ACQUISITIONS OF BUSINESSES

3 Months Ended

Mar. 31, 2023

ACQUISITIONS OF BUSINESSES [Abstract]

2. ACQUISITIONS OF BUSINESSES

2023 Acquisition

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.

The purchase price for the 2023 acquisition has been preliminarily allocated as follows (in thousands):

	Physical Therapy
	Operations
Cash paid, net of cash acquired	$	5,796
Seller note		360
Total consideration	$	6,156

Estimated fair value of net tangible assets acquired:
Total current assets	$	168
Total non-current assets		1,062
Total liabilities		(1,012	)
Net tangible assets acquired		218
Customer and referral relationships		1,586
Non-compete agreement		76
Tradenames		391
Goodwill		5,424
Fair value of non-controlling interest (classified as redeemable non-controlling interest)		(1,539	)
	$	6,156

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 $9.0 million on March 31, 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.

On September 30, 2022, the Company acquired an 80% interest in a two-clinic physical therapy practice. The practice’s owners retained 20% of the equity interests. The purchase price for the 80% equity interest was approximately $4.2 million, of which $3.9 million was paid in cash and $0.3 million in the form of a note payable. The note accrues interest at 5.5% per annum and the principal and interest are payable on September 30, 2024.

On August 31, 2022, the Company acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $3.5 million, of which $3.3 million was paid in cash and $0.2 million in the form of a note payable. The note accrues interest at 5.5% per annum and the principal and interest are payable on August 31, 2024.

On March 31, 2022, the Company acquired a 70% interest in a six-clinic physical therapy practice. The practice’s owners retained 30% of the equity interests. The purchase price for the 70% equity interest was approximately $11.5 million, of which $11.2 million was paid in cash and $0.3 million 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 prices for the 2022 acquisitions have been preliminarily allocated as follows (in thousands):

	Physical Therapy
	Operations
Cash paid, net of cash acquired	$	59,788
Seller notes		1,574
Contingent payments		10,000
Total consideration	$	71,362

Estimated fair value of net tangible assets acquired:
Total current assets	$	1,558
Total non-current assets		7,619
Total liabilities		(9,865	)
Net tangible assets acquired		(688	)
Customer and referral relationships		18,955
Non-compete agreements		983
Tradenames		4,417
Goodwill		74,496
Fair value of non-controlling interest (classified as redeemable non-controlling interest)		(26,801	)
	$	71,362

For the 2023 and 2022 acquisitions, a majority of total current assets primarily represents accounts receivable. Total non-current assets are fixed assets and equipment used in the practice.

The purchase price plus the fair value of the non-controlling interests for the acquisitions in 2022 were allocated to the fair value of the assets acquired, inclusive of identifiable intangible assets, (i.e. trade names, referral relationships and non-compete agreements) and liabilities assumed based on the fair values at the acquisition date, with the amount exceeding the fair values being recorded as goodwill.

For the acquisition in 2023, the values assigned to the customer and referral relationships and non-compete agreement are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period was 12.0 years. For the non-compete agreements, the amortization period was 5.0 years. The values assigned to tradenames are tested annually for impairment.

For the acquisitions in 2022, the values assigned to the customer and referral relationships and non-compete agreements are being amortized to expense equally over the respective estimated lives. For customer and referral relationships, the weighted-average amortization period is 12.0 years. For non-compete agreements, the weighted-average amortization period is 5.0 years. The values assigned to tradenames are tested annually for impairment.

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 2023 and 2022 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 2023 and those acquired after March 31, 2022 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 March 31, 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 purchase price allocation for the March 2022 Acquisition has been finalized. The Company continues to evaluate the components for the purchase price allocations for other acquisitions in 2022 and 2023.