UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SeptemberJune 30, 20222023
OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO _____
COMMISSION FILE NUMBER 1-11151

U.S. PHYSICAL THERAPY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA 76-0364866
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

1300 WEST SAM HOUSTON PARKWAY SOUTH, SUITE 300, HOUSTON, TEXAS
 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par valueUSPHNew York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes     ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files).   ☒  Yes     ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☑Accelerated filer☐
Non-accelerated filer
☐
Smaller reporting company☐
  Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

As of November 8, 2022,August 9, 2023 the number of shares outstanding (issued less treasury stock) of the registrant’s common stock, par value $.01 per share, was: 13,001,589.14,987,316.

PART I—FINANCIAL INFORMATION - UNAUDITED

Item 1.
Financial Statements.
3
   
 
Consolidated Balance Sheets as of SeptemberJune 30, 20222023 and December 31, 20212022
3
   
 
Unaudited Consolidated Statements of Net Income for the threeThree and nine months ended SeptemberSix Months Ended June 30, 20222023 and 20212022
4
   
 
Unaudited Consolidated Statements of Comprehensive Income for the threeThree and nine months ended SeptemberSix Months Ended June 30, 20222023 and 20212022
5
   
 
Unaudited Consolidated Statements of Cash Flows for the nine months ended SeptemberSix Months Ended June 30, 20222023 and 20212022
6
   
 
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the threeThree and nine months ended SeptemberSix Months Ended June 30, 20222023 and 20212022
7
   
 
Notes to Consolidated Financial Statements
8
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3129
   
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
46
45
   
Item 4.
Controls and Procedures
47
45
Item 5.
Other Information
45
  
PART II—OTHER INFORMATION 
  
Item 1.
Legal Proceedings
47
46
  
Item 1A.
Risk Factors
47
46
  
Item 6.
Exhibits
49
46
   
 
Signatures
49
Certifications47

2
ITEM 1.FINANCIAL STATEMENTS.

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)AND PER SHARE AMOUNTS)

 September 30, 2022  December 31, 2021  June 30, 2023  December 31, 2022 
ASSETS (unaudited)     (unaudited)    
Current assets:            
Cash and cash equivalents $37,914  $28,567  $160,738  $31,594 
Patient accounts receivable, less allowance for credit losses of $2,964 and $2,768, respectively
  49,747   46,272 
Patient accounts receivable, less allowance for credit losses of $2,800 and $2,829, respectively
  54,285   51,934 
Accounts receivable - other  19,146   16,144   16,852   16,671 
Other current assets  6,085   4,183   9,924   11,067 
Total current assets  112,892   95,166   241,799   111,266 
Fixed assets:                
Furniture and equipment  62,006   58,743   63,429   62,074 
Leasehold improvements  41,961   39,194   45,096   42,877 
Fixed assets, gross  103,967   97,937   108,525   104,951 
Less accumulated depreciation and amortization  78,960   74,958   83,548   80,203 
Fixed assets, net  25,007   22,979   24,977   24,748 
Operating lease right-of-use assets  100,967   96,427   101,582   103,004 
Investment in unconsolidated affiliate
  11,978   12,215   12,229   12,131 
Goodwill  449,548   434,679   506,703   494,101 
Other identifiable intangible assets, net  93,697   86,382   107,592   108,755 
Other assets  5,619   1,578   4,699   4,149 
Total assets $799,708  $749,426  $999,581  $858,154 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST, USPH SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTEREST                
Current liabilities:                
Accounts payable - trade $4,471  $3,268  $3,674  $3,300 
Accounts payable - due to seller of acquired business
  3,203   3,203   -   3,204 
Accrued expenses  33,784   45,705   43,338   37,413 
Current portion of operating lease liabilities  32,540   30,475   31,274   33,709 
Current portion of term loan and notes payable  7,490   830   7,530   7,863 
Total current liabilities  81,488   83,481   85,816   85,489 
Notes payable, net of current portion  2,912   3,587   2,194   1,913 
Revolving line of credit  -   114,000   -   31,000 
Term Loan, net of current portion and deferred financing costs
  143,778   - 
Term loan, net of current portion and deferred financing costs
  141,266   142,918 
Deferred taxes  23,838   14,385   23,102   21,303 
Operating lease liabilities, net of current portion  76,907   74,185   78,912   77,934 
Other long-term liabilities  4,026   7,345   12,779   13,029 
Total liabilities  332,949   296,983   344,069   373,586 
                
Redeemable non-controlling interest - temporary equity  148,155   155,262   165,514   167,515 
                
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 
Common stock, $0.01 par value, 20,000,000 shares authorized, 17,202,053 and 15,216,326 shares issued, respectively
  172   152 
Additional paid-in capital  108,515   102,688   277,493   110,317 
Accumulated other comprehensive gain
  4,424  -   4,796   4,004 
Retained earnings  235,683   224,395   237,665   232,948 
Treasury stock at cost, 2,214,737 shares
  (31,628)  (31,628)  (31,628)  (31,628)
Total USPH shareholders’ equity  317,146   295,606   488,498   315,793 
Non-controlling interest - permanent equity  1,458   1,575   1,500   1,260 
Total USPH shareholders’ equity and non-controlling interest - permanent equity  318,604   297,181   489,998   317,053 
Total liabilities, redeemable non-controlling interest, USPH shareholders’ equity and non-controlling interest - permanent equity $799,708  $749,426  $999,581  $858,154 

SeeThe accompanying notes toare an integral part of these unaudited consolidated financial statements.

3
IndexTable of Contents
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF NET NET INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)AMOUNTS)

 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30, 2022  September 30, 2021  September 30,2022  September 30, 2021  June 30, 2023  June 30, 2022  June 30,2023  June 30, 2022 
                        
Net patient revenue $116,710  $112,327  $344,444  $324,819  $129,280  $118,196  $255,861  $227,734 
Other revenue  22,892   13,566   67,518   40,370   22,205   22,460   44,133   44,626 
Net revenue  139,602   125,893   411,962   365,189   151,485   140,656   299,994   272,360 
Operating cost:                                
Salaries and related costs  81,786   70,492   236,874   203,173   86,871   79,939   172,911   155,088 
Rent, supplies, contract labor and other  29,696   24,244   86,703   68,095   30,844   28,345   60,944   57,007 
Provision for credit losses  1,336   1,358   4,192   3,922   1,563   1,551   3,075   2,856 
Total operating cost  112,818   96,094   327,769   275,190   119,278   109,835   236,930   214,951 
                                
Gross profit  26,784   29,799   84,193   89,999   32,207   30,821   63,064   57,409 
                                
Corporate office costs  11,889   12,867   34,186   35,815   12,145   10,741   26,004   22,297 
Operating income  14,895   16,932   50,007   54,184   20,062   20,080   37,060   35,112 
                                
Other income and expense                
Resolution of a payor matter  -   1,216   -   1,216 
Other (expense) income                
Interest expense - debt and other, net  (2,633)  (987)  (5,193)  (1,527)
Change in fair value of contingent earn-out consideration
  2,000   -   2,000   -   708   -   10   - 
Equity in earnings of unconsolidated affiliate  304   -   983   -   326   340   600   679 
Interest and other income, net  65   58   790   158 
Gain on revaluation of put-right liability  785   -   771   - 
Interest expense - debt and other  (2,013)  (268)  (3,540)  (751)
Total other income and expense  1,141  1,006   1,004  623 
Change in revaluation of put-right liability  (50)  (617)  (199)  (14)
Relief Funds  -   -   467   - 
Other and interest income  682   679   746   725 
Total other (expense) income  (967)  (585)  (3,569)  (137)
Income before taxes  16,036   17,938   51,011   54,807   19,095   19,495   33,491   34,975 
                                
Provision for income taxes  3,215   3,815   10,952   11,326   4,231   4,239   7,200   7,737 
                                
Net income  12,821   14,123   40,059   43,481   14,864   15,256   26,291   27,238 
                                
Less: net income attributable to non-controlling interest:                
Less: Net income attributable to non-controlling interest:                
Redeemable non-controlling interest - temporary equity  (2,037)  (2,605)  (7,220)  (8,669)  (2,920)  (2,626)  (5,640)  (5,183)
Non-controlling interest - permanent equity  (1,227)  (1,509)  (3,288)  (4,194)  (1,025)  (1,435)  (2,322)  (2,061)
  (3,264)  (4,114)  (10,508)  (12,863)  (3,945)  (4,061)  (7,962)  (7,244)
                                
Net income attributable to USPH shareholders $9,557  $10,009  $29,551  $30,618  $10,919  $11,195  $18,329  $19,994 
                                
Basic and diluted earnings per share attributable to USPH shareholders $0.72  $0.66  $2.27  $1.69  $0.64  $0.87  $1.22  $1.55 
                                
Shares used in computation - basic and diluted  13,001   12,909   12,979   12,894   13,720   12,998   13,375   12,968 
                                
Dividends declared per common share $0.41  $0.38  $1.23  $1.08  $0.43  $0.41  $0.86  $0.82 

SeeThe accompanying notes toare an integral part of these unaudited consolidated financial statements.

4
IndexTable of Contents
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)THOUSANDS)

 Three Months Ended  For the Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30, 2022
  September 30, 2021
  September 30, 2022
  September 30, 2021
  June 30, 2023
  June 30, 2022
  June 30, 2023
  June 30, 2022
 
                        
Net income $12,821  $14,123  $40,059  $43,481  $14,864  $15,256  $26,291  $27,238 
Other comprehensive loss                                
Unrealized gain on cash flow hedge  6,473   -   5,942   - 
Tax effect at statutory rate (federal and state) of 25.55%
  (1,654)  -   (1,518)  - 
Unrealized gain (loss) on cash flow hedge  2,881   (531)  1,064   (531)
Tax effect at statutory rate (federal and state)
  (736)  136   (272)  136 
Comprehensive income $17,640  $14,123  $44,483  $43,481  $17,009  $14,861  $27,083  $26,843 
                                
Comprehensive income attributable to non-controlling interest  (3,264)  (4,114)  (10,508)  (12,863)  (3,945)  (4,061)  (7,962)  (7,244)
Comprehensive income attributable to USPH shareholders $14,376  $10,009  $33,975  $30,618  $13,064  $10,800  $19,121  $19,599 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
IndexTable of Contents

U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)

 Nine Months Ended  Six Months Ended 
 September 30, 2022  September 30, 2021  June 30, 2023  June 30, 2022 
OPERATING ACTIVITIES            
Net income including non-controlling interest and earnings from unconsolidated affiliates, net
 $40,059  $43,481 
Net income including non-controlling interest
 $26,291  $27,238 
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:                
Depreciation and amortization  10,950   8,519   7,615   7,298 
Provision for credit losses  4,192   3,922   3,075   2,856 
Equity-based awards compensation expense  5,462   6,280   3,592   3,660 
Deferred income taxes  6,077   1,292 
Change in deferred income taxes  1,799   4,307 
Change in revaluation of put-right liability  (771)  -   199   14 
Change in fair value of contingent earn-out consideration
  (2,000)  - 
(Gain) loss on sale of clinics and fixed assets  (643)  113 
Earnings in unconsolidated affiliate
  (983)  -   (600)  (679)
Unrealized gain on cash flow hedge
  (5,942)  - 
Loss (gain) on sale of clinics and fixed assets
  63   (614)
Changes in operating assets and liabilities:                
Increase in patient accounts receivable  (7,585)  (7,513)  (5,341)  (7,459)
(Increase) decrease in accounts receivable - other  (4,551)  (738)
(Decrease) increase in other assets  1,669   (195)
(Decrease) Increase in accounts payable and accrued expenses  (4,568)  4,529 
(Decrease) increase in other long-term liabilities  (128)  811 
Increase in accounts receivable - other  (85)  (2,862)
Decrease in other assets  593   230 
Increase (decrease ) in accounts payable and accrued expenses  1,335   (3,891)
Increase (decrease) in other long-term liabilities  243   (2,587)
Net cash provided by operating activities  41,238   60,501   38,779   27,511 
                
INVESTING ACTIVITIES                
Purchase of fixed assets  (7,290)  (5,996)  (4,523)  (4,569)
Purchase of majority interest in businesses, net of cash acquired  (18,573)  (22,589)  (8,040)  (11,799)
Purchase of redeemable non-controlling interest, temporary equity  (14,096)  (14,916)  (7,804)  (8,648)
Purchase of non-controlling interest, permanent equity  (280)  (1,093)
Proceeds on sales of partnership interest, clinics and fixed assets  740   136 
Purchase of non controlling interest-permanent equity
  (39)  (156)
Proceeds on sale of partnership interest - redeemable non-controlling interest  237   740 
Proceeds on sales of redeemable non-controlling interest-temporary  -   344 
Distributions from unconsolidated affiliate
  1,220
   -
   502   548 
Sale of non-controlling interest - permanent  -   131 
Proceeds on sales of redeemable non-controlling interest-temporary  401   69 
Proceeds on sale of fixed assets
  7   - 
Net cash used in investing activities  (37,878)  (44,258)  (19,660)  (23,540)
                
FINANCING ACTIVITIES                
Distributions to non-controlling interest, permanent and temporary equity  (11,760)  (14,330)  (8,431)  (7,202)
Cash dividends paid to shareholders  (15,990)  (13,934)  (11,238)  (10,659)
Proceeds from revolving line of credit  61,000   193,000   24,000   61,000 
Proceeds from term loan
  150,000   -   -   150,000 
Proceeds from issuance of common stock pursuant to the secondary public offering, net of issuance costs  163,655   - 
Payments on revolving line of credit  (175,000)  (176,000)  (55,000)  (175,000)
Principal payments on notes payable  (496)  (4,662)  (1,086)  (338)
(Payment) receipt of Medicare Accelerated and Advance Funds  -   (14,054)
Payment of deferred financing costs
  (1,779)  - 
Payment on term loan
  (1,875)  (1,779)
Other  12   7   -   12 
Net cash used in financing activities  5,987   (29,973)
Net cash provided by financing activities  110,025   16,034 
                
Net decrease in cash and cash equivalents  9,347   (13,730)
Net increase in cash and cash equivalents  129,144   20,005 
Cash and cash equivalents - beginning of period  28,567   32,918   31,594   28,567 
Cash and cash equivalents - end of period $37,914  $19,188  $160,738  $48,572 
                
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                
Cash paid during the period for:                
Income taxes $7,529  $10,777  $1,241  $4,524 
Interest paid
 $2,159  $1,195   4,011   1,319 
Non-cash investing and financing transactions during the period:                
Purchase of businesses - seller financing portion $824  $1,800   360   374 
Notes payable related to purchase of redeemable non-controlling interest, temporary equity
 $1,074  $1,302   621   948 
Notes payable related to purchase of non-controlling interest, permanent equity $576  $-   -   296 
Notes receivable related to sale of partnership interest - redeemable non-controlling interest
 $1,580  $914   2,687   1,476 

SeeThe accompanying notes toare an integral part of these unaudited consolidated financial statements.

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IndexTable of Contents
U. S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
(unaudited)

 U.S.Physical Therapy, Inc.        U.S.Physical Therapy, Inc.       
 Common Stock  Additional  Accumulated Other  Retained  Treasury Stock  Total Shareholders’  Non-Controlling     Common Stock  Additional  Accumulated Other  Retained  Treasury Stock  Total Shareholders’  Non-Controlling    
For the three months ended September 30, 2022 Shares  Amount Paid-In Capital  Comprehensive Loss  Earnings  Shares  Amount  Equity  Interests  Total 
For the three months ended June 30, 2023 Shares  Amount Paid-In Capital  Comprehensive Gain  Earnings  Shares  Amount  Equity  Interests  Total 
                                                          
Balance June 30, 2022 
15,219   152  $106,801   (395) $232,247   (2,215) $(31,628) $307,177  $1,756  $308,933 
Balance March 31, 2023
  15,277  $
152  $112,123  $
2,651  $234,760   (2,215) $(31,628) $318,058  $1,418  $319,476 
Issuance of restricted stock, net of cancellations  (3)  -   -   -   -   -   -   -   -   -   9   -   -   -   -   -   -   -   -   - 
Revaluation of redeemable non-controlling interest, net of tax  -   -   -   -   (147)  -   -   (147)  -   (147)  -   -   -   -   (2,865)  -   -   (2,865)  -   (2,865)
Purchase of non-controlling interest  -   -   -  -   (50)   -   -   (50)  11   (39)
Compensation expense - equity-based awards  -   -   1,802   -   -   -   -   1,802   -   1,802   -   -   1,786   -   -   -   -   1,786   -   1,786 
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans  -   -   -   -   -   -   -   -   -   - 
Purchase of partnership interests - non-controlling interest  -   -   (88)  -   -   -   -   (88)  (6)  (94)
Dividends paid to USPH shareholders  -   -   -   -   (5,331)  -   -   (5,331)  -   (5,331)  -   -   -   -   (5,621)  -   -   (5,621)  -   (5,621)
Distributions to non-controlling interest partners - permanent equity  -   -   -   -   -   -   -   -   (1,519)  (1,519)  -   -   -   -   -   -   -   -   (955)  (955)
Deferred taxes related to redeemable non-controlling interest - temporary equity  -   -   -   -   (643)  -   -   (643)  -   (643)  -   -   -   -   237  -   -   237  -   237
Other  -   -   -   -   -   -   -   -   -   -   -   -   (51)  -   285   -   -   234   1   235 
Issuance of common stock, pursuant to the secondary public offering, net of issuance costs  1,916   20   163,635   -   -   -   -   163,655   -   163,655 
Net income attributable to non-controlling interest - permanent equity  -   -   -   -   -   -   -   -   1,227   1,227   -   -   -   -   -   -   -   -   1,025   1,025 
Net income attributable to USPH shareholders  -   -   -   -   9,557   -   -   9,557   -   9,557   -   -   -   -   10,919   -   -   10,919   -   10,919 
Other comprehensive gain
  -   -   -   4,819   -   -   -   4,819   -   4,819   -   -   -   2,145   -   -   -   2,145   -   2,145 
Balance September 30, 2022  15,216   152  $108,515  $4,424  $235,683   (2,215) $(31,628) $317,146  $1,458  $318,604 
Balance June 30, 2023
  17,202  $
172  $277,493  $4,796  $237,665   (2,215) $(31,628) $488,498  $1,500  $489,998 

 U.S.Physical Therapy, Inc.        
U .S.Physical Therapy, Inc.
       
 Common Stock  Additional Accumulated Other  Retained  Treasury Stock Total Shareholders’ Non-Controlling  
  Common Stock  Additional Accumulated Other  Retained  Treasury Stock Total Shareholders’ Non-Controlling  
 
For the nine months ended September 30, 2022 Shares Amount Paid-In Capital Comprehensive Gain
  Earnings  Shares  Amount  Equity  Interests  Total 
For the six months ended June 30, 2023 Shares Amount Paid-In Capital Comprehensive Gain
  Earnings  Shares  Amount  Equity  Interests  Total 
                                                      
Balance December 31, 2021 $15,126   151  $102,688   -  $224,395   (2,215) $(31,628) $295,606  $1,575  $297,181 
Balance December 31, 2022
 
15,216  $
152  $110,317  $
4,004  $232,948   (2,215) $(31,628) $315,793  $1,260  $317,053 
Issuance of restricted stock, net of cancellations  90   1   -   -   -   -   -   1   -   1   70   -   -   -   -   -   -   -   -   - 
Revaluation of redeemable non-controlling interest, net of tax  -   -   -   -   (144)  -   -   (144)  -   (144)
Revaluation of redeemable non-controlling interest
  -   -   -   -   (2,746)  -   -   (2,746)  -   (2,746)
Purchase of non-controlling interest  -   -   -  -   (50)   -   -   (50)  11   (39)
Compensation expense - equity-based awards  -   -   5,462   -   -   -   -   5,462   -   5,462   -   -   3,592   -   -   -   -   3,592   -   3,592 
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)
Dividends paid to USPH shareholders  -   -   -   -   (15,990)  -   -   (15,990)  -   (15,990)  -   -   -   -   (11,238)  -   -   (11,238)  -   (11,238)
Distributions to non-controlling interest partners - permanent equity  -   -   -   -   -   -   -   -   (3,990)  (3,990)  -   -   -   -   -   -   -   -   (2,094)  (2,094)
Deferred taxes related to redeemable non-controlling interest - temporary equity  -   -   -   -   (2,129)  -   -   (2,129)  -   (2,129)  -   -   -   -   374  -   -   374  -   374
Other  -   -   11   -   -   -   -   11   686   697   -   -   (51)  -   48  -   -   (3)  1   (2)
Issuance of common stock, pursuant to the secondary public offering, net of issuance costs  1,916   20   163,635   -   -   -   -   163,655   -   163,655 
Net income attributable to non-controlling interest - permanent equity  -   -   -   -   -   -   -   -   3,288   3,288   -   -   -   -   -   -   -   -   2,322   2,322 
Net income attributable to USPH shareholders  -   -   -   -   29,551   -   -   29,551   -   29,551   -   -   -   -   18,329   -   -   18,329   -   18,329 
Other comprehensive gain
  -   -   -   4,424   -   -   -   4,424   -   4,424   -   -   -   792   -   -   -   792   -   792 
Balance September 30, 2022  15,216   152  $108,515  $4,424  $235,683   (2,215) $(31,628) $317,146  $1,458  $318,604 
Balance June 30, 2023
  17,202  $
172  $277,493  $4,796  $237,665   (2,215) $(31,628) $488,498  $1,500  $489,998 

 U.S.Physical Therapy, Inc.        U.S.Physical Therapy, Inc.       

