ 59,788 Seller notes 1,574 Contingent payments 8,400 Total consideration $ 69,762 Estimated fair value of net tangible assets acquired: Total current assets $ 1,500 Total non-current assets 7,985 Total liabilities ( 9,951 ) Net tangible assets acquired ( 466 ) Customer and referral relationships 18,955 Non-compete agreements 983 Tradenames 4,417 Goodwill 72,674 Fair value of non-controlling interest (classified as redeemable non-controlling interest) ( 26,801 ) $ 69,762 On December 31, 2021, the Company acquired a 75 % interest in three -clinic physical therapy practice with the practice founder retaining 25 %. The purchase price for the 75 % interest was approximately $ 3.7 million, of which $ 3.5 million was paid in cash and $ 0.2 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 December 31, 2023. On November 30, 2021, the Company acquired an approximate 70 % interest in a leading provider of industrial injury prevention services (“IIP Acquisition”). In each case, the previous owners retained the remaining interest. The purchase price for the approximate 70 % equity interest, not inclusive of a contingent payment up to $ 2.0 million , was approximately $ 63.2 million of which $ 60.7 million was paid in cash and $ 1.0 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 November 30, 2023. As part of the transaction, the Company also agreed to the potential future purchase of a separate company under the same ownership that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. The current owners have the right to put this transaction to the Company in approximately five years , with such right having a $ 3.5 million value on December 31, 2021, as reflected on the Company’s consolidated balance sheet in Other long-term liabilities. The value of this right will be adjusted in future periods, as appropriate, with any change in value reflected in the Company’s consolidated statement of income. The Company does not currently possess more than 50% of the controlling interests in this separate company, does not control this company through contract or governance rights and currently does not exercise significant influence over this separate company. Due to the aforementioned reasons, and based on current accounting guidance, the Company did not consolidate the separate company through the variable interest or voting interest model. The Company revalued the contingent earn-out consideration related to the acquisition during the year ended December 31, 2022, resulting in the elimination of the $ 2.0 million liability previously booked. On September 30, 2021, the Company acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The Company 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 Briotix Health. 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. The Company revalued the contingent earn-out consideration related to the acquisition during the year ended December 31, 2022, resulting in the elimination of the $ 0.6 million liability previously booked. On June 30, 2021, the Company acquired a 65 % interest in an eight -clinic physical therapy with the previous owners 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 previous owners 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. 57 Table of Contents The purchase price for the 2021 acquisitions has been allocated as follows (in thousands): Physical Therapy IIP* Operations Total Cash paid, net of cash acquired $ 63,193 $ 23,544 $ 86,737 Seller notes 1,250 800 2,050 Contingent payments 2,520 837 3,357 Other payable - 1,000 1,000 Seller put right 3,522 - 3,522 Total consideration $ 70,485 $ 26,181 $ 96,666 Estimated fair value of net tangible assets acquired: Total current assets $ 5,588 $ 1,885 $ 7,473 Total non-current assets 12,620 7,014 19,634 Total liabilities ( 4,842 ) ( 8,399 ) ( 13,241 ) Net tangible assets acquired $ 13,366 $ 500 $ 13,866 Customer and referral relationships 21,127 7,969 29,096 Non-compete agreements 500 415 915 Tradenames 5,141 2,144 7,285 Goodwill 58,257 27,109 85,366 Fair value of non-controlling interest (classified as redeemable non-controlling interest) ( 27,906 ) ( 11,956 ) ( 39,862 ) $ 70,485 $ 26,181 $ 96,666 *Industrial injury prevention services business On November 30, 2020, the Company acquired a 75 % interest in a three -clinic physical therapy practice with the previous owners retaining 25 %. 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 was paid in November 2021 with the second installment paid in November 2022 totaling $ 162,500 . 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 was paid in February 2022. The purchase price for the 2020 acquisitions has been allocated as follows (in thousands): Physical Therapy Operations Cash paid, net of cash acquired $ 23,912 Seller note 1,121 Total consideration $ 25,033 Estimated fair value of net tangible assets acquired: Total current assets $ 1,049 Total non-current assets 196 Total liabilities ( 562 ) Net tangible assets acquired $ 683 Referral relationships 5,520 Non-compete 500 Tradename 1,890 Goodwill 27,738 Fair value of non-controlling interest (classified as redeemable non-controlling interest) ( 11,298 ) $ 25,033 58 Table of Contents The finalized purchase prices plus the fair value of the non-controlling interests for the acquisitions in 2021 and 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 some of the acquisitions in 2022, the Company is in the process of completing its formal valuation analysis 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 December 31, 2022 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 2022, the values assigned to the customer and referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period is 12.0 years. For non-compete agreements, the weighted-average amortization period is 5.0 years. The values assigned to tradenames are tested annually for impairment. For the acquisitions in 2021 and 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 was 14.0 and 12.0 years at December 31, 2021 and December 31, 2020, respectively. For non-compete agreements, the weighted average amortization period was 5.6 years and 6.0 years at December 31, 2021 and December 31, 2020, respectively. Generally, the values assigned to tradenames are tested annually for impairment. For the 2022, 2021 and 2020 acquisitions, total current assets primarily represent patient accounts receivable. Total non-current assets are fixed assets, primarily equipment, used in the practices. 