What changed in this filing

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Item 1. Financial Statements

2020-08-05 compared with 2020-05-11 · 396 added, 273 removed, 874 unchanged (43% of the section changed)

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

(In thousands, except par values)

1 unchanged sentence

Cash and cash equivalents $ 201,738 $ 59,175

Accounts receivable—less allowance for doubtful accounts of $ 3,421 and $2,472 at March 31, 2020 and December 31, 2019, respectively

Accounts receivable—less allowance for doubtful accounts of $ 3,685 and $ 2,472 at June 30, 2020 and December 31, 2019, respectively

302,061 308,985

19 unchanged sentences

Accrued self-insurance liabilities—current 29,493 29,252

CARES Act Provider Relief Fund and advance payments liabilities (Note 3) 207,642 —

Other accrued liabilities 95,921 70,273

4 unchanged sentences

Accrued self-insurance liabilities—less current portion 61,324 58,114

Other long-term liabilities 5,955 5,278

Other long-term liabilities (Note 3) 25,877 5,278

Total liabilities 1,770,381 1,705,765

5 unchanged sentences

100,000 shares authorized;

56,437 and 53,666 shares issued and outstanding at March 31, 2020, respectively, and 56,176 and 53,487 shares issued and outstanding at December 31, 2019, respectively (Note 19)

56,543 and 53,755 shares issued and outstanding at June 30, 2020, respectively, and 56,176 and 53,487 shares issued and outstanding at December 31, 2019, respectively (Note 20)

Additional paid-in capital 319,770 307,914

Retained earnings 467,219 391,523

Common stock in treasury, at cost, 2,771 and 2,079 shares at March 31, 2020 and December 31, 2019, respectively (Note 19)

Common stock in treasury, at cost, 2,788 and 2,079 shares at June 30, 2020 and December 31, 2019, respectively (Note 20)

( 71,049 ) ( 45,296 )

7 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31,

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

2020 2019 2020 2019

(In thousands, except per share data)

8 unchanged sentences

Interest expense ( 2,293 ) ( 3,941 ) ( 5,958 ) ( 7,613 )

Interest income 698 563

Interest and other income 1,082 562 1,780 1,125

Other expense, net ( 1,211 ) ( 3,379 ) ( 4,178 ) ( 6,488 )

5 unchanged sentences

Net income attributable to noncontrolling interests in continuing operations 440 116 793 201

Net income attributable to noncontrolling interests in discontinued operations

(Note 3) — 150

Net income attributable to noncontrolling interests in discontinued operations (Note 4) — 200 — 350

Net income attributable to noncontrolling interests 440 316 793 551

28 unchanged sentences

Dividends declared ($ 0.0500 per share)

— — — ( 2,683 ) — — — ( 2,683 )

Employee stock award compensation — — 3,235 — — — — 3,235

5 unchanged sentences

Balance - March 31, 2020 53,666 $ 57 $ 315,786 $ 429,689 2,771 $ ( 70,296 ) $ 1,579 $ 676,815

Issuance of common stock to employees and directors resulting from the exercise of stock options 31 — 456 — — — — 456

Issuance of restricted stock 75 — — — — — — —

Shares of common stock used to satisfy tax withholding obligations ( 17 ) — — — 17 ( 753 ) — ( 753 )

Dividends declared ($ 0.0500 per share)

— — — ( 2,718 ) — — — ( 2,718 )

Employee stock award compensation — — 3,528 — — — — 3,528

Net income attributable to noncontrolling interest — — — — — — 440 440

Distribution to noncontrolling interest holder — — — — — — ( 240 ) ( 240 )

Net income attributable to the Ensign Group, Inc.

— — — 40,248 — — — 40,248

Balance - June 30, 2020 53,755 $ 57 $ 319,770 $ 467,219 2,788 $ ( 71,049 ) $ 1,779 $ 717,776

Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Non-Controlling Interest

3 unchanged sentences

Dividends declared ($ 0.0475 per share)

— — — ( 2,543 ) — — — ( 2,543 )

Employee stock award compensation — — 2,612 — — — — 2,612

5 unchanged sentences

Balance - March 31, 2019 52,955 $ 55 $ 292,612 $ 378,443 1,932 $ ( 38,405 ) $ 12,298 $ 645,003

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards 326 — 3,213 — — — — 3,213

Shares of common stock used to satisfy tax withholding obligations ( 9 ) — — — 9 ( 485 ) — ( 485 )

Dividends declared ($ 0.0475 per share)

— — — ( 2,559 ) — — — ( 2,559 )

Employee stock award compensation — — 3,066 — — — — 3,066

Noncontrolling interest attributable to subsidiary equity plan (Note 17) — — — ( 2,497 ) — — 2,733 236

Distribution to noncontrolling interest holder — — — — — — ( 92 ) ( 92 )

Net income attributable to noncontrolling interest — — — — — — 316 316

Net income attributable to the Ensign Group, Inc.

— — — 28,609 — — — 28,609

Balance - June 30, 2019 53,272 $ 55 $ 298,891 $ 401,996 1,941 $ ( 38,890 ) $ 15,255 $ 677,307

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands) 2020 2019

9 unchanged sentences

Stock-based compensation 6,763 5,385

Loss on insurance claims and disposal of assets 101 18

Cash received from insurance proceeds related to replacement properties and business interruptions 108 638

Change in operating assets and liabilities

29 unchanged sentences

Issuance of common stock upon exercise of options 2,008 5,547

Repurchase of shares of common stock to satisfy tax withholding obligations ( 753 ) ( 485 )

Repurchase of shares of common stock (Note 20) ( 25,000 ) —

1 unchanged sentence

Non-controlling interest distribution ( 960 ) ( 92 )

CARES Act Provider Relief Funds 108,756 —

Proceeds from Medicare Advance Payment Program (Note 3) 98,886 —

Net cash (used in)/provided by continuing financing activities ( 3,249 ) 33,937

Net cash (used in)/provided by financing activities ( 3,249 ) 33,937

Net increase in cash and cash equivalents 4,042 6,741

Net increase in cash, cash equivalents, and restricted cash 142,563 7,959

Cash and cash equivalents beginning of period, including cash of discontinued operations 59,175 31,083

5 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands) 2020 2019

2 unchanged sentences

Interest $ 6,917 $ 7,500

Income taxes $ 1,935 $ 12,375

Lease liabilities $ 65,109 $ 73,748

2 unchanged sentences

Accrued dividends declared $ 2,718 $ 2,559

Note payable due to seller from business acquisition $ — $ 924

Right-of-use assets obtained in exchange for new and modified operating lease obligations $ 8,370 $ 6,348

Right-of-use assets obtained in exchange for new operating lease obligations $ 8,370 $ 47,748

See accompanying notes to condensed consolidated financial statements.

6 unchanged sentences

The Company, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum.

As of March 31, 2020, the Company operated 225 facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Massachusetts, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

As of June 30, 2020, the Company operated 225 facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Massachusetts, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

The Company's operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services.

The Company's operating subsidiaries have a collective capacity of approximately 22,900 operational skilled nursing beds and 2,100 senior living units.

As of March 31, 2020, the Company operated 163 facilities under long-term lease arrangements, and had options to purchase 11 of those 163 facilities.

As of June 30, 2020, the Company operated 163 facilities under long-term lease arrangements, and had options to purchase 11 of those 163 facilities.

The Company owned an additional 92 real estate properties, which included 62 operations the Company operated and managed, real estate properties of 31 senior living operations that were leased to The Pennant Group, Inc.

14 unchanged sentences

Refer to Note 4, Spin-Off of Subsidiaries, for additional information regarding discontinued operations.

Other Information — The accompanying condensed consolidated financial statements as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 (collectively, the Interim Financial Statements) are unaudited.

Other Information — The accompanying condensed consolidated financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 (collectively, the Interim Financial Statements) are unaudited.

Certain information and note disclosures normally included in annual consolidated financial statements have been condensed or omitted, as permitted under applicable rules and regulations.

3 unchanged sentences

The results of operations presented in the Interim Financial Statements are not necessarily representative of operations for the entire year.

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THE ENSIGN GROUP, INC.

10 unchanged sentences

The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that "most significantly impact" the VIE's economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE.

The Company's relationship with variable interest entities was not material during the three months ended March 31, 2020 and 2019.

The Company's relationship with variable interest entities was not material during the three and six months ended June 30, 2020 and 2019.

During the first quarter of 2019, the Company completed the sale of one of its senior living operations for a sale price of $ 1,838 .

1 unchanged sentence

Estimates and Assumptions — The preparation of Interim Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and the reported amounts of revenue and expenses during the reporting periods.

The most significant estimates in the Company’s Interim Financial Statements relate to revenue, intangible assets and goodwill, right-of-use-assets, impairment of long-lived assets, lease liabilities, general and professional liability, workers' compensation and healthcare claims included in accrued self-insurance liabilities, and income taxes.

