ENSIGN GROUP, INC 10-Q

Item 1. FINANCIAL STATEMENTS THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2020 December 31, 2019 (In thousands, except par values) Assets Current assets: Cash and cash equivalents $ 201,738 $ 59,175 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 Investments—current 16,357 17,754 Prepaid income taxes — 739 Prepaid expenses and other current assets 27,150 24,428 Total current assets 547,306 411,081 Property and equipment, net 780,439 767,565 Right-of-use assets 1,032,684 1,046,901 Insurance subsidiary deposits and investments 32,499 30,571 Escrow deposits 364 14,050 Deferred tax assets 3,612 4,615 Restricted and other assets 30,712 26,207 Intangible assets, net 3,004 3,382 Goodwill 54,469 54,469 Other indefinite-lived intangibles 3,068 3,068 Total assets $ 2,488,157 $ 2,361,909 Liabilities and equity Current liabilities: Accounts payable $ 42,694 $ 44,973 Accrued wages and related liabilities 155,013 151,009 Lease liabilities—current 46,983 44,964 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 Current maturities of long-term debt 3,292 2,702 Total current liabilities 581,038 343,173 Long-term debt—less current maturities 143,893 325,217 Long-term lease liabilities—less current portion 958,249 973,983 Accrued self-insurance liabilities—less current portion 61,324 58,114 Other long-term liabilities (Note 3) 25,877 5,278 Total liabilities 1,770,381 1,705,765 Commitments and contingencies (Notes 16, 18 and 19) Equity Ensign Group, Inc. stockholders' equity: Common stock: 0.001 par value; 100,000 shares authorized; 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) 57 56 Additional paid-in capital 319,770 307,914 Retained earnings 467,219 391,523 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 ) Total Ensign Group, Inc. stockholders' equity 715,997 654,197 Non-controlling interest 1,779 1,947 Total equity 717,776 656,144 Total liabilities and equity $ 2,488,157 $ 2,361,909 See accompanying notes to condensed consolidated financial statements. 1 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (In thousands, except per share data) Revenue $ 584,699 $ 492,916 $ 1,174,312 $ 964,224 Expense: Cost of services 451,749 394,741 906,270 766,730 Rent—cost of services 32,484 31,222 64,814 61,403 General and administrative expense 31,427 25,848 63,676 53,108 Depreciation and amortization 13,605 12,366 27,325 24,295 Total expenses 529,265 464,177 1,062,085 905,536 Income from operations 55,434 28,739 112,227 58,688 Other income (expense): Interest expense ( 2,293 ) ( 3,941 ) ( 5,958 ) ( 7,613 ) Interest and other income 1,082 562 1,780 1,125 Other expense, net ( 1,211 ) ( 3,379 ) ( 4,178 ) ( 6,488 ) Income before provision for income taxes 54,223 25,360 108,049 52,200 Provision for income taxes 13,535 4,576 26,159 9,851 Net income from continuing operations 40,688 20,784 81,890 42,349 Net income from discontinued operations, net of tax (Note 4) — 8,141 — 14,183 Net income 40,688 28,925 81,890 56,532 Less: Net income attributable to noncontrolling interests in continuing operations 440 116 793 201 Net income attributable to noncontrolling interests in discontinued operations (Note 4) — 200 — 350 Net income attributable to noncontrolling interests 440 316 793 551 Net income attributable to The Ensign Group, Inc. $ 40,248 $ 28,609 $ 81,097 $ 55,981 Amounts attributable to The Ensign Group, Inc.: Income from continuing operations attributable to The Ensign Group, Inc. $ 40,248 $ 20,668 $ 81,097 $ 42,148 Income from discontinued operations, net of income tax (Note 4) — 7,941 — 13,833 Net income attributable to The Ensign Group, Inc. $ 40,248 $ 28,609 $ 81,097 $ 55,981 Net income per share attributable to The Ensign Group, Inc.: Basic: Continuing operations $ 0.76 $ 0.39 $ 1.52 $ 0.79 Discontinued operations — 0.15 — 0.26 Basic income per share attributable to The Ensign Group, Inc. $ 0.76 $ 0.54 $ 1.52 $ 1.05 Diluted: Continuing operations $ 0.73 $ 0.37 $ 1.46 $ 0.75 Discontinued operations — 0.14 — 0.25 Diluted income per share attributable to The Ensign Group, Inc. $ 0.73 $ 0.51 $ 1.46 $ 1.00 Weighted average common shares outstanding: Basic 53,094 53,408 53,285 53,246 Diluted 55,181 56,078 55,489 55,896 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Non-Controlling Interest (In thousands) Shares Amount Shares Amount Total Balance - January 1, 2020 53,487 $ 56 $ 307,914 $ 391,523 2,079 $ ( 45,296 ) $ 1,947 $ 656,144 Issuance of common stock to employees and directors resulting from the exercise of stock options 148 — 1,552 — — — — 1,552 Issuance of restricted stock 723 1 3,085 — — — — 3,086 Dividends declared ($ 0.0500 per share) — — — ( 2,683 ) — — — ( 2,683 ) Employee stock award compensation — — 3,235 — — — — 3,235 Repurchase of common stock (Note 20) ( 692 ) — — — 692 ( 25,000 ) — ( 25,000 ) Net income attributable to noncontrolling interest — — — — — — 352 352 Distribution to noncontrolling interest holder — — — — — — ( 720 ) ( 720 ) Net income attributable to the Ensign Group, Inc. — — — 40,849 — — — 40,849 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 3 Table of Contents Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Non-Controlling Interest (In thousands) Shares Amount Shares Amount Total Balance - January 1, 2019 52,584 $ 55 $ 284,384 $ 344,901 1,932 $ ( 38,405 ) $ 11,405 $ 602,340 Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards 371 — 5,616 — — — — 5,616 Dividends declared ($ 0.0475 per share) — — — ( 2,543 ) — — — ( 2,543 ) Employee stock award compensation — — 2,612 — — — — 2,612 Noncontrolling interest attributable to subsidiary equity plan (Note 17) — — — ( 317 ) — — 658 341 Cumulative effect of accounting change, net of tax — — — 9,030 — — — 9,030 Net income attributable to noncontrolling interest — — — — — — 235 235 Net income attributable to the Ensign Group, Inc. — — — 27,372 — — — 27,372 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. 4 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, (In thousands) 2020 2019 Cash flows from operating activities: Net income $ 81,890 $ 56,532 Net income from discontinued operations, net of tax — ( 14,183 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 27,325 24,295 Amortization of deferred financing fees 420 583 Non-cash leasing arrangement (Note 18) 236 ( 849 ) Deferred income taxes 1,003 — Provision for doubtful accounts 1,559 694 Stock-based compensation 6,763 5,385 Cash received from insurance proceeds related to replacement properties and business interruptions 108 638 Change in operating assets and liabilities Accounts receivable 5,365 ( 18,998 ) Prepaid income taxes 739 343 Prepaid expenses and other assets ( 7,745 ) 2,576 Operating lease obligations ( 378 ) ( 6,378 ) Accounts payable ( 680 ) 194 Accrued wages and related liabilities 7,092 ( 27 ) Income taxes payable 22,459 — Other accrued liabilities 3,175 ( 3,703 ) Accrued self-insurance liabilities 4,208 3,717 Other long-term liabilities 20,599 2,006 Net cash provided by continuing operating activities 174,138 52,825 Net cash provided by discontinued operating activities (Note 4) — 14,233 Net cash provided by operating activities 174,138 67,058 Cash flows from investing activities: Purchase of property and equipment ( 27,070 ) ( 32,099 ) Cash payments for business acquisitions (Note 9) — ( 6,504 ) Cash payments for asset acquisitions (Note 9) ( 14,054 ) ( 43,155 ) Escrow deposits ( 364 ) — Escrow deposits used to fund acquisitions 14,050 7,271 Cash proceeds from the sale of assets and insurance proceeds 239 2,575 Purchases of investments ( 5,984 ) ( 8,169 ) Maturities of investments 5,452 6,088 Other restricted assets ( 595 ) ( 458 ) Net cash used in continuing investing activities ( 28,326 ) ( 74,451 ) Net cash used in discontinued investing activities (Note 4) — ( 18,585 ) Net cash used in investing activities ( 28,326 ) ( 93,036 ) Cash flows from financing activities: Proceeds from revolving credit facility and other debt (Note 16) 380,600 535,000 Payments on revolving credit facility and other debt (Note 16) ( 561,398 ) ( 500,965 ) 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 ) — Dividends paid ( 5,388 ) ( 5,068 ) 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, 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 Cash and cash equivalents end of period, including cash of discontinued operations 201,738 39,042 Less cash of discontinued operations at end of period — 43 Cash and cash equivalents end of period $ 201,738 $ 38,999 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE ENSIGN GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) Six Months Ended June 30, (In thousands) 2020 2019 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 6,917 $ 7,500 Income taxes $ 1,935 $ 12,375 Lease liabilities $ 65,109 $ 73,748 Non-cash financing and investing activity: Accrued capital expenditures $ 2,500 $ 3,600 Accrued dividends declared $ 2,718 $ 2,559 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 Table of Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars, shares and options in thousands, except per share data) 1. DESCRIPTION OF BUSINESS The Company - The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating assets, employees or revenue. The Company, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum. 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 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. as part of the Spin-Off (defined below), and the Service Center location. Of those 31 senior living operations, two are located on the same real estate properties as the skilled nursing facilities. Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide specific accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. The Company also has a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities. Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities in this Report is not meant to imply, nor should it be construed as meaning that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries, are operated by The Ensign Group, Inc. Spin-Off Transaction — On October 1, 2019, the Company completed the separation of its transitional and skilled nursing services, home health and hospice operations and substantially all of its senior living operations into two separate, publicly traded companies (the Spin-Off). Upon completion of the Spin-Off, the Company restructured its operations. The Company operates and reports only one reportable operating segment: transitional and skilled services. The Company believes that this structure reflects its current operational and financial management, and provides the best structure for the Company to focus on growth opportunities while maintaining financial discipline. As a result of the Spin-Off, the condensed consolidated financial statements reflect the Spin-Off operations, assets and liabilities, and cash flows as discontinued operations for 2019 periods presented. Unless otherwise noted, amounts in the Notes to the Condensed Consolidated Financial Statements exclude amounts attributable to discontinued operations. Refer to Note 4, Spin-Off of Subsidiaries, for additional information regarding discontinued operations. 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. Readers of the Interim Financial Statements should refer to the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019 which are included in the Company’s Annual Report on Form 10-K, File No. 001-33757 (the Annual Report) filed with the Securities and Exchange Commission (SEC). Management believes that the Interim Financial Statements reflect all adjustments which are of a normal and recurring nature necessary to present fairly the Company’s financial position and results of operations in all material respects. The results of operations presented in the Interim Financial Statements are not necessarily representative of operations for the entire year. 7 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation — The accompanying Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The Company is the sole member or stockholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing operations, senior living operations and related ancillary services. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. The Company presents noncontrolling interests within the equity section of its condensed consolidated balance sheets and the amount of consolidated net income that is attributable to The Ensign Group, Inc. and the noncontrolling interest in its condensed consolidated statements of income. The condensed consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest. Additionally, the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities, entitled to receive a majority of the entity's residual returns, or both. 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 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 . The sale transaction did not meet the criteria of discontinued operations as it did not represent a strategic shift that had, or will have, a major effect on the Company's operations and financial results. 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, 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. Fair Value of Financial Instruments — The Company’s financial instruments consist principally of cash and cash equivalents, debt security investments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations. 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. The fair value of the pooled investment funds is derived using Level 2 inputs. Revenue Recognition — The Company recognizes revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606). See Note 5, Revenue and Accounts Receivable. Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources, net of estimates for variable consideration. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts and other currently available evidence. Property and Equipment — Property and equipment are initially recorded at their historical cost. Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 59 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term. 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 8 Table Contents 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 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. On January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases (ASC 842), electing the transition method that allows it to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings. The Company determines if an arrangement is a lease at the inception of each lease. 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 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. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments. The Company utilized a third-party valuation specialist to assist in estimating the incremental borrowing rate. The Company records rent expense for operating leases on a straight-line basis over the term of the lease. The lease term used for straight-line rent expense is calculated from the date the Company is given control of the leased premises through the end of the lease term. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements. The Company recognizes lease expense for leases with an initial term of 12 months or less on a straight-line basis over the lease term. These leases are not recorded on the condensed consolidated balance sheet. Certain of the Company's lease agreements include rental payments that are adjusted periodically for inflation. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company does not have material subleases. 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 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. The Company's indefinite-lived intangible assets consist of trade names, and Medicare and Medicaid licenses. The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. 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 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. Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company. The combined self-insured retention is $ 500 per claim, subject to an additional one-time deductible of $ 750 for California affiliated operations and a separate, one-time, deductible of $ 1,000 for non-California operations. For all affiliated operations, except those located in Colorado, the third-party coverage above these limits is $ 1,000 per claim, $ 3,000 per operation, with a $ 5,000 blanket aggregate limit and an additional state-specific aggregate where required by state law. 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. 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. 9 Table Contents 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. The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis. 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 $ 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. To protect itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $ 500 per occurrence. In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and the Company has purchased individual stop-loss coverage that insures individual claims that exceed $ 750 per occurrence. The Company’s operating subsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $ 350 per occurrence. In Washington, the operating subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and benefit payments are managed through a state insurance pool. Outside of California, Texas and Washington, the Company has purchased insurance coverage that insures individual claims that exceed $ 350 per accident. In all states except Washington, the Company accrues amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost of claims that have been incurred but not reported. 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 $ 24,424 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. The Company is fully liable for all financial and legal aspects of these benefit plans. 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 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. The amount of the Company’s reserves was determined based on an estimation process that uses information obtained from both company-specific and industry data. This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring and the Company’s assumptions about emerging trends, the Company, with the assistance of an independent actuary, develops information about the size of ultimate claims based on the Company’s historical experience and other available industry information. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates, and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses that could be material to net income. If the Company’s actual liability exceeds its estimates of loss, its future earnings, cash flows and financial condition would be adversely affected. 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. The Company generally expects to fully utilize its deferred tax assets; however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. 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 10 Table Contents 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. Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the acquisition date and is presented within total equity in the Company's condensed consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc. in its condensed consolidated statements of income and net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest. Stock-Based Compensation — The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award. Net income has been reduced as a result of the recognition of the fair value of all stock options and restricted stock awards issued, the amount of which is contingent upon the number of future grants and other variables. Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. For any new pronouncements announced, the Company considers whether the new pronouncements could alter previous generally accepted accounting principles and determines whether any new or modified principles will have a material impact on the Company's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company's financial management and certain standards are under consideration. Recent Accounting Standards Adopted by the Company In August 2018, the FASB issued amended guidance to simplify fair value measurement disclosure requirements. The new provisions eliminate the requirements to disclose (1) transfers between Level 1 and Level 2 of the fair value hierarchy, (2) policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy, and (3) net asset value disclosure of estimates of timing of future liquidity events. 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 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. The new provisions eliminate step 2 from the goodwill impairment test and shifts the concept of impairment from a measure of loss when comparing the implied fair value of goodwill to its carrying amount to comparing the fair value of a reporting unit with its carrying amount. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment or step 2 of the goodwill impairment test. 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 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 condensed consolidated financial statements. Accounting Standards Recently Issued but Not Yet Adopted by the Company In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740)", as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU 2019-12 on its financial position, results of operations and liquidity. 11 Table Contents 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. 3. 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. The U.S. 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. 12 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 4. SPIN-OFF OF SUBSIDIARIES On October 1, 2019, the Company completed the separation of its transitional and skilled nursing services, ancillary businesses, home health and hospice operations and substantially all of its senior living operations into two separate, publicly traded companies: • Ensign, which includes skilled nursing and senior living services, physical, occupational and speech therapies and other rehabilitative and healthcare services at 225 healthcare facilities and campuses, post-acute-related ancillary operations and real estate investments; and • The Pennant Group, Inc. (Pennant), which is a holding company of operating subsidiaries that provide home health, hospice and senior living services. The Company completed the separation through a tax-free distribution of substantially all of the outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis. Ensign stockholders received one share of Pennant common stock for every two shares of Ensign common stock held at the close of business on September 20, 2019, the record date for the Spin-Off. The number of shares of Ensign common stock each stockholder owns and the related proportionate interest in Ensign did not change as a result of the Spin-Off. Each Ensign stockholder received only whole shares of Pennant common stock in the distribution, as well as cash in lieu of any fractional shares. The Spin-Off was effective October 1, 2019, with shares of Pennant common stock distributed on October 1, 2019. Pennant is listed on the NASDAQ Global Select Market (NASDAQ) and trades under the ticker symbol “PNTG”. Ensign and Pennant entered into several agreements in connection with the Spin-Off, including a transition services agreement (TSA), separation and distribution agreement, tax matters agreement and an employee matters agreement. Pursuant to the TSA, Ensign, Pennant and their respective subsidiaries are providing various services to each other on an interim, transitional basis. Services being provided by Ensign include, among others, certain finance, information technology, human resources, employee benefits and other administrative services. The TSA will terminate on or before September 30, 2021. 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 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 June 30, 2019 Six Months Ended June 30, 2019 (In thousands) Revenue $ 82,734 $ 160,641 Expense: Cost of services 62,258 120,272 Rent—cost of services 5,839 11,443 General and administrative expense 4,712 10,477 Depreciation and amortization 818 1,487 Total expenses 73,627 143,679 Income from discontinued operations 9,107 16,962 Interest income 10 22 Provision for income taxes 976 2,801 Income from discontinued operations, net of tax 8,141 14,183 Net income attributable to discontinued noncontrolling interests 200 350 Net income attributable to The Ensign Group, Inc. $ 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. 13 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 5. REVENUE AND ACCOUNTS RECEIVABLE The Company's revenue is derived primarily from providing healthcare services to its patients. Revenues are recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare replacement plans), in exchange for providing patient care. The healthcare services in transitional and skilled patient contracts include routine services in exchange for a contractual agreed-upon amount or rate. Routine services are treated as a single performance obligation satisfied over time as services are rendered. As such, patient care services represent a bundle of services that are not capable of being distinct. Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered. Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price. The Company determines the transaction price based on contractually agreed-upon amounts or rate on a per day basis, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction price may be constrained, and is included in net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. 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 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. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity. 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 and six months ended June 30, 2020 and 2019. Disaggregation of Revenue The Company disaggregates revenue from contracts with its patients by payors. The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Revenue by Payor The Company’s revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration. 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 and six months ended June 30, 2020 and 2019 is summarized in the following tables: Three Months Ended June 30, 2020 2019 Revenue % of Revenue Revenue % of Revenue Medicaid $ 226,118 38.7 % $ 195,778 39.7 % Medicare 175,044 29.9 118,807 24.1 Medicaid — skilled 36,385 6.2 31,792 6.5 Total Medicaid and Medicare 437,547 74.8 346,377 70.3 Managed care 82,316 14.1 86,491 17.5 Private and other (1) 64,836 11.1 60,048 12.2 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 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 . 14 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Six Months Ended June 30, 2020 2019 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 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 Managed care 57,906 70,015 Medicare 66,017 53,163 Private and other payors 64,372 62,836 305,746 311,457 Less: allowance for doubtful accounts ( 3,685 ) ( 2,472 ) Accounts receivable, net $ 302,061 $ 308,985 Practical Expedients and Exemptions As the Company’s contracts with its patients have an original duration of one year or less, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. 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. 15 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 6. COMPUTATION OF NET INCOME PER COMMON SHARE Basic net income per share is computed by dividing income from continuing operations attributable to stockholders of The Ensign Group, Inc. by the weighted average number of outstanding common shares for the period. The computation of diluted net income per share is similar to the computation of basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Numerator: Net income from continuing operations $ 40,688 $ 20,784 $ 81,890 $ 42,349 Less: net income attributable to noncontrolling interests in continuing operations 440 116 793 201 Net income from continuing operations attributable to The Ensign Group, Inc. 40,248 20,668 81,097 42,148 Net income from discontinued operations, net of tax — 8,141 — 14,183 Less: net income attributable to noncontrolling interests in discontinued operations — 200 — 350 Net income from discontinued operations, net of tax — 7,941 — 13,833 Net income attributable to The Ensign Group, Inc. $ 40,248 $ 28,609 $ 81,097 $ 55,981 Denominator: Weighted average shares outstanding for basic net income per share 53,094 53,408 53,285 53,246 Basic net income per common share: Income from continuing operations $ 0.76 $ 0.39 $ 1.52 $ 0.79 Income from discontinued operations — 0.15 — 0.26 Net income attributable to The Ensign Group, Inc. $ 0.76 $ 0.54 $ 1.52 $ 1.05 A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Numerator: Net income from continuing operations $ 40,688 $ 20,784 $ 81,890 $ 42,349 Less: net income attributable to noncontrolling interests in continuing operations 440 116 793 201 Net income from continuing operations attributable to The Ensign Group, Inc. 40,248 20,668 81,097 42,148 Net income from discontinued operations, net of tax — 8,141 — 14,183 Less: net income attributable to noncontrolling interests in discontinued operations — 200 — 350 Net income from discontinued operations, net of tax — 7,941 — 13,833 Net income attributable to The Ensign Group, Inc. $ 40,248 $ 28,609 $ 81,097 $ 55,981 Denominator: Weighted average common shares outstanding 53,094 53,408 53,285 53,246 Plus: 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 Diluted net income per common share: Income from continuing operations $ 0.73 $ 0.37 $ 1.46 $ 0.75 Income from discontinued operations — 0.14 — 0.25 Net income attributable to The Ensign Group, Inc. $ 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 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. 16 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 7. FAIR VALUE MEASUREMENTS Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; 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 $ 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. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, the Company assesses its long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value. Debt Security Investments - Held to Maturity 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 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. 8. BUSINESS SEGMENTS Prior to the Spin-Off, the Company had three reportable segments: (1) transitional and skilled services, (2) home health and hospice services and (3) senior living services. Upon completion of the Spin-Off, the Company has one reportable operating segment: transitional and skilled services, which includes the operation of skilled nursing facilities. The Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, reviews financial information at the operating segment level. The Company also reports an “all other” category that includes results from its senior living operations, real estate properties leased to third-parties, mobile diagnostics, medical transportation and other ancillary operations. These operations are neither significant individually nor in the aggregate, and therefore do not constitute a reportable segment. 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 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. The Company evaluates performance and allocates capital resources to its operations based on an operating model that is designed to maximize the quality of care provided and profitability. General and administrative expenses are not allocated to the Company's reportable segment for purposes of determining segment profit or loss, and are included in the "all other" category in the selected segment financial data that follows. The accounting policies of the reporting segment are the same as those described in Note 2 , Summary of Significant Accounting Policies. The Company's CODM does not review assets by segment in his resource allocation and therefore assets by segment are not disclosed below. 17 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Segment revenues by major payor source were as follows: Three Months Ended June 30, 2020 Transitional and Skilled Services All Other Total Revenue Revenue % Medicaid $ 222,924 $ 3,194 (1) $ 226,118 38.7 % Medicare 175,044 — 175,044 29.9 Medicaid-skilled 36,385 — 36,385 6.2 Subtotal 434,353 3,194 437,547 74.8 Managed care 82,316 — 82,316 14.1 Private and other 40,110 24,726 (2) 64,836 11.1 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 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 % Medicaid $ 192,545 $ 3,233 (1) $ 195,778 39.7 % Medicare 118,807 — 118,807 24.1 Medicaid-skilled 31,792 — 31,792 6.5 Subtotal 343,144 3,233 346,377 70.3 Managed care 86,491 — 86,491 17.5 Private and other 39,603 20,445 (2) 60,048 12.2 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 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. 18 Table Contents 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 June 30, 2020 Transitional and Skilled Services All Other (1) Total Revenue $ 556,779 $ 27,920 $ 584,699 Segment income (loss) 84,904 ( 29,470 ) 55,434 Interest expense, net of interest and other income ( 1,211 ) Income before provision for income taxes $ 54,223 Depreciation and amortization $ 10,197 $ 3,408 $ 13,605 (1) General and administrative expense are included in the "all other" category. Three Months Ended June 30, 2019 Transitional and Skilled Services All Other (1) Total Revenue $ 469,238 $ 23,678 $ 492,916 Segment income (loss) 56,652 ( 27,913 ) 28,739 Interest expense, net of interest and other income ( 3,379 ) Income before provision for income taxes $ 25,360 Depreciation and amortization $ 8,938 $ 3,428 $ 12,366 (1) General and administrative expense is included in the "all other" category. Six Months Ended June 30, 2020 Transitional and Skilled Services All Other (1) Total 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) Total 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 19 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 9. ACQUISITIONS The Company's subsidiaries acquisition focus is to purchase or lease operations that are complementary to the current affiliated operations, accretive to the business or otherwise advance the Company's strategy. The results of all operating subsidiaries are included in the accompanying Interim Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting. The Company's affiliated operations also enter into long-term leases that may include options to purchase the facilities. As a result, from time to time, the affiliated operations will acquire the real estate of facilities that have been operating under third-party leases. 2020 Acquisitions 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 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. The Company entered into a separate operations transfer agreement with the prior operator as part of each transaction. The fair value of assets for all four of the acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions. The purchase price for the asset acquisitions was $ 14,054 . 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 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. 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. 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 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 , 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 . 20 Table Contents 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. The operating subsidiaries acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with underperforming operating subsidiaries, is often inadequate, inaccurate or unavailable. 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 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 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, 2020 2019 Land $ 4,080 $ 7,660 Building and improvements 9,669 33,900 Equipment, furniture, and fixtures 236 2,758 Assembled occupancy 69 224 Definite-lived intangible assets — 440 Goodwill — 5,431 Other indefinite-lived intangible assets — 170 Total acquisitions $ 14,054 $ 50,583 10. PROPERTY AND EQUIPMENT— NET Property and equipment, net consists of the following: June 30, 2020 December 31, 2019 Land $ 95,820 $ 91,740 Buildings and improvements 547,859 531,538 Equipment 225,763 212,808 Furniture and fixtures 4,524 4,453 Leasehold improvements 132,993 127,983 Construction in progress 3,193 3,409 1,010,152 971,931 Less: accumulated depreciation ( 229,713 ) ( 204,366 ) Property and equipment, net $ 780,439 $ 767,565 See also Note 9, Acquisitions for information on acquisitions during the six months ended June 30, 2020 and 2019. 11. INTANGIBLE ASSETS — NET June 30, 2020 December 31, 2019 Weighted Average Life (Years) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Intangible Assets Net Net Lease acquisition costs 1.7 $ 360 $ ( 360 ) $ — $ 360 $ ( 349 ) $ 11 Favorable leases 2.1 534 ( 534 ) — 534 ( 448 ) 86 Assembled occupancy 0.4 3,051 ( 3,051 ) — 2,982 ( 2,818 ) 164 Facility trade name 30.0 733 ( 354 ) 379 733 ( 342 ) 391 Customer relationships 18.2 4,640 ( 2,015 ) 2,625 4,640 ( 1,910 ) 2,730 Total $ 9,318 $ ( 6,314 ) $ 3,004 $ 9,249 $ ( 5,867 ) $ 3,382 21 Table Contents 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: Year Amount 2020 (remainder) $ 117 2021 234 2022 234 2023 234 2024 234 2025 234 Thereafter 1,717 $ 3,004 12. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS The Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there may be impairment. The Company performs its analysis for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management and provides services that are distinct from the other components of the operating segment, in accordance with the provisions of Accounting Standards Codification topic 350, Intangibles—Goodwill and Other (ASC 350). This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, a "Step 0" analysis. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs "Step 1" of the traditional two-step goodwill impairment test by comparing the net assets of each reporting unit to their respective fair values. The Company determines the estimated fair value of each reporting unit using a discounted cash flow analysis. In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. 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 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 six months ended June 30, 2020: Goodwill Transitional and Skilled Services All Other Total January 1, 2020 $ 45,486 $ 8,983 $ 54,469 Additions — — — June 30, 2020 $ 45,486 $ 8,983 $ 54,469 Other indefinite-lived intangible assets consists of the following: June 30, 2020 December 31, 2019 Trade name $ 889 $ 889 Medicare and Medicaid licenses 2,179 2,179 $ 3,068 $ 3,068 22 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 13. RESTRICTED AND OTHER ASSETS Restricted and other assets consists of the following: June 30, 2020 December 31, 2019 Debt issuance costs, net $ 3,019 $ 3,374 Long-term insurance losses recoverable asset 7,242 7,999 Deposits with landlords 12,141 11,765 Capital improvement reserves with landlords and lenders 3,700 3,024 Cash surrender value of life insurance related to deferred compensation plan 4,610 — Other — 45 Restricted and other assets $ 30,712 $ 26,207 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. 14. OTHER ACCRUED LIABILITIES Other accrued liabilities consists of the following: June 30, 2020 December 31, 2019 Quality assurance fee $ 6,096 $ 6,461 Refunds payable 34,149 29,412 Resident advances 4,707 8,870 Cash held in trust for patients 6,093 3,038 Resident deposits 1,630 1,818 Dividends payable 2,718 2,705 Property taxes 7,311 8,055 Income tax payable 22,459 — Other 10,758 9,914 Other accrued liabilities $ 95,921 $ 70,273 Quality assurance fee represents the aggregate of amounts payable to Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Utah, Washington and Wisconsin as a result of a mandated fee based on patient days or licensed beds. Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor sources. Resident advances occur when the Company receives payments in advance of services provided. Resident deposits include refundable deposits to patients. Cash held in trust for patients reflects monies received from or on behalf of patients. Maintaining a trust account for patients is a regulatory requirement and, while the trust assets offset the liabilities, the Company assumes a fiduciary responsibility for these funds. The cash balance related to this liability is included in other current assets in the accompanying condensed consolidated balance sheets. 23 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 15. INCOME TAXES 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 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 six months ended June 30, 2020 and 2019. 16. DEBT Debt consists of the following: June 30, 2020 December 31, 2019 Revolving credit facility with Truist $ 30,000 $ 210,000 Mortgage loans and promissory notes 119,552 120,350 149,552 330,350 Less: current maturities ( 3,292 ) ( 2,702 ) Less: debt issuance costs ( 2,367 ) ( 2,431 ) $ 143,893 $ 325,217 Credit Facility with a Lending Consortium Arranged by Truist The Company maintains a revolving credit facility under the Third Amended and Restated Credit Agreements, dated as of October 1, 2019, between the Company and Truist Financial Corporation (Truist) (formerly known as SunTrust Bank, Inc.) (the Credit Facility). The Credit Facility includes a revolving line of credit of up to $ 350,000 in aggregate principal amount. The maturity date of the Credit Facility is October 1, 2024. Borrowings are supported by a lending consortium arranged by Truist. The interest rates applicable to loans under the Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.50 % to 1.50 % per annum or LIBOR plus a margin range from 1.50 % to 2.50 % per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement). In addition, the Company pays a commitment fee on the unused portion of the commitments that ranges from 0.25 % to 0.45 % per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio. The Credit Facility is guaranteed, jointly and severally, by certain of the Company’s wholly owned subsidiaries, and is secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of its personal property. The Credit Facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its operating subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and pay certain dividends and other restricted payments. 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; 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. 24 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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. Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment. For the majority of the loans, during the first three years, the prepayment fee is 10 % and is reduced by 3 % in the fourth year of the loan, and reduced by 1.0 % per year for years five through ten of the loan. There is no prepayment penalty after year ten . The terms for all the mortgage loans are 25 to 35 years. 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 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 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 . 17. 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 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. 2017 Omnibus Incentive Plan - The Company has one active stock incentive plan, the 2017 Omnibus Incentive Plan (the 2017 Plan). The 2017 Plan provided for the issuance of 6,881 shares of common stock which are to be proportionally adjusted in the event of any Equity Restructuring. 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 (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). Granted non-employee director options vest and become exercisable in three equal annual installments, or the length of the term if less than three years , on the completion of each year of service measured from the grant date. All other options generally vest over 5 years at 20 % per year on the anniversary of the grant date. Options expire 10 years from the date of grant. 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. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. 25 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Modifications of Equity Awards Effective at the time of the consummation of the Spin-Off, all holders of the Company's restricted stock awards on the date of record for the Spin-Off, received Pennant restricted stock awards consistent with the distribution ratio, with terms and conditions substantially similar to the terms and conditions applicable to the Company's restricted stock awards. For purposes of the vesting of these equity awards, continued employment or service with Ensign or with Pennant is treated as continued employment for purposes of both Ensign's and Pennant's equity awards and the vesting terms of each converted grant remained unchanged. Also, effective with the Spin-Off, the holders of the Company's stock options on the date of record received stock options consistent with a conversion ratio that was necessary to maintain the pre Spin-Off intrinsic value of the options. The stock options terms and conditions are based on the preexisting terms in the 2017 Plan, including nondiscretionary antidilution provisions. In order to preserve the aggregate intrinsic value of the Company's stock options held by such persons, the exercise prices of such awards were adjusted by using the proportion of the Pennant closing stock price to the total Company closing stock prices on the distribution date. All of these adjustments were designed to equalize the fair value of each award before and after Spin-Off. These adjustments were accounted for as modifications to the original awards. Due to the modification of the equity options as a result of the Spin-Off, the Company compared the fair value of the original equity awards immediately before and after the Spin-Off and no incremental fair value was recognized as a result of the above adjustments due to immateriality. Accordingly, the Company did not record any incremental compensation expense as a result of the modifications to the awards on the date of the Spin-Off. The Company's stock-based compensation expense was not significantly impacted by the equity award adjustments that occurred as a result of the Spin-Off. Deferred compensation costs as of the date of the Spin-Off reflected the unamortized balance of the original grant date fair value of the equity awards held by the employees of the Company's operating subsidiaries (regardless of whether those awards are linked to the Company's stock or Pennant's stock). Stock Options 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) Weighted Average Risk-Free Rate Expected Life Weighted Average Volatility Weighted Average Dividend Yield 2020 235 0.4 % 6.2 years 40.9 % 0.4 % 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 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) Weighted Average Exercise Price (2) Weighted Average Fair Value of Options (3) 2020 380 $ 47.26 $ 16.87 2019 399 $ 45.49 $ 16.40 (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. (2) Weighted average exercise price was calculated using exercise prices reflective of the Spin-Off Conversion for all periods presented. (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 June 30, 2020 and 2019 and therefore, the intrinsic value was $ 0 at the date of grant. 26 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table represents the employee stock option activity during the six months ended June 30, 2020: Number of Options Outstanding Weighted Average Exercise Price Number of Options Vested Weighted Average Exercise Price of Options Vested January 1, 2020 4,428 $ 20.85 2,557 $ 12.82 Granted 380 47.26 Forfeited ( 34 ) 30.39 Exercised ( 179 ) 11.20 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 Number Outstanding Black-Scholes Fair Value Remaining Contractual Life (Years) Vested and Exercisable Year of Grant Exercise Price 2010 $ 4.04 - $ 4.20 4 $ 9 0 4 2011 5.00 - 6.77 73 180 1 73 2012 5.56 - 6.75 191 596 2 191 2013 6.76 - 9.74 340 1,390 3 340 2014 8.94 - 16.05 971 4,650 4 971 2015 18.20 - 21.39 436 3,374 5 373 2016 15.93 - 16.86 362 2,137 6 246 2017 15.80 - 19.41 436 2,571 7 210 2018 22.49 - 32.71 651 6,669 8 199 2019 41.07 - 45.76 752 11,805 9 90 2020 $ 44.84 - $ 51.20 379 6,392 10 — 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 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 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. 27 Table Contents 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 Nonvested at January 1, 2020 610 $ 31.35 Granted 194 44.71 Vested ( 193 ) 34.31 Forfeited ( 8 ) 27.63 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) 2020 2019 (1) Stock-based compensation expense related to stock options $ 1,545 $ 1,403 $ 2,965 $ 2,657 Stock-based compensation expense related to restricted stock awards 1,777 1,138 3,374 2,069 Stock-based compensation expense related to stock options and restricted stock awards to non-employee directors 206 388 424 659 Total $ 3,528 $ 2,929 $ 6,763 $ 5,385 (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 1,898 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 On May 26, 2016, the Company granted stock options and restricted stock awards under the Subsidiary Equity Plan to employees and management of the subsidiary. During 2019, the Company contributed the net assets of the subsidiary to Pennant prior to the consummation of the Spin-Off on October 1, 2019. 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 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 six months ended June 30, 2019, there were 976 restricted stock awards that vested. 28 Table Contents 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. As a result of the conversion of the Subsidiary Equity Plan, the Company's noncontrolling interest in the subsidiary was eliminated. The grant values were determined based on an independent valuation of the subsidiary shares. 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. 18. LEASES The Company leases from CareTrust REIT, Inc. (CareTrust) real property associated with 85 affiliated skilled nursing, senior living facilities used in the Company’s operations under eight “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 12 to 20 years. In connection with the Spin-Off, 11 of the original 94 properties under the CareTrust lease were transferred to Pennant. Of the 11 properties, two of the senior living operations are located on the same real estate properties as the skilled nursing facilities. At the Company’s option, the Master Leases may be extended for two or three five -year renewal terms beyond the initial term, on the same terms and conditions. The extension of the term of any of the Master Leases is subject to the following conditions: (1) no event of default under any of the Master Leases having occurred and being continuing; and (2) the tenants providing timely notice of their intent to renew. The term of the Master Leases is subject to termination prior to the expiration of the then current term upon default by the tenants in their obligations, if not cured within any applicable cure periods set forth in the Master Leases. If the Company elects to renew the term of a Master Lease, the renewal will be effective to all, but not less than all, of the leased property then subject to the Master Lease. The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent. If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continued payment of rent through the end of the lease term as well as maintenance and repair costs for the leased property. Commencing the third year, the rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5 %. In addition to rent, the Company is required to pay the following: (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; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; 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 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 June 30, 2020. In connection with the Spin-Off, the Company amended the Master Leases with CareTrust and other third-party lease agreements. These amendments terminated the leases related to Pennant and modified the rental payments and lease terms of the operations that remained with Ensign. In accordance with ASC 842, the amended lease agreements are considered to be modified and subject to lease modification guidance. The amended lease agreements are considered to be modified and subject to lease modification guidance. The right-of-use (ROU) asset and lease liabilities related to these agreements were remeasured based on the change in the lease conditions such as rent payment and lease terms. The incremental borrowing rate was adjusted to reflect the revised lease terms which became effective at the date of the modification, which is the date of the Spin-Off. The net impact of the lease termination, for the 23 leases that transferred to Pennant and modification of lease agreements, is a reduction in ROU asset and lease liabilities of approximately $ 35,000 . The annual rent expense transferred to Pennant was approximately $ 23,000 . In connection with the Spin-Off, the Company also guaranteed certain leases of Pennant based on the underlying terms of the leases. The Company does not consider these guarantees to be probable, and cannot estimate the maximum exposure. 29 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company also leases certain affiliated operations and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years. The Company has entered into multiple lease agreements with various landlords to operate newly constructed state-of-the-art, full-service healthcare resorts. The term of each lease is 15 years with two five -year renewal options and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage. In addition, the Company leases certain of its equipment under non-cancelable operating leases with initial terms ranging from three to five years . 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 $ 32,499 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. Under these master leases, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’s leases, master lease agreements and debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The components of operating lease expense are as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Rent - cost of services (1) $ 32,484 $ 31,222 $ 64,814 $ 61,403 General and administrative expense 15 150 32 305 Depreciation and amortization (2) 290 495 644 990 Variable lease costs (3) 3,252 3,248 6,463 6,063 $ 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 June 30, 2020 are as follows: Year Amount 2020 (remainder) $ 63,875 2021 127,375 2022 126,153 2023 124,417 2024 123,436 2025 123,288 Thereafter 1,020,202 Total lease payments 1,708,746 Less: present value adjustment ( 703,514 ) Present value of total lease liabilities 1,005,232 Less: current lease liabilities ( 46,983 ) Long-term operating lease liabilities $ 958,249 30 Table Contents 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 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, 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; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all facility maintenance and repair costs; 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. The initial terms range between 14 to 16 years. 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 Pennant (1) $ 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 $ 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: Year Amount 2020 (remainder) $ 8,328 2021 15,583 2022 15,099 2023 14,913 2024 14,516 2025 14,333 Thereafter 102,220 Total lease payments receivable $ 184,992 31 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 19. COMMITMENTS AND CONTINGENCIES Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. Included in these laws and regulations is the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which requires healthcare providers (among other things) to safeguard the privacy and security of certain health information. 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. 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. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities the Company acquires against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer to the Company's independent operating subsidiary, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship or relationship to the Company. The terms of such obligations vary by contract and, in most instances, do not expressly state or include a specific or maximum dollar amount. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s consolidated balance sheets for any of the periods presented. U.S. Department of Justice Civil Investigative Demand - On May 31, 2018, the Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice stating that it is investigating whether there has been a violation of the False Claims Act and/or the Anti-Kickback Statute with respect to the relationships between certain of the Company’s independently operated skilled nursing facilities and persons who serve or have served as medical directors, advisory board participants or other potential referral sources. The CID covered the period from October 3, 2013 to the present, and was limited in scope to ten of the Company’s Southern California independent operating entities. In October 2018, the Department of Justice made an additional request for information covering the period of January 1, 2011 to the present, relating to the same topic. As a general matter, the Company’s independent operating entities maintain policies and procedures to promote compliance with the False Claims Act, the Anti-Kickback Statute, and other applicable regulatory requirements. The Company has fully cooperated with the U.S. 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. The Company, its independent operating subsidiaries, and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims. 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. 32 Table Contents 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. A violation may provide the basis for exclusion from Federally-funded healthcare programs. Such exclusions could have a correlative negative impact on the Company’s financial performance. Under the qui tam or "whistleblower" provisions of the False Claims Act, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a percentage of the federal government's recovery. Due to these whistleblower incentives, lawsuits have become more frequent. 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. In addition, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. 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. 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. Following changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an obligation to pay money or property to the government. This includes the retention of any government overpayment. 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. Thus, an employment relationship is generally not required in order to qualify for protection against retaliation for whistleblowing. Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company's independent operating subsidiaries are routinely subjected to varying types of claims. One particular type of suit arises from alleged violations of minimum staffing requirements for skilled nursing facilities in those states which have enacted such requirements. The alleged failure to meet these requirements can, among other things, jeopardize a facility's compliance with the requirements of participation under certain state and federal healthcare programs; it may also subject the facility to a deficiency, a citation, a civil money penalty, or litigation. These class-action “staffing” suits have the potential to result in large jury verdicts and settlements. The Company expects the plaintiffs' bar to continue to be aggressive in their pursuit of these staffing and similar claims. 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 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 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. 33 Table Contents 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 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). 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. U.S. 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 U.S. 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. The Company and its independent operating entities have denied engaging in any illegal conduct and agreed to the settlement amount without any admission of wrongdoing in order to resolve the allegations and to avoid the uncertainty and expense of protracted litigation. In connection with the settlement and effective as of October 1, 2013, the Company and its independent operating entities entered into a five -year corporate integrity agreement (the CIA) with the Office of Inspector General-HHS. CMS acknowledged the existence of the Company’s current compliance program, which is in accord with the Office of the Inspector General (OIG)’s guidance related to an effective compliance program, and required that the Company and its independent operating entities continue during the term of the CIA to maintain a program designed to promote compliance with the statutes, regulations, and written directives of Medicare, Medicaid, 5and all other Federal health care programs. In the first quarter of 2019, the Company received notice from the OIG that the Company’s five -year CIA with the OIG had been completed. Upon receipt of the Company’s fifth and final annual report, the OIG confirmed that the term of the CIA is concluded. Concentrations Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. 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 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. that exceed FDIC insurance limits. FDIC insurance provides protection for bank deposits up to $250. In addition, the Company has uninsured bank deposits with a financial institution outside the U.S. 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. 34 Table Contents THE ENSIGN GROUP, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 20. COMMON STOCK REPURCHASE PROGRAM As approved by the Board of Directors on March 4, 2020 and March 13, 2020, the Company entered into two stock repurchase programs pursuant to which the Company may repurchase up to $ 20,000 and $ 5,000 , respectively, of its common stock under the programs for a period of approximately 12 months. 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 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. As approved by the Board of Directors on August 26, 2019, the Company entered into a stock repurchase program pursuant to which the Company may repurchase up to $ 20,000 of its common stock under the program for a period of approximately 12 months. Under this program, 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. 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.