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 2022, 2021 and 2020, have not been included as the results are immaterial individually and in the aggregate. 5. Acquisitions and Sale of Non-Controlling Interests During 2022, the Company acquired additional interests in three partnerships which are included in non-controlling interest. The additional interests purchased in each of the partnerships ranged from 10 % to 35 %. The aggregated purchase price for these acquired interests was $ 0.3 million. During 2021, the Company acquired additional interests in five partnerships which are included in non-controlling interest. The additional interests purchased in each of the partnerships ranged from 5 % to 35 %. The aggregated purchase price for these acquired interests was $ 1.3 million. The Company also sold an interest in a partnership for $ 0.1 million. During 2020, the Company acquired additional interests in five partnerships which are included in non-controlling interest. The additional interests purchased in each of the partnerships ranged from 20 % to 35 % . The aggregated purchase price for these acquired interests was $ 0.3 million . The Company also sold an interest in a partnership for $ 0.1 million . During 2020, the Company also sold 14 previously closed clinics. The aggregate sales price was $ 1.1 million, of which $ 0.7 million was paid in cash and $ 0.4 million in a note receivable payable in two equal installments of principal and any accrued interest. The first payment was received in June 2021 and the next payment was received in June 2022. 6. Redeemable Non-Controlling Interest Therapy Practice Acquisitions Since October 2017, when the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic (referred to as “Therapy Practice”), these Therapy Practice transactions 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 Acquired Therapy Practice and provide physical therapy services to patients. 2. In conjunction with the Acquisition, the Seller Entity contributes the acquired 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 two-year note in lieu of an escrow (the “Purchase Price”). The Purchase Agreement usually does not contain any future earn-out or other contingent consideration that is payable to the Seller Entity or the Selling Shareholders. 59 Table of Contents 4. The Company and the Seller Entity also execute a partnership agreement (the “Partnership Agreement”) for NewCo that sets forth the rights and obligations of the limited and general partners of NewCo. After the Acquisition, the Company is the general partner of NewCo. 5. As noted above, the Company does not purchase 100% of the limited partnership interests in NewCo and the Seller Entity retains a portion of the limited partnership interest in NewCo (“Seller Entity Interest”). 6. In most cases, some or all of the Selling Shareholders enter into an employment agreement (the “Employment Agreement”) with NewCo with an initial term that ranges from three to five years (the “Employment Term”), with automatic one-year renewals, unless employment is terminated prior to the end of the Employment Term. As a result, a Selling Shareholder becomes an employee (“Employed Selling Shareholder”) of NewCo. The employment of an Employed Selling Shareholder can be terminated by the Employed Selling Shareholder or NewCo, with or without cause, at any time. In a few situations, a Selling Shareholder does not become employed by NewCo and is not involved with NewCo following the closing; in those situations, such Selling Shareholders sell their entire ownership interest in the Seller Entity as of the closing of the Acquisition. 7. The compensation of each Employed Selling Shareholder is specified in the Employment Agreement and is customary and commensurate with his or her responsibilities based on other employees in similar capacities within NewCo, the Company and the industry. 8. The Company and the Selling Shareholder (including both Employed Selling Shareholders and Selling Shareholders not employed by NewCo) execute a non-compete agreement (the “Non-Compete Agreement”) which restricts the Selling Shareholder from engaging in competing Therapy Practice 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 Therapy Practice 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 mileage radius from the Acquired Therapy Practice. That is, an Employed Selling Shareholder is permitted to engage in competing Therapy Practicees or activities outside the designated geography (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 Therapy Practice or activities outside the designated geography. 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 the fifth anniversary of the Closing 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 fifth anniversary of the Closing 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 has 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 fifth anniversary of the Closing Date, the Seller Entity has 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. 60 Table of Contents 2. Call Right a. If any Selling Shareholder’s employment by NewCo is terminated prior to the fifth anniversary of the Closing Date, the Company thereafter has an irrevocable right to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, in each case at the purchase price described in “3” below. b. In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the fifth anniversary of the Closing Date, the Company has the Call Right, and upon the exercise of the Call Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below. 