What changed in this filing

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Item 1. Financial Statements

2020-10-28 compared with 2020-08-05 · 344 added, 294 removed, 976 unchanged (40% of the section changed)

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

(In thousands, except par values)

1 unchanged sentence

Cash and cash equivalents $ 175,380 $ 59,175

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

Accounts receivable—less allowance for doubtful accounts of $ 6,053 and $ 2,472 at September 30, 2020 and December 31, 2019, respectively

294,151 308,985

19 unchanged sentences

Accrued self-insurance liabilities—current 33,022 29,252

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

CARES Act Provider Relief Fund and advance payment liabilities (Note 3) 123,988 —

Other accrued liabilities 89,625 70,273

12 unchanged sentences

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)

56,926 and 54,135 shares issued and outstanding at September 30, 2020, respectively, and 56,176 and 53,487 shares issued and outstanding at December 31, 2019, respectively (Note 20)

Additional paid-in capital 328,347 307,914

Retained earnings 507,554 391,523

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

Common stock in treasury, at cost, 2,791 and 2,079 shares at September 30, 2020 and December 31, 2019, respectively (Note 20)

( 71,203 ) ( 45,296 )

7 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

67 unchanged sentences

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

Issuance of common stock to employees and directors resulting from the exercise of stock options 340 — 4,404 — — — — 4,404

Issuance of restricted stock 43 — — — — — — —

Shares of common stock used to satisfy tax withholding obligations ( 3 ) — — — 3 ( 154 ) — ( 154 )

Dividends declared ($ 0.0500 per share)

— — — ( 2,725 ) — — — ( 2,725 )

Employee stock award compensation — — 4,173 — — — — 4,173

Net income attributable to noncontrolling interest — — — — — — 253 253

Distribution to noncontrolling interest holder — — — — — — ( 1,243 ) ( 1,243 )

Net income attributable to the Ensign Group, Inc.

— — — 43,060 — — — 43,060

Balance - September 30, 2020 54,135 $ 57 $ 328,347 $ 507,554 2,791 $ ( 71,203 ) $ 789 $ 765,544

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

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

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards 200 $ — $ 1,828 $ — — $ — $ — $ 1,828

Repurchase of common stock ( 105 ) — — — 105 ( 5,000 ) — ( 5,000 )

Dividends declared ($ 0.0475 per share)

— — — ( 2,564 ) — — — ( 2,564 )

Employee stock award compensation — — 2,961 — — — — 2,961

Repurchase of common stock attributable to subsidiary equity plan (Note 17) — — — — — — ( 394 ) ( 394 )

Noncontrolling interest attributable to subsidiary equity plan (Note 17) — — — ( 177 ) — — 194 17

Distribution to noncontrolling interest holder — — — — — — ( 177 ) ( 177 )

Net income attributable to noncontrolling interest — — — — — — 669 669

Net income attributable to the Ensign Group, Inc.

— — — 27,159 — — — 27,159

Balance - September 30, 2019 53,367 $ 55 $ 303,680 $ 426,414 2,046 $ ( 43,890 ) $ 15,547 $ 701,806

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands) 2020 2019

4 unchanged sentences

Depreciation and amortization 41,082 37,700

Impairment of long-lived assets 2,681 1,471

Amortization of deferred financing fees 630 876

4 unchanged sentences

Cash received from insurance proceeds related to replacement properties and business interruptions 282 803

Gain on insurance claims and disposal of assets — ( 3,026 )

Change in operating assets and liabilities

5 unchanged sentences

Accrued wages and related liabilities 29,194 14,493

Income taxes payable 22,459 —

Other accrued liabilities 19,333 8,487

22 unchanged sentences

Repurchase of shares of common stock to satisfy tax withholding obligations ( 907 ) ( 485 )

Repurchase of shares of common stock and subsidiary shares (Note 17) — ( 5,000 )

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

1 unchanged sentence

Non-controlling interest distribution ( 2,203 ) ( 269 )

CARES Act Provider Relief Funds 108,756 —

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

Proceeds from CARES Act Provider Relief Fund and Medicare Advance Payment Program(Note 3) 235,976 —

Repayments of CARES Act Provider Relief Fund and Medicare Advance Payment Program(Note 3) ( 111,988 ) —

Net cash (used in)/provided by continuing financing activities ( 117,471 ) 25,502

Net cash used in discontinued financing activities — ( 394 )

Net cash (used in)/provided by financing activities ( 117,471 ) 25,108

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

Net increase in cash and cash equivalents 116,205 13,313

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

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands) 2020 2019

16 unchanged sentences

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.