The most significant estimates in the Company’s Interim Financial Statements relate to revenue, acquired property and equipment, intangible assets and goodwill, right-of-use-assets, impairment of long-lived assets, lease liabilities, general and professional liability, workers' compensation and healthcare claims included in accrued self-insurance liabilities, and income taxes.

Actual results could differ from those estimates.

13 unchanged sentences

Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used in the Company’s operating subsidiaries for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operating subsidiaries to which the assets relate, utilizing management’s best estimate, appropriate assumptions, and projections at the time.

If the carrying value is determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset.

If the carrying value is determined to be unrecoverable from future

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

operating cash flows, the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset.

The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset.

Management has evaluated its long-lived assets and determined there was no impairment during the three months ended March 31, 2020 and 2019.

Management has evaluated its long-lived assets and determined there was no impairment during the three and six months ended June 30, 2020 and 2019.

Leases and Leasehold Improvements - The Company leases skilled nursing facilities, senior living facilities and commercial office space.

2 unchanged sentences

At the inception of each lease, the Company performs an evaluation to determine whether the lease should be classified as an operating or finance lease.

As of March 31, 2020, the Company does not have any leases that are classified as finance leases.

As of June 30, 2020, the Company does not have any leases that are classified as finance leases.

Operating leases are included in right-of-use assets, current lease liabilities and long-term lease liabilities on the Company's condensed consolidated balance sheet.

11 unchanged sentences

Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of patient base, facility trade names and customer relationships.

Patient base is amortized over a period of four to 8 months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date.

Patient base is amortized over a period of four to eight months , depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date.

Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period of up to 20 years.

5 unchanged sentences

The Company performs its annual test for impairment during the fourth quarter of each year.

The Company did no t identify any goodwill or intangible asset impairment during the three months ended March 31, 2020 and 2019.

The Company did no t identify any goodwill or intangible asset impairment during the three and six months ended June 30, 2020 and 2019.

Self-Insurance — The Company is partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention) with an aggregate, one-time deductible above this limit.

3 unchanged sentences

In Colorado, the third-party coverage above these limits is $ 1,000 per claim and $ 3,000 per operation, which is independent of the aforementioned blanket aggregate limits that apply outside of Colorado.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states (except Texas and Washington for workers' compensation) are self-insured through the Captive, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets.

The Captive is subject to certain statutory requirements as an insurance provider.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s policy is to accrue amounts equal to the actuarial estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been incurred but not reported.

1 unchanged sentence

The Company uses actuarial valuations to estimate the liability based on historical experience and industry information.

Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 49,706 and $ 46,984 as of March 31, 2020 and December 31, 2019, respectively.

Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 52,528 and $ 46,984 as of June 30, 2020 and December 31, 2019, respectively.

The Company’s operating subsidiaries are self-insured for workers’ compensation in California.

7 unchanged sentences

The Company uses actuarial valuations to estimate the liability based on historical experience and industry information.

Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $ 24,744 and $ 25,419 as of March 31, 2020 and December 31, 2019, respectively.

In addition, the Company has recorded an asset and equal liability of $ 7,707 and $ 7,999 at March 31, 2020 and December 31, 2019, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $ 24,424 and $ 25,419 as of June 30, 2020 and December 31, 2019, respectively.

In addition, the Company has recorded an asset and equal liability of $ 7,242 and $ 7,999 at June 30, 2020 and December 31, 2019, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its employees.

1 unchanged sentence

To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $ 300 for each covered person with an additional one-time aggregate individual stop loss deductible of $ 75 .

The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 6,901 and $ 6,964 as of March 31, 2020 and December 31, 2019, respectively.

The Company's policy does not include the additional one-time aggregate individual stop loss deductible of $ 75 .

The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 6,623 and $ 6,964 as of June 30, 2020 and December 31, 2019, respectively.

The Company believes that adequate provision has been made in the Interim Financial Statements for liabilities that may arise out of patient care, workers’ compensation, healthcare benefits and related services provided to date.

6 unchanged sentences

If the Company’s actual liability exceeds its estimates of loss, its future earnings, cash flows and financial condition would be adversely affected.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes — Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates in effect when such temporary differences are expected to reverse.

2 unchanged sentences

In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, the Company makes certain estimates and assumptions.

These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields.

These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

with knowledge and expertise in certain fields.

Due to certain risks associated with the Company’s estimates and assumptions, actual results could differ.

12 unchanged sentences

The FASB also modified disclosure requirements of Level 3 fair value measurements.

The Company adopted this standard effective January 1, 2020 and determined there was no material impact on the Company's consolidated financial statements.

The Company adopted this standard effective January 1, 2020 and determined there was no material impact on the Company's condensed consolidated financial statements.

In January 2017, the FASB issued amended authoritative guidance to simplify and reduce the cost and complexity of the goodwill impairment test.

2 unchanged sentences

The new guidance does not amend the optional qualitative assessment of goodwill impairment.

The Company adopted this standard effective January 1, 2020 and determined there was no material impact on the Company's consolidated financial statements.

The Company adopted this standard effective January 1, 2020 and determined there was no material impact on the Company's condensed consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13 “ Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments ”, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected.

The Company adopted this standard effective January 1, 2020 and determined there was no material impact on the Company's consolidated financial statements.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company adopted this standard effective January 1, 2020 and determined there was no material impact on the Company's condensed consolidated financial statements.

Accounting Standards Recently Issued but Not Yet Adopted by the Company

4 unchanged sentences

The Company is currently evaluating the impact of ASU 2019-12 on its financial position, results of operations and liquidity.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)" which provides temporary, optional practical expedients and exceptions to enable a smoother transition to the new reference rates which will replace LIBOR and other reference rates expected to be discontinued.

Adoption of the provisions of ASU 2020-04 is optional.

The amendments are effective for all entities from the beginning of the interim period that includes the issuance date of the ASU.

An entity may elect to apply the amendments prospectively through December 31, 2022.

The Company is currently evaluating the impact of ASU.

2020-04 on its financial position, results of operations and liquidity.

COVID-19 UPDATE

The outbreak of the 2019 coronavirus disease (COVID-19), which was declared a global pandemic by the World Health Organization (WHO) on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, continues to spread and impact healthcare operations across the United States, including the markets in which the Company operates.

The Centers for Disease Control and Prevention (CDC) has stated that older adults are at a higher risk for serious illness from the coronavirus.

As the COVID-19 pandemic continues, the impact on the Company's financial and operational results remain subject to change.

The Company continues to monitor the impacts of the pandemic on its operations and financial condition.

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act), signed into law on March 27, 2020, which authorized the cash distribution of relief funds to healthcare providers.

On April 10, 2020, the Company began to receive CARES Act provider relief fund payments (Provider Relief Fund) from the U.S.

Department of Health and Human Services (HHS).

As of June 30, 2020, the Company's affiliated operations ha ve directly or indirectly received in the aggregate approximately $ 108,756 in Provider Relief Funds.

In June 2020, the Company started to repay the Provider Relief Funds received and has subsequently returned the all of the funds received to an agent of HHS.

As of June 30, 2020, the Company recorded the Provider Relief Funds as a short-term liability on the condensed consolidated balance sheet.

Additionally, the Company applied for and received $ 98,886 through the Medicare Accelerated and Advance Payment Program under the CARES Act.

The purpose of the program is to assist in providing needed liquidity to care delivery providers.

These funds are currently required to be repaid starting 120 days after the receipt of the cash.

Any unpaid funds will begin accruing interest after the 120 day period.

The Company has paid a portion of the funds back in July 2020 and, as of June 30, 2020, has classified the cash receipts as a short-term liability.

On March 18, 2020, the President signed into law The Family First Coronavirus Response Act, which provided a temporary 6.2% increase to the Federal Medical Assistance Percent (FMAP) effective January 1, 2020.

The law permits states to retroactively change their state's Medicaid program rates effective as of January 1, 2020.

The law provides discretion to each state and specifies that the funds are to be used to reimburse the recipient for healthcare related expenses that are attributable to COVID-19 associated with providing patient care.

As of June 30, 2020, eight of the fourteen states in which the Company operates have approved a state-specific FMAP Medicaid program.

Revenues from these additional payments are recognized in accordance with ASC 606, subject to variable consideration constraints.

In certain operations where the Company received additional payments that exceeded expenses incurred related to COVID-19, the Company characterized such payments as variable revenue that required additional consideration and accordingly, the amount of FMAP-related revenue recognized is limited to the actual COVID-19 related expenses incurred.

For the three months ended June 30, 2020, the Company received $ 14,388 in billable FMAP payments, of which, $ 12,404 was recognized as revenue.

For the six months ended June 30, 2020, the Company received $ 15,118 in billable FMAP payments, of which, $ 13,134 was recognized as revenue.

The CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due by December 31, 2021 with the remaining 50% due by December 31, 2022.

The Company recorded $ 16,434 of deferred payment of social security taxes as a long-term liability, which is included in Other Long-Term Liabilities in the condensed consolidated balance sheets as of June 30, 2020.

Treasury Department and Internal Revenue Service also allows corporate taxpayers to defer their estimated federal income taxes for the first and second quarters of 2020.

Total income tax payable as of June 30, 2020 of $ 22,459 is included in Other Accrued Liabilities in the condensed consolidated balance sheets.

The Company subsequently paid the payable in July 2020.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SPIN-OFF OF SUBSIDIARIES

13 unchanged sentences

The TSA will terminate on or before September 30, 2021.

Billings by Ensign under the TSA were not material during the three months ended March 31, 2020.

Billings by Ensign under the TSA were not material during the three and six months ended June 30, 2020.

Immediately after the Spin-Off, Ensign no longer consolidated the results of Pennant operations into its financial results.

Pennant's operating results and cash flows for the three months ended March 31, 2019 presented have been classified as discontinued operations within the Condensed Consolidated Financial Statements.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pennant's operating results and cash flows for the three and six months ended June 30, 2019 presented have been classified as discontinued operations within the Condensed Consolidated Financial Statements.

The following table presents the financial results of Pennant for the indicated period and does not include corporate overhead allocations:

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019 Six Months Ended June 30, 2019

(In thousands)

11 unchanged sentences

Net income attributable to The Ensign Group, Inc.

The Company incurred transaction costs of $ 9,119 related to the Spin-Off since commencing in 2018, of which $ 2,990 is reflected in the Company's condensed consolidated statement of operations as discontinued operations for the three months ended March 31, 2019.

$ 7,941 $ 13,833

The Company incurred transaction costs of $ 9,119 related to the Spin-Off since commencing in 2018, of which $ 1,658 and $ 4,648 is reflected in the Company's condensed consolidated statement of operations as discontinued operations for the three and six months ended June 30, 2019, respectively.

Transaction costs primarily consist of third-party advisory, consulting, legal and professional services, as well as other items that are incremental and one-time in nature that are related to the separation.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

REVENUE AND ACCOUNTS RECEIVABLE

10 unchanged sentences

If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such variances become known.

Revenue from the Medicare and Medicaid programs accounted for 70.5 % and 70.4 % for the three months ended March 31, 2020 and 2019, respectively.

Revenue from the Medicare and Medicaid programs accounted for 74.8 % and 72.7 % for the three and six months ended June 30, 2020, respectively and 70.3 % for both the three and six months ended June 30, 2019.

Settlements with Medicare and Medicaid payors for retroactive adjustments due to audits and reviews are considered variable consideration and are included in the determination of the estimated transaction price.

1 unchanged sentence

Consistent with healthcare industry practices, any changes to these revenue estimates are recorded in the period the change or adjustment becomes known based on the final settlement.

The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue or Interim Financial Statements for the three months ended March 31, 2020 and 2019.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue or Interim Financial Statements for the three and six months ended June 30, 2020 and 2019.

Disaggregation of Revenue

4 unchanged sentences

For patients under reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or rate, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.

Revenue for the three months ended March 31, 2020 and 2019 is summarized in the following tables:

Three Months Ended March 31,

Revenue for the three and six months ended June 30, 2020 and 2019 is summarized in the following tables:

Three Months Ended June 30,

Revenue % of Revenue Revenue % of Revenue

7 unchanged sentences

Revenue $ 584,699 100.0 % $ 492,916 100.0 %

(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended March 31, 2020 and 2019.

During the three months ended March 31, 2020 and 2019, private and other payors includes $ 4,303 and $ 757 of rental income, respectively .

(1) Private and other payors also includes revenue from all payors generated in other ancillary services for the three months ended June 30, 2020 and 2019.

During the three months ended June 30, 2020 and 2019, private and other payor s includes $ 3,927 and $ 668 of rental income, respectively .

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Six Months Ended June 30,

Revenue % of Revenue Revenue % of Revenue

Medicaid $ 450,314 38.3 % $ 380,277 39.4 %

Medicare 330,628 28.2 235,508 24.4

Medicaid — skilled 72,394 6.2 62,243 6.5

Total Medicaid and Medicare 853,336 72.7 678,028 70.3

Managed care 184,345 15.7 169,663 17.6

Private and other (1)

136,631 11.6 116,533 12.1

Revenue $ 1,174,312 100.0 % $ 964,224 100.0 %

(1) Private and other payors also includes revenue from all payors generated in other an cillary services for the six months ended June 30, 2020 and 2019.

During the six months ended June 30, 2020 and 2019, private and other payors includes $ 8,230 and $ 1,425 of rental income, respectively

Balance Sheet Impact

Included in the Company’s condensed consolidated balance sheets are contract assets, comprised of billed accounts receivable and unbilled receivables, which are the result of the timing of revenue recognition, billings and cash collections, as well as, contract liabilities, which primarily represent payments the Company receives in advance of services provided.

The Company had no material contract liabilities as of March 31, 2020 and December 31, 2019, or activity during the three months ended March 31, 2020 and 2019.

Accounts receivable as of March 31, 2020 and December 31, 2019, is summarized in the following table:

March 31, 2020 December 31, 2019

The Company had no material contract liabilities as of June 30, 2020 and December 31, 2019, or activity during the three and six months ended June 30, 2020 and 2019.

Accounts receivable as of June 30, 2020 and December 31, 2019, is summarized in the following table:

June 30, 2020 December 31, 2019

Medicaid $ 117,451 $ 125,443

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In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs , and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less.

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THE ENSIGN GROUP, INC.

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A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:

Three Months Ended March 31,

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

2020 2019 2020 2019

Net income from continuing operations $ 40,688 $ 20,784 $ 81,890 $ 42,349

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A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows:

Three Months Ended March 31,

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

2020 2019 2020 2019

Net income from continuing operations $ 40,688 $ 20,784 $ 81,890 $ 42,349

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incremental shares from assumed conversion (1)

2,087 2,670 2,204 2,650

Adjusted weighted average common shares outstanding 55,181 56,078 55,489 55,896

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$ 0.73 $ 0.51 $ 1.46 $ 1.00

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 787 and 489 for the three months ended March 31, 2020 and 2019, respectivel y.

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(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 1,199 and 852 for th e three and six months ended June 30, 2020, respectively and 173 and 322 for the three and six months ended June 30, 2019, respectivel y.

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THE ENSIGN GROUP, INC.

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and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The fair value of cash and cash equivalents of $ 63,217 and $ 59,175 as of March 31, 2020 and December 31, 2019, respectively, is derived using Level 1 inputs.

Contracts insuring the lives of certain employees who are eligible to participate in non-qualified deferred compensation plans are held in a rabbi trust.

Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in the deferred compensation plan.

As of March 31, 2020, the fair value of the pooled investment funds of $ 3,712 is derived using Level 2 inputs.

The fair value of cash and cash equivalents of $ 201,738 and $ 59,175 as of June 30, 2020 and December 31, 2019, respectively, is derived using Level 1 inputs.

The Company's other financial assets include contracts insuring the lives of certain employees who are eligible to participate in non-qualified deferred compensation plans which are held in a rabbi trust.

The cash surrender value of these contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in the deferred compensation plan.

As of June 30, 2020, the fair value of the pooled investment funds of $ 4,610 is derived using Level 2 inputs.

The Company's non-financial assets, which includes goodwill, intangible assets, property and equipment and right-of-use assets, are not required to be measured at fair value on a recurring basis.

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Debt Security Investments - Held to Maturity

At March 31, 2020 and December 31, 2019, the Company had approximately $ 47,937 and $ 48,325 , respectively, in debt security investments which were classified as held to maturity and carried at amortized cost.

At June 30, 2020 and December 31, 2019, the Company had approximately $ 48,856 and $ 48,325 , respectively, in debt security investments which were classified as held to maturity and carried at amortized cost.

The carrying value of the debt securities approximates fair value based on Level 1 inputs.

The Company has the intent and ability to hold these debt securities to maturity.

Further, as of March 31, 2020, the debt security investments were held in AA, A and BBB rated debt securities.

The Company believes its debt security investments that were in an unrealized loss position as of March 31, 2020 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date, including the recent developments related to Coronavirus (COVID-19), that would indicate any other-than-temporary impairment.

Further, as of June 30, 2020, the debt security investments were held in AA, A and BBB rated de bt securities.

The Company believes its debt security investments that were in an unrealized loss position as of June 30, 2020 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date, including the recent developments related to Coronavirus (COVID-19), that would indicate any other-than-temporary impairment.

BUSINESS SEGMENTS

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transitional and skilled services, which includes the operation of skilled nursing facilities.

During the first quarter, there was no change made to the historically presented segment of transitional and skilled services, which remains as the single segment subsequent to the Spin-Off.

The Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, reviews financial information at the operating segment level.

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The Company believes that this structure reflects its current operational and financial management, and provides the best structure for the Company to maximize the quality of care provided while maintaining financial discipline.