3. For the Put Right and the Call Right, the purchase price is derived from a formula based on a specified multiple of NewCo’s trailing twelve months of earnings before interest, taxes, depreciation, amortization, and the Company’s internal management fee, plus an Allocable Percentage of any undistributed earnings of NewCo (the “Redemption Amount”). NewCo’s earnings are distributed monthly based on available cash within NewCo; therefore, the undistributed earnings amount is small, if any. 4. The Purchase Price for the initial equity interest purchased by the Company is also based on the same specified multiple of the trailing twelve-month earnings that is used in the Put Right and the Call Right noted above. 5. The Put Right and the Call Right do not have an expiration date. 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. ProgressiveHealth Acquisition On November 30, 2021, the Company acquired a majority interest in ProgressiveHealth Companies, LLC (“Progressive”), which owns a majority interest in certain subsidiaries (“Progressive Subsidiaries”) that operate in the industrial injury prevention and therapy services businesses. The Progressive transaction was completed in a series of steps which are described below. 1. Prior to the acquisition, the Progressive Subsidiaries were owned by a legal entity (“Progressive Parent”) controlled by its individual owners (the “Progressive Selling Shareholders”), who work in and manage the Progressive business. 2. In conjunction with the acquisition, the Progressive Selling Shareholders caused the Progressive Parent to transfer its ownership of the Progressive Subsidiaries into a newly-formed limited liability company (“Progressive NewCo”), in exchange for one hundred percent ( 100 %) of the membership interests in Progressive NewCo. Therefore, in this step, Progressive NewCo became wholly-owned by the Progressive Selling Shareholders. 3. The Company entered into an agreement (the “Progressive Purchase Agreement”) to acquire from the Progressive Selling Shareholders a majority of the membership interest in Progressive NewCo. The consideration for the acquisition is primarily payable in the form of cash at closing, a relatively small portion paid in cash after the closing contingent on certain performance criteria, and a small note in lieu of an escrow (the “Progressive Purchase Price”). 4. The Company and the Progressive Selling Shareholders also executed an operating agreement (the “Progressive Operating Agreement”) for Progressive NewCo that sets forth the rights and obligations of the members of Progressive NewCo. 5. As noted above, the Company did not purchase 100 % of the membership interests in Progressive NewCo and the Progressive Selling Shareholders retained a portion of the membership interest in Progressive NewCo (“Progressive Selling Shareholders’ Interest”). 6. The Company and the Progressive Selling Shareholders executed a non-compete agreement (the “Progressive Non-Compete Agreement”) which restricts the Progressive Selling Shareholders from competing for a specified period of time (the “Progressive Non-Compete Term”). 61 Table of Contents 7. The Progressive Non-Compete Term commences as of the date of the closing of the Progressive acquisition (the “Progressive Closing Date”) and expires on the later of: a. Two years after the date a Progressive Selling Shareholder no longer is involved in the management of Progressive NewCo or b. Seven years from the Progressive Closing Date. 8. The Progressive Non-Compete Agreement applies to the entire United States. The Progressive Operating Agreement contains provisions for the redemption of the Progressive Selling Shareholder’s Interest, either at the option of the Company (the “Progressive Call Right”) or at the option of the Progressive Selling Shareholder (the “Progressive Put Right”) as follows: 1. Progressive Put Right a. Each of the Progressive Selling Shareholders has the right to sell 30 % of their respective residual interests on each of the 4th and 5th anniversaries of the Progressive Closing Date, and then 10 % on each of the 6th and 7th anniversaries b. In the event that any Progressive Selling Shareholder terminates his management relationship with Progressive NewCo for any reason on or after the seventh anniversary of the Progressive Closing Date, the Progressive Selling Shareholder has the Progressive Put Right, and upon the exercise of the Progressive Put Right, the Progressive Selling Shareholder’s Interest shall be redeemed by the Company at the purchase price described in “3” below. 2. Progressive Call Right a. If any Progressive Selling Shareholder’s ceases to perform management services on behalf of Progressive NewCo, the Company thereafter shall have an irrevocable right to purchase from such Progressive Selling Shareholder his Interest, in each case at the purchase price described in “3” below. 3. For the Progressive Put Right and the Progressive Call Right, the purchase price is derived from a formula based on a specified multiple of Progressive 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 Progressive NewCo (the “Progressive Redemption Amount”). Progressive NewCo’s earnings are distributed monthly based on available cash within Progressive NewCo; therefore, the undistributed earnings amount is small, if any. 4. The Progressive Purchase Price for the initial equity interest purchased by the Company is also based on the same specified multiple of the trailing twelve-month earnings that is used in the Progressive Put Right and the Progressive Call Right noted above. 