As of September 30, 2020, the Company operated 226 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 23,000 operational skilled nursing beds and 2,300 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 of September 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 93 real estate properties, which included 63 facilities operated and managed by the Company, 31 senior living operations leased to The Pennant Group, Inc.

as part of the Spin-Off (defined below), and the Service Center location.

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Upon completion of the Spin-Off, the Company restructured its operations.

The Company operates and reports only one reportable operating segment:

The Company operates and reports one reportable operating segment:

transitional and skilled services.

3 unchanged sentences

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

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

Other Information — The accompanying condensed consolidated financial statements as of September 30, 2020 and for the three and nine months ended September 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.

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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.

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 are 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.

The Company's relationship with variable interest entities was not material during the three and nine months ended September 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 .

17 unchanged sentences

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

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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.

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

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.

Management has evaluated its long-lived assets and determined there were impairment charges of $ 2,681 and $ 1,471 during the three and nine months ended September 30, 2020 and 2019, respectively.

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

2 unchanged sentences

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

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

Rights and obligations of operating leases are included as 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.

18 unchanged sentences

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

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

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

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

3 unchanged sentences

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

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

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

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

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

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

1 unchanged sentence

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

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

Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 53,759 and $ 46,984 as of September 30, 2020 and December 31, 2019, respectively.

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

7 unchanged sentences

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

Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $ 24,424 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.

Accrued workers’ compensation liabilities are recorded on an undiscounted basis, net of estimated recoveries, in the accompanying condensed consolidated balance sheets and were $ 25,230 and $ 25,419 as of September 30, 2020 and December 31, 2019, respectively.

In addition, the Company has recorded an asset and equal liability of $ 7,239 and $ 7,999 at September 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.

2 unchanged sentences

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’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 8,810 and $ 6,964 as of September 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.

9 unchanged sentences

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

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

with knowledge and expertise in certain fields.

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

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

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

1 unchanged sentence

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.

in its condensed consolidated statements of income.

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.

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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.

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

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 intra-period 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 and the Company has elected not to early adopt this ASU.

The Company does not expect the adoption of ASU 2019-12 to have a material impact on its financial position, results of operations and liquidity.

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.

2 unchanged sentences

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.

The Company is currently evaluating the impact of ASU 2020-04 on its financial position, results of operations and liquidity.

In May 2020, the SEC issued Final Rule Release No.

33-10786 “ Amendments to Financial Disclosures about Acquired and Disposed Businesses ” (“SEC Rule 33-10786”), which amends the disclosure requirements applicable to acquisitions and dispositions of businesses.

Amendments within SEC Rule 33-10786 primarily impact (1) the tests and thresholds used to determine the significance of acquisitions and dispositions;

(2) the form and content of pro forma information required to be disclosed in connection with significant acquisitions and dispositions;

(3) acquiree financial statement requirements;

and (4) thresholds used to determine the significance of acquisitions and dispositions of real estate operations, and related financial statement requirements, among others.

The amendments are effective for all SEC registrants beginning January 1, 2021, with early compliance permitted.

The Company does not expect the amendments to have a material impact on its condensed consolidated financial statements.

COVID-19 UPDATE

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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.

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act), which was signed into law on March 27, 2020, and 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.

Through September 30, 2020, the Company's affiliated operations have directly or indirectly received in the aggregate approximately $ 132,052 in Provider Relief Funds.

The Company returned $ 108,756 of the funds received to an agent of HHS in mid-July 2020.

The Company received $ 23,296 of Provider Relief Funds in the third quarter as part of the $5.0 billion Nursing Home Infection Control distribution to be used to protect residents of nursing homes and long-term care facilities from the impact of COVID-19.

The Company intends to repay the entire distribution received during the third quarter, but has not yet begun the repayment process.

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

HHS has announced that it intends to issue another round of Provider Relief Funds to skilled nursing facilities that pass two gateway qualification tests based upon a facility’s COVID-19 infection and mortality rates.

In order to qualify, facilities must demonstrate COVID-19 infection rates below the rate of infection in the counties they are located and demonstrate mortality rates below nationally established performance thresholds for nursing home residents infected with COVID-19.

Facilities that qualify during each of the monthly performance periods, running from September 2020 through December 2020, will be eligible for additional funds based upon their aggregate performance on these infection and mortality measures.

To date, the Company has not received additional funding related to this distribution.

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THE ENSIGN GROUP, INC.

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

Additionally, the Company applied for and received $ 103,924 through the Medicare Accelerated and Advance Payment Program under the CARES Act for the nine months ended September 30, 2020.

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.

The Company repaid $ 3,232 of the funds in July 2020.

In October 2020, the Centers for Medicare and Medicaid Services (CMS) released updated payment guidance to extend the repayment period beginning one year from the date the accelerated or advance payment was issued through lump sum payments or recoupment of future Medicare billings.

Any unpaid funds will begin accruing interest 15 months after the repayment period.

The Company's repayment period will start in March 2021.

As of September 30, 2020, the Company has classified $ 100,692 the remaining 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.

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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.

As of September 30, 2020, nine 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.

For the three months ended September 30, 2020, the Company received $ 17,344 in FMAP funding, of which, $ 11,691 was recognized as revenue.

For the nine months ended September 30, 2020, the Company received $ 32,455 in FMAP funding, of which, $ 24,825 was recognized as revenue.

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

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

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

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

The Company subsequently paid the payable in July 2020.

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THE ENSIGN GROUP, INC.

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

The Company recorded $ 33,231 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 September 30, 2020.

SPIN-OFF OF SUBSIDIARIES

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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.

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

Immediately after the Spin-Off, Ensign ceased to consolidate the results of Pennant operations into its financial results.

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

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THE ENSIGN GROUP, INC.

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

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

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019

(In thousands)

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$ 5,011 $ 18,844

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.

The Company incurred transaction costs of $ 9,119 related to the Spin-Off since commencing in 2018, of which $ 3,261 and $ 7,909 is reflected in the Company's condensed consolidated statement of operations as discontinued operations for the three and nine months ended September 30, 2019, respectively.

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

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THE ENSIGN GROUP, INC.

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

REVENUE AND ACCOUNTS RECEIVABLE

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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.

Revenue from the Medicare and Medicaid programs accounted for 75.1 % and 73.5 % for the three and nine months ended September 30, 2020, respectively, and 70.2 % and 70.3 % for the three and nine months ended September 30, 2019, respectively.

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

1 unchanged sentence

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

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

The Company recorded adjustments to revenue which were not material to the Company's condensed consolidated revenue for the three and nine months ended September 30, 2020 and 2019.

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THE ENSIGN GROUP, INC.

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

Disaggregation of Revenue

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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,

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

Three Months Ended September 30,

Revenue % of Revenue Revenue % of Revenue

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Revenue $ 599,255 100.0 % $ 512,109 100.0 %

(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 .

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THE ENSIGN GROUP, INC.

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

Six Months Ended June 30,

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

During the three months ended September 30, 2020 and 2019, private and other payor s inclu des $ 4,065 and $ 660 of rental income, respectively .

Nine Months Ended September 30,

Revenue % of Revenue Revenue % of Revenue

7 unchanged sentences

Revenue $ 1,773,567 100.0 % $ 1,476,333 100.0 %

(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

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

During the nine months ended September 30, 2020 and 2019, private and other payors includes $ 12,295 and $ 2,085 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

Included in the Company’s condensed consolidated balance sheets are contract balances, 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 and contract assets as of September 30, 2020 and December 31, 2019, or activity during the three and nine months ended September 30, 2020 and 2019.

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THE ENSIGN GROUP, INC.

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

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

September 30, 2020 December 31, 2019

Medicaid $ 114,925 $ 125,443

9 unchanged sentences

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

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THE ENSIGN GROUP, INC.

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

COMPUTATION OF NET INCOME PER COMMON SHARE

3 unchanged sentences

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,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

14 unchanged sentences

$ 0.81 $ 0.50 $ 2.33 $ 1.55

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THE ENSIGN GROUP, INC.

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

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,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

17 unchanged sentences

$ 0.77 $ 0.48 $ 2.23 $ 1.48

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

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THE ENSIGN GROUP, INC.

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

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 1,144 and 979 for th e three and nine months ended September 30, 2020, respectively, and 421 and 143 for the three and nine months ended September 30, 2019, respectivel y.

FAIR VALUE MEASUREMENTS

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

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

The fair value of cash and cash equivalents of $ 175,380 and $ 59,175 as of September 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.

As of September 30, 2020, the fair value of the pooled investment funds of $ 5,378 is derived using Level 2 inputs.

The Company had no pooled investment funds as the cash surrender value of life insurance related to the deferred compensation plan was not implemented as of December 31, 2019.

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.

2 unchanged sentences

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.

At September 30, 2020 and December 31, 2019, the Company had approximately $ 49,345 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.

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

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

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THE ENSIGN GROUP, INC.

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

BUSINESS SEGMENTS

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

As of 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.

As of September 30, 2020, transitional and skilled services included 193 wholly-owned affiliated skilled nursing operations and 24 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 24 campuses.

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

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THE ENSIGN GROUP, INC.

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

Segment revenues by major payor source were as follows:

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Transitional and Skilled Services All Other Total Revenue Revenue %

6 unchanged sentences

Total revenue $ 570,384 $ 28,871 $ 599,255 100.0 %

(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

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

Three Months Ended September 30, 2019

Transitional and Skilled Services All Other Total Revenue Revenue %

6 unchanged sentences

Total revenue $ 485,973 $ 26,136 $ 512,109 100.0 %

(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

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

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THE ENSIGN GROUP, INC.

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

Nine Months Ended September 30, 2020

Transitional and Skilled Services All Other Total Revenue Revenue %

6 unchanged sentences

Total revenue $ 1,685,568 $ 87,999 $ 1,773,567 100.0 %

(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

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

Nine Months Ended September 30, 2019

Transitional and Skilled Services All Other Total Revenue Revenue %

6 unchanged sentences

Total revenue $ 1,404,469 $ 71,864 $ 1,476,333 100.0 %

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

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

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THE ENSIGN GROUP, INC.

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

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

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

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Transitional and Skilled Services All Other (1)

5 unchanged sentences

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

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Transitional and Skilled Services All Other (1)

5 unchanged sentences

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

Six Months Ended June 30, 2020

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THE ENSIGN GROUP, INC.

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

Nine Months Ended September 30, 2020

Transitional and Skilled Services All Other (1)

5 unchanged sentences

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

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Transitional and Skilled Services All Other (1)

5 unchanged sentences

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

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THE ENSIGN GROUP, INC.

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

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.

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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 .

During the nine months ended September 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, one stand-alone independent living operation and one campus operation.

These new operations added a total of 303 operational skilled nursing beds and 298 operational senior living units operated by the Company's affiliated operating subsidiaries.

The aggregate purchase price for these acquisitions during the nine months ended September 30, 2020 was $ 23,077 .

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 .

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

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.

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THE ENSIGN GROUP, INC.

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

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.

During the nine months ended September 30, 2019, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of eleven stand-alone skilled nursing operations, two stand-alone senior living operations and three campus operations.

2 unchanged sentences

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.

In addition, the Company acquired real estate for an aggregate of $ 10,735 .

The aggregate purchase price for these acquisitions during the nine months ended September 30, 2019 was $ 82,684 .

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

The purchase price for the seventeen asset acquisitions was $ 75,305 .

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

The purchase price for the business combination was $ 7,379 .

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

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

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THE ENSIGN GROUP, INC.

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

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

In connection with the Spin-Off, the Company transferred the assets of two home health agencies, five hospice agencies, two home care agencies and the operations of one stand-alone senior living that were purchased for an aggregate price of $ 18,779 .

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.

2 unchanged sentences

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.

The businesses acquired during the nine months ended September 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,

These acquisitions have been included in the September 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 nine months ended September 30, 2020 and 2019, excluding assets that were contributed to Pennant that occurred during the Spin-Off.

Nine Months Ended September 30,

Land $ 8,938 $ 23,940

4 unchanged sentences

Goodwill — 5,382

Favorable leases — 294

Other indefinite-lived intangible assets 231 170

Total acquisitions $ 23,077 $ 82,684

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THE ENSIGN GROUP, INC.

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

PROPERTY AND EQUIPMENT— NET

Property and equipment, net consists of the following:

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Land $ 100,678 $ 91,740

Buildings and improvements 552,217 531,538

Leasehold improvements 134,659 127,983

Equipment 231,813 212,808

Furniture and fixtures 4,525 4,453

Leasehold improvements 132,993 127,983

Construction in progress 1,684 3,409

2 unchanged sentences

Property and equipment, net $ 783,187 $ 767,565

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

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

INTANGIBLE ASSETS — NET

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Weighted Average Life (Years)

7 unchanged sentences

Total $ 9,338 $ ( 6,379 ) $ 2,959 $ 9,249 $ ( 5,867 ) $ 3,382

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THE ENSIGN GROUP, INC.

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

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

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

During the three and nine months ended September 30, 2020, amortization expense was $ 354 and $ 1,445 , respectively, of which $ 289 and $ 933 was related to the amortization of right-of-use assets, respectively.

Amortization expense was $ 855 and $ 2,724 , respectively, of which $ 495 and $ 1,485 was related to the amortization of right-of-use assets for the three and nine months ended September 30, 2019, respectively.

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

1 unchanged sentence

Thereafter 1,716

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THE ENSIGN GROUP, INC.

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

GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

7 unchanged sentences

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:

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

The Company's acquisitions during the nine months ended September 30, 2020 were each classified as asset acquisitions and accordingly, no goodwill was recognized for these acquisitions.

There were no other activities in goodwill during the nine months ended September 30, 2020.

The following table represents the goodwill value by transitional and skilled service segment and "all other"category as of September 30, 2020:

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

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

Other indefinite-lived intangible assets consists of the following:

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Trade name $ 889 $ 889

1 unchanged sentence

$ 3,299 $ 3,068

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THE ENSIGN GROUP, INC.

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

RESTRICTED AND OTHER ASSETS

Restricted and other assets consists of the following:

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Debt issuance costs, net $ 2,841 $ 3,374

4 unchanged sentences

Restricted and other assets $ 31,777 $ 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.

Included in restricted and other assets as of September 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.

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THE ENSIGN GROUP, INC.

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

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.

1 unchanged sentence

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.

The Company recorded a gain on the deferral investment of $ 252 and $ 710 , which is included in interest and other income and an offsetting expense of $ 268 and $ 657 between cost of services and general and administrative expenses in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2020, respectively.

OTHER ACCRUED LIABILITIES

Other accrued liabilities consists of the following:

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Quality assurance fee $ 6,452 $ 6,461

1 unchanged sentence

Resident advances 9,720 8,870

Deferred FMAP revenue 7,629 —

Cash held in trust for patients 5,596 3,038

2 unchanged sentences

Property taxes 10,933 8,055

Income tax payable 22,459 —

Other 9,217 9,914

7 unchanged sentences

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

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THE ENSIGN GROUP, INC.

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

The Company recorded income tax expense of $ 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.

The Company recorded income tax expense of $ 37,026 and $ 14,944 during the nine months ended September 30, 2020 and 2019, respectively, or 22.8 % of earnings before income taxes for the nine months ended September 30, 2020, compared to 18.7 % for the nine months ended September 30, 2019.

The effective tax rate for both nine month periods is driven by the impact of excess tax benefits from stock-based compensation, 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.

In August 2020, the Company received notification from the IRS that it is no longer under examination.

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

1 unchanged sentence

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.

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

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THE ENSIGN GROUP, INC.

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

Debt consists of the following:

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Revolving credit facility with Truist $ — $ 210,000

2 unchanged sentences

current maturities ( 3,139 ) ( 2,702 )

debt issuance costs ( 2,367 ) ( 2,431 )

debt issuance costs, net ( 2,334 ) ( 2,431 )

$ 113,222 $ 325,217

10 unchanged sentences

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

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

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

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

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THE ENSIGN GROUP, INC.

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

As of September 30, 2020, there was no outstanding debt under the Credit Facility.

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

As of October 26, 2020, there was no outstanding borrowings under the Credit Facility.

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.

As of September 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 $ 114,428 , 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.

5 unchanged sentences

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.

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THE ENSIGN GROUP, INC.

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

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

1 unchanged sentence

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.

As of September 30, 2020, the Company's operating subsidiaries had $ 118,695 outstanding under the mortgage loans and notes, of which $ 3,139 is classified as short-term and the remaining $ 115,556 is classified as long-term.

The Company was in compliance with all loan covenants as of September 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 .

During the three months ended September 30, 2020, the Company increased its outstanding letters of credit by $ 1,788 to $ 7,580 .

As of September 30, 2020, the Company had approximately $ 7,580 o n the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

OPTIONS AND AWARDS

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

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

As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three and nine months ended September 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.

7 unchanged sentences

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.

At September 30, 2020, there were approximately 3,334 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 stock option awards.

Determining the appropriate fair-value model and calculating the fair value of stock option awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life, and forfeiture rates.

The fair-value of the restricted stock awards at the grant date is based on the market price on the grant date, adjusted for forfeiture rates.

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

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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:

The Company granted 160 and 540 stock options during the three and nine months ended September 30, 2020, respectively.

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

Grant Year Options Granted (1)

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2019 154 1.5 % 6.2 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:

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

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

Grant Year Options Granted (1 )

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2019 553 2.0 % 6.2 years 33.9 % 0.4 %

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:

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

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THE ENSIGN GROUP, INC.

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

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

Grant Year Granted (1)

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2019 553 $ 44.96 $ 16.01

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

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

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

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

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

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THE ENSIGN GROUP, INC.

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

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

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 September 30, 2020 and 2019 and therefore, the intrinsic value was $ 0 at the date of grant.

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

Outstanding Weighted

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Exercised ( 519 ) 12.34

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:

September 30, 2020 4,397 $ 25.36 2,501 $ 15.60

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

Stock Options Outstanding Stock Options Vested

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Total 4,397 $ 37,715 2,501

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

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

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

Options September 30, 2020 December 31, 2019

Outstanding $ 139,537 $ 108,623

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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.

The Company granted 48 and 242 restricted stock awards during the three and nine months ended September 30, 2020, respectively.

The Company granted 58 and 252 restricted stock awards during the three and nine months ended September 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 of restricted awards granted during the nine months ended September 30, 2020 and 2019 ranged from $ 35.47 to $ 58.06 and $ 41.68 to $ 57.39 , respectively.

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

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

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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:

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

Non-Vested Restricted Awards Weighted Average Grant Date Fair Value

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Forfeited ( 13 ) 30.20

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.

Nonvested at September 30, 2020 594 $ 37.08

During the three and nine months ended September 30, 2020, respectively, the Company granted 6 and 16 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.

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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,

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 286 and $ 675 for the three and nine months ended September 30, 2020, respectively.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 (1)

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Total $ 4,173 $ 2,829 $ 10,936 $ 8,215

(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.

(1) The amount of stock-based compensation expense that was classified as discontinued operations was $ 132 and $ 424 , respectively, for the three and nine months ended September 30, 2019.

In future periods, the Company expects to recognize approximately $ 23,699 and $ 25,155 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of September 30, 2020.

Future stock-based compensation expense will be recognized over 3.8 and 3.7 weighted average years for unvested options and restricted stock awards, respectively.

There were 1,896 unvested and outstanding options at September 30, 2020, of which 1,769 shares are expected to vest.

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

Equity Instrument Denominated in the Shares of a Subsidiary

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

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

No additional shares will be granted under this plan.

The Company did no t grant any new restricted shares nor did the Company grant any options during the nine months ended September 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.

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

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

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

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

For the three 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 .

For the three and nine months ended September 30, 2019, the Company expensed $ 17 and $ 594 , respectively, in stock-based compensation related to the Subsidiary Equity Plan.

Further, during the three and nine months ended September 30, 2019, the Company repurchased 65 and 534 shares of common stock under the Subsidiary Equity Plan for $ 394 and $ 2,687 , respectively.

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.

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THE ENSIGN GROUP, INC.

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

The Company leases from CareTrust REIT, Inc.

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

Total rent expense 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.

Total rent expense under the Master Leases was approximately $ 13,139 and $ 39,394 for the three and nine months ended September 30, 2020, respectively, and $ 13,738 and $ 40,662 for the three and nine months ended September 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.

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

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

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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.

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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.

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

The Company does not consider these guarantees to be probable and the likelihood of Pennant defaulting is remote, and therefore no liabilities have been accrued.

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.

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

Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 32,499 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.

Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 32,520 and $ 97,366 for the three and nine months ended September 30, 2020, respectively, and $ 31,930 and $ 93,638 for the three and nine months ended September 30, 2019, respectively.

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THE ENSIGN GROUP, INC.

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

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

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The components of operating lease expense are as follows:

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020

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$ 36,038 $ 35,531 $ 107,991 $ 104,292

(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.

(1) Rent- cost of services includes deferred rent expense adju stments of $ 101 and $ 337 for the three and nine months ended September 30, 2020, respectively.

Rent- cost of services includes a reduction in deferred rent expense adjustments of $ 983 and increase in deferred rent expense adjustments of $ 134 for the three and nine months ended September 30, 2019, respectively.

Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 567 and $ 1,781 for the three and nine months ended September 30, 2020, respectively, and $ 628 and $ 1,056 for the three and nine months ended September 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:

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

2020 (remainder) $ 31,940

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Long-term operating lease liabilities $ 952,866

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 September 30, 2020, the weighted average remaining lease term is 13.9 and the weighted average discount rate used to determine the operating lease liability is 8.3 %.

Subsequent to September 30, 2020, the Company entered into a new operating lease agreement at one of its facilities which will commence immediately upon the expiration of the current lease agreement at the facility, which is expiring on June 30, 2021.

The new lease term is 24 years with the option to extend for an additional 10 years.

The fair value of the related lease liability and ROU asset is estimated to be approximately $ 4,900 .

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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

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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,

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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$ 4,065 $ 660 $ 12,295 $ 2,085

(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:

(1) Pennant rental income includes variable rent such as property taxes of $ 312 and $ 909 during the three and nine months ended September 30, 2020, respectively.

Future annual rental income for all leases as of September 30, 2020 were as follows:

Year Amount (1)

2020 (remainder) $ 4,104

Thereafter 98,956

Total lease payments receivable $ 184,992

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THE ENSIGN GROUP, INC.

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

Total $ 175,995

(1) Annualized rental income includes base rents and variable rental income pursuant to existing leases as of September 30, 2020 .

Subsequent to September 30, 2020, the Company amended a lease agreement at one of its properties, which is expiring on September 30, 2029, to extended the lease term an additional 5 years.

The aggregate increase in rental income related to the amendment is estimated to be approximately $ 4,100 .

COMMITMENTS AND CONTINGENCIES

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

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THE ENSIGN GROUP, INC.

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

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

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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.

Department of Justice stating that it was investigating whether there has been a violation of the False Claims Act and/or the Anti-Kickback Statute with respect to 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 through 2018, 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 through 2018, 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.

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

Department of Justice declined to intervene in any subsequent action filed by a relator in connection with the subject matter of this investigation.

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

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

Further, the U.S.

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

House of Representatives Select Subcommittee on the Coronavirus Crisis has launched a nation-wide investigation into the coronavirus crisis in nursing homes.

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

The Company is cooperating with this inquiry;

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

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THE ENSIGN GROUP, INC.

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

The Company is cooperating in responding to this inquiry.

However, it is not possible to predict the ultimate outcome of any such investigation or whether and 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.

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

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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.

Further, 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,

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THE ENSIGN GROUP, INC.

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

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.

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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.

These class-action “staffing” suits have the potential to result in large jury verdicts and settlements, and may result in significant legal costs.

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.

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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.

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 or wage and hour violations, 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 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).

For several months during the COVID-19 pandemic, CMS suspended its Targeted Probe and Educate (TPE) program.

In July 2020, CMS announced that TPE program activity would resume in August 2020.

As of September 30, 2020, none of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

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

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

As of September 30, 2020, the Company's independent operating subsidiaries have responded to the requests, and the related claims are currently under review, on appeal or in a dispute resolution process.

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

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.

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.

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.

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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.

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

The Company’s receivables from Medicare and Medicaid payor programs accounted for 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.

The Company’s receivables from Medicare and Medicaid payor programs accounted for 59.7 % and 57.3 % of its total accounts receivable as of September 30, 2020 and December 31, 2019, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 75.1 % and 73.5 % of the Company's revenue for the three and nine months ended September 30, 2020, respectively, and 70.2 % and 70.3 % for the three and nine months ended September 30, 2019, respectively.

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

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

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

As of October 26, 2020, the Company had approximately $ 998 in uninsured cash deposits.

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

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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.

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 was authorized to 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 was 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 and 189 shares of its common stock for $ 20,000 and $ 5,000 , respectively.

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

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

What changed 10-Q

Item 1. Financial Statements