 Common Stock  Additional Accumulated Other  Retained Treasury Stock Total Shareholders’ Non-Controlling     Common Stock  Additional Accumulated Other  Retained Treasury Stock Total Shareholders’ Non-Controlling    
For the three months ended September 30, 2021 Shares  Amount Paid-In Capital Comprehensive Loss  Earnings  Shares  Amount  Equity  Interests  Total 
For the three months ended June 30, 2022 Shares  Amount Paid-In Capital Comprehensive Loss  Earnings  Shares  Amount  Equity  Interests  Total 
                                                        
Balance June 30, 2021  15,121   151  $99,039  $-  $216,286   (2,215) $(31,628) $283,848  $963  $284,811 
Balance March 31, 2022
  15,206  $
151  $105,205  
-  $227,243   (2,215) $(31,628) $300,971  $1,245  $302,216 
Issuance of restricted stock, net of cancellations  5   -   -   -   -   -   -   -   -   -   13   1   -   -   -   -   -   1   -   1 
Revaluation of redeemable non-controlling interest, net of tax  -   -   -   -   (1,542)  -   -   (1,542)  -   (1,542)  -   -   -   -   116   -   -   116   -   116 
Compensation expense - equity-based awards  -   -   2,877   -   -   -   -   2,877   -   2,877   -   -   1,814   -   -   -   -   1,814   -   1,814 
Purchase of non-controlling interest
  -   -   -   -   (619)  -   -   (619)  (49)  (668)
Sale of non-controlling interest, net of purchases
  -   -   -   -   130   -   -   130   131   261 
Dividends paid to USPT shareholders  -   -   -   -   (4,906)  -   -   (4,906)  -   (4,906)
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans
  -   -   1   -   -   -   -   1   -   1 
Purchase of partnership interests - non-controlling interest
  -   -   (219)  -   -   -   -   (219)  239   20 
Dividends payable to USPH shareholders  -   -   -   -   (5,332)  -   -   (5,332)  -   (5,332)
Distributions to non-controlling interest partners - permanent equity  -   -   -   -   -   -   -   -   (1,730)  (1,730)  -   -   -   -   -   -   -   -   (1,163)  (1,163)
Deferred taxes related to redeeemable non-controlling interest - temporary equity  -   -   -   -   (1,486)  -   -   (1,486)  -   (1,486)
Other  -   -   6   -   (20)  -   -   (14)  10   (4)  -   -   -   -   511   -   -   511   -   511 
Net income attributable to non-controlling interest - permanent equity  -   -   -   -   -   -   -   -   1,509   1,509   -   -   -   -   -   -   -   -   1,435   1,435 
Net income attributable to USPH shareholders  -   -   -   -   10,009   -   -   10,009   -   10,009   -   -   -   -   11,195   -   -   11,195   -   11,195 
Balance September 30, 2021  15,126   151  $101,922  $-  $219,338   (2,215) $(31,628) $289,783  $834  $290,617 
Other comprehensive loss  -   -   -   (395)  -   -   -   (395)  -   (395)
Balance June 30, 2022
  15,219  $
152  $106,801  $(395) $232,247   (2,215) $(31,628) $307,177  $1,756  $308,933 

 U.S.Physical Therapy, Inc.        U.S.Physical Therapy, Inc.       
 Common Stock  Additional Accumulated Other  Retained Treasury Stock Total Shareholders’ Non-Controlling     Common Stock  Additional Accumulated Other  Retained Treasury Stock Total Shareholders’ Non-Controlling    
For the nine months ended September 30, 2021 Shares  Amount Paid-In Capital Comprehensive Loss  Earnings  Shares Amount  Equity  Interests  Total 
For the six months ended June 30, 2022 Shares  Amount Paid-In Capital Comprehensive Loss  Earnings  Shares Amount  Equity  Interests  Total 
                                                      
Balance December 31, 2020  15,065   151  $95,622  $-  $212,015   (2,215) $(31,628) $276,160  $1,470  $277,630 
Balance December 31, 2021
  15,126  $
151  $102,688  
-  $224,395   (2,215) $(31,628) $295,606  $1,575  $297,181 
Issuance of restricted stock, net of cancellations  61   -   -   -   -   -   -   -   -   -   93   1   -   -   -   -   -   1   -   1 
Revaluation of redeemable non-controlling interest, net of tax  -   -   -   -   (8,852)  -   -   (8,852)  -   (8,852)  -   -   -   -   3   -   -   3   -   3 
Compensation expense - equity-based awards  -   -   6,280   -   -   -   -   6,280   -   6,280   -   -   3,660   -   -   -   -   3,660   -   3,660 
Purchase of non-controlling interest
  -   -   -   -   (619)  -   -   (619)  (49)  (668)
Sale of non-controlling interest, net of purchases
  -   -   -   -   130   -   -   130
   131   261 
Dividends paid to USPT shareholders  -   -   -   -   (13,934)  -   -   (13,934)  -   (13,934)
Transfer of compensation liability for certain stock issued pursuant to long-term incentive plans
  -   -   707   -   -   -   -   707   -   707 
Purchase of partnership interests - non-controlling interest
  -   -   (265)  -   -   -   -   (265)  (95)  (360)
Dividends paid to USPH shareholders  -   -   -   -   (10,659)  -   -   (10,659)  -   (10,659)
Distributions to non-controlling interest partners - permanent equity  -   -   -   -   -   -   -   -   (4,912)  (4,912)  -   -   -   -   -   -   -   -   (2,471)  (2,471)
Short swing profit settlement  -   -   20   -   -   -   -   20   -   20 
Deferred taxes related to redeeemable non-controlling interest - temporary equity  -   -   -   -   (1,486)  -   -   (1,486)  -   (1,486)
Other  -   -   -   -   (20)  -   -   (20)  -   (20)  -   -   11   -   -   -   -   11   686   697 
Net income attributable to non-controlling interest - permanent equity  -   -   -   -   -   -   -   -   4,194   4,194   -   -   -   -   -   -   -   -   2,061   2,061 
Net income attributable to USPH shareholders  -   -   -   -   30,618   -   -   30,618   -   30,618   -   -   -   -   19,994   -   -   19,994   -   19,994 
Balance September 30, 2021  15,126   151  $101,922  $-  $219,338   (2,215) $(31,628) $289,783  $834  $290,617 
Other comprehensive loss              (395)  -           (395)      (395)
Balance June 30, 2022
  15,219  $
152  $106,801  $(395) $232,247   (2,215) $(31,628) $307,177  $1,756  $308,933 

SeeThe accompanying notes toare an integral part of these unaudited consolidated financial statements.

7
IndexTable of Contents
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(unaudited)

1.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements include the accountsNature of Business

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 thesegments: (a) physical therapy operations segment, and the(b) industrial injury prevention services (“IIP”) segment. The Company’s physical therapy operations consist of physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries, preventive care, rehabilitation of injured workers and neurological injuries. Services provided by the industrial injury prevention servicesIIP segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.

During the nine months ended September 30, 2022, and the 2021 year, the Company completed the acquisitions of six multi-clinic practices and two industrial injury prevention businesses as detailed below.


Acquisition
 Date Acquired  Clinics 
September 2022 Acquisition
 September 30, 2022  80%
  2 
August 2022 Acquisition
 August 31, 2022  70%
  6 
March 31, 2022 Acquisition
 March 31, 2022  
70
%
  6 
December 2021 Acquisition
 December 31, 2021  
75
%
  3 
November 2021 Acquisition
 November 30, 2021  
70
%
 
IIPS* 
September 2021 Acquisition
 September 30, 2021  
100
%
 
IIPS* 
June 2021 Acquisition
 June 30, 2021  
65
%
  8 
March 2021 Acquisition
 March 31, 2021  
70
%
  6 


*
Industrial injury prevention services business



As of SeptemberJune 30, 2023, 2022, the Company operated 614656 clinics in 40 states. The Company also manages physical therapy facilities for third parties, primarily hospitalhospitals and physicians, with 4043 third-party facilities under management as of SeptemberJune 30, 2023, 2022..

During the six months ended June 30, 2023 and year-ended December 31, 2022, the Company completed the acquisition of the following physical therapy practices.


Acquisition
 Date 
% Interest
Acquired
 
Number of
Clinics
May 2023 Acquisition May 31, 2023 45%* 4
February 2023 Acquisition February 28, 2023 80% 1
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

During the nine months ended September 30, 2022, the Company closed five clinics and sold five clinics.* See Note 3 for additional information.


Physical Therapy Operations

The physical therapy operations segment primarily operates through subsidiary clinic partnerships, in whichIn May 2023, the Company generally ownscompleted a 1% general partnership interest in the Clinic Partnerships. Our limited partnership interests generally range from 65% to 75% in the Clinic Partnerships. The managing therapistsecondary offering of each clinic owns, directly or indirectly, the remaining limited partnership interest in most1,916,667 shares of its common stock at an offering price of $90.00 per share.  Upon completion of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent,offering, 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 physiciansreceived net proceeds of approximately $163.7 million, after deducting an underwriting discount of $8.6 million and other referral sources, by offering these therapists a competitive salaryrecognizing related fees and incentives based on the profitabilityexpenses of $0.2 million.  A portion of the clinic that they manage. For multi-site clinic practices in which a controlling interestnet proceeds was used to repay the $35.0 million then outstanding under the Company’s credit facility while the remainder is acquired by the Company, the prior owners typically continue as employeesexpected to manage the clinic operations, retain a non-controlling ownership interest in the clinics and receive a competitive salarybe used primarily 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.

8
Clinic Partnerships

For non-acquired Clinic Partnerships, the earnings and liabilities attributable to the non-controlling interests, typically owned by the managing therapist, directly or indirectly, are recorded within the balance sheets as non-controlling interest – permanent equity and within the income statements as net income attributable to non-controlling interest – permanent equity.

For acquired Clinic Partnerships with redeemable non-controlling interest, the earnings attributable to the redeemable non-controlling interest are recorded within the consolidated statements of income line item – net income attributable to non-controlling interest – redeemable non-controlling interest – temporary equity and the equity interest is recorded on the consolidated balance sheet as redeemable non-controlling interest – temporary equity.  In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is not included in net income but charged directly to retained earnings and is included in the basic and diluted earnings per share calculation.

Wholly-Owned Facilitiesadditional acquisitions.

For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due to the profit sharing therapists. The amount is expensed as compensation and included in operating cost – salaries and related costs. The respective liability is included in current liabilities – accrued expenses on the balance sheets.

Industrial Injury Prevention Services

Services provided in the industrial injury prevention services segment include onsite services for clients’ employees including 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 certified athletic trainers.

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q.10-Q. However, the statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Management believes this report contains all necessary adjustments (consisting only of normal recurring adjustments) to present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented. For further information regardingThese unaudited consolidated financial statements should be read in conjunction with the Company’s accounting policies, please read the audited consolidated financial statements includedand related notes in the Company’s Annual Report on Form 10-K10-K for the year ended December 31, 20212022, filed with the Securities and Exchange Commission on March 1, 2022.February 28, 2023.

The Company believes, and the Chief Executive Officer and Chief Financial Officer have certified, that the financial statements included in this report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the interim periods presented.

Operating
Interim results for the three and nine months ended September 30, 2022, are not necessarily indicative of the results the Company expects for the entire year.

In addition to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 1, 2022, see Item 1A in Part II of this report.

98
Significant Accounting Policies

Cash EquivalentsPrinciples of Consolidation

The Company maintains its cash and cash equivalents atconsolidated financial institutions.  The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The combined account balances at several institutions typically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related on deposits in excess of FDIC insurance coverage. Management believes thatstatements include the risk is not significant.

Long-Lived Assets

Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful livesaccounts of the assets. Estimated useful lives for furnitureCompany. All significant intercompany transactions and equipment range from three to eight years and for purchased software from three to seven years. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets, which is generally three to five years.

The Company reviews property and equipment and intangible assets with finite lives for impairment upon the occurrence of certain events or circumstances which indicate that the amounts may be impaired. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

The Company did not note an impairment to long-lived assets during the three and nine months ended September 30, 2022.

Goodwillunaudited balances have been eliminated.

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 and other intangible assets, allocations of purchase price, allowance for credit losses, tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and related disclosures. Actual results may differ from these estimates.

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 andor upon the occurrence of certain triggering events or conditions and are written down to fair value, if considered impaired. These events or conditions include but are not limited to: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 triggering events or conditions could significantly impact an impairment assessment, necessitating an impairment charge. The Company evaluates indefinite livedindefinite-lived tradenames in conjunction with itsour annual goodwill impairment test.

10
The Company has aoperates its business through two operating segmentsegments consisting of physical therapy operations and its IIP business. Reporting units within our physical therapy operations are comprised of six regions primarily based on each clinic’s location. In 2022 and 2023, the IIP business which is made upconsisted of various clinics within partnerships, and an industrial injury prevention services business. The partnerships are components of regions and are aggregated to the operating segment level for the purpose of determining the Company’stwo reporting units when performing its annual goodwill impairment test. In 2021 and 2020, there were six regions. In addition to the six regions, the impairment analysis included a separate analysis for the industrial injury prevention services business, as a separate reporting unit.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, the Companyit 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

9
For the six months ended June 30, 2023, no triggering events or indicators were identified that were deemed impaired.

As part ofwould require impairment assessments for such period.  During the annual assessment,year ended December 31, 2022, the Company evaluated whether events or circumstances indicated that it was more likely than not thatrecorded a charge for goodwill impairment of $9.1 million related to one reporting unit in the fair value ofIIP business acquired in November 2021(“the IIP Acquisition”). The impairment is related to a change in the reporting units were reduced below their carrying valueunit’s current and projected operating income as of December 31, 2021. Aswell as various market inputs based on current market conditions, including the higher interest rate environment. No impairment was recognized as a result of theour annual assessment the Company determined that it was not more likely than not thatof goodwill and tradenames offor the other seven reporting units were impaired as of December 31, 2021.units. The Company also noted no impairment to long-lived assets for all reporting units.


The Company will continuecontinues to monitor for any triggering events or other indicators of impairmentimpairment.

Investment in unconsolidated affiliate

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.


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 well as perform its annual assessmentpermanent equity in the fourth quarterunaudited consolidated financial statements separate from the parent entity’s equity. The amount of 2022net income attributable to determine whether itnon-controlling interest is more likely thanincluded in consolidated net income on the face of the consolidated statements of net income. Changes in a parent entity’s ownership interest in a subsidiary that do not thatresult 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 reporting units were reduced below their carrying value.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.



Redeemable Non-Controlling Interest

TheRedeemable non-controlling interests that are reflected as redeemable non-controlling interest in the consolidated financial statements consist of those that the owners and the Company have certain redemption rights, whether currently exercisable or not, and which currently, or in the future, require that the Company purchase or the owner sell the non-controlling interest held by the owner, if certain conditions are met.  The purchase price is derived at a predetermined formula based on a multiple of trailing twelve months earnings performance as defined in the respective limited partnership agreements.  The redemption rights can be triggered by the owner or the Company at such time as both of the following events have occurred: 1) termination of the owner’s employment, regardless of the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction, typically three to five years, as defined in the limited partnership agreement.  The redemption rights are not automatic or mandatory (even upon death) and require either the owner or the Company to exercise its rights when the conditions triggering the redemption rights have been satisfied.

On the date the Company acquires a controlling interest in a partnership, and the limited partnership agreement for such partnership contains redemption rights not under the control of the Company, the fair value of the non-controlling interest is recorded in the consolidated balance sheet under the caption – Redeemable non-controlling interest – temporary equity.  Then, in each reporting period thereafter until it is purchased by the Company, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial carrying value, based on the predetermined formula defined in the respective limited partnership agreement.  As a result, the value of the non-controlling interest is not adjusted below its initial carrying value.  The Company records any adjustments in the redemption value net of tax, directly to retained earnings and the adjustments are not reflected in the unaudited consolidated statements of net income.  Although the adjustments are not reflected in the unaudited consolidated statements of net 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 unaudited consolidated statements of net income. Management believes the redemption value (i.e. the carrying amount) and fair value are the same.

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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 interest is included in consolidated net income on the face of the statements of net income. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the non-controlling equity investment on the deconsolidation date.

When the purchase price of a non-controlling interest by the Company exceeds the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital. Additionally, operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest partner.

Revenue Recognition

Revenues are recognized in the period in which services are rendered. See Note 3- Revenue Recognition, for further discussion of revenue recognition.

Provision for Credit Losses

The Company determines provisions for credit losses based on the specific agings and payor classifications at each clinic. The provision for credit losses is included in operating cost in the consolidated statements of net income. Net accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and provisions for credit losses, includes only those amounts the Company estimates to be collectible.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

On August 16, 2022, Inflation Reduction Act of 2022 was enacted and signed into law and includes targeted tax provisions. 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 effectCompany has determined that these provisions will not have a material impact on the Company’s deferred income taxes and current income taxes payable during the three and nine months ended September 30, 2022.financial statements.

The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interest expense recognized during the three and ninesix months ended September June 30, 2022.2023. The Company records any interest or penalties, if required, in interest and other expense, as appropriate.

Fair Value of Financial Instruments

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

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The three levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
●Level 1 – Quoted prices in active markets for identical assets or liabilities;
●Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
●Level 3 – Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.

The carrying amounts reported in the balance sheets for cash and cash equivalents, certain 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 of the debt under the Third Amended and Restated Credit Agreement (defined as “Credit Agreement” in Note 9) approximates its fair value due to the fair value. Thevariable interest rate on the debt under the Third Amended and Restated Amended Credit Agreementwhich 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 (as described in Note 2)IIP 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 separatea 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 used in the valuation of the put right as of June 30, 2023 include asset volatility of 25% and a discount rate of 11.36%11.46%. The asset volatility and discount rate used in the valuation of the put right as of June 30, 2022 were 25.0% and 10.49% respectively. See Note 5 for the changes in the fair value of redeemable non-controlling interest. The put right value decreased $0.8$0.1 million for the three months ended SeptemberJune 30, 20222023. andThe put-right was valued at $2.8$3.7 million on SeptemberJune 30, 2023 and $3.6 million on June 30, 2022.

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 fair value of the interest rate swap on September 30, 2022, was $5.9 million, of which 1.9 million has been included within Other current assets and $4.0 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 $4.8 million, net of tax, for the 2022 Third Quarter.

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 and other intangible assets, allocations of purchase price, allowance for credit losses, tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and related disclosures. Actual results may differ from these estimates.

Self-Insurance Program

The Company utilizes a self-insurance plan for its employee group health insurance coverage administered by a third party. Predetermined loss limits have been arranged with an insurance company to minimize the Company’s maximum liability and cash outlay. Accrued expenses include the estimated incurred but unreported costs to settle unpaid claims and estimated future claims. Management believes that the current accrued amounts are sufficient to pay claims arising from self-insurance claims incurred through September 30, 2022.

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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 Guidance

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)–Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The objective of ASU 2019-12 is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and early adoption was permitted. The Company adopted this pronouncement as of January 1, 2021. The adoption of ASU 2020-06 did not have a 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.

This pronouncement was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021.The2021. 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 adoption of ASU 2020-06 did not have a material impact on the Company’s financial statements.

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 has elected to apply the amendments prospectively through December 31, 2022. Borrowings under the Third Amended and Restated Credit Agreement bear interest based on SOFR. The interest rate applicable to the Third Amended and Restated Credit Agreement is tied to SOFR.

2. EARNINGS PER SHARE

Basic and diluted earnings per share is computed using the two-class method, which is an earnings allocation method that determines earnings per share for common shares and participating securities. The restricted stock the Company grants are participating securities containing non-forfeitable rights to receive dividends. Accordingly, any unvested restricted stock is included in the basic and diluted earnings per share computation. In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest (see Note 5 – Redeemable Non-Controlling Interest), net of tax, charged directly to retained earnings is included in the earnings per basic and diluted share calculation.

The following table provides a detail of the basic and diluted earnings per share computation (in thousands, except per share data).

 Three Months Ended  Six Months Ended 
  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
  (In thousands, except per share data) 
Computation of earnings per share - USPH shareholders:            
Net income attributable to USPH shareholders $10,919  $11,195  $18,329  $19,994 
Charges to retained earnings:                
Revaluation of redeemable non-controlling interest  (2,865)  210   (2,746)  57 
Tax effect at statutory rate (federal and state)
  732   (54)  700   (15)
  $8,786  $11,351  $16,283  $20,036 
                 
Earnings per share (basic and diluted) $0.64  $0.87  $1.22  $1.55 
                 
Shares used in computation:                
Basic and diluted earnings per share - weighted-average shares  13,720   12,998   13,375   12,968 

3. ACQUISITIONS OF BUSINESSES

The Company’s strategy is to continue acquiring multi-clinic outpatient physical therapy practices, to develop outpatient physical therapy clinics as satellites in existing partnerships and to continue acquiring companies that provide industrial injury prevention services.  The consideration paid for each acquisition is derived through arm’s length negotiations and funded through working capital, borrowings under the Company’s revolving credit facilities or proceeds from the recently completed secondary offering discussed in Note 1, Basis of Presentation and Significant Accounting Policies.
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The purchase price plus the fair value of the non-controlling interest for the acquisitions after June 30, 2022 were allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets (i.e. tradenames, referral relationships and non-compete agreements) and liabilities assumed based on the estimated fair values at the acquisition date, with the amount in excess of fair values being recorded as goodwill. The Company is in the process of completing its formal valuation analysis of the acquisitions, to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates used on June 30, 2023, 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. The Company continues to evaluate the components for the purchase price allocations for other acquisitions in 2022 and 2023.

The results of operations of the acquisitions below have been included in the Company’s consolidated financial statements since their respective date of acquisition. Unaudited proforma consolidated financial information for the acquisitions have not been included, as the results, individually and in the aggregate, were not material to current operations.

2023 Acquisitions

On February 28, 2023, the Company acquired an 80% interest in a one-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $6.2 million, of which $5.8 million was paid in cash and $0.4 million in the form of a note payable. The note accrues interest at 4.5% per annum and the principal and interest are payable on February 28, 2025.

On May 31, 2023, the Company and a local partner together acquired a 75% interest in a four-clinic physical therapy practice. After the transaction, the Company’s ownership interest is 45%, the Company’s local partner’s ownership interest is 30%, and the practice’s pre-acquisition owners have a 25% ownership interest. The purchase price for the 75% equity interest was approximately $3.1 million, of which $1.7 million was paid in cash by the Company, $1.1 million was paid in cash by the local partner, and $0.3 million was in the form of a note payable, (of which $0.2 million will be paid by the Company and $0.1 million will be paid by the local partner). The note will be paid on July 1, 2024. The Company guaranteed the full payment of the $0.3 million on its due date.

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The aggregate purchase price for the 2023 acquisitions has been preliminarily allocated as follows:

  Physical Therapy 
   Operations 
    (In thousands) 
Cash paid, net of cash acquired $8,040 
Seller note  360 
Contingent and deferred payments  380 
Total consideration $8,780 
     
Estimated fair value of net tangible assets acquired:    
Total current assets $348 
Total non-current assets  1,459 
Total liabilities  (1,451)
Net tangible assets acquired  356 
Customer and referral relationships  2,101 
Non-compete agreement  101 
Tradenames  518 
Goodwill  9,627 
Fair value of non-controlling interest (classified as redeemable non-controlling interest)  (3,923)
  $8,780 

Total current assets primarily represent accounts receivable while total non-current assets consist of fixed assets and equipment used in the practice.

For the acquisitions in 2023, the values assigned to the customer and referral relationships and non-compete agreement are being amortized on a straight-line basis over their respective estimated lives. For customer and referral relationships, the weighted-average amortization period is 12.0 years. For the non-compete agreements, the weighted-average amortization period is 5.0 years. The values assigned to tradenames are tested annually for impairment.

2022 Acquisitions

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 of up to $1.6 million if future operational objectives are met. The additional contingent consideration is currently valued at $1.6 million.  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 a 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 June 30, 2023, 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.

OnSeptember 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.

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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 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.

The purchase priceprices for the 2022 acquisitions hashave been preliminarily allocated as follows (in thousands):follows:
 
 Physical Therapy 
 Physical Therapy  Operations 
 Operations   (In thousands)
 
Cash paid, net of cash acquired $18,573  $59,788 
Seller notes  825   1,574 
Contingent payments  100   10,000 
Total consideration $19,498  $71,362 
        
Estimated fair value of net tangible assets acquired:        
Total current assets $347  $1,558 
Total non-current assets  2,956   7,619 
Total liabilities  (3,096)  (9,865)
Net tangible assets acquired  207   (688)
Customer and referral relationships  5,756   18,955 
Non-compete agreements  346   983 
Tradenames  1,165   4,417 
Goodwill  19,522   74,496 
Fair value of non-controlling interest (classified as redeemable non-controlling interest)  (7,498)  (26,801)
 $19,498  $71,362 

On December 31, 2021, the Company acquired a 75% interest in a three-clinic physical therapy practice with the practice founder retaining 25%. The purchase price for the 75% interest was approximately $3.6 million, of which $3.4 million was paid in cash and $0.2 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are 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. The previous owners retained the remaining interest. The purchase price for the approximate 70% equity interest, not inclusive of a $2.0 million contingent payment, was approximately $65.2 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 an initial fair value of $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 any 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 these reasons, and based on current accounting guidance, the Company did not consolidate the separate company through the variable interest or voting interest model. On September 30, 2022, the fair value of this put right was $2.8 million.  The increase was reflected in the consolidated statement of income in the line item – Change in revaluation of put-right liability.

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 the industrial injury services business. 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 in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on September 30, 2023.
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 $10.7 million, of which $8.6 million was paid in cash, $1.0 million was payable based on the achievement of certain business criteria and $0.3 million is in the form of a note payable. The business criteria were met and accordingly $1.0 million was paid in July 2022. The note accrues interest at 3.25% per annum and the principal and interest are 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 $11.6 million, of which $11.3 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 are payable on March 31, 2023.

The purchase price for the 2021 acquisitions has been preliminarily allocated as follows (in thousands):

     Physical Therapy    
  IIPS*  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

The results of operations of the acquired clinics have been included in the Company’s consolidated financial statements since the date of their respective acquisition.

The purchase price includes the original estimated fair value of the contingent earn-out consideration currently valued at $0.9 million. The Company determined the fair value of the contingent consideration obligations by calculating the probability-weighted earn out payments based on the Company’s assessment of the likelihood that the benchmarks will be achieved. The fair value of the contingent earn-out consideration is reviewed quarterly over the earn-out period to compare actual revenue to estimated revenue used in our forecasts. During the nine months ended September 30, 2022, the Company revalued contingent consideration related to an acquisition, resulting in the elimination of a previously booked liability of $2.0 million.

For the 2022 and 2021 acquisitions, a majority of totalTotal current assets primarily representsrepresent accounts receivable. Totalreceivable while total non-current assets areconsist of fixed assets and equipment used in the practice.

The purchase pricesprice plus the fair value of the non-controlling interests for the acquisitions in 20212022 were allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, i.e.(i.e. trade names, referral relationships and non-compete agreements,agreements) and liabilities assumed based on the fair values at the acquisition date, with the amount exceeding the fair values being recorded as goodwill.

For the acquisitions in 2021, 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 was 13.8 years. For non-compete agreements, the weighted-average amortization period was 5.6 years at the end of the year. The values assigned to tradenames are tested annually for impairment.

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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 and 2021 have not been included, as the results, individually and in the aggregate, were not material to current operations.

The purchase price plus the fair value of the non-controlling interest for the acquisitions in 2022 and those acquired after September 30, 2021 was allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, i.e. tradenames, referral relationships and non-compete agreements, and liabilities assumed based on the estimated fair values at the acquisition date, with the amount in excess of fair values being recorded as goodwill. The Company is in the process of completing its formal valuation analysis of the acquisitions, to identify and determine the fair value of tangible and identifiable intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates used on September 30, 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.  The purchase price allocations for the March 2021, June 2021 and September 2021 Acquisitions have been finalized. The Company continues to evaluate the components for the purchase price allocations for other acquisitions in 2021.

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 5.05.3 years. The values assigned to tradenames are tested annually for impairment.

34. REVENUE RECOGNITION

Categories

Revenues are recognized in the period in which services are rendered.

Net patient revenue consists of revenuerevenues for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic-relatedorthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Net patient revenue (patient revenuerevenues less estimated contractual adjustments)adjustments – as described below) is recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There is an implied contract between us and the patient upon each patient visit. Generally, this occursSeparate contractual arrangements exist between us and third-party payors (e.g. insurers, managed care programs, government programs, and workers’ compensation programs) 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, we are 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 our established rate and the anticipated reimbursement rate is accounted for as an offset to revenue—contractual allowance. The payment for 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 paymentsis due to the Company at amounts different from its established rates. The allowance for estimated contractual adjustments is based on termsthe respective payor contract. Typically, we receive payment within thirty to forty-five days of payor contracts and historical collection and write-off experience.service.

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Management contract revenue, which is included in other revenue in the consolidated statements of net income, is derived from contractual arrangements whereby the Company manages a clinic owned by a third party. The Company does not have any ownership interest in these clinics. Typically, revenue is determined based on the number of visits conducted at the clinic and recognized at the point in time when services are performed. Costs, typically salaries for our employees, are recorded when incurred.Management contract revenue is typically due the month following the service provided.

Revenue from the industrial injury prevention servicesIIP segment, which is included in other revenue in the consolidated statements of net income, is derived from onsite services the Company provides to clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization. Revenue from the industrial injury prevention servicesIIP segment is recognized when obligations under the terms of the contract are satisfied. Revenue is recognized at an amount equal to the consideration the Company expects to receive in exchange for providing injury prevention services to its clients. The revenue is determined and recognized based on the number of hours and respective rate for services provided in a given period. Payment for services rendered is typically within thirty days.

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Additionally, other revenue includes services the Company provides on-site, such as schools, for physical or occupational therapy services, and fees from athletic trainers. Contract terms and rates are agreed to in advance between the Company and the third parties. Services are typically performed over the contract period and revenue is recorded at the point of service. If the services are paid in advance, revenue is recorded as a liability over the period of the agreement and recognized at the point in time, when the services are performed.

The Company determines credit losses based on the specific agingsaging and payor classifications at each clinic. The provision for credit losses is included in clinic operating cost in the statements of net income. Patient accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and provision for credit losses, includes only those amounts the Company estimates to be collectible.

The following table details the revenue related to the various categories (in thousands):categories:

 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30, 2022  September 30, 2021  September 30, 2022  September 30, 2021  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
Revenue related to:
 (In thousands)
 
Net patient revenue $116,710  $112,327  $344,444  $324,819  $129,280  $118,196  $255,861  $227,734 
Other revenue  753   759   2,523   2,222   792   898   1,591   1,770 
Physical therapy operations $
117,463  $
113,086  $
346,967  $
327,041  
130,072  
119,094  
257,452  
229,504 
Management contract revenue 
1,984  
2,313  
6,335  
7,611 
Industrial injury prevention services revenue  20,155   10,494   58,660   30,537 
Total revenue
 $139,602  $125,893  $411,962  $365,189 
Industrial injury prevention services
  19,246   19,437   38,596   38,505 
Management contracts  2,167   2,125   3,946   4,351 

 $151,485  $140,656  $299,994  $272,360 

Medicare Reimbursement

The 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.

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In 2021 the 2020 MPFS Final Rule, theestablished by 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 beginningresulted 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%an approximate 3.5% 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 reimbursementreimbursement 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 20202020..

In For 2022, 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.

In the 2023 MPFS Proposed Rule, published on July 7, 2022, CMS proposed a 4.4%4.5% reduction in the Physician Fee Schedule conversion factor. In addition,However, this reduction was later addressed in the Consolidated Appropriations Act, 2021 included2023 (“2023 Act”). The provisions of the 2023 Act increased the conversion factor by 2.5% for 2023 and by 1.25% for 2024, resulting in an overall reduction of approximately 2% in the 2023 Physician Fee Schedule conversion factor for 2023. In the 2024 MPFS Proposed Rule, CMS proposed a 3.36% reduction in Medicare payment rates ofthe Physician Fee Schedule conversion factor, which is estimated to result in an approximately 3%3.5% reduction in 2024.  These paymentreimbursement for the codes applicable to physical/occupational therapy services provided by our clinics, as compared to 2023, unless these reductions are expected to take effect unless regulatorymodified in the 2024 MPFS Final Rule or Congressionalotherwise mitigated by action results in modifications to such rates as has occurred in 2021 and 2022.of Congress.
 
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 extendsextended 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.

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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. TheMedicare Access and CHIP Reauthorization Act of 2015 (“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.

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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.

Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that the Company 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 September 30, 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 nine months ended September 30, 2022, and 2021, respectively, net patient revenue from Medicare was approximately $115.1 million and $98.3 million, respectively.

Given the history of frequent revisions to the Medicare program and its reimbursement rates and rules, the Company may not continue to receive reimbursement rates from Medicare that sufficiently compensate usit for the Company’s services or, in some instances, cover the Company’s operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on the Company’s revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and, adversely, affect the Company’s business, financial condition and results of operations.

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 March 31, 2023. 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 six months ended June 30, 2023, and 2022, respectively, net patient revenue from Medicare were approximately $85.8 million and $74.9 million, respectively.
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Contractual Allowances

Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third-party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in Company clinics. The Company estimates contractual allowances based on its interpretation of the applicable regulations, payor contracts and historical calculations. Each month the Company estimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on the Company’s historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow the Company to provide the necessary detail and accuracy with its collectability estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from the Company’s estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. The Company’s billing system does not capture the exact change in its contractual allowance reserve estimate from period to period in order to assess the accuracy of its revenues and hence its contractual allowance reserves. Management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, historically the difference between net revenues and corresponding cash collections has generally reflected a difference within approximately 1.0% to 1.5% of net revenue. Additionally, analysis of subsequent periods’ contractual write-offs on a payor basis reflects a difference within approximately 1.0% to 1.5% between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, the Company believes that a change in the contractual allowance reserve estimate would not likely be more than 1.0% to 1.5% on September 30, 2022.each balance sheet date.

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A contract’s transaction price is allocated to each distinct performance obligation and recognized when, or as, the performance obligation is satisfied. To determine the transaction price, the Company includes the effects of any variable consideration, such as the probability of collecting that amount. The Company applies established rates to the services provided, and adjusts for the terms of payor contracts, as applicable. These contracted amounts are different from the Company’s established rates.  The Company has established a “contractual allowance” for this difference. The allowance is based on the terms of payor contracts, historical and current reimbursement information and current experience with the clinic and partners. The Company’s established rates less the contractual allowance is the revenue that is recognized in the period in which the service is rendered. This revenue is deemed the transaction price and stated as “Net Patient Revenue” on the Company’s consolidated statements of income.

The Company’s performance obligations are satisfied at a point in time. After the clinic has provided services and satisfied its obligation to the customer for the reimbursement rates stipulated in the payor contracts (i.e. the transaction price), the Company recognizes the revenue, net of contractual allowances, in the period in which the services are rendered. The Company recognizes the full amount of revenue and reports the contractual allowances as a contra (or offset) revenue account to report a net revenue number based on the expected collections.

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4. EARNINGS PER SHARE

In accordance with current accounting guidance, the revaluation of redeemable non-controlling interest (see Note 5 – Redeemable Non-Controlling Interest), net of tax, charged directly to retained earnings is included in the earnings per basic and diluted share calculation. The following table provides a detail of the basic and diluted earnings per share computation (in thousands, except per share data).

 Three Months Ended  Nine Months Ended 
  September 30, 2022  September 30, 2021  September 30, 2022  September 30, 2021 
Computation of earnings per share - USPH shareholders:            
Net income attributable to USPH shareholders $9,557  $10,009  $29,551  $30,618 
Charges to retained earnings:                
Revaluation of redeemable non-controlling interest  (196)  (2,070)  (193)  (11,889)
Tax effect at statutory rate (federal and state) of 25.55%
  50   529   49   3,038 
  $9,411  $8,468  $29,407  $21,767 
                 
Earnings per share (basic and diluted) $0.72  $0.66  $2.27  $1.69 
                 
Shares used in computation:                
Basic and diluted earnings per share - weighted-average shares  13,001   12,909   12,979   12,894 

5. REDEEMABLE NON-CONTROLLING INTEREST

Since October 2017, when the Company acquires a majority interest (the “Acquisition”) in a physical therapy clinic business (referred to as “Therapy Practice”), these Acquisitions occur in a series of steps which are described below.

1.Prior to the Acquisition, the Therapy Practice exists as a separate legal entity (the “Seller Entity”). The Seller Entity is owned by one or more individuals (the “Selling Shareholders”) most of whom are physical therapists that work in the Therapy Practice and provide physical therapy services to patients.


2.In conjunction with the Acquisition, the Seller Entity contributes the Therapy Practice into a newly-formed limited partnership (“NewCo”), in exchange for one hundred percent (100%) of the limited and general partnership interests in NewCo. Therefore, in this step, NewCo becomes a wholly-owned subsidiary of the Seller Entity.

3.
The Company enters into an agreement (the “Purchase Agreement”) to acquire from the Seller Entity a majority (ranges from 50% to 90%) of the limited partnership interest and in all cases 100% of the general partnership interest in NewCo. The Company does not purchase 100% of the limited partnership interest because the Selling Shareholders, through the Seller Entity, want to maintain an ownership percentage. The consideration for the Acquisition is primarily payable in the form of cash at closing and a small, two-year note in lieu of an escrow (the “Purchase Price”). The Purchase Agreement does not contain any future earn-out or other contingent consideration that is payable to the Seller Entity or the Selling Shareholders.

4.The Company and the Seller Entity also execute a partnership agreement (the “Partnership Agreement”) for NewCo that sets forth the rights and obligations of the limited and general partners of NewCo. After the Acquisition, the Company is the general partner of NewCo.


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.

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8.The Company and the Selling Shareholder (including both Employed Selling Shareholders and Selling Shareholders not employed by NewCo) execute a non-compete agreement (the “Non-Compete Agreement”) which restricts the Selling Shareholder from engaging in competing business activities for a specified period of time (the “Non-Compete Term”). A Non-Compete Agreement is executed with the Selling Shareholders in all cases. That is, even if the Selling Shareholder does not become an Employed Selling Shareholder, the Selling Shareholder is restricted from engaging in a competing business during the Non-Compete Term.

9.
The Non-Compete Term commences as of the date of the Acquisition and  expires on the later of :

a.Two years after the date an Employed Selling Shareholders’ employment is terminated (if the Selling Shareholder becomes an Employed Selling Shareholder) or

b.
Five to six years from the date of the Acquisition, as defined in the Non-Compete Agreement, regardless of whether the Selling Shareholder is employed by NewCo.

10.
The Non-Compete Agreement applies to a restricted region which is a defined mile radius from the Therapy Practice. That is, an Employed Selling Shareholder is permitted to engage in competing businesses or activities outside the defined mileage (after such Employed Selling Shareholder no longer is employed by NewCo) and a Selling Shareholder who is not employed by NewCo immediately is permitted to engage in the competing business or activities outside the defined mileage.

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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)a.
In the event that any Selling Shareholder’s employment is terminated under certain circumstances prior to a specified date (the “Specified Date”), the Seller Entity thereafter may have an irrevocable right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below.

b)b.
In the event that any Selling Shareholder is not employed by NewCo as of the Specified Date and the Company has not exercised its Call Right with respect to the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, Seller Entity thereafter shall have the Put Right to cause the Company to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest at the purchase price described in “3” below.

c)c.
In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after the Specified Date, the Seller Entity shall have the Put Right, and upon the exercise of the Put Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below.

2.Call Right

a)a.
If any Selling Shareholder’s employment by NewCo is terminated prior to the Specified Date, the Company thereafter shall have an irrevocable right to purchase from Seller Entity the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest, in each case at the purchase price described in “3” below.

b)b.
In the event that any Selling Shareholder’s employment with NewCo is terminated for any reason on or after Specified Date, the Company shall have the Call Right, and upon the exercise of the Call Right, the Terminated Selling Shareholder’s Allocable Percentage of Seller Entity’s Interest shall be redeemed by the Company at the purchase price described in “3” below.

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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. NewCo’s earnings are distributed monthly based on available cash within NewCo. Therefore, the undistributed earnings amount is small, if any.

4.
The Purchase Price for the initial equity interest purchased by the Company is, in almost all cases, also based on the same specified multiple of the trailing twelve-month earnings that is used in the Put Right and the Call Right noted above.

5.
The Put Right and the Call Right do not have an expiration date, and the Seller Entity Interest is not required to be purchased by the Company or sold by the Seller Entity unless either the Put Right or the Call Right is exercised.

6.
The Put Right and the Call Right never apply to Selling Shareholders who do not become employed by NewCo, since the Company requires that such Selling Shareholders sell their entire ownership interest in the Seller Entity at the closing of the Acquisition.

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 preventionIIP 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”).
 

7.
The Progressive Non-Compete Term commences as of the date of the Progressive acquisition and expires on the later of:
 
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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 date of the acquisition.
 

8.The Progressive Non-Compete Agreement applies to the entire United States.
 

9.The Progressive Put Right (as defined below) and the Progressive Call Right (as defined below) do not have an expiration date. 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:

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 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 acquisition closing, 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 Closing Date, the Progressive Selling Shareholder has the 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.
 
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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 “Redemption Amount”).NewCo. 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
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For both scenarios described above, an Employed Selling Shareholder’s ownership of his or her equity interest in the Seller Entity predates the Acquisition and the Company’s purchase of its partnership interest in NewCo. The Employment Agreement and the Non-Compete Agreement do not contain any provision to escrow or “claw back” the equity interest in the Seller Entity held by such Employed Selling Shareholder, nor the Seller Entity Interest in NewCo, in the event of a breach of the employment or non-compete terms. More specifically, even if the Employed Selling Shareholder is terminated for “cause” by NewCo, such Employed Selling Shareholder does not forfeit his or her right to his or her full equity interest in the Seller Entity and the Seller Entity does not forfeit its right to any portion of the Seller Entity Interest. The Company’s only recourse against the Employed Selling Shareholder for breach of either the Employment Agreement or the Non-Compete Agreement is to seek damages and other legal remedies under such agreements. There are no conditions in any of the arrangements with an Employed Selling Shareholder that would result in a forfeiture of the equity interest held in the Seller Entity or of the Seller Entity Interest.

For the dates indicated, the following table details the changes in the carrying amount (fair value) of the Company’s redeemable non-controlling interest (in thousands):interest:

 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30, 2022  September 30, 2021  September 30, 2022  September 30, 2021  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
             (In thousands) 
Beginning balance $151,400  $143,338  $155,262  $132,340  $164,283  $158,008  $167,515  $155,262 
Operating results allocated to redeemable non-controlling interest partners  2,037   2,605   7,220   8,669   2,920   2,626   5,640   5,183 
Distributions to redeemable non-controlling interest partners  (3,038)  (3,202)  (7,770)  (9,418)  (4,179)  (2,328)  (6,337)  (4,731)
Changes in the fair value of redeemable non-controlling interest  196   2,071   193   11,889   2,865   (210)  2,746   (57)
Purchases of redeemable non-controlling interest  (5,574)  (6,683)  (15,170)  (16,218)  (2,659)  (7,138)  (8,821)  (9,596)
Acquired interest  2,552   -   7,498   10,719   2,138   -   3,893   4,946 
Sales of redeemable non-controlling interest - temporary equity  143   664   2,331   983   2,286   2,187   2,925   2,187 
Notes receivable related to sales of redeemable non-controlling interest - temporary equity  (58)  (627)  (1,901)  (914)
Adjustments in notes receivable related to the the sales of redeemable non-controlling interest - temporary equity  497   51   492   167 
Changes in notes receivable related to redeemable non-controlling interest - temporary equity  (2,140)  (1,745)  (2,047)  (1,794)
Ending balance $148,155  $138,217  $148,155  $138,217  $165,514  $151,400  $165,514  $151,400 

24
The following table categorizes the carrying amount (fair value) of the redeemable non-controlling interest (in thousands):interest:
 
 Nine Months Ended 
 September 30, 2022  September 30, 2021  June 30, 2023  June 30, 2022 
           (In thousands)
 
Contractual time period has lapsed but holder’s employment has not terminated
 
$
74,002
  
$
54,683
  
$
73,640
  
$
73,204
 
Contractual time period has not lapsed and holder’s employment has not terminated
  
74,153
   
83,534
   
91,874
   
78,196
 
Holder’s employment has terminated and contractual time period has expired
  
-
   
-
   
-
   
-
 
Holder’s employment has terminated and contractual time period has not expired
  
-
   
-
   
-
   
-
 
 
$
148,155
  
$
138,217
  
$
165,514
  
$
151,400
 

6. GOODWILL

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

 Nine Months Ended  Year Ended  Six Months Ended  Year Ended 
 September 30, 2022  December 31, 2021  June 30, 2023  December 31, 2022 
           (In thousands) 
Beginning balance $434,679  $345,646  $494,101  $434,679 
Goodwill acquired  19,522   89,746   9,627   72,674 
Goodwill adjustments for purchase price allocation of businesses acquired in prior year  (4,653)  (713)  2,975   (4,140)
Goodwill impairment
  -   (9,112)
Ending balance $449,548  $434,679  $506,703  $494,101 

For the three and six months ended June 30, 2023 and 2022, no triggering events or indicators were identified that would require impairment assessments as of such periods. During the year ended December 31, 2022, the Company recorded a charge for goodwill impairment of $9.1 million related to the IIP Acquisition in November 2021. The impairment was 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.

7. INTANGIBLE ASSETS, NET

Intangible assets, net as of September 30,2022, and December 31,2021consisted of the following (in thousands):following:

 September 30, 2022  December 31, 2021 
Tradenames $40,188  $38,790 
Customer and referral relationships, net of accumulated amortization of $22,176 and $17,762, respectively
  51,806   45,643 
Non-compete agreements, net of accumulated amortization of $6,846 and $6,450, respectively
  1,703   1,949 
  $93,697  $86,382 
 June 30, 2023  December 31, 2022 
  (In thousands)
 
Tradenames $44,291  $43,373 
Customer and referral relationships, net of accumulated amortization of $27,039 and $23,736, respectively (weighted average amortization period 12.7 years)
  61,376   63,238 
Non-compete agreements, net of accumulated amortization of $7,301 and $6,999 respectively (weighted average amortization period 6.0 years)
  1,925   2,144 
  $107,592  $108,755 

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 six7 to fourteen14 years. Non-compete agreements are amortized over the respective term of the agreements which range from five5 to six6 years.

The following table details the amount of amortization expense recorded for intangible assets for the three and ninesix months ended SeptemberJune 30, 2022,2023, and 20212022 (in thousands):

 Three Months Ended  Six Months Ended 
 Three Months Ended  Nine Months Ended  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
 September 30, 2022  September 30, 2021  September 30, 2022  September 30, 2021  (In thousands)
 
Customer and referral relationships $1,404  $852  $4,415  $2,412  $1,639  $1,339  $3,303  $3,011 
Non-compete agreements  129   143   396   320   149   120   302   267 
 $1,533  $995  $4,811  $2,732  $1,788  $1,459  $3,605  $3,278 

2523
Based on the balance of referral relationships and non-compete agreements as of SeptemberJune 30, 2022,2023, the expected amount to be amortized in 20222023 and thereafter by year is as follows (in thousands):

Customer and Referral Relationships
Customer and Referral Relationships
  Non-Compete Agreements 
Customer and Referral Relationships
  Non-Compete Agreements 
(In thousands)
(In thousands)
 
Years Annual Amount  Years  Annual Amount  Annual Amount  Years  Annual Amount 
Ending December 31,    Ending December 31,        Ending December 31,    
2022 (excluding the nine months ended September 30, 2022)
 $1,421  
2022 (excluding the nine months ended September 30, 2022)
  $137 
2023 $5,586  2023
  $492 
2023 (excluding the three months ended June 30, 2023)
 $3,387  
2023 (excluding the three months ended June 30, 2023)
  $299 
2024 $5,421  2024
  $436  $6,624  2024
  $565 
2025 $5,276  2025
  $369  $6,480  2025
  $498 
2026 $4,809  2026
  $229  $6,012  2026
  $359 
2027 $5,848  2027
  $204 
Thereafter $29,293  Thereafter  $40  $33,025  
  

 

8. ACCRUED EXPENSES

Accrued expenses as of SeptemberJune 30, 2022,2023, and December 31, 20212022 consisted of the following (in thousands):following:

 September 30, 2022  December 31, 2021 
Salaries and related costs $16,588  $23,569 
Credit balances due to patients and payors  7,875   6,649 
Group health insurance claims  2,888   1,984 
Closure costs  238   498 
Federal taxes payable  144   2,716 
Contingent payments related to acquisition
  520   1,000 
Settlement of a legal matter
  -   2,750 
Other  5,531   6,539 
Total $33,784  $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 $2.75 million, of which $2.6 million was recorded as an expense in 2021.
 June 30, 2023  December 31, 2022 
  (In thousands)
 
Salaries and related costs $23,118  $22,912 
Credit balances due to patients and payors  8,033   8,094 
Group health insurance claims  2,552   1,666 
Closure costs  224   243 
Contingency payable
  2,437   620 
Interest payable
  1,288   - 
Other  5,686   3,878 
Total $43,338  $37,413 

9. NOTES PAYABLE AND AMENDED CREDIT AGREEMENTBORROWINGS

Amounts outstanding under the Company’s Senior Credit Facilities (as defined below) and notes payable as of June 30, 2023 and December 31, 2022 consisted of the following:

  
June 30, 2023
  
December 31, 2022
 
  
Principal
Amount
  
Unamortized
discount and
debt issuance
cost
  Net Debt  
Principal
Amount
  
Unamortized
discount and
debt issuance
cost
  Net Debt 
  
(In thousands)
 
Revolving Facilitiy $-  $-  $-  $31,000  $-  $31,000 
Term Facility  146,250   1,650   144,600   148,125   1,861   146,264 
Other Debt  6,390   -   6,390   6,430   -   6,430 
Total Debt $152,640  $1,650  $150,990  $185,555  $1,861  $183,694 
Less: Current portion of long-term debt  7,530   -   7,530   8,271   408   7,863 
Total long-term debt, net of current portion $145,110  $1,650  $143,460  $177,284  $1,453  $175,831 

Senior Credit Facilities

EffectiveOn 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 others.the lenders from time-to-time party thereto.

Amounts outstanding under the Amended Credit Agreement and Credit Agreement (as defined above) and notes payable as of September 30,2022 and December 31,2021 consisted of the following (in thousands):

  
September 30, 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 $-  $-  $-  $114,000  $-  $114,000 
Term Facility  150,000   1,942   148,058   -   -   - 
Other Debt  6,122   -   6,122   4,417   -   4,417 
Total Debt $156,122  $1,942  $154,180  $118,417  $-  $118,417 
Less: Current portion of long-term debt  7,898   408  $7,490   830   -   830 
Total long-term debt, net of current portion $148,224  $1,534  $146,690  $117,587  $-  $117,587 

The Credit Agreement, which matures on June 17, 2027, provides for loans in an aggregate principal amount of $325325.0 million. Such loans were made available through the following facilities (collectively, the “Senior Credit Facilities”):


1)Revolving Facility: $175175.0 million, five-year, revolving credit facility (“Revolving Facility”), which includes a $1212.0 million sublimit for the issuance of standby letters of credit and a $1515.0 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.
 
24
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.
 
As of SeptemberJune 30, 2022,2023, $150.0146.3 million was outstanding on the Senior Credit Facilities,Term Facility while none was outstanding under the Revolving Facility resulting in $175.0 million of credit availability. As of SeptemberJune 30, 2022,2023, the Company was in compliance with all of the covenants contained in the Credit Agreement. The average effective interest rate, net of the gain on interest rate swap discussed in Note 10, Derivative Instruments, for borrowings under the Senior Credit Facilities was 6.0% and 5.7% in the three and six months ended June 30, 2023, respectively.

Notes Payable Related to Acquisitions

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 the six months ended June 30, 2022 and 2021,2023, the Company entered into notes payable in the aggregate amount of $6.01.0 million of which an aggregate principal paymentpayments of $1.0 million was paid in the six months ended June 30, 2023. Notes payable related to acquisitions amounted to a balance of $6.4 million as of June 30, 2023. Of this balance, $0.13.8 million is due later in 2023, $1.6 million is due in 2022,$3.0 million is due in 20232024 and $2.9$1.0 million is due in 2024.2025. Interest accrues in the range of 3.25% to 5.50%8.0% per annum and is payable with each principal installment.

10. DERIVATIVE INSTRUMENTS

The Company is exposed to certain market risks duringin 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, which hashad a $150 million notional value, and a maturity date of June 30, 2027. Beginning in July 2022, the Company makes interest payments based on thereceives 1-month SOFR, and pays a fixed rate (“variable rate payment”) and receives or pays the differential between the variable rate payment and the fixedof interest of 2.815% on 1-month SOFR rate on a monthlyquarterly basis. Also included in theThe total interest paymentrate in any period iswill 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.

25
The impacts of the Company’s derivative instruments on the accompanying Consolidated Statements of Comprehensive Income for the three months and six months ended SeptemberJune 30, 20222023 are presented in the table below (in thousands):below:

  Three Months Ended  For the Nine Months Ended 
  September 30, 2022  September 30, 2021  September 30, 2022  September 30, 2021 
Unrealized loss on cash flow hedge $
6,473
  $
-
  $
5,942
  $
-
 
Tax effect at statutory rate (federal and state) of 25.55%
  
(1,654
)
  
-
   
(1,518
)
  
-
 
Other Comprehensive loss 
$
4,819
  
$
-
  
$
4,424
  
$
-
 
  For the Three Months Ended  For the Six Months Ended 
  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
  
(In thousands)
 
Net income
 $14,864   $15,256  $26,291  $27,238 
Other comprehensive loss
                
Unrealized gain (loss) on cash flow hedge  
2,881
   
(531
)
  
1,064
   
(531
)
Tax effect at statutory rate (federal and state)
  
(736
)
  
136
   
(272
)
  
136
 
Comprehensive income
 
$
17,009
  
$
14,861
  
$
27,083
  
$
26,843
 

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 (swap on June 30, 2023, was $6.4 million, of which $3.5 million has been included inwithin Other current assets and $2.9 million has been included in Other assets,) were as follows: in the accompanying unaudited consolidated balance sheet. The impact of the interest rate swap on the accompanying unaudited consolidated statements of comprehensive income was an unrealized gain of $2.1 million, net of tax, for the three months ended June 30, 2023.

  September 30, 2022  September 30, 2021 
Interest rate swap:      
Other current assets
 
$
1,948
 
$
-
 
Other assets
 $
3,995  $
- 

11. LEASES

The Company has operating leases for its corporate offices and operating facilities. The Company determines if an arrangement is a lease at the inception of a contract. Effective January 1, 2019, right- of-use assets and operating lease liabilities are included in the consolidated balance sheet. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent net present value of the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at commencement date based on the net present value of the fixed lease payments over the lease term. The Company’s operating lease terms are generally five years or less. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating fixed lease expense is recognized on a straight-line basis over the lease term.

28
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 three and nine months ended September 30, 2022, the components of lease expense were as follows (in thousands):follows:

 Three Months Ended  Six Months Ended 
 Three Months Ended  Nine Months Ended  
June 30, 2023
  
June 30, 2022
  
June 30, 2023
  
June 30, 2022
 
 
September 30, 2022
  
September 30, 2021
  
September 30, 2022
  
September 30, 2021
  (In thousands)  (In thousands) 
Operating lease cost $8,870  $8,114  $25,974  $23,738  $9,410  $8,700  $18,775  $17,104 
Short-term lease cost  210   440   790   1,169   284   259   559   580 
Variable lease cost  1,913   1,670   5,839   4,908   2,373   1,994   4,504   3,926 
Total lease cost * $10,993  $10,224  $32,603  $29,815  $12,067  $10,953  $23,838  $21,610 

*Sublease income was immaterial

Lease cost is reflected in the consolidated statement of net income in the line item – rent, supplies, contract labor and other.

Supplemental information related to leases was as follows (in thousands):follows:

 Three Months Ended  Nine Months Ended 
  September 30, 2022  September 30, 2021  
September 30, 2022
  
September 30, 2021
 
             
Cash paid for amounts included in the measurement of operating lease liabilities (in thousands) $9,139  $8,354  $26,697  $24,724 
                 
Right-of-use assets obtained in exchange for new operating lease liabilities (in thousands) $8,011  $13,269  $29,618  $34,112 
 Three Months Ended  Six Months Ended 
  June 30, 2023  June 30, 2022  
June 30, 2023
  
June 30, 2022
 

 (In thousands)
 
             
Cash paid for amounts included in the measurement of operating lease liabilities $9,753  $8,940  $19,399  $17,557 
                 
Right-of-use assets obtained in exchange for new operating lease liabilities $9,938  $15,595  $16,219  $21,606 

26
The aggregate future lease payments for operating leases as of SeptemberJune 30, 20222023 were as follows (in thousands):follows:

Fiscal Year Amount  Amount 
2022 (excluding the nine months ended September 30, 2022)
 $9,151 
 (In thousands) 
2023  33,724  $19,235 
2024  27,159   33,687 
2025  19,573   25,731 
2026  12,748   18,216 
2027 and therafter
  13,399   21,089 
Total lease payments $115,754  $117,958 
Less: imputed interest  6,307   7,772 
Total operating lease liabilities $109,447  $110,186 

Average lease terms and discount rates were as follows:

 Three Months Ended  Nine Months Ended 
  September 30, 2022  September 30, 2021  
September 30, 2022
  
September 30, 2021
 
Weighted-average remaining lease term - Operating leases 4.2 Years  4.1 Years  
4.2 Years
  
4.1 Years
 
             
Weighted-average discount rate - Operating leases  2.7%  2.9%  2.7%  2.9%
 Three Months Ended  Six Months Ended 
  June 30, 2023  June 30, 2022  
June 30, 2023
  
June 30, 2022
 
Weighted-average discount rate - Operating leases  3.5%
  2.5%
  3.5%
  2.5%

The weighted-average remaining lease term for operating leases was 4.0 years as of June 30, 2023 and 4.2 years as of June 30, 2022.

12. SEGMENT INFORMATION

The Company’s reportable segments include the physical therapy operations segment and the industrial injury prevention servicesIIP 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 athletic trainers for 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.

29
The following table summarizes selected financial data for the Company’s reportable segments.

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
 2022  2021  2022  2021  2023  2022  2023  2022 
             (In thousands)  (In thousands) 
Net operating revenue:            
Net revenue:            
Physical therapy operations $119,447  $115,399  $353,302  $334,652  $132,239  $121,219  $261,398  $233,855 
Industrial injury prevention services  20,155   10,494   58,660   30,537   19,246   19,437   38,596   38,505 
Total Company $139,602  $125,893  $411,962  $365,189  $151,485  $140,656  $299,994  $272,360 
                                
Gross profit:                                
Physical therapy operations
 $22,379  $27,123  $71,513  $82,058  $28,222  $26,699  $55,310  $49,134 
Industrial injury prevention services  4,405   2,676   12,680   7,941   3,985   4,122   7,754   8,275 
Gross profit $26,784  $29,799  $84,193  $89,999 
Total Company
 $32,207  $30,821  $63,064  $57,409 
                                
Total Assets:                                
Physical therapy operations 

  

  $432,683  $583,785  

  

  $521,104  $414,172 
Industrial injury prevention services  
   
   367,025   46,313   
  

   478,477   382,272 
Total Company 

  

  $799,708  $630,098  

  

  $999,581  $796,444 

13. INVESTMENT IN UNCONSOLIDATED AFFILIATE

Through a subsidiary,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 joint venture,company, the Company’s investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of SeptemberJune 30, 2022,2023, is $12.0 million. For the nine months ended September 30, 2022,$12.2 million and the earnings amounted to $983 thousand$0.3 million and $1.2$0.6 million was distributed tofor the Company.three and six months ended June 30, 2023, respectively.

27

14. 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 197,316 shares (based on the closing price of $76.02 on September 30, 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 not purchase any shares of its common stock during the three and nine months ended September 30, 2022.

15. RECLASSIFICATION OF PRIOR PERIOD PRESENTATION

Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

16. SUBSEQUENT EVENTEVENTS

The Company’s Board of Directors declared a quarterly dividend of $0.43 per share payable on September 8, 2023, to shareholders of record on August 18, 2023. 

On OctoberJuly 31, 2022,2023, the Company acquired 60% of the equity interests of a fourteen-clinic70% interest in a five-clinic physical therapy practice with the practice’s owners retaining 40%. Thefor a purchase price for the 60% equity interest was approximately $19.3 million, withof $2.1 million. The pre-closing practice owners retained a potential additional amount to be paid at a later date based on the performance of the business. 30% interest.

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Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following is a discussion and analysis of our historical consolidated financial conditionU.S. Physical Therapy, Inc. and results of operations,its subsidiaries (herein referred to as “we,” “us,” “our” and the “Company”) should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 20212022 filed with the Securities and Exchange Commission (the “SEC”) on March 1, February 28, 2023 (“2022 (“2021 Annual Report”); and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 20212022 Annual Report.

This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed below.

Forward-Looking Statements

We make statements in “Forward-Looking Statements” hereinthis report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening new clinics, availability of personnel and the reimbursement environment.  The forward-looking statements are based on our current views and assumptions and actual results could differ materially from those anticipated in Part II, Item 1A. Risk Factorssuch forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are not limited to the following.

the impact of future public health crises and epidemics/pandemics, such as was the case with the novel strain of COVID-19 and its variants;
changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status;
revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
changes in reimbursement rates or payment methods from third party payors including government agencies, and changes in the deductibles and co-pays owed by patients;
compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
one of our acquisition agreements contains a Put Right related to a future purchase of a majority interest in a separate company;
the impact of future vaccinations and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations;
our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing and our ability to operate our business;
changes as the result of government enacted national healthcare reform;
business and regulatory conditions including federal and state regulations;
governmental and other third party payor inspections, reviews, investigations and audits, which may result in sanctions or reputational harm and increased costs;
revenue and earnings expectations;
some of our acquisition agreements contain contingent consideration, the value of which may impact future financial results;
legal actions, which could subject us to increased operating costs and uninsured liabilities;

29
general economic conditions, including but not limited to inflationary and recessionary periods;
actual or perceived events involving banking volatility or limited liability, defaults or other adverse developments that affect the U.S. or international financial systems, may result in market wide liquidity problems which could have a material and adverse impact on our available cash and results of operations;
our business depends on hiring, training, and retaining qualified employees
availability and cost of qualified physical therapists;
competitive environment in the industrial injury prevention services business, which could result in the termination or non-renewal of contractual service arrangements and other adverse financial consequences for that service line;
acquisitions, and the successful integration of the operations of the acquired businesses;
impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interest (minority interests);
maintaining our information technology systems with adequate safeguards to protect against cyber-attacks;
a security breach of our or our third party vendors’ information technology systems may subject us to potential legal action and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 of the Health Information Technology for Economic and Clinical Health Act;
maintaining clients for which we perform management, IIP, and other services, as a breach or termination of those contractual arrangements by such clients could cause operating results to be less than expected;
maintaining adequate internal controls;
maintaining necessary insurance coverage;
availability, terms, and use of capital; and
weather and other seasonal factors.

Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report.

References Except as required by law, we are under no obligation to “we,” “us,” “our” andupdate any forward-looking statement, regardless of the “Company” shall mean U.S. Physical Therapy, Inc. and its subsidiaries.reason the statement may no longer be accurate.

EXECUTIVE SUMMARY

Our Business

We operate outpatient physical therapy clinics that provide pre- and post-operative care and treatment for a variety of orthopedic-related disorders and sports-related injuries, neurologically-related injuries and rehabilitation of injured workers. We also operate an industrial injury prevention services (“IIPS”IIP”) business which includes onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments services.

Selected Operating and Financial Databusiness.

Our reportable segments include the physical therapy operations segment and the IIPSIIP segment. Our 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 IIPSIIP segment include onsite injury prevention and rehabilitation, performance optimization and ergonomic assessments.

On SeptemberDuring the six months ended June 30, 2023 (“2023 Second Quarter”) and for the year ended December 31, 2022, we completed the acquisitions of the following physical therapy practices.

30
Acquisition Date 
% Interest
Acquired
 
Number of
Clinics
May 2023 Acquisition May 31, 2023 45% * 4
February 2023 Acquisition February 28, 2023 80% 1
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

*On May 31, 2023, the Company and a local partner together acquired a 75% interest in a four-clinic physical therapy practice. After the transaction, our ownership interest is 45%, our local partner's ownership interest is 30%, and the practice's pre-acquisition owners have a 25% ownership interest.

In May 2023, we completed a secondary public offering of common stock, in which we sold 1,916,667 shares. The shares were sold at a public offering price of $90.00 per share. Upon completion of the offering, the Company received net proceeds of approximately $163.7 million, after deducting an underwriting discount of $8.6 million and recognizing related fees and expenses of $0.2 million.  A portion of the net proceeds was used to repay the $35.0 million then outstanding under the Company’s credit facility while the remainder is expected to be used primarily to fund acquisitions.

On June 30, 2023, we operated 614656 clinics in 40 states.  In addition to our ownership and operation of outpatient physical therapy clinics, we also manage physical therapy facilities for third parties, such as physicians and hospitals, with 40 such43 third-party facilities under management as of SeptemberJune 30, 2022.2023.

During the 2021 year andThe following table provides a roll forward of our clinic count for the nine months ended September 30, 2022, we completedperiods presented.


 Three Months Ended  Six Months Ended 

 June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
Number of clinics, beginning of period  647   601   640   591 
Additions (1)  13   11   21   25 
Closed or sold  (4)  (4)  (5)  (8)
Number of clinics, end of period  656   608   656   608 


(1)Includes clinics added through acquisitions.

RESULTS OF OPERATIONS

The defined terms, with their respective descriptions, used in the acquisitions of six multi-clinic practices and two IIPS businesses as detailedfollowing discussions are listed below.

Acquisition
 Date Acquired Clinics
September 2022 Acquisition
 September 30, 2022 80% 2
August 2022 Acquisition
 August 31, 2022 70% 6
March 31, 2022
 March 31, 2022 70% 6
December 2021 Acquisition
 December 31, 2021 75% 3
November 2021 Acquisition
 November 30, 2021 70% IIPS
September 2021 Acquisition
 September 30, 2021 100% IIPS
June 2021 Acquisition
 June 30, 2021 65% 8
March 2021 Acquisition
 March 31, 2021 70% 6

During the nine months ended September 30, 2022, we closed five clinics and sold five clinics.
•
Mature clinics are clinics opened or acquired prior to January 1, 2022, and are still operating as of June 30, 2023.
•
Net rate per patient visit is net patient revenue related to our physical therapy operations divided by total number of patient visits (defined below) during the periods presented.
•
Patient visitsis the number of unique patient visits during the periods presented.
•
Average visits per day per clinic is patient visits divided by the number of days in which normal business operations were conducted during the periods presented and further divided by the average number of clinics in operation during the periods presented.
•
2023 Second Quarter refers to the period three months ended June 30, 2023.
•
2022 Second Quarter refers to the period three months ended June 30, 2022.
•
2023 Six Months refers to the period six months ended June 30, 2023.
•
2022 Six Months refers to the period six months ended June 30, 2022.

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Employees

Our strategy is to acquire physical therapy practices, develop outpatient physical therapy clinics as satellites within existing partnerships, acquire IIPS businesses, and support the growth of our existing businesses, which requires a talented workforce. As of September 30, 2022, we employed approximately 6,046 people nationwide, of which approximately 3,507 were full-time employees.

It is crucial that we continue to attract and retain top talent. To attract and retain talented employees, we strive to make our corporate office and all our practices and businesses a diverse and healthy workplace, with opportunities for our employees to receive continuing education, skill development, encouragement to grow and develop their career, all supported by competitive compensation, incentives, and benefits. Our clinical professionals are all licensed and a vast majority have advanced degrees. Our operational leadership teams have long-standing relationships with local and regional universities, professional affiliations, and other applicable sources that provide our practices with a talent pipeline.

We provide competitive compensation and benefits programs to help meet our employees’ needs in the practices and communities in which they serve. These programs (which can vary by practice and employment classification) include incentive compensation plans, a 401(k) plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, education assistance, mental health, and other employee assistance benefits.

We invest resources to develop the talent needed to support our business strategy. Resources include a multitude of training and development programs delivered internally and externally, online and instructor-led, and on-the-job learning formats.

We expect to continue adding personnel in the future as we focus on potential acquisition targets and organic growth opportunities.

RESULTS OF OPERATIONS

For the three months ended September 30, 2022 (“2022 Third Quarter”), our netNet income attributable to our shareholders, was $9.6 million as compared to $10.0 million for the three months ended September 30, 2021 (“2021 Third Quarter”).  In accordance witha Generally Accepted Accounting Principles (“GAAP”), measure, was $10.9 million for the 2023 Second Quarter compared to $11.2 million for the 2022 Second Quarter. The decrease in net income was primarily driven by the $1.6 million increase in interest expense as a result of higher effective interest rates and increased borrowings to fund acquisitions. In accordance with GAAP, the revaluation of redeemable non-controlling interest, net of taxes, is not included in net income but is charged directly to retained earnings; however, the charge for this change is included in the computation of earnings per basic and dilutedshare. Earnings per share, calculation. Inclusive ofin accordance with GAAP, was $0.64 for the charge for revaluation of non-controlling interest, net of taxes, the amount is $9.4 million, or $0.72 per diluted share,2023 Second Quarter as compared to $0.87 for the 2022 Third Quarter, and $8.5 million, or $0.66 per diluted share, for the 2021 ThirdSecond Quarter. The 2022 Third Quarter included a change in the fair value of a contingent earn-out payment which had the effect of increasing net income by $1.5 million and included a gain on revaluation of a put-right liability which increased net income by $0.6 million, both net of tax.

For the 2022 Nine Months, our netNet income attributable to our shareholders was $29.6$18.3 million for the 2022 Nine2023 Six Months and $30.6compared to $20.0 million for 2021 Nine Months.  Inclusivethe six months ended June 30, 2022. The decrease in net income was primarily driven by an increase in interest expense as a result of higher effective interest rates and increased borrowings to fund acquisitions. Earnings per share, in accordance with GAAP, was $1.22 for the charge for revaluation of non-controlling interest, net of taxes, the amount is $29.4 million, or $2.27 per diluted share,2023 Six Months as compared to $1.55 for the 2022 Nine Months, and $21.8 million, or $1.69Six Months.

The following table provides a calculation of earnings per diluted share, for the 2021 Nine Months. The 2022 Nine Months includedshare.


 Three Months Ended June 30,  Six Months Ended June 30, 

 June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 

 (In thousands, except per share data) 
Earnings per share            
Computation of earnings per share - USPH shareholders:            
Net income attributable to USPH shareholders $10,919  $11,195  $18,329  $19,994 
Charges to retained earnings:                
Revaluation of redeemable non-controlling interest  (2,865)  210   (2,746)  57 
Tax effect at statutory rate (federal and state)  732   (54)  700   (15)
  $8,786  $11,351  $16,283  $20,036 
                 
Earnings per share (basic and diluted) $0.64  $0.87  $1.22  $1.55 

Non-GAAP Measures

Adjusted EBITDA, a non-GAAP measure, is defined as net income attributable to USPH shareholders before interest income, interest expense, taxes, depreciation, amortization, change in the fair value of a contingent earn-out payment which had the effectconsideration, Relief Funds, changes in revaluation of increasing net income by $1.5 million, net of tax.put-right liability, equity-based awards compensation expense, and related portions for non-controlling interests.

For the 2022 Third Quarter, our Operating Results, a non-GAAP measure, was $7.5 million, or $0.58 per diluted share, as compared to $10.0 million, or $0.78 per diluted share, for the 2021 Third Quarter.

For the 2022 Nine Months, our Operating Results, a non-GAAP measure, was $27.5 million, or $2.12 per diluted share, as compared to $30.6 million, or $2.37 per diluted share, for the 2021 Nine Months.

Operating Results, equals net income attributable to USPHour diluted shareholders per the consolidated statements of income, less the changechanges in the revaluation of the put-right liability, and the changeRelief Funds, changes in the fair value of a contingent earn-out payment.  In accordance with GAAP,consideration, and any allocations to non-controlling interests, all net of taxes. Operating Results per diluted share also exclude the impact of the revaluation of redeemable non-controlling interest net ofand the associated tax is included in the earnings per basic and diluted share calculation, although it is not included in net income but charged directly to retained earnings.impact.

We believe providinguse Operating Results and Adjusted EBITDA, which eliminate certain items described above that can be subject to volatility and unusual costs, as one the principal measures to evaluate and monitor financial performance period over period.  We believe that presenting Operating Results and Adjusted EBITDA is useful information for investors to investors foruse in comparing ourthe Company’s period-to-period results andas well as for comparing with other similar businesses since most do not have redeemable instruments and therefore have different equity structures. We use Operating Results, which eliminates certain items described above that can be subject to volatility and unusual costs, as one of the principal measures to evaluate and monitor financial performance.

Operating Results isand Adjusted EBITDA are not a measuremeasures of financial performance under GAAPGAAP. Adjusted EBITDA and Operating Results should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements.

32
The following tables provide detail of the diluted earnings per share computation and reconcile net income attributable to our shareholders calculated in accordance with GAAP to Adjusted EBITDA and Operating Results (in thousands, except per share data):Results.

  Three Months Ended,  Six Months Ended, 
  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022* 
  (In thousands, except per share data) 
Adjusted EBITDA            
Net income attributable to USPH shareholders $10,919  $11,195  $18,329  $19,994 
Adjustments:                
Provision for income taxes  4,231   4,240   7,200   7,737 
Depreciation and amortization  3,827   3,474   7,615   7,298 
Interest expense - debt and other, net  2,633   987   5,193   1,527 
Equity-based awards compensation expense  1,786   1,814   3,592   3,660 
Change in fair value of contingent earn-out consideration  (708)  -   (10)  - 
Interest and other income  (682)  (679)  (746)  (725)
Change in revaluation of put-right liability  50   617   199   14 
Relief Funds  -   -   (467)  - 
Allocation to non-controlling interests  (389)  (333)  (761)  (697)
Adjusted EBITDA  (a non-GAAP measure) $21,667  $21,315   40,144   38,808 
                 
Operating Results                
Net income attributable to USPH shareholders $10,919  $11,195  $18,329  $19,994 
Adjustments:                
Change in fair value of contingent earn-out consideration  (708)  -   (10)  - 
Change in revaluation of put-right liability  50   617   199   14 
Relief Funds  -   -   (467)  - 
Allocation to non-controlling interest          33     
Tax effect at statutory rate (federal and state)  168   (158)  63   (4)
Operating Results (a non-GAAP measure) $10,429  $11,654  $18,147  $20,004 
                 
Operating Results per share (a non-GAAP measure) $0.76  $0.90  $1.36  $1.54 
                 
Shares used in computation - basic and diluted  13,720   12,998   13,375   12,968 

  Three Months Ended September 30, 
  2022  2021 
Computation of earnings per share - USPH shareholders:
      
Net income attributable to USPH shareholders
 $9,557
  $10,009
 
Charges to retained earnings:
        
Revaluation of redeemable non-controlling interest
  (196)  (2,070
)
Tax effect at statutory rate (federal and state) of 25.55%
  50
   529
 
  $9,411
  $8,468
 
         
Earnings per share (basic and diluted) $0.72
  $0.66
 
         
Adjustments:        
Change in revaluation of put-right liability  (785)  - 
Change in fair value of contingent earn-out consideration
  (2,000
)
  -
 
Revaluation of redeemable non-controlling interest  196   2,070
 
Tax effect at statutory rate (federal and state)  661
   (529)
Operating Results (a non-GAAP measure) $7,483
  $10,009
 
         
Basic and diluted Operating Results per share (a non-GAAP measure) $0.58
  $0.78
 
         
Shares used in computation - basic and diluted  13,001
   12,909
 
*Revised to conform to current year presentation.

  Nine Months Ended September 30, 
  2022  2021 
Computation of earnings per share - USPH shareholders:      
Net income attributable to USPH shareholders $29,551  $30,618 
Credit (charges) to retained earnings:        
Revaluation of redeemable non-controlling interest  (193)  (11,889)
Tax effect at statutory rate (federal and state) of 25.55%  49   3,038 
  $29,407  $21,767 
         
Earnings per share (basic and diluted) $2.27  $1.69 
         
Adjustments:        
Change in revaluation of put-right liability  (771)  - 
Change in fair value of contingent earn-out consideration  (2,000
)
  -
 
Revaluation of redeemable non-controlling interest  193   11,889 
Tax effect at statutory rate (federal and state)  659   (3,038)
Operating Results (a non-GAAP measure) $27,488  $30,618 
         
Basic and diluted Operating Results per share (a non-GAAP measure) $2.12  $2.37 
         
Shares used in computation - basic and diluted  12,979   12,894 
Adjusted EBITDA, a non- GAAP measure, was $21.7 million for the 2023 Second Quarter, an increase of $0.4 million from $21.3 million for the 2022 Second Quarter. Adjusted EBITDA increased $1.3 million to $40.1 million for the 2023 Six Months from $38.8 million for the 2022 Six Months.

Operating Results per diluted share, a non-GAAP measure, was $10.4 million, or $0.76 per share, for the 2023 Second Quarter as compared to $11.7 million, or $0.90 per share, for 2022 Second Quarter.Operating Results was $18.1 million, or $1.36 per share, in the 2023 Six Months as compared to $20.0 million, or $1.54 per share, in the 2022 Six Months.

33
2022 Third2023 Second Quarter Compared to the 2021 Third2022 Second Quarter Results

Our reportable segments include the physical therapy operations segment and the IIP 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 athletic trainers for schools.  The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements (in thousands):statements:

 Three Months Ended September 30,  Three Months Ended June 30, 
 2022 2021  2023 2022 
      (In thousands) 
Net operating revenue:     
Net revenue:     
Physical therapy operations $119,447
 $115,399
  $132,239  $121,219 
Industrial injury prevention services  20,155
  10,494
   19,246   19,437 
Total Company $139,602
 $125,893
  $151,485  $140,656 
             
Gross profit:             
Physical therapy operations $22,379
 $27,123
  $28,222  $26,699 
Industrial injury prevention services  4,405
  2,676
   3,985   4,122 
Gross profit $26,784
 $29,799
 
Total Company $32,207  $30,821 
             
Total Assets:             
Physical therapy operations $432,683 $583,785  $521,104  $414,172 
Industrial injury prevention services  367,025  46,313   478,477   382,272 
Total Company $799,708 $630,098  $999,581  $796,444 

Net Revenue

Reported totalTotal net revenue for the 2022 Third2023 Second Quarter was $139.6$151.5 million, an increase of 10.9% as7.7%, compared to $125.9 million for the 2021 Third Quarter.  See table below for a detail of reported total revenue (in thousands):

  Three Months Ended 
  September 30, 2022  September 30, 2021 
Revenue related to Mature Clinics $106,485  $106,631 
Revenue related to 2022 Clinic Additions  3,707   - 
Revenue related to 2021 Clinic Additions  6,481   4,869 
Revenue from clinics sold or closed in 2022  37   762 
Revenue from clinics sold or closed in 2021  -   65 
Net patient revenue from physical therapy operations  116,710   112,327 
Other revenue  753   759 
Revenue from physical therapy operations  117,463   113,086 
Revenue - Management contracts  1,984   2,313 
Revenue - Industrial injury prevention services  20,155   10,494 
Total revenue $139,602  $125,893 

Revenue from physical therapy operations increased $4.4 million, or 3.9%, to $117.5$140.7 million for the 2022 Third Quarter from $113.1 million for the 2021 ThirdSecond Quarter.  Net patient revenue related to clinics opened or acquired prior to 2021 and still in operation on September 30, 2022 (“Mature Clinics”) decreased slightly. Visits for Mature Clinics (same store) for the 2022 Third Quarter decreased by 1.5% as compared to the 2021 Third Quarter, while theThe following table provides a breakdown of total net patient revenue per visit increased by 1.4%.revenue.

The average net patient revenue per visit was $104.01 for the 2022 Third Quarter, a $1.08 per visit increase from $102.93 for the 2021 Third Quarter. Total patient visits increased 2.8% to 1,122,070 for the 2022 Third Quarter from 1,091,329 for the 2021 Third Quarter.  Net patient revenue is based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation. Net patient revenue is determined after contractual and other adjustments relating to patient discounts from certain payors. Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.
  For the Three Months Ended June 30,  Variance  
  2023  2022  $
  %  
  (In thousands, except percentages)         
Revenue related to:              
Mature Clinics (1) $115,053  $113,538  $1,515   1.3% 
2023 clinic additions  1,910   -   1,910   * (2)
2022 clinic additions  12,271   3,201   9,070   * (2)
Clinics sold or closed (3)  46   1,457   (1,411)  * (2)
Net patient revenue from physical therapy operations  129,280   118,196   11,084   9.4% 
Other revenue  792   898   (106)  (11.8)% 
Physical therapy operations  130,072   119,094   10,978   9.2% 
Industrial injury prevention services  19,246   19,437   (191)  (1.0)% 
Management contracts  2,167   2,125   42   2.0% 
  $151,485  $140,656  $10,829   7.7% 


(1)
See above for defined terms.

(2)
Not meaningful.

(3)
Revenue from closed clinics includes revenue from the five and 16 clinics closed or sold during the six months ended June 30, 2023 and the year ended December 31, 2022, respectively.

34
IIPS revenue was an all-time high andRevenue from our physical therapy operations increased 92.1%$11.0 million, or 9.2%, to $20.2$130.1 million for the 2023 Second Quarter from $119.1 million for the 2022 ThirdSecond Quarter as comparedprimarily due to $10.5 millionrecord-high average visits per clinic per day (30.4 for the 2021 Third Quarter.  Excluding $6.8 million2023 Second Quarter versus 29.5 for the 2022 Second Quarter) and an increase in volume from the 48 net new clinics added since the comparable prior year period, partially offset by a decrease in net rate per patient visit. The number of revenue relatedpatient visits increased 10.6% to 1,267,140 for the November 2021 IIPS Acquisition, IIPS revenue increased 27.1%2023 Second Quarter from 1,145,554 in the 2022 ThirdSecond Quarter. Patient visits at our mature clinics increased 2.6% in the 2023 Second Quarter as compared to the 2021 Third2022 Second Quarter. Net rate per patient visit was $102.03 in the 2023 Second Quarter as compared to $103.18 in the 2022 Second Quarter due to a decrease in the net rate for Medicare visits, partially offset by rate increases for commercial and workers compensation visits.  The decrease in the Medicare net rate is primarily due to the 2% Medicare rate reduction beginning in January 2023 and discontinuation of the sequestration relief on Medicare visits effective in July 2022.

Revenue from management contracts was $2.0IIP services revenue decreased slightly to $19.2 million for the 2023 Second Quarter as compared to $19.4 million for the 2022 Third Quarter as compared to $2.3Second Quarter.

Operating Costs

Operating costs were $119.3 million for the 2021 Third2023 Second Quarter, dueor 78.7% of net revenue, compared to $109.8 million, or 78.1% of net revenue, for the termination2022 Second Quarter. The following table provides a breakdown of five management contracts.operating costs.


 For the Three Months Ended June 30,  Variance  
  2023  2022  $  %  
Operating costs related to: (In thousands, except percentages)
Mature Clinics (1) $90,965  $89,364  $1,601   1.8% 
2023 clinic additions  1,832   -   1,832   * (2)
2022 clinic additions  9,192   2,713   6,479   * (2)
Clinics sold or closed (3)  157   821   (664)  * (2)
Physical therapy operations  102,146   92,898   9,248   10.0% 
Industrial injury prevention services  15,261   15,315   (54)  (0.4)% 
Management contracts  1,871   1,622   249   15.4% 
  $119,278  $109,835  $9,443   8.6% 

(1)
See above for defined terms.
(2)
Not meaningful.
(3)
Operating costs from closed clinics include costs from the five and 16 clinics closed or sold during the six months ended June 30, 2023 and the year ended December 31, 2022, respectively

Operating costs from physical therapy operations increased $9.2 million, or 10.0%, to $102.1 million in the 2023 Second Quarter from $92.9 million in the 2022 Second Quarter primarily driven by costs associated with the 48 net new clinics since the comparable prior year period as well as increased patient visits at mature clinics.

Operating Costcosts from IIP services were down slightly versus the comparable prior year period.

Total operating cost was $112.8 million for the 2022 Third Quarter, or 80.8% of total revenue, as compared to $96.1 million, or 76.3% of total revenue, for the 2021 Third Quarter. Operating cost related to Mature Clinics increased by $4.3 million, or 5.2%, for the 2022 Third Quarter compared to the 2021 Third Quarter.   In addition, operating cost related to the IIPS business increased by $7.9 million of which $5.8 million related to our November 2021 IIPS Acquisition.  See table below for a detail of operating cost (in thousands):

  Three Months Ended 
  September 30, 2022  September 30, 2021 
Operating cost related to Mature Clinics $86,177
  $81,911
 
Operating cost related to 2022 Clinic Additions  3,267
   - 
Operating cost related to 2021 Clinic Additions  5,366
   3,748
 
Operating cost related to clinics sold or closed in 2022  721
   504
 
Operating cost related to clinics sold or closed in 2021  -
   69
 
Operating cost related to physical therapy operations  95,531
   86,232
 
Operating cost related to management contracts  1,537
   2,044
 
Operating cost related to industrial injury prevention services  15,750
   7,818
 
Total operating cost $112,818
  $96,094
 

Each component of operating cost is discussed below:

Operating Cost—Salaries and Related Costs

Salaries and related costs including physical therapy operations and the IIPS business, was 58.6%were $86.9 million or 57.3% of net revenue for the 2022 Third2023 Second Quarter versus 56.1%$79.9 million or 56.8% for the 2021 Third2022 Second Quarter. Salaries and related costs for the physical therapy operations was $68.4$72.9 million in the 2023 Second Quarter, as compared to $66.7 million in the 2022 ThirdSecond Quarter or 58.3%and 56.0% of physical therapy operations revenue as compared to $62.5 million in the 2021 Third Quarter, or 55.3% of physical therapy operations revenue. Included in salaries and related costs for the physical therapy operations for the 2022 Third Quarter was $5.7 million related to 2022 and 2021 Clinic Additions.  Adjusted for the salaries and related costs for clinics closed or sold in 2022 and 2021 of $0.1 million in the Third Quarter and $0.4 million in 2021 Third Quarter, salaries and related costs related to Mature Clinics increased by $2.9 million in the 2022 Third Quarter compared to the 2021 Third Quarter.  Physical therapy total operating costs were $85.14 per visit in the 2022 Third Quarter as compared to $79.02 per visit in the 2021 Third Quarter, an increase of 7.7%.  Physical therapy salaries and related costs were $60.99 per visit in the 2022 Third Quarter as compared to $56.63 per visit in the Third Quarter 2021, an increase of 7.7%, The cost increases are primarily due to continuing labor rate pressures and the inflationary economic environment.

both comparative periods. Salaries and related costs for the IIPSIIP business was $12.1$12.5 million in the 2023 Second Quarter, or 64.8% of IIP services revenue, as compared to $11.6 million in the 2022 ThirdSecond Quarter, or 59.9% of IIPS revenue, as compared to $6.3 million in the 2021 Third Quarter, or 60.8% of IIPSIIP revenue.

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Operating Cost—Rent, Supplies, Contract Labor and Other

Rent, supplies, contract labor and other costs including physical therapy operations andas a percentage of total revenue were $30.8 million or 20.4% for the IIPS business, was 21.3% of net revenue in2023 Second Quarter versus $28.3 million or 20.2% for the 2022 Third Quarter versus 19.3% in the 2021 ThirdSecond Quarter. Rent, supplies, contract labor and other costs for the physical therapy operations was $25.7$27.7 million in the 2022 Third2023 Second Quarter, or 21.9%21.3% of physical therapy operations revenue, as compared to $22.4$24.7 million in the 2021 Third2022 Second Quarter, or 19.8%20.8% of physical therapy operations revenue. Included in rent, supplies, contract labor and other costs related to physical therapy operations for the 2022 Third Quarter was $2.8 million related to 2022 and 2021 Clinic Additions.  Adjusted for the rent, supplies, contract labor and other costs for clinics related to the clinics closed or sold in 2022 and 2021 of $0.7 million in the 2022 Third Quarter and $0.2 million in the 2021 Third Quarter, rent, supplies, contract labor and other costs for Mature Clinics increased by $1.3 million in the 2022 Third Quarter compared to the 2021 Third Quarter.  Rent, supplies, contract labor and other costs, related to management contracts decreased $0.1 million in the 2022 Third Quarter.

Rent, supplies, contract labor and other costs for the IIPSIIP services business was $3.7$2.8 million in the 2023 Second Quarter, or 14.5% of IIP revenue, as compared to $3.5 million in the 2022 ThirdSecond Quarter, or 18.6% of IIPS revenue, as compared to $1.4 million in the 2021 Third Quarter, or 13.7%18.2% of net IIPSIIP revenue.

Operating Cost—Provision for Credit Losses

The provision for credit losses as a percentage of net revenue was 1.0% in the 2022 Third2023 Second Quarter and 1.1% for the comparable period in 2021.

2022 Second Quarter.  Our provisionallowance for credit losses for patient accounts receivable as a percentage of total patient accounts receivable was 5.62%4.9% on SeptemberJune 30, 2022,2023, as compared to 5.64%5.2% on December 31, 2021.2022. Our days’ sales outstanding were both 3231 days on SeptemberJune 30, 2022,2023, and December 31, 2021.2022.

Gross Profit

Gross profit for the 2023 Second Quarter increased $1.4 million, or 4.5%, to $32.2 million from $30.8 million for the 2022 ThirdSecond Quarter. Gross profit margin slightly decreased to 21.3% in the 2023 Second Quarter from 21.9% in the 2022 Second Quarter. The following table provides a detailed breakdown of gross profit and related gross profit margins.


 For the Three Months Ended June 30,       

 2023  2022  Variance 

 $  
%
  $  %  $  % 

 (In thousands, except percentages) 
Physical therapy operations $27,926   21.6% $26,196   22.0% $1,730   6.6%
Industrial injury prevention services $3,985   20.7%  4,122   21.2%  (137)  (3.3)%
Management contracts $296   13.7%  503   23.7%  (207)  (41.2)%
Gross profit $32,207   21.3% $30,821   21.9% $1,386   4.5%

Corporate Office Costs

Corporate office costs were $12.1 million, or 8.0% of net revenue, for the 2023 Second Quarter compared to $10.7 million, or 7.6% of net revenue, for the 2022 Second Quarter.  The increase was primarily due to higher salaries related to merit increases and inflationary impacts, staff additions to support a larger number of clinics and a higher accrual for bonus expense.

Operating Income

Operating income was flat at $20.1 million for both the 2023 Second Quarter and 2022 Second Quarter.

Other Income and Expense

Total other (expense) income was ($1.0) million in the 2023 Second Quarter compared to ($0.6) million in the 2022 Second Quarter.

Interest expense, net of $0.8 million savings from the interest rate swap arrangement discussed below, under “Liquidity and Capital Resources – Interest Rate Swap”, was $2.6 million for the 2023 Second Quarter compared to $1.0 million in the 2022 Second Quarter. The increase in interest expense was primarily due to a higher effective interest rate and increased borrowings to fund acquisitions. The effective net interest rate on our Credit Facilities was 6.0% for the 2023 Second Quarter. We revalued the contingent earn-out consideration related to an acquisition and recognized $0.7 million as income (reduction in the related liability).

The revaluation of a put-right liability resulted in $0.1 million of expense (an increase in the related liability) for the 2023 Second Quarter. The put-right relates to the potential future purchase of a company that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. The owners have the right to put this transaction to us in approximately five years from November 2021.

36
Other and interest income for the 2023 Second Quarter included $0.5 million of interest income earned in June 2023 from investing the net proceeds from the secondary offering of our common stock in a high-yield savings account while the prior year comparable period mostly consisted of $0.6 million of gain from the sale of certain clinics.

Provision for Income Taxes

The provision for income tax was $4.2 million for both the 2023 Second Quarter and 2022 Second Quarter. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 27.9% for the 2023 Second Quarter and 27.5% for the 2022 Second Quarter. A reconciliation of our income tax expense and effective income tax rate is as follows:


 Three Months Ended June 30, 

 2023  2022 

 (In thousands, except percentages) 
Income before taxes $19,095  $19,495 

        
Less: net loss (income) attributable to non-controlling interest:        
Redeemable non-controlling interest - temporary equity  (2,920)  (2,626)
Non-controlling interest - permanent equity  (1,025)  (1,435)

 $(3,945) $(4,061)

        
Income before taxes less net income attributable to non-controlling interest $15,150  $15,434 

        
Provision for income taxes $4,231  $4,239 

        
Percentage  27.9%  27.5%

Net Income Attributable to Non-controlling Interest

Net income attributable to redeemable non-controlling interest (temporary equity) was $2.9 million for the 2023 Second Quarter and $2.6 million for the 2022 Second Quarter.  Net income attributable to non-controlling interest (permanent equity) was $1.0 million for the 2023 Second Quarter and $1.4 million for the 2022 Second Quarter.

Other Comprehensive Income

In May 2022, we entered into an interest rate swap effective on June 30, 2022, which will mature on June 30, 2027.  It has a $150.0 million notional value adjusted concurrently with scheduled principal payments made on the Term Facility. On June 30, 2023, the fair value of the interest rate swap was $6.4 million, an increase of $0.8 million, net of tax, as compared to December 31, 2022.  The fair value of the interest rate swap is included in other assets (current and long term) in the accompanying consolidated balance sheet while the increase in fair value is presented as unrealized gain in the accompanying unaudited consolidated statements of comprehensive income. The interest rate swap arrangement has generated $1.5 million in interest savings since its inception. The average interest rate for the term loan during the 2023 Second Quarter was $26.85.01% inclusive of debt amortization costs.

37
2023 Six Months Compared to 2022 Six Months Results.

Our reportable segments include the physical therapy operations segment and the IIP 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 athletic trainers for schools.  The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements:


 Six Months Ended June 30, 

 2023  2022 

 (In thousands) 
Net revenue:      
Physical therapy operations $261,398  $233,855 
Industrial injury prevention services  38,596   38,505 
Total Company $299,994  $272,360 
         
Gross profit:        
Physical therapy operations $55,310  $49,134 
Industrial injury prevention services  7,754   8,275 
Total Company $63,064  $57,409 
         
Total Assets:        
Physical therapy operations $521,104  $414,172 
Industrial injury prevention services  478,477   382,272 
Total Company $999,581  $796,444 

Net Revenue

Total net revenue for the 2023 Six Months was $300.0 million, an increase of 10.1%, compared to $272.4 million for the 2022 Six Months.  The table below provides a breakdown of total net revenue.

  Six Months Ended June 30,  Variance  
  2023  2022  $
  %  
Revenue related to: (In thousands, except percentages)  
Mature Clinics (1) $229,072  $221,187  $7,885   3.6% 
2023 clinic additions  2,282   -   2,282   * (2)
2022 clinic additions  24,291   3,395   20,896   * (2)
Clinics sold or closed (3)  216   3,152   (2,936)  * (2)
Net patient revenue from physical therapy operations  255,861   227,734   28,127   12.4% 
Other revenue  1,591   1,770   (179)  (10.1)% 
Physical therapy operations  257,452   229,504   27,948   12.2% 
Industrial injury prevention services  38,596   38,505   91   0.2% 
Management contracts  3,946   4,351   (405)  (9.3)% 
  $299,994  $272,360  $27,634   10.1% 


(1)
See Glossary of Terms - Revenue Metrics for the definition.

(2)Not meaningful.

(3)Revenue from closed clinics includes revenue from the five and 16 clinics closed or sold during the six months ended June 30, 2023 and the year ended December 31, 2022, respectively.
Revenue from physical therapy operations increased $27.9 million, or 12.2%, to $257.5 million for the 2023 Six Months from $229.5 million for the 2022 Six Months primarily due to higher average visits per clinic per day (30.1 for the 2023 Six Months versus 28.7 for the 2022 Six Months) and an increase in volume from the 48 net new clinics added since the comparable prior year period, partially offset by a decrease in net rate per visit. The number of patient visits increased 12.9% to 2,494,630 for the 2023 Six Months from 2,209,073 for the 2022 Six Months. Patient visits at our mature clinics increased 4.2% for the 2023 Six Months as compared to the 2022 Six Months.  Net rate per patient visit decreased to $102.56 in the 2023 Six Months from $103.09 in the 2022 Six Months due to a decrease in the net rate for Medicare visits, partially offset by rate increases for commercial and workers compensation visits.  The decrease in the Medicare net rate is primarily due to the 2% Medicare rate reduction beginning in January 2023 and discontinuation of sequestration relief on Medicare visits effective in July 2022.

38
Revenue from IIP services slightly increased to $38.6 million for the 2023 Six Months as compared to $38.5 million for the 2022 Six Months.

Operating Cost

Operating cost was $236.9 million for the 2023 Six Months, or 79.0% of net revenue, compared to $215.0 million, or 78.9% of net revenue, for the 2022 Six Months. See table below for a more detailed breakdown of operating costs.


 For the Six Months Ended June 30,  Variance   

 2023  2022  $  %   
Operating costs related to: (In thousands, except percentages) 
Mature Clinics (1) $181,469  $175,717  $5,752   3.3%  
2023 clinic additions  2,291   -   2,291   * (2)
2022 clinic additions  18,509   3,114   15,395   * (2)
Clinics sold or closed (3)  498   2,437   (1,939)  * (2)
Physical therapy operations  202,767   181,268   21,499   11.9%  
Industrial injury prevention services  30,842   30,230   612   2.0%  
Management contracts  3,321   3,453   (132)  (3.8)%  
  $236,930  $214,951  $21,979   10.2%  


(1)
See Glossary of Terms - Revenue Metrics for the definition.

(2)
Not meaningful.

(3)
Operating costs from closed clinics include costs from the five and 16 clinics closed or sold during the six months ended June 30, 2023 and the year ended December 31, 2022, respectively

Operating costs from physical therapy operations increased $21.5 million or 11.9% to $202.8 million in the 2023 Six Months from $181.3 million in the 2022 Six Months primarily driven by costs associated with the 48 net new clinics added since the comparable prior year period as well as increased patient visits at mature clinics.

Operating costs from IIP services increased by $0.6 million, or 2.0%, to $30.8 million as compared to $29.8$30.2 million in the 2022 Six Months.

Salaries and Related Costs

Salaries and related costs was $172.9 million or 57.6% of net revenue for the 2021 Third Quarter. The gross profit percentage was 19.2% 2023 Six Months versus $155.1 million or 56.9%of totalnet revenue for the 2022 Third Quarter as compared to 23.7%Six Months. Salaries and related costs for the 2021 Third Quarter. The gross profit percentage for our physical therapy operations was 18.7%$145.5 million in the 2023 Six Months, or 56.5% of physical therapy operations revenue, as compared to $129.1 million in the 2022 Six Months, or 56.3% of physical therapy operations revenue. Salaries and related costs for our IIP business was $24.6 million in the 2023 Six Months, or 63.8% of IIP revenue, as compared to $22.7 million in the 2022 Six Months, or 59.0% of IIP revenue.

Rent, Supplies, Contract Labor and Other

Rent, supplies, contract labor and other costs as a percentage of total revenue were $60.9 million or 20.3% for the 2023 Six Months versus $57.0 million or 20.9% for the 2022 Third QuarterSix Months. Rent, supplies, contract labor and other costs for physical therapy operations was $54.1 million in the 2023 Six Months, or 21.0% of physical therapy operations revenue, as compared to 23.7%$49.3 million in the 2022 Six Months, or 21.5% of physical therapy operations revenue. Rent, supplies, contract labor and other costs for the 2021 Third Quarter. IIP business was $6.2 million in the 2023 Six Months, or 16.1% of IIP services revenue, as compared to $7.4 million in the 2022 Six Months, or 19.1% of net IIP services revenue in the 2022 Six Months.

39
Provision for Credit Losses

The grossprovision for credit losses as a percentage of total revenue were both 1.0% for 2023 Six Months and the 2022 Six Months.

Gross Profit

Gross profit percentage on management contracts was 22.5%for the 2023 Six Months increased $5.7 million, or 9.9%, to $63.1 million from $57.4 million for the 2022 Third Quarter as comparedSix Months. Gross profit margin decreased slightly to 11.6% for21.0% in the 2021 Third Quarter.2023 Six Months from 21.1% in the 2022 Six Months. The following table provides a detailed breakdown of gross profit percentage for IIPS was 21.9% for the 2022 Third Quarter as compared to 25.5% for the 2021 Third Quarter.  The IIPS margin in 2022 has been impacted by the lower margin profile of our November 2021 IIPS Acquisition.  The table below details theand related gross profit (in thousands):margins.


 For the Six Months Ended June 30,    
 Three Months Ended  2023 2022  Variance 
 September 30, 2022 September 30, 2021  $  %  $  % $ % 
       (In thousands, except percentages) 
Physical therapy operations $21,932  $26,854  $54,685  21.2% $48,236  21.0% $6,449  13.4%
Industrial injury prevention services 7,754  20.1% 8,275  21.5% (521) (6.3)%
Management contracts 447  269   625   15.8%  898   20.6%  (273)  (30.4)%
Industrial injury prevention services  4,405   2,676 
Gross profit $26,784  $29,799  $63,064  21.0% $57,409   21.1% $5,655   9.9%

Corporate Office Cost

Corporate office costs were $11.9$26.0 million, or 8.7% of net revenue, for the 2022 Third Quarter2023 Six Months compared to $12.9$22.3 million, for the 2021 Third Quarter. Corporate office costs were 8.5%or 8.2% of totalnet revenue, for the 2022 Third Quarter as compared to 10.2% for the 2021 Third Quarter.Six Months. The decreaseincrease was primarily due to lower estimatedhigher salaries related to merit increases and inflationary impacts, staff additions to support a larger number of clinics and a higher accrual for bonus expense in the 2022 Third Quarter than the 2021 Third Quarter.expense.

Operating Income

OperatingOur operating income increased 5.5%, to $37.1 million, or 12.4% of net revenues, for the 2023 Six Months from $35.1 million, or 12.9% of net revenues, in the 2022 Six Months.

Other Income and Expense

Total other (expense) income was $(3.6) million during the 2023 Six Months compared to $(0.1) million during the 2022 Six Months.

Interest expense, net of $1.4 million savings from the interest rate swap arrangement, was $5.2 million for the 2023 Six Months compared to $1.5 million in the 2022 Six Months. The increase in interest expense was primarily due to a higher effective interest rate and increased borrowings to fund acquisitions. The effective interest rate on the Company’s credit facilities was 5.7% for the 2023 Six Months.

During the 2023 Six Months, the Company recognized $0.5 million of income received under the Coronavirus Aid, Relief and Economic Security Act (“Relief Funds”). The Relief Funds were received in prior years but were subject to certain compliance requirements which were met in the three months ended March 31, 2023. The Company does not expect to receive or recognize any future Relief Funds. No such income was recognized in the prior year six-month period.

40
Other and interest income for the 2022 Third Quarter was $14.92023 Six Months included $0.5 million and $16.9of interest income earned in June 2023 from the investment of excess cash from the secondary offering of the Company’s common stock in a high-yield savings account while the prior year comparable period included $0.6 million for 2021 Third Quarter. Operating income as a percentage of total revenue was 10.7% forgain from the 2022 Third Quarter as compared to 13.4% for the 2021 Third Quarter.sale of certain clinics.

Change in fair value of contingent earn-out consideration

During the 2022 Third Quarter, the Company revalued contingent earn-out consideration related to an acquisition, resulting in the elimination of a previously booked liability of $2.0 million.

Equity in earnings of unconsolidated affiliate

Through a subsidiary, we have a 49% joint venture interest in a company which provides physical therapy services for patients at hospitals. Since we are deemed to not have a controlling interest in the joint venture, our investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of SeptemberJune 30, 2022,2023, is $12.0$12.2 million. ForEquity in earnings of this unconsolidated affiliate was $0.6 million and $0.7 million in the 2023 Six Months and the 2022 Third Quarter, we recognized income of $0.3 million on this 49% joint venture.

36
Change in Revaluation of Put-Right Liability

The gain on revaluation of put-right liability was $0.8 million for the 2022 Third Quarter.  As part of the November 2021 IIPS Acquisition, we 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 owners have the right to put this transaction to us in approximately five years from November 2021, with such right having a $2.8 million value on September 30, 2022, as reflected on our consolidated balance sheet in Other long-term liabilities. The value of this right will continue to be adjusted in future periods, as appropriate.

Interest expense – debt and other, net

For the 2022 Third Quarter, the interest expense on debt and other, primarily from our $150 million term loan entered into in June 2022, details of which are disclosed within LIQUIDITY AND CAPITAL RESOURCES below, amounted to $2.0 million.  See discussion of Other Comprehensive Income below. Interest expense, primarily from the Company’s revolving line of credit, was $0.3 million for the 2021 Third Quarter.
Six Months, respectively.

Provision for Income Taxes

The provision for income tax was $3.2$7.2 million for the 2023 Six Months compared to $7.7 million for the 2022 Third Quarter and $3.8 million for the 2021 Third Quarter. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 25.2% for the 2022 Third Quarter and 27.6% for the 2021 Third Quarter. The current quarter included an adjustment to the tax provision based on revised estimates on certain non-deductible items (see computation of 2022 Nine Month tax rate in next section).  See table below detailing calculation of the provision for income taxes as a percentage of income before taxes less net income attributable to non-controlling interest ($ in thousands):

  Three Months Ended 
  September 30, 2022  September 30, 2021 
Income before taxes $16,036  $17,938 
         
Less: net income attributable to non-controlling interest:        
Redeemable non-controlling interest - temporary equity  (2,037)  (2,605)
Non-controlling interest - permanent equity  (1,227)  (1,509)
  $(3,264) $(4,114)
         
Income before taxes less net income attributable to non-controlling interest $12,772  $13,824 
         
Provision for income taxes $3,215  $3,815 
         
Percentage  25.2%  27.6%

Net Income Attributable to Non-controlling Interest

Net income attributable to redeemable non-controlling interest (temporary equity) was $2.0 million for the 2022 Third Quarter and $2.6 million for the 2021 Third Quarter.  Net income attributable to non-controlling interest (permanent equity) was $1.2 million for the 2022 Third Quarter and $1.5 million for the 2021 Third Quarter.

Other Comprehensive Gain

We entered into an interest rate swap agreement in May 2022, which has a $150 million notional value, a maturity date of June 30, 2027 and was effective on June 30, 2022. Beginning in July 2022, we pay a fixed rate of interest of 2.815% on a quarterly basis. The total interest rate in any period will also include an applicable margin based on our consolidated leverage ratio. Currently, our interest rate including the applicable margin is 4.665%.  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 fair value of the interest rate swap on September 30, 2022, was $5.9 million, of which $1.9 million has been included within Other current assets and $4.0 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 $4.8 million, net of tax, for the 2022 Third Quarter.

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2022 Nine Months Compared to 2021 Nine Months Results

The following table summarizes financial data by segment for the periods indicated and reconciles the data to our consolidated financial statements (in thousands):

  Nine Months Ended September 30, 
  2022  2021 
       
Net operating revenue:      
Physical therapy operations $353,302  $334,652 
Industrial injury prevention services  58,660   30,537 
Total Company $411,962  $365,189 
         
Gross profit:        
Physical therapy operations $71,513  $82,058 
Industrial injury prevention services  12,680   7,941 
Gross profit $84,193  $89,999 
         
Total Assets:        
Physical therapy operations $432,683  $583,785 
Industrial injury prevention services  367,025   46,313 
Total Company $799,708  $630,098 

Revenue

Reported total revenue for the 2022 Nine Months was $412.0 million, an increase of 12.8% as compared to $365.2 million for the 2021 Nine Months.  See table below for a detail of reported total revenue (in thousands):

  For the Nine Months Ended 
  September 30, 2022  September 30, 2021 
Revenue related to Mature Clinics $317,514  $314,969 
Revenue related to 2022 Clinic Additions  7,019   - 
Revenue related to 2021 Clinic Additions  18,827   7,334 
Revenue from clinics sold or closed in 2022  1,084   2,058 
Revenue from clinics sold or closed in 2021  -   458 
Net patient revenue from physical therapy operations  344,444   324,819 
Other revenue  2,523   2,222 
Revenue from physical therapy operations  346,967   327,041 
Revenue - Management contracts  6,335   7,611 
Revenue - Industrial injury prevention services  58,660   30,537 
Total revenue $411,962  $365,189 

Revenue from physical therapy operations increased $19.9 million, or 6.1%, to $347.0 million for the 2022 Nine Months from $327.0 million for the 2021 Nine Months.

The average net patient revenue per visit was $103.40 for the 2022 Nine Months as compared to $104.00 for the 2021 Nine Months. Total patient visits increased 6.7% to 3,331,143 for the 2022 Nine Months from 3,123,187 for the 2021 Nine Months. Net patient revenue is based on established billing rates less allowances for patients covered by contractual programs and workers’ compensation. Net patient revenue is determined after contractual and other adjustments relating to patient discounts from certain payors. Payments received under contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates.

Net patient revenue related to Mature Clinics increased $2.5 million, or 0.8%, to $317.5 million for the 2022 Nine Months compared to $315.0 million for the 2021 Nine Months. Visits for Mature Clinics (same store) for the 2022 Nine Months increased 1.5% as compared to the 2021 Nine Months. The increase in visits was partially offset by a 0.7% reduction in the net patient revenue per visit.

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IIPS services revenue increased 92.1% to $58.7 million for the 2022 Nine Months as compared to $30.5 million for the 2021 Nine Months.  Excluding $20.5 million of revenue related to the November 2021 IIPS Acquisition, IIPS revenue increased 25.0% in the 2022 Nine Months as compared to the 2021 Nine Months.

Revenue from management contract revenue decreased 16.8% to $6.3 million for the 2022 Nine Months as compared to $7.6 million for the 2021 Nine Months due to the termination of certain management contracts.

Operating Cost

Total operating cost was $327.8 million for the 2022 Nine Months, or 79.6% of total revenue, as compared to $275.2 million, or 75.4% of total revenue, for the 2021 Nine Months. Operating cost related to Mature Clinics increased by $15.9 million for the 2022 Nine Months compared to the 2021 Nine Months.  In addition, operating cost related to the IIPS business increased by $23.4 million of which $17.0 million related to the November 2021 IIPS Acquisition.  See table below for a detail of operating cost (in thousands):

  Nine Months Ended 
  September 30, 2022  September 30, 2021 
Operating cost related to Mature Clinics $253,899  $237,982 
Operating cost related to 2022 Clinic Additions  6,271   - 
Operating cost related to 2021 Clinic Additions  15,393   5,877 
Operating cost related to clinics sold or closed in 2022  1,233   1,733 
Operating cost related to clinics sold or closed in 2021  2   510 
Operating cost related to physical therapy operations  276,798   246,102 
Operating cost related to management contracts  4,991   6,492 
Operating cost related to industrial injury prevention services  45,980   22,596 
Total operating cost $327,769  $275,190 

Each component of operating cost is discussed below:

Operating Cost—Salaries and Related Costs

Salaries and related costs, including physical therapy operations and the IIPS business, was 57.5% of net revenue for the 2022 Nine Months versus 55.6% for the 2021 Nine Months. Salaries and related costs for the physical therapy operations was $197.7 million in the 2022 Nine Months, or 57.0% of physical therapy operations revenue, as compared to $178.6 million in the 2021 Nine Months, or 54.6% of physical therapy operations revenue. Included in salaries and related costs for the physical therapy operations for the 2022 Nine Months was $13.8 million related to 2022 and 2021 Clinic Additions.  Adjusted for the salaries and related costs for clinics closed or sold in 2022 and 2021 of $0.8 million in the 2022 Nine Months and $1.4 million in 2021 Nine Months, salaries and related costs related to Mature Clinics increased by $9.7 million in the 2022 Nine Months compared to the 2021 Nine Months.  Salaries and related costs related to management contracts decreased by $1.3 million for the 2022 Nine Months. As previously mentioned, the Company is experiencing pressure on labor rates and other costs due to the inflationary economic environment.

Salaries and related costs for the IIPS business was $34.8 million in the 2022 Nine Months, or 59.3% of IIPS revenue, as compared to $18.8 million in the 2021 Nine Months, or 61.8% of IIPS revenue.

Operating Cost—Rent, Supplies, Contract Labor and Other

Rent, supplies, contract labor and other costs, including physical therapy operations and the IIPS business, was 21.0% of net revenue in the 2022 Nine Months versus 18.6% in the 2021 Nine Months. Rent, supplies, contract labor and other costs for the physical therapy operations was $75.0 million in the 2022 Nine Months, or 21.6% of physical therapy operations revenue, as compared to $63.5 million in the 2021 Nine Months, or 19.4% of physical therapy operations revenue. Included in rent, supplies, contract labor and other costs related to physical therapy operations for the 2022 Nine Months was $7.5 million related to 2022 and 2021 Clinic Additions.  Adjusted for the rent, supplies, contract labor and other costs for clinics related to the clinics closed or sold in 2022 and 2021 of $0.4 million in the 2022 Nine Months and $0.8 million in the 2021 Nine Months, rent, supplies, contract labor and other costs for Mature Clinics increased by $6.4 million in the 2022 Nine Months compared to the 2021 Nine Months.  Rent, supplies, contract labor and other costs, related to management contracts decreased $0.2 million in the 2022 Nine Months.

Rent, supplies, contract labor and other costs for the IIPS business was $11.1 million in the 2022 Nine Months, or 18.9% of IIPS revenue, as compared to $3.7 million in the 2021 Nine Months, or 12.2% of net IIPS revenue.

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Operating Cost—Provision for Credit Losses

The provision for credit losses as a percentage of net revenue was 1.0% in the 2022 Nine Months and 1.1% for the comparable period in 2021.

Our provision for credit losses for patient accounts receivable as a percentage of total patient accounts receivable was 5.62% on September 30, 2022, as compared to 5.64% at December 31, 2021. Our days’ sales outstanding were 32 days at September 30, 2022 and December 31, 2021.

Gross Profit

Gross profit for the 2022 Nine Months was $84.2 million, a decrease of $5.8 million, or 6.5%, as compared to $90.0 million for the 2021 Nine Months. The gross profit percentage was 20.4% of total revenue for the 2022 Nine Months as compared to 24.6% for the 2021 Nine Months. The gross profit percentage for our physical therapy operations was 20.2% for the 2022 Nine Months as compared to 24.7% for the 2021 Nine Months. The gross profit percentage on management contracts was 21.2% for the 2022 Nine Months as compared to 14.7% for the 2021 Nine Months.  The gross profit percentage for the IIPS business was 21.6% for the 2022 Nine Months as compared to 26.0% for the 2021 Nine Months. The IIPS margin in 2022 has been impacted by the lower margin profile of our November IIPS Acquisition. The table below details the gross profit (in thousands):

  Nine Months Ended 
  September 30, 2022  September 30, 2021 
       
Physical therapy operations $70,169  $80,939 
Management contracts  1,344   1,119 
Industrial injury prevention services  12,680   7,941 
Gross profit $84,193  $89,999 

Corporate Office Cost

Corporate office costs were $34.2 million for the 2022 Nine Months compared to $35.8 million for the 2021 Nine Months. Corporate office costs were 8.3% of total revenue for the 2022 Nine Months as compared to 9.8% for the 2021 Nine Months. The decrease was primarily due to lower estimated bonus expense in the 2022 Nine Months than the 2021 Nine Months.

Operating Income

Operating income for the 2022 Nine Months was $50.0 million and $54.2 million for 2021 Nine Months. Operating income as a percentage of total revenue was 12.1% for the 2022 Nine Months as compared to 14.8% for the 2021 Nine Months.

Equity in earnings of unconsolidated affiliate

Through a subsidiary, we have a 49% joint venture interest in a company which provides physical therapy services for patients at hospitals. Since we are deemed to not have a controlling interest in the joint venture, our investment is accounted for using the equity method of accounting. The investment balance of this joint venture as of September 30, 2022, is $12.0 million. For the 2022 Nine Months, we recognized income of $1.0 million on this 49% joint venture.

Change in fair value of contingent earn-out consideration

During the 2022 Nine Months, the Company revalued contingent earn-out consideration related to an acquisition, resulting in the elimination of a previously booked liability of $2.0 million.

Change in Revaluation of Put-Right Liability

For the 2022 Nine Months, we recorded a gain on the revaluation of the put-right liability of $0.8 million.  As part of the November 2021 IIPS Acquisition, we 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 owners have the right to put this transaction to us in approximately five years, with such right having a $2.8 million value on September 30, 2022, as reflected on our consolidated balance sheet in Other long-term liabilities. The value of this right will continue to be adjusted in future periods, as appropriate.

Interest expense – debt and other, net

For the 2022 Nine Months, the interest expense on debt and other, primarily from our $150 million term loan entered into in June 2022, details of which are disclosed withing LIQUIDITY AND CAPITAL RESOURCES, amounted to $3.5 million.  See discussion of Other Comprehensive Income below. Interest expense, primarily from the Company’s revolving line of credit was $0.8 million for the 2021 Nine Months.

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Provision for Income Taxes

The provision for income tax was $11.0 million for the 2022 Nine Months and $11.3 million for the 2021 NineSix Months. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 27.0%28.2% for boththe 2023 Six Months and 27.9% for the 2022 Nine MonthsSix Months. A reconciliation of our income tax expense and the 2021 Nine Months. See table below ($ in thousands):
effective income tax rate is as follows:


 Six Months Ended June 30, 
 For the Nine Months Ended  2023 2022 
 September 30, 2022 September 30, 2021  (In thousands, except percentages) 
Income before taxes $51,011  $54,807  $33,491 $34,975 
             
Less: net income attributable to non-controlling interest:             
Redeemable non-controlling interest - temporary equity  (7,220)  (8,669) (5,640) (5,183)
Non-controlling interest - permanent equity  (3,288)  (4,194)  (2,322)  (2,061)
 $(10,508) $(12,863) $(7,962) $(7,244)
             
Income before taxes less net income attributable to non controlling interest $40,503  $41,944 
Income before taxes less net income attributable to non-controlling interest $25,529 $27,731 
             
Provision for income taxes $10,952  $11,326  $7,200 $7,737 
             
Percentage  27.0%  27.0%  28.2%  27.9%

Net Income Attributable to Non-controlling Interest

Net income attributable to redeemable non-controlling interest (temporary equity) was $7.2$5.6 million for the 2023 Six Months and $5.2 million for the 2022 Nine Months and $8.7 million for the 2021 NineSix Months.  Net income attributable to non-controlling interest (permanent equity) was $3.3$2.3 million forin the 2023 Six Months compared to $2.1 million in the 2022 Nine Months and $4.2 million for the 2021 NineSix Months.

Other Comprehensive Income
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The impact of the interest rate swap (described within LIQUIDITY AND CAPITAL RESOURCES below) on the accompanying Consolidated Statements of Comprehensive Income was an unrealized gain of $4.4 million, net of tax, for the 2022 Nine Months.

LIQUIDITY AND CAPITAL RESOURCES

We believe that our business has sufficient cash to allow us to meet our short-term cash requirements. On SeptemberJune 30, 20222023, and December 31, 2021,2022, we had $37.9$160.7 million and $28.6$31.6 million, respectively, in cash.cash and cash equivalents. Additionally, we had $146.3 million of outstanding borrowings and $175.0 million in available credit under our credit facilities as of June 30, 2023 compared to $179.1 million of outstanding borrowings and $144.0 million in available credit on our revolving credit facility as of December 31, 2022. As discussed above, in May 2023 we completed a secondary offering of our common stock resulting in net proceeds of $163.7 million, after deducting the underwriting discount and certain offering expenses. A portion of the net proceeds was used to repay the $35.0 million then outstanding under our Revolving Credit Facility while the remainder is expected to be used primarily for acquisitions. While such cash is awaiting deployment, it is currently invested in a high-yield savings account which generated interest income of approximately $0.5 million in June 2023.  We believe that our cash and cash equivalents and availability under our Credit Facilities are sufficient to fund the working capital needs of our operating subsidiaries through at least SeptemberJune 30, 2023.2024.

Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions. We have, from time to time, purchased the non-controlling interests of limited partners in our Clinic Partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using a combination of cash and financing. Any large acquisition would likely require financing.

We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting CMS approval initially may not be submitted for six months or more. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the account receivable has been outstanding for 120 days or longer.  As of June 30, 2023, we have accrued $8.0 million related to credit balances, a portion of which is due to patients and payors.  The credit balances are expected to be resolved or paid in the next twelve months.

Cash Flow

A summary of our operating, investing and financing activities is discussed below.

Cash and cash equivalents increased by $9.4$129.1 million from December 31, 20212022 to SeptemberJune 30, 2022.2023.  During the 2022 Nine2023 Six Months, $41.2$38.8 million was provided by operations, $110.0 million was provided by financing activities primarily related to the secondary offering in May 2023, and $36.0$19.7 million net of payments, from proceeds on our Credit Agreement (described below).was used in investing activities. The major uses of cash for investing and financing activities included: net payments made on Credit Facilities ($32.9 million), payments on purchase of business and non-controlling interest ($15.8 million), cash dividends paid to our shareholders ($11.2 million), distributions to non-controlling interests inclusive of those classified as redeemable non-controlling interest ($11.8 million), dividends paid to our shareholders ($16.0 million), purchase of business and non-controlling interest ($32.98.4 million), and purchase of fixed assets ($7.34.5 million).

Senior Credit Faculties

On 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. On June 17, 2022, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) among Bank of America, N.A., as administrative agent (“Administrative Agent”) and others.the lenders from time-to-time party thereto.

The Credit Agreement, which matures on June 17, 2027, provides for loans in an aggregate principal amount of $325 million. Such loans will be 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”).

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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.
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 have been and shall continue to be used by us for working capital and other general corporate purposes of theour Company and its subsidiaries, including to fund future acquisitions and invest in growth opportunities. The proceeds of the Term Facility were used by us to refinance the indebtedness outstanding under the Second Amended and Restated Credit Agreement, to pay fees and expenses incurred in connection with the loan facilities transactions, for working capital and other general corporate purposes of our Company and its subsidiaries.purposes.

We will be 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 agreement plus an applicable margin or, at our option, an alternate base rate plus an applicable margin. Currently, ourOur interest rate includingfor the applicable margin2023 Six Months for the Senior Credit Facilities inclusive of the savings from the interest rate swap described below is 4.665%5.7%.  Interest is payable at the end of the selected interest period but no less frequently than quarterly and on the date of maturity.

We will also 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”). We 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.

Our obligations under the Credit Agreement are guaranteed by itsour wholly owned material domestic subsidiaries (each, a “Guarantor”), and our obligations and any Guarantors are secured by a perfected first priority security interest in substantially all of theour existing and future personal property of our Company and each Guarantor, subject to certain exceptions.

As of June 30, 2023, $144.6 million, net of unamortized debt issuance costs of $1.7 million, was outstanding on the Term Facility while none was outstanding under the Revolving Facility resulting in $175.0 million of credit availability. As of June 30, 2023, we were in compliance with all of the covenants contained in the Credit Agreement. The average effective interest rate, net of the gain on interest rate swap discussed below, for borrowings under the Senior Credit Facility was 6.0% and 5.7% in the three and six months ended June 30, 2023, respectively.

Interest Rate Swap

In May 2022, we entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A, which became effective on June 30, 2022. It has a $150 million notional value adjusted concurrently with schedule principal payments made on the term loan and has a maturity date of June 30, 2027. Beginning in July 2022, we make interest payments based on thereceive 1-month SOFR, and pay a fixed rate (“variable rate payment”) and receive or pay the  differential between the variable rate payment and the fixedof interest of 2.815% on 1-month SOFR rate on a monthlyquarterly basis. Also included in theThe total interest paymentrate in any period isalso includes an applicable margin based on our consolidated leverage ratio. In connection with the swap, no cash was exchanged between us and the counterparty.

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We designated theour 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.

Notes Payable Related to Acquisitions

We generally enter into various notes payable as a means of financing our acquisitions. Our present outstanding notes payable primarily relate to the acquisitions of a business or acquisitions of majority interests in businesses. At June 30, 2023, our remaining outstanding balance on these notes aggregated $6.4 million. $3.8 million of the outstanding notes payable are payable in 2023, $1.6 million is payable in 2024, and $1.0 million is payable in 2025. Notes are generally payable in equal annual installments of principal over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 8.0% per annum.

On May 31, 2023, we and a local partner together acquired a 75% interest in a four-clinic physical therapy practice. After the transaction, our ownership interest is 45%, our local partner's ownership interest is 30%, and the practice's pre-acquisition owners have a 25% ownership interest. The purchase price for the 75% equity interest was approximately $3.1 million, of which $1.7 million was paid in cash by us, $1.1 million was paid in cash by the local partner, and $0.3 million was in the form of a note payable (of which $0.2 million will be paid by us and $0.1 million will be paid by the local partner). The note will be paid on July 1, 2024. We guaranteed the full payment of the $0.3 million on its due date.

On February 28, 2023, we acquired an 80% interest in a one-clinic physical therapy practice. The practice’s owners and founders retained 20% of the equity interest. The purchase price for the 80% equity interest was approximately $6.2 million, of which $5.8 million was paid in cash and $0.4 million in the form of a note payable.  The note accrues interest at 4.5% per annum and the principal and interest are payable on February 28, 2025.

On November 30, 2022, we 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. The note accrues interest at 7.0% per annum and the principal and interest are payable on November 30, 2024.

On October 31, 2022, we acquired a 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 a potential additional amount to be paid at a later date based on the performance of the business. This contingent consideration had a fair value of $8.3 million on June 30, 2023. The fair value of this contingent consideration will be adjusted quarterly based on certain criteria and market inputs. There is no maximum payout for this contingency.

On September 30, 2022, $150.0we 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 outstanding onpaid in cash and $0.3 million in the Term Loanform of a note payable.  The note accrues interest at 5.5% per annum and the Revolving Facility remains available resultingprincipal and interest are payable on September 30, 2024.

On August 31, 2022, we acquired a 70% interest in $175.0a 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 availability. Aswhich $3.3 million was paid in cash and $0.2 million in the form of September 30, 2022, we were in compliance with all ofa note payable.  The note accrues interest at 5.5% per annum and the covenants thereunder. Through the date of this report, we have drawn $5.0 millionprincipal and interest are payable on the Revolving Facility.August 31, 2024.

On March 31, 2022, we 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.

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On August 31, 2022,Redeemable Non-Controlling Interest

Certain limited partnership agreements, as amended, provide that, upon the triggering events, we acquiredhave a 70% interest inCall Right and the selling entity or individual has a six-clinic physical therapy practice. The practice’s owners retained 30%Put Right for the purchase and sale of the equity interests.limited partnership interest held by the partner. Once triggered, the Put Right and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. 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 September 30, 2022, we acquired an 80% interest in a two-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price forpartner’s limited partnership interest upon the 80% equity interest was approximately $4.2 million,exercise of which $3.9 million was paid in cash and $0.3 million ineither the form of a note payable.  The note accrues interest at 5.5%Put Right or the Call Right is calculated per annum and the principal and interest are payable on September 30, 2024.

On December 31, 2021, we acquired a 75% interest in a 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 are payable on December 31, 2023.

On November 30, 2021, we acquired an approximate 70% interest in a leading provider of industrial injury prevention services. The previous owners retained the remaining interest. The initial purchase price for the 70% equity interest, not inclusiveterms of the $2.0 million contingent paymentrespective agreements and classified as redeemable non-controlling interest (temporary equity) in conjunction with the acquisition if specified future operational objectives are met, was approximately $63.2 million, of which $62.2 million was paid in cash, and $1.0 million is in the form of a note payable. The note accrues interest at 3.25% and the principal and interest is payable on November 30, 2023. The business generates approximately $27.0 million in annual revenue at a margin of approximately 20%. As part of the transaction, we also agreed to the 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 us in approximately five years, with such put right having an initial $3.5 million fair value on June 30, 2022, as reflected on our consolidated balance sheet in Other long-term liabilities.sheets. The value of this right will be adjusted in future periods, as appropriate, with any change in fair value reflected in our consolidated statement of income.

On September 30, 2021, we acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The business generates more than $2.0 million in annual revenue. We 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 our IIPS subsidiary. The initial purchase price, not inclusive of the $0.6 million contingent payment, was approximately $2.7 million, of which $2.4 million was paid in cash, and $0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest are payable on September 30, 2023.

On June 30, 2021, we acquired a 65% interest in an eight-clinic physical therapy practice with the practice founders retaining 35%. The purchase price was approximately $10.3 million, of which $9.0 million was paid in cash, $1.0 million was payable based on the achievement of certain business criteria and $0.3 million is in the form of a note payable. The business criteria were met and accordingly $1.0 million was paid in July 2022. The note accrues interest at 3.25% per annum and the principal and interest are payable on June 30, 2023. Additionally, we have 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. We recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair value each reporting date.

On March 31, 2021, the Company acquired a 70% interest in a five-clinic physical therapy practice with the practice founders 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 is in the form of a note payable.  The note accrues interest at 3.25% per annum and the principal and interest are payable on March 31, 2023.

On March 27, 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 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.

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The CARES Act allowed for qualified healthcare providers to receive advanced payments under the MedicareAccelerated and Advance Payment Program (“MAAPP Funds”) during the COVID-19 pandemic. Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided. We applied for and received approval fromCenters for Medicare & Medicaid Services (“CMS”) in April 2020. We recorded the $14.1 million in advance payments received as a liability. During the 2021 First Quarter, we repaid the MAAPP Funds of $14.1 million rather than applying them to future services performed.

Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions. We have from time to time purchased the non-controlling interests of limited partners in our Clinic Partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using a combination of cash and financing. Any large acquisition would likely require financing.

We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts, in a consistent manner for all payor types. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting payor credentialing approval initially may be delayed for a relatively short transition period. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the accounts receivable has been outstanding for at least 120 days.

We generally enter into various notes payable as a means of financing our acquisitions. Our outstanding notes payable as of September 30, 2022 relate to certain of the acquisitions of businesses and purchases of redeemable non-controlling interest that occurred in 2018 through September 2022. Typically, the notes are payable over two years plus any accrued and unpaid interest. Interest accrues at various interest rates ranging from 3.25% to 5.5% per annum, subject to adjustment. At SeptemberJune 30, 2022, the balance on these notes payable2023 was $5.5$165.5 million.  In addition, we assumed leases with remaining terms of 1 month to 6 years for the operating facilities.

In conjunction with the above-mentioned acquisitions, in the event that a limited minority partner’s employment ceases at any time after a specified date that is typically between three and five years from the acquisition date, we have agreed to certain contractual provisions which enable such minority partners to exercise their right to trigger our repurchase of that partner’s non-controlling interest at a predetermined multiple of earnings before interest and taxes.

As of September 30, 2022, we have accrued $7.9 million related to credit balances due to patients and payors.  This amount is expected to be paid in the next twelve months.Share Repurchase Program

From September 2001 through December 31, 2008, our Board of Directors (“Board”) authorized us to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of our common stock. In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of our common stock (“March 2009 Authorization”). Our Amended Credit Agreement permits share repurchases of up to $15,000,000,$50.0 million in the aggregate, subject to compliance with covenants. We are required to retire shares purchased under the March 2009 Authorization.

There is no expiration date for the share repurchase program. As of SeptemberJune 30, 2022,2023, there are currently an additional estimated 197,316123,569 shares (based on the closing price of $76.02$121.39 on SeptemberJune 30, 2022)2023) that may be purchased from time to time in the open market or private transactions depending on price, availability and our cash position. We did not purchase any shares of our common stock during the ninethree and six months ended SeptemberJune 30, 2022.

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FACTORS AFFECTING FUTURE RESULTS

The risks related to our business2023, and operations include:

the multiple effects of the impact of public health crises and epidemics/pandemics, such as the novel strain of COVID-19 and its variants, for which the total financial magnitude cannot be currently estimated;
changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status;
revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
changes in reimbursement rates or payment methods from third party payors including government agencies, and changes in the deductibles and co-pays owed by patients;
compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
the impact of COVID-19 related vaccination and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations;
changes as the result of government enacted national healthcare reform;
•business and regulatory conditions including federal and state regulations;
governmental and other third party payor inspections, reviews, investigations and audits, which may result in sanctions or reputational harm and increased costs;
revenue and earnings expectations;
some of our acquisition agreements contain contingent consideration, the value of which may impact future financial results;
one of our acquisition agreements includes a Put Right for a potential purchase of a company and we may or may not have the capital necessary to satisfy this obligation;
legal actions, which could subject us to increased operating costs and uninsured liabilities;
general economic conditions, including but not limited to inflationary and recessionary periods;
availability and cost of qualified physical therapists;
personnel productivity and hiring, training and retaining key personnel;
competitive environment in the IIPS business, which could result in the termination or nonrenewal of contractual service arrangements and other adverse financial consequences for that service line;
acquisitions, and the successful integration of the operations of the acquired businesses;
impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interest (minority interests);
maintaining our information technology systems with adequate safeguards to protect against cyber-attacks;
a security breach of our or our third party vendors’ information technology systems may subject us to potential legal action and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 of the Health Information Technology for Economic and Clinical Health Act;
maintaining clients for which we perform management and other services, as a breach or termination of those contractual arrangements by such clients could cause operating results to be less than expected;
maintaining adequate internal controls;
our business depends upon hiring, training and retaining qualified personnel;
maintaining necessary insurance coverage;
availability, terms, and use of capital; and
weather and other seasonal factors.

In addition to the above, see Risk Factors in Part I - Item 1A of our Annual Report on Form 10-K forduring the year ended December 31, 2021 and in Part II – Item 1A of this report.2022.

Forward-Looking Statements

We make statements in this report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening new clinics, availability of personnel and the reimbursement environment.  The forward-looking statements are based on our current views and assumptions and actual results could differ materially from those anticipated in such forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are not limited to the risks listed above.

Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement may no longer be accurate.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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.

In May 2022, we entered intoWe maintain an interest rate swap agreement, effective on June 30, 2022,arrangement which hasis considered a $150 million notional value, and a maturity datederivative instrument. Our indebtedness as of June 30, 2027. Beginning in July 2022, we receive 1-month SOFR,2023, was the outstanding balance of seller notes from our acquisitions of $6.4 million, and pay a fixed rate of interest of 2.815% plus an additional margin on a quarterly basis. The total interest rate in any period will also include an applicable margin basedoutstanding balance on our Consolidated Leverage Ratio.

term note related to Credit Agreement of $146.3 million. We designateddo not have a balance on the Revolving Facility as of June 30, 2023. The Revolving Facility is subject to fluctuating interest rates. A 1% change in the interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related towould yield no additional interest expense on the fair valuefacility because of the interest rate swap are recordeddescribed above. See Note 9 to accumulated other comprehensive income (loss), net of tax.the unaudited consolidated financial statements.

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ITEM 4.CONTROLS AND PROCEDURES.

(a)Evaluation of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company’s management completed an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded (i) that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure and (ii) that our disclosure controls and procedures are effective.

(b)Changes in Internal Control over Financial Reporting
Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 5.
OTHER INFORMATION.

Rule 105b-1 Trading Plans

The Company's directors and executive officers do not currently have 10b5-1plans. During the three and six months ended June 30, 2023, none of our directors or executive officers adopted or terminated any contract, instruction, or written plan for the purchase or sale of our securities to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement.

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PART II—OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS.

We are a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of our business. We cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future that may, either individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations, and liquidity.

Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. We have been a defendant in these cases in the past and may be named as a defendant in similar cases from time to time in the future.

ITEM 1A.RISK FACTORS.

Our debt and financial obligations could adversely affectThere have been no material changes to our financial condition, our ability to obtain future financing, and our ability to operate our business.

We have outstanding debt obligations that could adversely affect our financial condition and limit our ability to successfully implement our business strategy. Furthermore, from time to time, we may need additional financing to support our business and pursue our business strategy, including strategic acquisitions. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors. We cannot provide assurances that additional financing will be available to us on favorable terms when required, or at all.

Our loan agreements contain certain restrictions and requirements that among other things:
require us to maintain a quarterly fixed charge coverage ratio and minimum working capital ratio;
limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions, to fund growth or for general corporate purposes;
limit our future ability to refinance our indebtedness on terms acceptable to us or at all;
limit our flexibility in planning for or reacting to changes in our business and market conditions or in funding our strategic growth plan; and
impose on us financial and operational restrictions.

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Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors describedas previously disclosed in Item 1A contained in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021,2022 and filed with the SEC on February 28, 2023 and Quarterly Report on Form 10-Q for the first quarter ended March 1, 2022. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we will be able to take any of these actions31, 2023 filed with the SEC on a timely basis, on terms satisfactory to us, or at all.May 5, 2023.

If we fail to satisfy our debt service obligations or the other restrictions and requirements in our loan agreements, we could be in default. Unless cured or waived, a default would permit lenders to accelerate the maturity of the debt under the credit agreement and to foreclose upon the collateral securing the debt.

Our outstanding loans bear interest at variable rates. In response to the variable rates, we entered into an interest rate swap agreement.  We are 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 our variable-rate borrowing. Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks.  In May 2022, we entered into an interest rate swap agreement to manage these risks.  While intended to reduce the effects of fluctuations in these prices and rates, these transactions may limit our potential gains or expose us to losses. If our counterparties to such transactions or the sponsors fail to honor their obligations due to financial distress, we would be exposed to potential losses or the inability to recover anticipated gains from these transactions.

Our business depends upon hiring, training and retaining qualified employees.

Our workforce costs represent our largest operating expense, and our ability to meet our labor needs while controlling labor costs is subject to numerous external factors, including market pressures with respect to prevailing wage rates and unemployment levels. We compete with rehabilitation companies and other businesses for many of our clinical and non-clinical employees, and turnover in these positions can lead to increased training and retention costs, particularly in a competitive labor market. We cannot be assured that we can continue to hire, train and retain qualified employees at current wage rates since we operate in a competitive labor market, and there are currently significant inflationary and other pressures on wages.  If we are unable to hire, properly train and retain qualified employees, we could experience higher employment costs and reduced revenues, which could adversely affect our earnings.

Some of our acquisition agreements contain contingent consideration, the value of which may impact future financial results.

Some of our acquisition agreements include contingent earn-out consideration, the fair value of which is estimated as of the acquisition date based on the present value of the expected contingent payments as determined using weighted probabilities of possible future payments. These fair value estimates contain unobservable inputs and estimates that could materially differ from the actual future results. The fair value of the contingent earn-out consideration could increase or decrease as applicable. Changes in the fair value of contingent earn-outs will be reflected in our results of operations in the period in which they are recognized, the amount of which may be material and cause volatility in our operating results.

One of our acquisition agreements contains a Put Right related to a potential future purchase of a majority Interest In a separate company.

One of our acquisition agreements includes a Put Right for the potential future purchase of a majority interest in a separate company at a purchase price which is derived based on a specified multiple of the separate company’s historical earnings. The exercise of the Put Right is outside of our control.  In the event the Put Right is triggered, we are required to purchase the aforementioned equity interest at the calculated purchase price described above. The resulting purchase price may be greater than the fair value of such equity interests at the time, and we may or may not have the capital necessary to satisfy such contractual purchase obligation, in which case we could be in breach.  

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ITEM 6.EXHIBITS.

Exhibit
Number
Description
1.1
Underwriting Agreement, dated May 24, 2023, by and between U.S. Physical Therapy, Inc. and BofA Securities, Inc. and J.P. Morgan Securities LLC, as representatives of the several underwriters named therein [incorporated by reference to Exhibit 1.1 to the Company Current Report on Form 8-K filed with the SEC on May 23, 2023].
31.1*
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2*
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32*
Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*XBRL Instance Document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document

**
Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.


U.S. PHYSICAL THERAPY, INC.



Date: November 8, 2022August 9, 2023By:/s/ CAREY HENDRICKSON


Carey Hendrickson


Chief Financial Officer


(Principal financial and accounting officer)


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