5. The Progressive Put Right and the Progressive Call Right do not have an expiration date. Neither the Progressive Operating Agreement nor the Progressive Non-Compete Agreement contain any provision to escrow or “claw back” the equity interest in Progressive NewCo held by the Progressive Selling Shareholders, in the event of a breach of the operating agreement or non-compete terms, or the management services agreement pursuant to which the Progressive Selling Shareholders perform services on behalf of Progressive NewCo. The Company’s only recourse against the Progressive Selling Shareholder for breach of any of these agreements is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements with a Progressive Selling Shareholder that would result in a forfeiture of the equity interest in Progressive NewCo held by a Progressive Selling Shareholder. An employed Progressive Selling Shareholder’s ownership of his or her equity interest in the Progressive Parent and Progressive NewCo predates the Progressive Acquisition and the Company’s purchase of its partnership interest in Progressive NewCo. The Progressive Employment Agreement and the Progressive Non-Compete Agreement do not contain any provision to escrow or “claw back” the equity interest held by the Progressive Parent in Progressive NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even if the Employed Progressive Selling Shareholder is terminated for “cause” by Progressive NewCo, such Employed Progressive Selling Shareholder does not forfeit his or her right to his or her full equity interest in the Progressive Parent and the Progressive Parent does not forfeit its right to any portion of its equity interest in Progressive NewCo. The Company’s only recourse against the Employed Selling Shareholder for breach of either the Progressive Employment Agreement or the Progressive 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 Progressive Parent or of the equity interest in Progressive NewCo held by the Progressive Parent. 62 Table of Contents For the years ended December 31, 2022, 2021 and 2020, the following table details the changes in the carrying amount (fair value) of the redeemable non-controlling interests (in thousands): Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Beginning balance $ 155,262 $ 132,340 $ 137,750 Operating results allocated to redeemable non-controlling interest partners 6,902 11,358 11,175 Distributions to redeemable non-controlling interest partners ( 10,102 ) ( 11,359 ) ( 12,403 ) Changes in the fair value of redeemable non-controlling interest 3,862 13,011 4,632 Purchases of redeemable non-controlling interest ( 16,061 ) ( 30,204 ) ( 20,521 ) Acquired interest 26,746 39,862 11,297 Contributed Capital 231 - - Sales of redeemable non-controlling interest - temporary equity 1,982 982 1,133 Notes receivable related to sales of redeemable non-controlling interest - temporary equity ( 1,901 ) ( 914 ) ( 1,006 ) Adjustments in notes receivable related to the the sales of redeemable non-controlling interest - temporary equity 594 186 283 Ending balance $ 167,515 $ 155,262 $ 132,340 The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interests (in thousands): December 31, 2022 December 31, 2021 December 31, 2020 Contractual time period has lapsed but holder’s employment has not terminated $ 75,688 $ 80,781 $ 62,390 Contractual time period has not lapsed and holder’s employment has not terminated 91,827 74,481 69,950 Holder’s employment has terminated and contractual time period has expired - - - Holder’s employment has terminated and contractual time period has not expired - - - $ 167,515 $ 155,262 $ 132,340 7. Goodwill The changes in the carrying amount of goodwill as of December 31, 2022 and 2021 consisted of the following (in thousands): Year Ended Year Ended December 31, 2022 December 31, 2021 Beginning balance $ 434,679 $ 345,646 Goodwill acquired 72,674 89,746 Goodwill adjustments for purchase price allocation of businesses acquired in prior year ( 4,140 ) ( 713 ) Goodwill impairment ( 9,112 ) - Ending balance $ 494,101 $ 434,679 During the year ended December 31, 2022, the Company recorded a charge for goodwill impairment of $ 9.1 million related to the IIP Acquisition. The impairment is related to a change in the IIP Acquisition’s current and projected operating income as well as various market inputs based on current market conditions, including the higher interest rate environment. 8. Intangible Assets, net Intangible assets, net as of December 31, 2022, and 2021 consisted of the following (in thousands): December 31, 2022 December 31, 2021 Tradenames $ 43,373 $ 38,790 Customer and referral relationships, net of accumulated amortization of $ 23,736 and $ 17,762 , respectively (weighted average amortization period 12.9 years) 63,238 45,643 Non-compete agreements, net of accumulated amortization of $ 6,999 and $ 6,450 respectively (weighted average amortization period 5.6 years) 2,144 1,949 $ 108,755 $ 86,382 63 Table of Contents Tradenames, customer and 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 customer and referral relationships is being amortized over their respective estimated useful lives which range from 6 to 16 years . Non-compete agreements are amortized over the respective term of the agreements which range from 5 to 6 years . The following table details the amount of amortization expense recorded for intangible assets for the years ended December 31, 2022, 2021 and 2020 (in thousands): December 31, 2022 December 31, 2021 December 31, 2020 Customer and referral relationships $ 5,974 $ 3,240 $ 2,845 Non-compete agreements 549 458 569 $ 6,523 $ 3,698 $ 3,414 The remaining balances of the customer and referral relationships and non-compete agreements are expected to be amortized as follows (in thousands): Customer and Referral Relationships Non-Compete Agreements Years Annual Amount Years Annual Amount Ending December 31, Ending December 31, 2023 $ 6,651 2023 $ 604 2024 $ 6,504 2024 $ 556 2025 $ 6,359 2025 $ 490 2026 $ 5,891 2026 $ 349 2027 $ 5,728 2027 $ 145 Thereafter $ 32,105 Thereafter $ - 9. Accrued Expenses Accrued expenses as of December 31, 2022 and 2021 consisted of the following (in thousands): December 31, 2022 December 31, 2021 Salaries and related costs $ 22,912 $ 23,569 Credit balances due to patients and payors 8,094 6,649 Group health insurance claims 1,666 1,984 Closure costs 243 498 Federal taxes payable - 2,716 Contingent payments related to acquisition - 1,000 Settlement of a legal matter - 2,750 Other 4,498 6,539 Total $ 37,413 $ 45,705 In January 2022, to avoid the legal fees and discovery costs in defending a legal matter and the uncertainty of protracted litigation, the Company entered into a settlement agreement. The Company admitted no liability or wrongdoing. Under the terms of the settlement, the Company agreed to make payments which amounted to $ 2.8 million, of which $ 2.6 million was recorded as an expense in 2021. 10. Borrowings 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”). On June 17, 2022, the Company entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) among Bank of America, N.A., as administrative agent (“Administrative Agent”) and the lenders from time-to-time party thereto. 64 Table of Contents Amounts outstanding under the Amended Credit Agreement and Credit Agreement (as defined above) and notes payable as of December 31, 2022, and December 31, 2021 consisted of the following (in thousands): December 31, 2022 December 31, 2021 Principal Amount Unamortized discount and debt issuance cost Net Debt Principal Amount Unamortized discount and debt issuance cost Net Debt Revolving Facilitiy $ 31,000 $ - $ 31,000 $ 114,000 $ - $ 114,000 Term Facility 148,125 1,861 146,264 - - - Other Debt 6,430 - 6,430 4,417 - 4,417 Total Debt $ 185,555 $ 1,861 $ 183,694 $ 118,417 $ - $ 118,417 Less: Current portion of long-term debt 8,271 408 7,863 830 - 830 Total long-term debt, net of current portion $ 177,284 $ 1,453 $ 175,831 $ 117,587 $ - $ 117,587 The Credit Agreement, which matures on June 17, 2027 , provides for loans in an aggregate principal amount of $ 325 million. Such loans were made available through the following facilities (collectively, the “Senior Credit Facilities”): 1) Revolving Facility: $ 175 million , five-year , revolving credit facility (“Revolving Facility”), which includes a $ 12 million sublimit for the issuance of standby letters of credit and a $ 15 million sublimit for swingline loans (each, a “Swingline Loan”). 2) Term Facility: $ 150 million term loan facility (the “Term Facility”). The Term Facility amortizes in quarterly installments of: (a) 0.625 % in each of the first two years, (b) 1.250 % in the third and fourth year, and (c) 1.875 % in the fifth year of the Credit Agreement. The remaining outstanding principal balance of all term loans is due on the maturity date. The proceeds of the Revolving Facility shall be used by the Company for working capital and other general corporate purposes of the Company and its subsidiaries, including to fund future acquisitions and invest in growth opportunities. The proceeds of the Term Facility were used by the Company to refinance the indebtedness outstanding under the Amended Credit Agreement, to pay fees and expenses incurred in connection with the transactions involving the loan facilities, for working capital and other general corporate purposes of the Company and its subsidiaries. The Company is permitted to increase the Revolving Facility and/or add one or more tranches of term loans in an aggregate amount not to exceed the sum of (i) $ 100 million plus (ii) an unlimited additional amount, provided that (in the case of clause (ii)), after giving effect to such increases, the pro forma Consolidated Leverage Ratio (as defined in the Credit Agreement) would not exceed 2.0 :1.0, and the aggregate amount of all incremental increases under the Revolving Facility does not exceed $ 50,000,000 . The interest rates per annum applicable to the Senior Credit Facilities (other than in respect of Swingline Loans) will be Term SOFR (as defined in the Credit Agreement) plus an applicable margin or, at the option of the Company, an alternate base rate plus an applicable margin. Each Swingline Loan shall bear interest at the base rate plus the applicable margin. The applicable margin for Term SOFR borrowings ranges from 1.50 % to 2.25 %, and the applicable margin for alternate base rate borrowings ranges from 0.50 % to 1.25 %, in each case, based on the Consolidated Leverage Ratio of the Company and its subsidiaries. Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity. The Company is also required to pay to the Administrative Agent, for the account of each lender under the Revolving Facility, a commitment fee equal to the actual daily excess of each lender’s commitment over its outstanding credit exposure under the Revolving Facility (“unused fee”). Such unused fee will range between 0.25 % and 0.35 % per annum and is also based on the Consolidated Leverage Ratio of the Company and its subsidiaries. The Company may prepay and/or repay the revolving loans and the term loans, and/or terminate the revolving loan commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions. The Credit Agreement contains customary covenants limiting, among other things, the incurrence of additional indebtedness, the creation of liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other payments in respect of equity interests, acquisitions, investments, loans and guarantees, subject, in each case, to customary exceptions, thresholds and baskets. The Credit Agreement includes certain financial covenants which include the Consolidated Fixed Charge Coverage Ratio, and the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement also contains customary events of default. The Company’s obligations under the Credit Agreement are guaranteed by its wholly-owned material domestic subsidiaries (each, a “Guarantor”), and the obligations of the Company and any Guarantors are secured by a perfected first priority security interest in substantially all of the existing and future personal property of the Company and each Guarantor, subject to certain exceptions. 65 Table of Contents As of December 31, 2022, $ 179.1 million was outstanding on the Senior Credit Facilities, resulting in $ 145.9 million of availability. As of December 31, 2022, the Company was in compliance with all of the covenants contained in the Credit Agreement. 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 2022 and 2021, the Company entered into notes payable in the aggregate amount of $ 4.6 million of which an aggregate principal payment of $ 0.2 million is due in 2023, and $ 2.0 million is due in 2024. Interest accrues in the range of 3.25 % to 7.0 % per annum and is payable with each principal installment. 11. Derivative Instruments The Company is exposed to certain market risks during the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results from the Company’s variable-rate borrowing. The Company may elect to use derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks. Interest Rate Swap In May 2022, the Company entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A. The swap has a $ 150 million notional value adjusted concurrently with scheduled principal payments made on the term loan. The swap has a maturity date of June 30, 2027 . Beginning in July 2022, the Company receives 1-month SOFR, and pays a fixed rate of interest of 2.815 % on 1-month SOFR on a quarterly basis. The total interest rate in any period will also include an applicable margin based on the Company’s consolidated leverage ratio. In connection with the swap, no cash was exchanged between the Company and the counterparty. The Company designated its interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax. The impacts of the Company’s derivative instruments on the accompanying Consolidated Statements of Comprehensive Income for the year ended December 31, 2022, and 2021 are presented in the table below (in thousands): For the Year Ended December 31, 2022 December 31, 2021 Net income $ 43,407 $ 57,924 Other comprehensive loss Unrealized gain on cash flow hedge 5,378 - Tax effect at statutory rate (federal and state) of 25.55 % ( 1,374 ) - Comprehensive income $ 47,411 $ 57,924 Comprehensive income attributable to non-controlling interest ( 11,249 ) ( 17,093 ) Comprehensive income attributable to USPH shareholders $ 36,162 $ 40,831 The valuations of the Company’s interest rate derivatives are measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement. The carrying and fair value of the Company’s interest rate derivatives (included in Other current assets and Other assets) were as follows: December 31, 2022 December 31, 2021 Interest rate swap: Other current assets $ 2,858 $ - Other assets $ 2,520 $ - 66 Table of Contents 12. 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 term of 12 months or less in the consolidated balance sheet. ASC 842 requires the separation of the fixed lease components from the variable lease components. The Company has elected the practical expedient to account for separate lease components of a contract as a single lease cost thus causing all fixed payments to be capitalized. Non-lease and variable cost components are not included in the measurement of the right-of-use assets or operating lease liabilities. The Company also elected the package of practical expedients permitted within ASC 842, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage are not included in the right-of-use assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense. For the years ended December 31, 2022, 2021 and 2020, the components of lease expense were as follows (in thousands): Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Operating lease cost $ 35,154 $ 32,021 $ 30,710 Short-term lease cost 1,049 1,160 1,454 Variable lease cost 6,287 7,057 5,752 Total lease cost * $ 42,490 $ 40,238 $ 37,916 * Sublease income was immaterial. Lease costs are reflected in the consolidated statements of net income in the line item—rent, supplies, contract labor and other. For the years ended December 31, 2022, 2021 and 2020, supplemental cash flow information related to leases was as follows (in thousands): Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) $ 36,136 $ 33,192 $ 30,307 Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands) $ 40,502 $ 46,088 $ 32,710 The aggregate future lease payments for operating leases as of December 31, 2022 were as follows (in thousands): Fiscal Year Amount 2023 $ 36,409 2024 29,863 2025 22,020 2026 14,810 2027 and thereafter 15,318 Total lease payments $ 118,420 Less: imputed interest 6,777 Total operating lease liabilities $ 111,643 Average lease terms and discount rates were as follows: Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Weighted-average remaining lease term - Operating leases 4.06 Years 4.17 Years 4.05 Years Weighted-average discount rate - Operating leases 2.9 % 2.8 % 3.1 % 67 Table of Contents 13. Income Taxes Significant components of deferred tax assets and liabilities included in the consolidated balance sheets at December 31, 2022 and 2021 were as follows (in thousands): December 31, 2022 December 31, 2021 Deferred tax assets: Compensation $ 1,464 $ 2,817 Allowance for credit losses 605 573 Lease obligations - including closed clinics 28,525 26,856 Deferred tax assets $ 30,594 $ 30,246 Deferred tax liabilities: Depreciation and amortization $ ( 23,836 ) $ ( 19,607 ) Operating lease right-of-use assets ( 26,318 ) ( 24,637 ) Gain on cash flow hedge ( 1,373 ) - Other ( 370 ) ( 387 ) Deferred tax liabilities ( 51,897 ) ( 44,631 ) Net deferred tax liability $ ( 21,303 ) $ ( 14,385 ) The deferred tax assets and liabilities related to purchased interests not yet finalized may result in an immaterial adjustment. During 2022, the Company recorded net deferred tax assets of $ 0.4 million related to the revaluation of redeemable non-controlling interests and acquisitions of non-controlling interests. In addition, during 2022, the Company recorded an adjustment to the deferred tax assets of $ 0.3 million as a result of a detailed reconciliation of its federal and state taxes payable and receivable accounts along with its federal and state deferred tax asset and liability accounts with its federal and state tax returns for 2021. The offset of this adjustment was an increase to the previously reported state income tax receivable and to federal income tax. As of December 31, 2022, the Company has a federal tax receivable of $ 3.9 million and state tax receivables of $ 0.7 million. The federal and state income tax receivable is included in other current assets on the accompanying consolidated balance sheets. The differences between the federal tax rate and the Company’s effective tax rate for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands): December 31, 2022 December 31, 2021 December 31, 2020 U. S. tax at statutory rate $ 9,307 21.0 % $ 11,782 21.0 % $ 10,125 21.0 % State income taxes, net of federal benefit 2,079 4.7 % 2,478 4.4 % 1,956 3.9 % Shortfall (excess) equity compensation deduction 149 0.3 % ( 246 ) - 0.4 % ( 99 ) 0.0 % Non-deductible expenses 629 1.4 % 1,258 2.2 % 1,040 2.1 % $ 12,164 27.4 % $ 15,272 27.2 % $ 13,022 27.0 % Significant components of the provision for income taxes for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands): December 31, 2022 December 31, 2021 December 31, 2020 Current: Federal $ ( 770 ) $ 7,477 $ 10,506 State 518 2,107 2,774 Total current ( 252 ) 9,584 13,280 Deferred: Federal 9,933 4,866 ( 38 ) State 2,483 822 ( 220 ) Total deferred 12,416 5,688 ( 258 ) Total income tax provision $ 12,164 $ 15,272 $ 13,022 For 2022, 2021 and 2020, the Company performed a detailed reconciliation of its federal and state taxes payable and receivable accounts along with its federal and state deferred tax asset and liability accounts. The adjustments were immaterial. The Company considers this reconciliation process to be an annual control. The Company is required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income in the periods which the deferred tax assets are deductible, management believes that a valuation allowance is not required, as it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. 68 Table of Contents The Company’s U.S. federal returns remain open to examination for 2019 through 2021 and U.S. state jurisdictions are open for periods ranging from 2018 through 2021 . The Company does not believe that it has any significant uncertain tax positions at December 31, 2022 and December 31, 2021, nor is this expected to change within the next twelve months due to the settlement and expiration of statutes of limitation. The Company did no t have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interest expense recognized during the years ended December 31, 2022, 2021 and 2020. 14. Segment Information The Company’s reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Also included in the physical therapy operations segment are revenues from management contract services and other services which include services the Company provides on-site, such as schools for athletic trainers . The Company evaluates performance of the segments based on gross profit. The Company has provided additional information regarding its reportable segments which contributes to the understanding of the Company and provides useful information . T he 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 . Segment Financials Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Net operating revenue: Physical therapy operations $ 476,092 $ 451,122 $ 383,770 Industrial injury prevention services 77,052 43,900 39,199 Total Company $ 553,144 $ 495,022 $ 422,969 Gross profit: Physical therapy operations $ 96,057 $ 106,488 $ 84,364 Industrial injury prevention services 15,967 10,694 10,086 Gross profit $ 112,024 $ 117,182 $ 94,450 Total Assets: Physical therapy operations $ 514,229 $ 587,801 $ 499,911 Industrial injury prevention services 343,925 161,625 94,450 Total Company $ 858,154 $ 749,426 $ 594,361 15. Investment in Unconsolidated Affiliate Through one of its subsidiaries, the Company has a 49 % joint venture interest in a company which provides physical therapy services for patients at hospitals. Since the Company is deemed to not have a controlling interest in the company, the Company’s investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of December 31, 2022, is $ 12.1 million and the earnings amounted to $ 1.2 million. 16. Equity Based Plans The Company has the following equity-based plans with outstanding equity grants: The Amended and Restated 1999 Employee Stock Option Plan (the “Amended 1999 Plan”) permits the Company to grant to non-employee directors and employees of the Company up to 600,000 non-qualified options to purchase shares of common stock and restricted stock (subject to proportionate adjustments in the event of stock dividends, splits, and similar corporate transactions). The exercise prices of options granted under the Amended 1999 Plan are determined by the Compensation Committee. The period within which each option will be exercisable is determined by the Compensation Committee. The Amended 1999 Plan was approved by the shareholders of the Company at the 2008 Shareholders Meeting on May 20, 2008. The Amended and Restated 2003 Stock Option Plan (the “Amended 2003 Plan”) permits the Company to grant to key employees and outside directors of the Company incentive and non-qualified options and shares of restricted stock covering up to 2,600,000 shares of common stock (subject to proportionate adjustments in the event of stock dividends, splits, and similar corporate transactions). The material terms of the Amended 2003 Plan was reapproved by the shareholders of the Company at the 2015 Shareholders Meeting on May 19, 2015 and an increase in the number of shares authorized for issuance from 2,100,000 to 2,600,000 was approved at the 2022 Shareholders Meeting on March 17, 2022. 69 Table of Contents A cumulative summary of equity plans as of December 31, 2022 follows: Restricted Outstanding Stock Options Stock Options Shares Available Authorized Stock Issued Stock Options Exercised Exercisable for Grant Equity Plans Amended 1999 Plan 600,000 416,402 - 139,791 - 7,775 Amended 2003 Plan 2,600,000 1,258,021 - 778,300 - 574,716 3,200,000 1,674,423 - 918,091 - 582,491 During 2022, 2021 and 2020, the Company granted the following shares of restricted stock to directors, officers and employees pursuant to its equity plans as follows: Weighted Average Fair Year Granted Number of Shares Value Per Share 2022 95,316 $ 100.08 2021 60,317 $ 131.29 2020 86,982 $ 104.69 During 2022, 2021 and 2020, the following shares were cancelled due to employee terminations prior to restrictions lapsing: Weighted Average Fair Year Cancelled Number of Shares Value Per Share 2022 5,180 $ 109.42 2021 439 $ 113.80 2020 10,037 $ 102.52 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 restriction will lapse in equal quarterly installments during the four years following the date of grant. There were 124,939 and 102,682 shares outstanding as of December 31, 2022, and December 31, 2021, respectively, for which restrictions had not lapsed. The restrictions will lapse in 2023 through 2026 . Compensation expense for grants of restricted stock is recognized based on the fair value on the date of grant. Compensation expense for restricted stock grants was $ 7.3 million, $ 7.8 million, and $ 7.9 million, respectively, for 2022, 2021 and 2020. As of December 31, 2022, the remaining $ 9.8 million of compensation expense will be recognized from 2023 through 2026. 17. Preferred Stock The Board is empowered, without approval of the shareholders, to cause shares of preferred stock to be issued in one or more series and to establish the number of shares to be included in each such series and the rights, powers, preferences and limitations of each series. There are no provisions in the Company’s Articles of Incorporation specifying the vote required by the holders of preferred stock to take action. All such provisions would be set out in the designation of any series of preferred stock established by the Board. The bylaws of the Company specify that, when a quorum is present at any meeting, the vote of the holders of at least a majority of the outstanding shares entitled to vote who are present, in person or by proxy, shall decide any question brought before the meeting, unless a different vote is required by law or the Company’s Articles of Incorporation. Because the Board has the power to establish the preferences and rights of each series, it may afford the holders of any series of preferred stock, preferences, powers, and rights, voting or otherwise, senior to the right of holders of common stock. The issuance of the preferred stock could have the effect of delaying or preventing a change in control of the Company. 70 Table of Contents 18. 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 185,117 shares (based on the closing price of $ 81.03 on December 30, 2022, the last business day in 2022) 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 2022, 2021 or 2020. 19. Defined Contribution Plan The Company has several 401(k) profit sharing plans covering all employees with three months of service. For certain plans, the Company makes matching contributions. The Company may also make discretionary contributions of up to 50 % of employee contributions. The Company did no t make any discretionary contributions for the years ended December 31, 2022, 2021 and 2020. The Company matching contributions totaled $ 2.0 million, $ 1.9 million and $ 1.9 million, respectively, for the years ended December 31, 2022, 2021 and 2020. 20. Commitments and Contingencies Employment Agreements On December 31, 2022, the Company had outstanding employment agreements with five of its executive officers. Each of the agreements have a two-year term, however, each of these agreements provide for an automatic two-year renewal at the conclusion of the expiring term or renewal term. In addition, the Company has outstanding employment agreements with most of the managing physical therapist partners of the Company’s physical therapy clinics and with certain other clinic employees which obligate subsidiaries of the Company to pay compensation of $ 58.6 million in 2023 and $ 5.7 million in 2024. In addition, many of the employment agreements with the managing physical therapists provide for monthly bonus payments calculated as a percentage of each clinic’s net revenues (not in excess of operating profits) or operating profits. 21. Related Party Transactions Settlement of Short Swing Profit Claim For the year ended December 31, 2021, the Company recorded approximately $ 20,000 related to the short swing profit settlement remitted by a shareholder of the 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 December 31, 2021, and consolidated statements of stockholder’s equity, as well as in cash provided by financing activities included in Other, in the consolidated statements of cash flows, for the year ended December 31, 2021. 22. 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. 23. Subsequent Event On February 28, 2023, the Company acquired an 80 % interest in a physical therapy clinic with the previous owner retaining 20 %. The purchase price was approximately $ 6.2 million, of which $ 5.8 million was paid in cash, and $ 0.4 million is in the form of a note payable. The note accrues interest at 4.5 % per annum and the principal and interest is payable on February 28, 2025. 71 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable.