Fair Value Measurements of Financial Instruments

3 Months Ended

Mar. 31, 2024

Fair Value Measurements of Financial Instruments

The carrying amounts and fair values of the Company’s financial instruments as of March 31, 2024, are presented below (in thousands):


	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Assets
Money market accounts*	$	31,804	$	—	$	—	$	31,804
Marketable securities – certificates of deposit	2,258		—		—		2,258
Marketable securities – equity securities	232		—		—		232
Interest rate collar	—		438		—		438
Total assets	$	34,294	$	438	$	—	$	34,732

Liabilities
AAMG contingent consideration	$	—	$	—	$	7,407	$	7,407
VOMG contingent consideration	—		—		17		17
DMG remaining equity interest purchase	—		—		8,542		8,542
Sun Labs remaining equity interest purchase	—		—		7,278		7,278
ADSC contingent considerations	—		—		3,632		3,632
CFC contingent considerations	—		—		7,767		7,767
PCCCV contingent considerations	—		—		2,265		2,265
Total liabilities	$	—	$	—	$	36,908	$	36,908

* Included in cash and cash equivalents

The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2023, are presented below (in thousands):


	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Assets
Money market accounts*	$	4,842	$	—	$	—	$	4,842
Marketable securities – certificates of deposit	2,150		—		—		2,150
Marketable securities – equity securities	348		—		—		348
Total assets	$	7,340	$	—	$	—	$	7,340

Liabilities
AAMG contingent consideration	$	—	$	—	$	5,475	$	5,475
VOMG contingent consideration	—		—		17		17
DMG remaining equity interest purchase	—		—		8,542		8,542
Sun Labs remaining equity interest purchase	—		—		7,802		7,802
Interest rate collar	—		252		—		252
Total liabilities	$	—	$	252	$	21,836	$	22,088

* Included in cash and cash equivalents

The change in the fair value of Level 3 liabilities for the three months ended March 31, 2024, was as follows (in thousands):


	Amount
Balance at January 1, 2024	$	21,836
Additions	13,161
Change in fair value of existing Level 3 liabilities	1,911
Balance at March 31, 2024	$	36,908

Investments in Marketable Securities

Certificates of deposit are reported at par value, plus accrued interest, with maturity dates greater than ninety days. As of March 31, 2024, and December 31, 2023, certificates of deposit amounted to approximately $2.3 million and $2.2 million, respectively. Investments in certificates of deposit are classified as Level 1 investments in the fair value hierarchy.

Equity securities are reported at fair value. These securities are classified as Level 1 in the valuation hierarchy, where quoted market prices from reputable third-party brokers are available in an active market and unadjusted. As of March 31, 2024, and December 31, 2023, the equity securities were approximately $0.2 million and $0.3 million, respectively, in the accompanying condensed consolidated balance sheets. Gains and losses recognized on equity securities sold are recognized in the accompanying condensed consolidated statements of income as other income. The components comprising total gains and losses on equity securities are as follows (in thousands) for the periods listed below:


	Three Months Ended March 31,
	2024		2023

Total losses recognized on equity securities	$	(116)	$	(4,353)
Gains recognized on equity securities sold	—		—
Unrealized losses recognized on equity securities held at end of period	$	(116)	$	(4,353)

Derivative Financial Instruments

Interest Rate Collar Agreements

The Company’s collar agreement is designed to limit the interest rate risk associated with the Company’s Revolver Loan. The principal objective of the collar agreement is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. Refer to Note 9 - “Credit Facility, Bank Loans, and Lines of Credit,” for further information on the Company’s debt. Under the terms of the agreement, the ceiling is 5.0% and the floor is 2.34%. The collar agreement is not designated as a hedging instrument. Changes in the fair value of this contract are recognized as unrealized gain or loss on investments in the accompanying condensed consolidated statements of income and reflected in the accompanying condensed consolidated statements of cash flows as unrealized loss on investments. The estimated fair value of the collar was determined using Level 2. As of March 31, 2024 and December 31, 2023, the fair value of the collar was $0.4 million and $0.3 million, and presented within other assets and other long-term liabilities, respectively, in the accompanying condensed consolidated balance sheets. For the three months ended March 31, 2024, the Company recognized unrealized gains of $0.7 million.

Remaining equity interest purchase

In 2021, the Company entered into a financing obligation to purchase the remaining equity interest in Diagnostic Medical Group of Southern California (“DMG”) and Sun Clinical Laboratories (“Sun Labs”) within three years from the date the Company consolidated DMG and Sun Labs. The purchase of the remaining DMG equity value is considered a financing obligation with a carrying value of $8.5 million as of March 31, 2024 and December 31, 2023. Changes in the fair value of the remaining equity purchase are presented in unrealized gain and loss on investments in the accompanying condensed consolidated statements of income. The purchase of the remaining Sun Labs equity value is considered a financing obligation with a carrying value of $7.3 million and $7.8 million as of March 31, 2024 and December 31, 2023, respectively. For the three months ended March 31, 2024, and 2023, the Company recognized an unrealized gain of $0.5 million and unrealized loss of $1.4 million, respectively, due to the change in the fair value of Sun Labs equity value obligation. As the financing obligations

are embedded in the non-controlling interest, the non-controlling interests are recognized in other liabilities in the accompanying condensed consolidated balance sheets.

Contingent considerations

All American Medical Group (“AAMG”)

Upon acquiring 100% of the equity interest in AAMG, the purchase price consisted of cash funded upon close of the transaction and additional consideration (“AAMG contingent consideration”) and stock consideration (“AAMG stock contingent consideration”) contingent on AAMG meeting revenue and capitated member metrics for fiscal years 2023 (“2023 metric”) and 2024 (“2024 metric”). If the contingent considerations are met, the settlement will be paid in the Company’s common stock. The total amount of stock that can be issued for the 2023 and 2024 metrics is 157,048 and 184,361, respectively. The Company determined the fair value of the contingent considerations using a probability-weighted model that includes significant unobservable inputs (Level 3). Specifically, the Company considered various scenarios of revenue and assigned probabilities to each such scenario in determining fair value.

As of March 31, 2024 and December 31, 2023, the AAMG contingent consideration for the 2023 metric was valued at $3.5 million and $2.6 million, respectively, and was included within other liabilities in the accompanying condensed consolidated balance sheets. The 2023 metric was met, but remains in other liabilities until the shares are issued.

The AAMG contingent consideration for the 2024 metric was valued at $3.9 million and $2.9 million as of March 31, 2024 and December 31, 2023, respectively, and was included in other liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets, respectively. Changes in the AAMG contingent consideration are presented in general and administrative expenses in the accompanying condensed consolidated statements of income. The AAMG stock contingent consideration for 2023 and 2024 metric was valued at $5.6 million as of March 31, 2024 and December 31, 2023 and is included in additional paid-in capital in the accompanying condensed consolidated balance sheets.

ADSC

Upon acquiring 95% of the equity interest of Advanced Diagnostic and Surgical Center in 2024, the total consideration of the acquisition included contingent considerations. The contingent considerations will be settled in cash contingent on ADSC achieving revenue and EBITDA metrics for fiscal years 2023 (“ADSC 2023 Metric”) and 2024 (“ADSC 2024 Metric”) (collectively, “ADSC contingent considerations”). The Company determined the fair value of the contingent consideration using a probability-weighted model that includes significant unobservable inputs (Level 3). Specifically, the Company considered various scenarios of revenue and assigned probabilities to each such scenario in determining fair value. As of March 31, 2024, the ADSC 2023 Metric and the 2024 Metric were valued at $2.0 million and $1.6 million, respectively and were included in other liabilities in the accompanying condensed consolidated balance sheets. Changes in the ADSC contingent considerations are presented in general and administrative expenses in the accompanying condensed consolidated statements of income.

CFC

Upon acquiring certain assets of CFC in 2024, the total consideration of the acquisition included contingent considerations. The contingent considerations will be settled in cash contingent upon CFC maintaining or exceeding the target member month amount for the first, second and third measurement period (“CFC contingent considerations”). The contingent liability will be paid after achieving the metric in each measurement period. The Company will pay $5.0 million for each metric achieved for each measurement period or a total of $15.0 million. In the event that the CFC first and/or second contingent considerations are not achieved during the first and/or the second measurement period, if the metric is met within the second and/or third measurement period, there is a catch-up payment that shall be paid concurrently with the payments of the CFC second contingent consideration and/or CFC third contingent consideration. The Company determined the fair value of the contingent consideration using a probability-weighted model that includes significant unobservable inputs (Level 3). Specifically, the Company considered various scenarios of revenue and assigned probabilities to each such scenario in determining fair value. As of March 31, 2024, the first, second, and third metric were valued at $3.1 million, $2.8 million and $1.9 million, respectively, and were all included in other long-term liabilities in the accompanying condensed consolidated balance sheets. Changes in the CFC contingent considerations are presented in general and administrative expenses in the accompanying condensed consolidated statements of income.

PCCCV

Upon acquiring certain assets of PCCCV in 2024, the total consideration of the acquisition included contingent considerations. The contingent considerations will be settled in cash contingent upon PCCCV meeting certain metrics related to financial ratios and member months for the first and second measurement periods (“PCCCV contingent considerations”). The Company determined the fair value of the contingent considerations using a probability-weighted model that includes significant unobservable inputs (Level 3). Specifically, the Company considered various scenarios of revenue and assigned probabilities to each such scenario in determining fair value. As of March 31, 2024, the value of the contingent consideration was valued at $2.3 million. Changes in the PCCCV contingent considerations are presented in general and administrative expenses in the accompanying condensed consolidated statements of income.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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