As of March 31, 2020, transitional and skilled services included 193 wholly-owned affiliated skilled nursing operations and 23 campuses that provide skilled nursing and rehabilitative care services and senior living services.

As of June 30, 2020, transitional and skilled services included 193 wholly-owned affiliated skilled nursing operations and 23 campuses that provide skilled nursing and rehabilitative care services and senior living services.

Included in the "all other" category are ancillary services the Company provided through ancillary operations and room and board and social services through nine wholly-owned affiliated senior living operations and 23 campuses.

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The Company's CODM does not review assets by segment in his resource allocation and therefore assets by segment are not disclosed below.

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THE ENSIGN GROUP, INC.

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Segment revenues by major payor source were as follows:

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Transitional and Skilled Services All Other Total Revenue Revenue %

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Total revenue $ 556,779 $ 27,920 $ 584,699 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations for the three months ended March 31, 2020.

(2) Private and other payors also includes revenue from rental income, senior living operations and all payors generated in other ancillary services for the three months ended March 31, 2020.

Three Months Ended March 31, 2019

(1) Medicaid payor includes revenue generated from senior living operations for the three months ended June 30, 2020.

(2) Private and other payors also includes revenue from rental income, senior living operations and all payors generated in other ancillary services for the three months ended June 30, 2020.

Three Months Ended June 30, 2019

Transitional and Skilled Services All Other Total Revenue Revenue %

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Total revenue $ 469,238 $ 23,678 $ 492,916 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations for the three months ended March 31, 2019.

(2) Private and other payors also includes revenue from rental income, senior living operations and all payors generated in other ancillary services for the three months ended March 31, 2019.

(1) Medicaid payor includes revenue generated from senior living operations for the three months ended June 30, 2019.

(2) Private and other payors also includes revenue from rental income, senior living operations and all payors generated in other ancillary services for the three months ended June 30, 2019.

Six Months Ended June 30, 2020

Transitional and Skilled Services All Other Total Revenue Revenue %

Medicaid $ 443,893 $ 6,421 (1) $ 450,314 38.3 %

Medicare 330,628 — 330,628 28.2

Medicaid-skilled 72,394 — 72,394 6.2

Subtotal 846,915 6,421 853,336 72.7

Managed care 184,345 — 184,345 15.7

Private and other 83,924 52,707 (2) 136,631 11.6

Total revenue $ 1,115,184 $ 59,128 $ 1,174,312 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations for the six months ended June 30, 2020.

(2) Private and other payors also includes revenue from rental income, senior living operations and all payors generated in other ancillary services for the six months ended June 30, 2020.

Six Months Ended June 30, 2019

Transitional and Skilled Services All Other Total Revenue Revenue %

Medicaid $ 373,839 $ 6,438 (1) $ 380,277 39.4 %

Medicare 235,508 — 235,508 24.4

Medicaid-skilled 62,243 — 62,243 6.5

Subtotal 671,590 6,438 678,028 70.3

Managed care 169,663 — 169,663 17.6

Private and other 77,243 39,290 (2) 116,533 12.1

Total revenue $ 918,496 $ 45,728 $ 964,224 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations for the six months ended June 30, 2019.

(2) Private and other payors also includes revenue from rental income, senior living operations and all payors generated in other ancillary services for the six months ended June 30, 2019.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables set forth selected financial data consolidated by business segment:

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Transitional and Skilled Services All Other (1)

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Segment income (loss) 84,904 ( 29,470 ) 55,434

Interest expense, net of interest income ( 2,967 )

Interest expense, net of interest and other income ( 1,211 )

Income before provision for income taxes $ 54,223

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(1) General and administrative expense are included in the "all other" category.

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

Transitional and Skilled Services All Other (1)

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Segment income (loss) 56,652 ( 27,913 ) 28,739

Interest expense, net of interest income ( 3,109 )

Interest expense, net of interest and other income ( 3,379 )

Income before provision for income taxes $ 25,360

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(1) General and administrative expense is included in the "all other" category.

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Six Months Ended June 30, 2020

Transitional and Skilled Services All Other (1)

Revenue $ 1,115,184 $ 59,128 $ 1,174,312

Segment income (loss) 172,082 ( 59,855 ) 112,227

Interest expense, net of interest and other income ( 4,178 )

Income before provision for income taxes $ 108,049

Depreciation and amortization $ 20,457 $ 6,868 $ 27,325

(1) General and administrative expense are included in the "all other" category.

Six Months Ended June 30, 2019

Transitional and Skilled Services All Other (1)

Revenue $ 918,496 $ 45,728 $ 964,224

Segment income (loss) 115,416 ( 56,728 ) 58,688

Interest expense, net of interest and other income ( 6,488 )

Income before provision for income taxes $ 52,200

Depreciation and amortization $ 17,552 $ 6,743 $ 24,295

(1) General and administrative expense is included in the "all other" category

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THE ENSIGN GROUP, INC.

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2020 Acquisitions

During the three months ended March 31, 2020, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of three stand-alone skilled nursing operations and one stand-alone independent living operation.

During the six months ended June 30, 2020, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of three stand-alone skilled nursing operations and one stand-alone independent living operation.

The addition of these operations added a total of 247 operational skilled nursing beds and 162 operational senior living units to be operated by the Company's affiliated operating subsidiaries.

The aggregate purchase price for these acquisitions during the three months ended March 31, 2020 was $ 14,054 .

The aggregate purchase price for these acquisitions during the six months ended June 30, 2020 was $ 14,054 .

For the acquisitions made through long-term leases, the Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease.

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The purchase price for the asset acquisitions was $ 14,054 .

As of the date of this filing, the preliminary allocation of the purchase price for the acquisitions made during the first quarter was not finalized as necessary valuation information was not yet available.

During the first quarter of 2020, the Company entered into a long-term lease agreement to transfer two senior living operations to Pennant.

Ensign affiliates retained ownership of the real estate for these two senior living communities.

Subsequent to June 30, 2020, the Company expanded its operations through the acquisition of one campus operation for a purchase price of approximately $ 8 million, which added 62 operational skilled nursing beds and 162 operat ional senior living units to be operated by its operating subsidiary.

2019 Acquisitions

During the first quarter of 2019, the Company expanded its operations through a combination of a long-term lease and a real estate purchase, with the addition of two stand-alone skilled nursing operations.

During the six months ended June 30, 2019, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of seven stand-alone skilled nursing operations, one stand-alone senior living operation and three campus operations.

The addition of these operations added a total of 218 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries.

The Company also invested in a new ancillary services that are complementary to its existing businesses.

The addition of these operations added a total of 1,088 operational skilled nursing beds and 312 operational senior living units to be operated by the Company's affiliated operating subsidiaries.

The Company also invested in new ancillary services that are complementary to its existing businesses.

The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction.

The aggregate purchase price for these acquisitions during the three months ended March 31, 2019 was $ 13,191 .

The fair value of assets for the two acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions.

The purchase price for the two asset acquisitions was $ 5,763 .

The aggregate purchase price for these acquisitions during the six months ended June 30, 2019 was $ 50,583 .

The fair value of assets for the eleven acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions.

The purchase price for the eleven asset acquisitions was $ 43,155 .

The fair value of assets for the one acquisition was concentrated in goodwill and as such, the transaction was classified as a business combination in accordance with ASC 805.

The purchase price for the business combination was $ 7,428 .

The Company also entered into a note payable with the seller of $ 924 .

In connection with the Spin-Off, the Company transferred the assets of one home health agency and one hospice agency that were purchased for an aggregate price of $ 1,500 .

The Company also entered into a note payable with the seller of $ 924 , which was subsequently paid off in the second quarter of 2019 and included as payments of debt in the condensed consolidated statement of cash flow.

In connection with the Spin-Off, the Company transferred the assets of two home health agencies, four hospice agencies, two home care agencies and the operations of one stand-alone senior living that were purchased for an aggregate price of $ 14,779 .

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s acquisition strategy has been focused on identifying both opportunistic and strategic acquisitions within its target markets that offer strong opportunities for return.

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Consequently, the Company believes that prior operating results are not a meaningful representation of the Company’s current operating results or indicative of the integration potential of its newly acquired operating subsidiaries.

The businesses acquired during the three months ended March 31, 2020 were not material acquisitions to the Company individually or in the aggregate.

The businesses acquired during the six months ended June 30, 2020 were not material acquisitions to the Company individually or in the aggregate.

Accordingly, pro forma financial information is not presented.

These acquisitions have been included in the March 31, 2020 condensed consolidated balance sheets of the Company, and the operating results have been included in the condensed consolidated statements of operations of the Company since the dates the Company gained effective control.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below presents the allocation of the purchase price for the operations acquired during the three months ended March 31, 2020 and 2019, excluding assets that were contributed to Pennant that occurred during the Spin-Off.

Three Months Ended March 31,

These acquisitions have been included in the June 30, 2020 condensed consolidated balance sheets of the Company, and the operating results have been included in the condensed consolidated statements of operations of the Company since the dates the Company gained effective control.

The table below presents the allocation of the purchase price for the operations acquired during the six months ended June 30, 2020 and 2019, excluding assets that were contributed to Pennant that occurred during the Spin-Off.

Six Months Ended June 30,

Land $ 4,080 $ 7,660

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Property and equipment, net consists of the following:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Land $ 95,820 $ 91,740

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Property and equipment, net $ 780,439 $ 767,565

See also Note 8, Acquisitions for information on acquisitions during the three months ended March 31, 2020 and 2019.

See also Note 9, Acquisitions for information on acquisitions during the six months ended June 30, 2020 and 2019.

INTANGIBLE ASSETS — NET

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Weighted Average Life (Years)

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Total $ 9,318 $ ( 6,314 ) $ 3,004 $ 9,249 $ ( 5,867 ) $ 3,382

During the three months ended March 31, 2020 and 2019, amortization expense was $ 674 and $ 879 , respectively, of which $ 354 and $ 495 , respectively, was related to the amortization of right-of-use assets.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the three and six months ended June 30, 2020, amortization expense was $ 417 and $ 1,091 and of which $ 290 and $ 644 , respectively, was related to the amortization of right-of-use assets.

Amortization expense was $ 990 and $ 1,869 and of which $ 495 and $ 990 , respectively, was related to the amortization of right-of-use assets for the three and six months ended June 30, 2019, respectively.

Estimated amortization expense for each of the years ending December 31 is as follows:

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An impairment loss is measured by the difference between the goodwill carrying value and the implied fair value.

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of March 31, 2020.

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of June 30, 2020.

See further discussion of goodwill acquired at Note 9, Acquisitions .

The following table represents activity in goodwill by transitional and skilled service segment and "all other" category as of and for the three months ended March 31, 2020:

The following table represents activity in goodwill by transitional and skilled service segment and "all other" category as of and for the six months ended June 30, 2020:

Transitional and Skilled Services All Other Total

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Additions — — —

March 31, 2020 $ 45,486 $ 8,983 $ 54,469

June 30, 2020 $ 45,486 $ 8,983 $ 54,469

Other indefinite-lived intangible assets consists of the following:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Trade name $ 889 $ 889

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$ 3,068 $ 3,068

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THE ENSIGN GROUP, INC.

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Restricted and other assets consists of the following:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Debt issuance costs, net $ 3,019 $ 3,374

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Restricted and other assets $ 30,712 $ 26,207

Included in restricted and other assets as of March 31, 2020 and December 31, 2019 are anticipated insurance recoveries related to the Company's workers' compensation, general and professional liability claims that are recorded on a gross rather than net basis in accordance with an Accounting Standards Update issued by the FASB.

The Company implemented a non-qualified deferred compensation plan (the DCP) that was effective in 2019 for certain executives.

The plan was then offered to other highly compensated employees, which went into effect on January 1, 2020.

These individuals are otherwise ineligible for participation in the Company's 401(k) plan.

Included in restricted and other assets as of June 30, 2020 and December 31, 2019 are anticipated insurance recoveries related to the Company's workers' compensation, general and professional liability claims that are recorded on a gross rather than net basis in accordance with an Accounting Standards Update issued by the FASB.

The Company implemented a non-qualified deferred compensation plan (the DCP) that was effective in 2019 for certain executives and was expanded to highly compensated employees on January 1, 2020.

The plan allows for the employee deferrals to be deposited into a rabbi trust and the funds are generally invested in individual variable life insurance contracts owned by the Company that are specifically designed to informally fund savings plans of this nature.

Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in the deferred compensation plan.

The Company recorded a gain on the deferral investment, which is included in interest and other income, and an offsetting expense, which is included in cost of services, of $ 458 in the accompanying condensed consolidated statements of income for both the three and six months ended June 30, 2020.

OTHER ACCRUED LIABILITIES

Other accrued liabilities consists of the following:

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Quality assurance fee $ 6,096 $ 6,461

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The cash balance related to this liability is included in other current assets in the accompanying condensed consolidated balance sheets.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company recorded income tax expense of $ 12,625 and $ 5,275 during the three months ended March 31, 2020 and 2019, respectively, or 23.5 % of earnings before income taxes for the three months ended March 31, 2020, compared to 19.7 % for the three months ended March 31, 2019.

The effective tax rate for both three month periods includes excess tax benefits from stock-based compensation which were offset by non-deductible expenses including non-deductible compensation.

The Company recorded income tax expense of $ 26,159 and $ 9,851 during the six months ended June 30, 2020 and 2019, respectively, or 24.2 % of earnings before income taxes for the six months ended June 30, 2020, compared to 18.9 % for the six months ended June 30, 2019.

The effective tax rate for both six month periods includes excess tax benefits from stock-based compensation, which were higher in 2019, offset by non-deductible expenses including non-deductible compensation.

In February 2020, the IRS sent notification to the Company that its 2017 tax return will be examined.

It is anticipated the audit will begin in July 2020.

The Company is not currently under examination by any other major income tax jurisdiction.

It is anticipated the audit will begin during the third quarter of 2020.

Th e Company is not currently under examination by any other major income tax jurisdiction.

During 2020, the statutes of limitations will lapse on the Company's 2016 Federal tax year and certain 2015 and 2016 state tax years.

The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months.

The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the three months ended March 31, 2020 and 2019.

Long-term debt consists of the following:

March 31, 2020 December 31, 2019

The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the six months ended June 30, 2020 and 2019.

Debt consists of the following:

June 30, 2020 December 31, 2019

Revolving credit facility with Truist $ 30,000 $ 210,000

Mortgage loans and promissory note 119,684 120,350

Mortgage loans and promissory notes 119,552 120,350

149,552 330,350

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Under the Credit Facility, the Company must comply with financial maintenance covenants to be tested quarterly, consisting of (i) a maximum consolidated total net debt to consolidated EBITDA ratio (which shall not be greater than 3.00 :1.00;

1.00 for the first fiscal quarter and the immediately following three fiscal quarters), and (ii) a minimum interest/rent coverage ratio (which cannot be less than 1.50 :

As of March 31, 2020, the Company's operating subsidiaries had $ 230,000 outstanding under the Credit Facility.

The Company was in compliance with all loan covenants as of March 31, 2020.

As of May 8, 2020, there was approximately $ 110,000 of outstanding borrowings under the Credit Facility.

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provided that if the aggregate consideration for approved acquisitions in a six month period is greater than $ 50,000 , then the ratio can be increased at the election of the Company with notice to the administrative agent to 3.50 :1.00 for the first fiscal quarter and the immediately following three fiscal quarters), and (ii) a minimum interest/rent coverage ratio (which cannot be less than 1.50 :1.00).

As of June 30, 2020, the Company's operating subsidiaries had $ 30,000 outstanding under the Credit Facility.

The Company was in compliance with all loan covenants as of June 30, 2020.

As of July 31, 2020, there was approximately $ 30,000 of outstanding borrowings under the Credit Facility.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Mortgage Loans and Promissory Note

As of March 31, 2020, 19 of the Company's subsidiaries are under mortgage loans insured with the Department of Housing and Urban Development (HUD) in the aggregate amount of $ 115,534 , which subjects these subsidiaries to HUD oversight and periodic inspections.

Mortgage Loans and Promissory Notes

As of June 30, 2020, 19 of the Company's subsidiaries are under mortgage loans insured with the Department of Housing and Urban Development (HUD) in the aggregate amount of $ 114,983 , which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear fixed interest rates ranging from 2.6 % to 3.5 % per annum.

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The terms for all the mortgage loans are 25 to 35 years.

The borrowings were arranged by Lancaster Pollard Mortgage Company, LLC, and insured by HUD.

Loan proceeds were used to pay down previously drawn amounts on Ensign's revolving line of credit.

In addition to refinancing existing borrowings, the proceeds of the HUD-insured debt helped fund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.

In addition to the HUD mortgage loans above, the Company has a promissory note issued in connection with an acquisition.

The note bears a fixed interest rate of 5.3 % per annum.

The term of the note is 12 years.

The note is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

As of March 31, 2020, the Company's operating subsidiaries had $ 119,684 outstanding under the mortgage loans and note, of which $ 2,727 is classified as short-term and the remaining $ 116,957 is classified as long-term.

The Company was in compliance with all loan covenants as of March 31, 2020.

In addition to the HUD mortgage loans above, the Company has two promissory notes.

The notes bear fixed interest rates of 5.3 % and 4.3 % per annum and the term of the notes are 12 years and 10 months, respectively.

The 12 year note which was used for an acquisition is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

As of June 30, 2020, the Company's operating subsidiaries had $ 119,552 outstanding under the mortgage loans and notes, of which $ 3,292 is classified as short-term and the remaining $ 116,260 is classified as long-term.

The Company was in compliance with all loan covenants as of June 30, 2020.

Based on Level 2, the carrying value of the Company's long-term debt is considered to approximate the fair value of such debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt.

Off-Balance Sheet Arrangements

As of March 31, 2020, the Company had approximately $ 5,442 o n the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

As of June 30, 2020, the Company had approximately $ 5,792 o n the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit .

OPTIONS AND AWARDS

Stock-based compensation expense consists of stock-based payment awards made to employees and directors, including employee stock options and restricted stock awards, based on estimated fair values.

As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three months ended March 31, 2020 and 2019 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2020 and 2019 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ.

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In connection with the Spin-Off, the number of shares available to be issued under the 2017 Plan were adjusted in the current year in order to reflect the proportional adjustments.

The adjustment provides for a total issuance of 8,118 shares of common stock (Spin-Off Conversion).

The adjustment provides for a total issuance of 8,118 shares of common stock (the Spin-Off Conversion).

The number of shares available to be issued under the 2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 2.5 shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award).

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Options expire 10 years from the date of grant.

At March 31, 2020, reflective of the Spin-Off, there were approximately 3,998 unissued shares of common stock available for issuance under this plan.

At June 30, 2020, there were approximately 3,585 unissued shares of common stock available for issuance under this plan.

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for all stock-based payment awards.

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The Company develops estimates based on historical data and market information, which can change significantly over time.

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THE ENSIGN GROUP, INC.

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Stock Options

The Company granted 145 options and 113 restricted stock awards during the three months ended March 31, 2020.

The Company used the following assumptions for stock options granted during the three months ended March 31, 2020 and 2019:

The Company granted 235 and 380 stock options during the three and six months ended June 30, 2020, respectively.

The Company used the following assumptions for stock options granted during the three months ended June 30, 2020 and 2019:

Grant Year Options Granted (1)

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2019 258 2.1 % 6.3 years 34.0 % 0.4 %

(1) Options granted represents historical grant values prior to the Spin-Off for the three months ended March 31, 2019.

For the three months ended March 31, 2020 and 2019, the following represents the exercise price and fair value displayed at grant date for stock option grants:

(1) Options granted represents historical grant values prior to the Spin-Off for the three months ended June 30, 2019.

The Company used the following assumptions for stock options granted during the six months ended June 30, 2020 and 2019:

Grant Year Options Granted (1 )

Weighted Average Risk-Free Rate Expected Life Weighted Average Volatility Weighted Average Dividend Yield

2020 380 0.8 % 6.2 years 37.6 % 0.4 %

2019 399 2.2 % 6.3 years 33.9 % 0.3 %

1) Options granted represents historical grant values prior to the Spin-Off for the six months ended June 30, 2019.

For the six months ended June 30, 2020 and 2019, the following represents the exercise price and fair value displayed at grant date for stock option grants:

Grant Year Granted (1)

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2019 399 $ 45.49 $ 16.40

(1) Options granted from January 1, 2019 through March 31, 2019 represent historical grant values prior to the impact of the Spin-Off.

(1) Options granted from January 1, 2019 through June 30, 2019 represent historical grant values prior to the impact of the Spin-Off.

Options granted subsequent to October 1, 2019 represent grant values reflective of the Spin-Off.

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(3) Weighted average fair value of options was calculated using the fair values reflective of the Spin-Off Conversion for all periods presented.

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended March 31, 2020 and 2019 and therefore, the intrinsic value was $ 0 at the date of grant.

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The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended June 30, 2020 and 2019 and therefore, the intrinsic value was $ 0 at the date of grant.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table represents the employee stock option activity during the three months ended March 31, 2020:

The following table represents the employee stock option activity during the six months ended June 30, 2020:

Outstanding Weighted

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Exercised ( 179 ) 11.20

March 31, 2020 4,413 $ 22.18 2,553 $ 13.63

The following summary information reflects stock options outstanding, vested and related details as of March 31, 2020:

June 30, 2020 4,595 $ 23.34 2,697 $ 14.70

The following summary information reflects stock options outstanding, vested and related details as of June 30, 2020:

Stock Options Outstanding Stock Options Vested

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Total 4,595 $ 39,773 2,697

The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of June 30, 2020 and December 31, 2019 is as follows:

Options June 30, 2020 December 31, 2019

Outstanding $ 89,021 $ 108,623

Vested 73,559 83,243

Expected to vest 13,889 22,399

Exercisable 6,532 29,032

The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options .

The intrinsic values as of June 30, 2020 decreased compared to the intrinsic values as of December 31, 2019 due to a decrease in the Company's stock price.

Restricted Stock Awards

The Company granted 113 and 105 restricted stock awards during the three months ended March 31, 2020 and 2019, respectively.

The Company granted 81 and 194 restricted stock awards during the three and six months ended June 30, 2020, respectively.

The Company granted 89 and 194 restricted stock awards during the three and six months ended June 30, 2019, respectively.

All awards were granted at an issue price of $ 0 and generally vest over five years .

The fair value per share of restricted awards granted during the three months ended March 31, 2020 and 2019 ranged from $ 42.02 to $ 51.20 and $ 41.68 to $ 53.99 , respectively.

The fair value per share during the three months ended March 31, 2019 is reflective of values prior to the Spin-Off, while the fair value per share during three months ended March 31, 2020 is reflective of values subsequent to the Spin-Off.

The fair value per share of restricted awards granted during the six months ended June 30, 2020 and 2019 ranged from $ 35.47 to $ 51.20 and $ 41.68 to $ 53.99 , respectively.

The fair value per share during the six months ended June 30, 2019 is reflective of values prior to the Spin-Off, while the fair value per share during six months ended June 30, 2020 is reflective of values subsequent to the Spin-Off.

The fair value per share includes quarterly stock awards to non-employee directors.

A summary of the status of the Company's non-vested restricted stock awards as of March 31, 2020 and changes during the three months ended March 31, 2020 is presented below:

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status of the Company's non-vested restricted stock awards as of June 30, 2020 and changes during the six months ended June 30, 2020 is presented below:

Non-Vested Restricted Awards Weighted Average Grant Date Fair Value

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Forfeited ( 8 ) 27.63

Nonvested at March 31, 2020 612 $ 32.88

During the three months ended March 31, 2020, the Company granted five automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors.

The fair value per share of these stock awards was $ 47.09 based on the market price on the grant date.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-based compensation expense recognized for the Company's equity incentive plans for the three months ended March 31, 2020 and 2019 was as follows:

Three Months Ended March 31,

Nonvested at June 30, 2020 603 $ 34.76

During the three and six months ended June 30, 2020, the Company granted 5 and 10 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors.

The fair value per share of these stock awards ranged from $ 35.47 to $ 47.09 based on the market price on the grant date.

Long-Term Incentive Plan

On August 27, 2019, the Board approved the Long-Term Incentive Plan (the 2019 LTI Plan).

The 2019 LTI Plan provides that certain employees of the Company and Pennant who assisted in the consummation of the Spin-Off are granted shares of restricted stock upon the successful completion of the Spin-Off.

The 2019 LTI Plan provides for the issuance of 500 shares of Pennant restricted stock.

The shares are vested over five years at 20 % per year on the anniversary of the grant date.

If a recipient is terminated or voluntarily leaves the Company, all shares subject to restriction or not yet vested shall be entirely forfeited.

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 195 and $ 389 for the three and six months ended June 30, 2020, respectively.

Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the three and six months ended June 30, 2020 and 2019 was as follows:

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

2020 2019 (1)

Stock-based compensation expense related to stock options $ 1,545 $ 1,403 $ 2,965 $ 2,657

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Total $ 3,528 $ 2,929 $ 6,763 $ 5,385

(1) The amount of stock-based compensation expense that was classified as discontinued operations was $ 156 for the three months ended March 31, 2019.

In future periods, the Company expects to recognize approximately $ 19,597 and $ 23,661 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of March 31, 2020.

(1) The amount of stock-based compensation expense that was classified as discontinued operations was $ 137 and $ 293 , respectively for the three and six months ended June 30, 2019.

In future periods, the Company expects to recognize approximately $ 21,826 and $ 25,078 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of June 30, 2020.

Future stock-based compensation expense will be recognized over 3.8 weighted average years for both unvested options and restricted stock awards, respectively.

There were 1,860 unvested and outstanding options at March 31, 2020, of which 1,745 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest at March 31, 2020 was 6.0 years.

The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of March 31, 2020 and December 31, 2019 is as follows:

Options March 31, 2020 December 31, 2019

Outstanding $ 75,136 $ 108,623

Vested 61,475 83,243

Expected to vest 12,255 22,399

Exercisable 5,621 29,032

The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options.

The intrinsic values as of March 31, 2020 decreased compared to the intrinsic values as of December 31, 2019 due to a decrease in the Company's stock price.

There were 1,898 unvested and outstanding options at June 30, 2020, of which 1,780 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest at June 30, 2020 was 6.0 years.

Equity Instrument Denominated in the Shares of a Subsidiary

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Effective upon the Spin-Off, all shares under the Plan were converted to Pennant shares and Pennant's Board of Directors hold full administrative authority of the Cornerstone Plan.

The Company did no t grant any new restricted shares during the three months ended March 31, 2019.

The Company did no t grant any new restricted shares nor did the Company grant any options during the six months ended June 30, 2019.

The awards granted generally vested over a period of three to five years , or upon the occurrence of certain prescribed events.

During the three months ended March 31, 2019, there were no restricted stock awards that vested.

The Company did no t grant any new stock options during the three months ended March 31, 2019.

The value of the stock options and restricted stock awards had been tied to the value of the common stock of the subsidiary.

Prior to the Spin-Off, the awards could be put to the Company at various prescribed dates, which in no event was earlier than six months after vesting of the restricted awards or exercise of the stock options.

The Company had the ability to call the awards, generally upon employee termination.

During the six months ended June 30, 2019, there were 976 restricted stock awards that vested.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Prior to the Spin-Off, the grant-date fair value of the awards was recognized as compensation expense over the relevant vesting periods, with a corresponding adjustment to noncontrolling interests.

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The grant values were determined based on an independent valuation of the subsidiary shares.

For the three months ended March 31, 2019, the Company expensed $ 341 in stock-based compensation related to the Subsidiary Equity Plan.

Stock-based compensation expense related to the Subsidiary Equity Plan is included within the Company's condensed consolidated financial statements as discontinued operations.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-Term Incentive Plan

On August 27, 2019, the Board approved the Long-Term Incentive Plan (the 2019 LTI Plan).

The 2019 LTI Plan provides for the issuance of 500 shares of Pennant restricted stock.

The shares are vested over five years at 20 % per year on the anniversary of the grant date.

If a recipient is terminated or voluntarily leaves the Company, all shares subject to restriction or not yet vested shall be entirely forfeited.

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 194 as of the three months ended March 31, 2020.

For the three and six months ended June 30, 2019, the Company expensed $ 236 and $ 577 , respectively, in stock-based compensation related to the Subsidiary Equity Plan.

Further, during the second quarter of 2019, the Company repurchased 469 shares of common stock under the Subsidiary Equity Plan for $ 2,293 .

The Company subsequently sold the shares and received net proceeds of $ 2,293 .

Stock-based compensation expense related to the Subsidiary Equity Plan, payments from the repurchase of shares and the proceeds from the sale of the repurchased shares related to the Subsidiary Equity Plan are all included within the Company's condensed consolidated financial statements as discontinued operations.

The Company leases from CareTrust REIT, Inc.

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and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties.

Total rent expense for continuing operations under the Master Leases was approximately $ 13,125 and $ 13,358 for the three months ended March 31, 2020 and 2019, respectively.

Total rent expense under the Master Leases was approximately $ 13,130 and $ 26,255 for the three and six months ended June 30, 2020, respectively, and $ 13,566 and $ 26,924 for the three and six months ended June 30, 2019, respectively.

Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio.

The Master Leases also include certain reporting, legal and authorization requirements.

The Company is not aware of any defaults as of March 31, 2020.

The Company is not aware of any defaults as of June 30, 2020.

In connection with the Spin-Off, the Company amended the Master Leases with CareTrust and other third-party lease agreements.

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The Company does not consider these guarantees to be probable, and cannot estimate the maximum exposure.

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THE ENSIGN GROUP, INC.

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Most of these leases contain renewal options, certain of which involve rent increases.

Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 32,347 and $ 30,336 for the three months ended March 31, 2020 and 2019, respectively.

Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 32,499 and $ 64,846 for the three and six months ended June 30, 2020, respectively, and $ 31,372 and $ 61,708 for the three and six months ended June 30, 2019, respectively.

Forty of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with CareTrust, are operated under eight separate master lease arrangements.

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The components of operating lease expense are as follows:

Three Months Ended March 31,

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

2020 2019 2020

Rent - cost of services (1)

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Depreciation and amortization (2)

290 495 644 990

Variable lease costs (3)

3,252 3,248 6,463 6,063

(1) Rent- cost of services includes the deferred rent adjustments of $ 125 and $ 254 for the three months ended March 31, 2020 and 2019, respectively.

Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 594 and $ 89 for the three months ended March 31, 2020 and 2019, respectively.

$ 36,041 $ 35,115 $ 71,953 $ 68,761

(1) Rent- cost of services includes deferred rent adju stments of $ 111 and $ 236 f or the three and six months ended June 30, 2020, respectively and $ 595 and $ 849 for the three and six months ended June 30, 2019, respectively.

Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 620 and $ 1,214 three and six months ended June 30, 2020, respectively and $ 339 and $ 428 for the three and six months ended June 30, 2019, respectively.

(2) Depreciation and amortization is related to the amortization of favorable and direct lease costs.

(3) Variable lease costs, including property taxes and insurance, are classified in Cost of services in the Company's condensed consolidated statements of income.

Future minimum lease payments for all leases as of March 31, 2020 are as follows:

Future minimum lease payments for all leases as of June 30, 2020 are as follows:

2020 (remainder) $ 63,875

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Long-term operating lease liabilities $ 958,249

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term.

In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date.

As of March 31, 2020, the weighted average remaining lease term is 14.4 and the weighted average discount rate used to determine the operating lease liability is 8.3 %.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term.

In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date.

As of June 30, 2020, the weighted average remaining lease term is 14.2 and the weighted average discount rate used to determine the operating lease liability is 8.3 %.

Subsequent to June 30, 2020, the Company exercised options to extend the leases at two of its facilities for an additional 10 years each.

These extensions resulted in an aggregate increase to the Company's operating lease liabilities of approximately $ 6.3 million.

Each of the modified leases now extend through November 31, 2031.

Lessor Activities

In connection with the Spin-Off, Ensign affiliates retained ownership of the real estate at 29 senior living operations that were contributed to Pennant.

During the first quarter of 2020, the Company transferred the operations of two senior living operations to Pennant .

During the first quarter of 2020, the Company transferred the operations of an additional two senior living operations to Pennant.

Ensign affiliates retained ownership of the real estate for these 31 senior living communities.

All of these properties are leased to Pennant on a triple-net basis, where as the respective Pennant affiliates are responsible for all costs at the properties including (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor);

All of these properties are leased to Pennant on a triple-net basis, whereas the respective Pennant affiliates are responsible for all costs at the properties including:

(1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor);

(2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties;

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The initial terms range between 14 to 16 years.

Total a nnual rental income generated from the leases with Pennant is approximately $ 14,000 , which includes variable rent such as property taxes, insurance and other items.

Total rental income from all third-party sources as of March 31, 2020 is as follows:

Three Months Ended

March 31, 2020 March 31, 2019

Total annual rental income generated from the leases with Pennant is approximately $ 14,000 , which includes variable rent such as property taxes, insurance and other items.

Total rental income from all third-party sources for the three and six months ended June 30, 2020 and 2019 is as follows:

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

2020 2019 2020 2019

$ 3,262 $ — $ 6,829 $ —

Other third-party 665 668 1,401 1,425

$ 3,927 $ 668 $ 8,230 $ 1,425

(1) Pennant rental income includes variable rent such as property taxes, insurance and other items of $ 466 during the three months ended March 31, 2020.

Future minimum lease payments receivable for all leases as of March 31, 2020 were as follows:

(1) Pennant rental income includes variable rent such as property taxes, insurance and other items of $ 131 and $ 597 during the three and six months ended June 30, 2020, respectively.

Future minimum lease payments receivable for all leases as of June 30, 2020 were as follows:

2020 (remainder) $ 8,328

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Total lease payments receivable $ 184,992

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

COMMITMENTS AND CONTINGENCIES

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Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Indemnities — From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims.

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The Company has fully cooperated with the U.S.

Department of Justice to promptly respond to the requests for information, and has recently been advised that the U.S.

Department of Justice has declined to intervene in any subsequent action based on or related to the subject matter of this investigation.

Department of Justice to promptly respond to the requests for information, and has been advised that the U.S.

Department of Justice declined to intervene in any subsequent action based on or related to the subject matter of this investigation.

Litigation — The skilled nursing business involves a significant risk of liability given the age and health of the patients and residents served by the Company's independent operating subsidiaries.

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The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.

Further, the U.S.

House of Representatives Select Subcommittee on the Coronavirus Crisis has launched an investigation into the coronavirus crisis in nursing homes.

In June 2020, the Company received a document request from the House Select Subcommittee.

The Company is cooperating with this inquiry;

however, it is not possible to predict the ultimate outcome of any such investigation or what other investigations or regulatory responses may result from the investigation and could have a material adverse effect on our reputation, business, financial condition and results of operations.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor.

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Due to these whistleblower incentives, lawsuits have become more frequent.

For example, and despite the decision of the United States Department of Justice to decline participation in litigation based on the subject matter of its previously issued Civil Investigative Demand, the qui tam relator may continue on with the lawsuit and pursue claims that the Company has allegedly violated the False Claims Act and/or the Anti-Kickback Statute.

For example, and despite the decision of the U.S.

Department of Justice to decline participation in litigation based on the subject matter of its previously issued Civil Investigative Demand, the qui tam relator may continue on with the lawsuit and pursue claims that the Company has allegedly violated the False Claims Act and/or the Anti-Kickback Statute.

In addition to the Federal False Claims Act, some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations.

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As such, the Company could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which its independent operating subsidiaries do business.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) which made significant changes to the Federal False Claims Act (FCA) and expanded the types of activities subject to prosecution and whistleblower liability.

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This includes the retention of any government overpayment.

The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it is knowingly improper.

The government can argue, therefore, that an FCA violation can occur without any affirmative fraudulent action or statement, as long as it is knowingly improper.

In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for employees, but also contractors and agents.

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The Company and its independent operating subsidiaries have in the past been subject to class action litigation involving claims of alleged violations of regulatory requirements related to staffing.

While the Company has been able to settle these claims without a material ongoing adverse effect on its business, future claims could be brought that may materially affect its business, financial condition and results of operations.

While the Company has been able to settle these claims without an ongoing material adverse effect on its business, future claims could be brought that may materially affect its business, financial condition and results of operations.

Other claims and suits, including class actions, continue to be filed against the Company and other companies in its industry.

The Company has been subjected to, and is currently involved in, class action litigation alleging violations (alone or in combination) of state and federal wage and hour laws as related to the alleged failure to pay wages, to timely provide and authorize meal and rest breaks, and related causes action.

The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s business, cash flows, financial condition or results of operations.

The Company and its independent operating subsidiaries have been, and continue to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims related to patient care and treatment (professional negligence claims), as well as employment related claims.

The Company has been subjected to, and is currently involved in, class action litigation alleging violations (alone or in combination) of state and federal wage and hour laws as related to the alleged failure to pay wages, to timely provide and au thorize meal and rest breaks, and related causes action.

The Company does not believe that the ultimate resolution of these actions will have an ongoing material adverse effect on the Company’s business, cash flows, financial condition or results of operations.

The Company and its independent operating subsidiaries have been, and continue to be, subject to claims and legal actions that arise in the ordinary course of business, including potential claims filed by residents and responsible parties related to patient care and treatment (professional negligence claims), as well as employment related claims filed by current or former employees.

A significant increase in the number of these claims, or an increase in the amounts owing should plaintiffs be successful in their prosecution of these claims, could materially adversely affect the Company’s business, financial condition, results of operations and cash flows.

Claims and suits continue to be filed against the Company, its independent operating entities, and other post-acute care providers.

In addition, professional negligence claims have been filed and will likely continue to be filed against the Company's independent operating entities by residents or responsible parties.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company cannot predict or provide any assurance as to the possible outcome of any inquiry, investigation or litigation.

If any such litigation were to proceed, and the Company and its independent operating subsidiaries are subjected to, alleged to be liable for, or agree to a settlement of, claims or obligations under Federal Medicare statutes, the Federal False Claims Act, or similar State and Federal statutes and related regulations, or if the Company or its independent operating subsidiaries are alleged or found to be liable on theories of general or professional negligence, the Company's business, financial condition and results of operations and cash flows could be materially and adversely affected and its stock price could be adversely impacted.

Among other things, any settlement or litigation could involve the payment of substantial sums to settle any alleged civil violations, and may also include the assumption of specific procedural and financial obligations by the Company or its subsidiaries going forward under a corporate integrity agreement and/or other such arrangements.

Among other things, any settlement or litigation could involve the payment of substantial sums to settle any alleged civil violations, and may also include the assumption of specific procedural and financial obligations by the Company or its operating subsidiaries going forward under a corporate integrity agreement and/or other such arrangements.

Medicare Revenue Recoupments — The Company's independent operating entities are subject to regulatory reviews relating to the provision of Medicare services, billings and potential overpayments as a result of Recovery Audit Contractors (RAC), Program Safeguard Contractors (PSC), and Medicaid Integrity Contractors (MIC) programs (collectively referred to as Reviews).

As of March 31, 2020, six of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process, both pre- and post-payment.

The Company anticipates that these Reviews will increase in frequency in the future.

If an operation fails a Review and/or subsequent Reviews, the operation could then be subject to extended review or an extrapolation of the identified error rate to billings in the same time period.

As of March 31, 2020, the Company's independent operating subsidiaries have responded to the requests and the related claims are currently under review, on appeal or in a dispute resolution process.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Government Inquiry and Corporate Integrity Agreement — In October 2013, the Company and its independent operating entities completed and executed a settlement agreement (the Settlement Agreement) with the DOJ, which received the final approval of the Office of Inspector General-HHS and the United States District Court for the Central District of California.

Centers for Medicare and Medicaid Services (CMS) has suspended all Targeted Probe and Educate program activity due to the public health emergency declared as a result of COVID-19.

Accordingly, as of June 30, 2020, none of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or are in a dispute resolution process, both pre- and post-payment.

Once the suspension period is lifted, the previously in-progress reviews could start again.

The Company anticipates that these Reviews will reconvene and could increase in frequency in the future.

District Court for the Central District of California.

Pursuant to the Settlement Agreement, the Company made a single lump-sum remittance to the government in the amount of $ 48,000 in October 2013.

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The Company believes that an appropriate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary.

The Company’s receivables from Medicare and Medicaid payor programs accounted for 57.9 % and 57.3 % of its total accounts receivable as of March 31, 2020 and December 31, 2019, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 70.5 % and 70.4 % of the Company's revenue for the three months ended March 31, 2020 and 2019, respectively.

The Company’s receivables from Medicare and Medicaid payor programs accounted for 60.0 % and 57.3 % of its total accounts receivable as of June 30, 2020 and December 31, 2019, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 74.8 % and 72.7 % of the Company's revenue for the three and six months ended June 30, 2020, respectively, and 70.3 % for both the three and six months ended June 30, 2019.

Cash in Excess of FDIC Limits — The Company currently has bank deposits with financial institutions in the U.S.

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In addition, the Company has uninsured bank deposits with a financial institution outside the U.S.

As of May 8, 2020, the Company had approximately $ 1,135 in uninsured cash deposits.

As of July 31, 2020, the Company had approximately $ 468 in uninsured cash deposits.

All uninsured bank deposits are held at high quality credit institutions.

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THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

COMMON STOCK REPURCHASE PROGRAM

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Under these programs, the Company is authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws.

During the three months ended March 31, 2020, the Company repurchased 503 shares of its common stock for a total of $ 20,000 and 189 shares of its common stock for a total of $ 5,000 , respectively.

During the first quarter of 2020, the Company repurchased 503 shares of its common stock for a total of $ 20,000 and 189 shares of its common stock for a total of $ 5,000 , respectively.

These repurchase programs expired upon the repurchase of the full authorized amount under the two plans.

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The Company repurchased 138 shares of its common stock for a total of $ 6,406 in fiscal year 2019 before the repurchase program was cancelled in the first quarter of 2020.

SUBSEQUENT EVENTS

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A new strain of coronavirus, which causes the viral disease known as COVID-19, has spread across the globe and disrupted economies around the world, including the markets in which the Company operates.

The outbreak has been declared to be a pandemic by the World Health Organization and the Health and Human Services Secretary has declared a public health emergency in the United States in response to the outbreak.

Additionally, the Centers for Disease Control and Prevention has stated that older adults are at a higher risk for serious illness from the coronavirus.

As the COVID-19 pandemic evolves, the Company's financial and operational outlook remains subject to change.

The Company continues to monitor the impacts of the pandemic on its operations and financial condition.

Subsequent to March 31, 2020, the Company received a cash payment of approximately $ 39,600 from the Public Health and Social Services Emergency Fund that was appropriated by Congress to the Department of Health and Human Services (“HHS”) in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

HHS distributed the funds to healthcare providers based on their 2019 Medicare fee-for-service reimbursement.

HHS requires providers, within 30 days of receipt of these funds, to submit an attestation accepting certain terms and condition.

If a provider does not wish to comply with these terms and conditions, the provider must remit the full payment to HHS.

Subsequent to March 31, 2020, the Company received $ 98,000 through the Medicare Accelerated and Advance Payment Program to assist in providing needed liquidity to care delivery providers.

The payment acceleration from Medicare is to be repaid starting 120 days after the receipt of cash.

The Company plans to repay in cash in August 2020 and classify the cash receipts as a liability.

Subsequent to March 31, 2020, the Family First Coronavirus Response Act provided a 6.2% increase to the Federal Medical Assistance Percent (FMAP).

The timing and the amount of the temporary increase from FMAP funding will vary substantially dependent on the state.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements