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Item 1. Financial Statements

2021-04-29 compared with 2020-10-28 · 425 added, 671 removed, 649 unchanged (63% of the section changed)

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(In thousands, except par values)

1 unchanged sentence

Cash and cash equivalents $ 155,527 $ 236,562

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

Accounts receivable—less allowance for doubtful accounts of $ 11,090 and $ 8,718 at March 31, 2021 and December 31, 2020, respectively

312,578 305,062

16 unchanged sentences

Accounts payable $ 53,942 $ 50,901

Accrued wages and related liabilities 177,115 151,009

Accrued wages and related liabilities (Note 3)

203,420 236,614

Lease liabilities—current 50,056 48,187

Accrued self-insurance liabilities—current 35,135 34,396

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

Advance payment liabilities (Note 3)

Other accrued liabilities 97,639 87,318

5 unchanged sentences

Other long-term liabilities (Note 3)

41,620 39,686

Total liabilities $ 1,636,920 $ 1,727,351

5 unchanged sentences

100,000 shares authorized;

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)

57,744 and 54,953 shares issued and outstanding at March 31, 2021, respectively, and 57,417 and 54,626 shares issued and outstanding at December 31, 2020, respectively

Additional paid-in capital 349,836 338,177

Retained earnings 597,375 551,055

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

Common stock in treasury, at cost, 2,791 shares at both periods ended March 31, 2021 and December 31, 2020 (Note 19)

( 71,222 ) ( 71,213 )

7 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

2020 2019 2020 2019

Three Months Ended March 31,

(In thousands, except per share data)

Revenue $ 599,255 $ 512,109 $ 1,773,567 $ 1,476,333

Service revenue $ 623,276 $ 585,951

Rental revenue 3,977 3,662

Total revenue $ 627,253 $ 589,613

Cost of services 482,186 454,521

10 unchanged sentences

Provision for income taxes 12,949 12,625

Net income from continuing operations 43,313 22,538 125,202 64,887

Net income from discontinued operations, net of tax (Note 4) — 5,290 — 19,473

Net income 49,837 41,201

Net income attributable to noncontrolling interests in continuing operations 253 390 1,045 591

Net income attributable to noncontrolling interests in discontinued operations (Note 4) — 279 — 629

Net income attributable to noncontrolling interests 631 352

1 unchanged sentence

$ 49,206 $ 40,849

Amounts attributable to The Ensign Group, Inc.:

Income from continuing operations attributable to The Ensign Group, Inc.

$ 43,060 $ 22,148 $ 124,157 $ 64,296

Income from discontinued operations, net of income tax (Note 4) — 5,011 — 18,844

Net income attributable to The Ensign Group, Inc.

$ 43,060 $ 27,159 $ 124,157 $ 83,140

Net income per share attributable to The Ensign Group, Inc.:

Continuing operations $ 0.81 $ 0.41 $ 2.33 $ 1.20

Discontinued operations — 0.09 — 0.35

Basic income per share attributable to The Ensign Group, Inc.

$ 0.81 $ 0.50 $ 2.33 $ 1.55

Continuing operations $ 0.77 $ 0.39 $ 2.23 $ 1.15

Discontinued operations — 0.09 — 0.33

Diluted income per share attributable to The Ensign Group, Inc.

$ 0.77 $ 0.48 $ 2.23 $ 1.48

Basic $ 0.91 $ 0.76

Diluted $ 0.86 $ 0.73

Weighted average common shares outstanding:

8 unchanged sentences

Issuance of common stock to employees and directors resulting from the exercise of stock options 246 — 3,880 — — — — 3,880

Issuance of restricted stock 723 1 3,085 — — — — 3,086

Dividends declared ($ 0.0500 per share)

— — — ( 2,683 ) — — — ( 2,683 )

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

Repurchase of common stock (Note 20) ( 692 ) — — — 692 ( 25,000 ) — ( 25,000 )

Net income attributable to noncontrolling interest — — — — — — 352 352

Distribution to noncontrolling interest holder — — — — — — ( 720 ) ( 720 )

Net income attributable to the Ensign Group, Inc.

— — — 40,849 — — — 40,849

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

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

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

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

Dividends declared ($ 0.0500 per share)

— — — ( 2,718 ) — — — ( 2,718 )

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

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

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

Net income attributable to the Ensign Group, Inc.

— — — 40,248 — — — 40,248

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

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 — — — — — — —

Issuance of restricted stock, net of forfeitures 81 — 3,725 — — — — 3,725

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

6 unchanged sentences

— — — 49,206 — — — 49,206

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

Balance - March 31, 2021 54,953 $ 58 $ 349,836 $ 597,375 2,791 $ ( 71,222 ) $ ( 467 ) $ 875,580

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

1 unchanged sentence

Balance - January 1, 2020 53,487 $ 56 $ 307,914 $ 391,523 2,079 $ ( 45,296 ) $ 1,947 $ 656,144

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards 371 — 5,616 — — — — 5,616

Issuance of common stock to employees and directors resulting from the exercise of stock options 148 — 1,552 — — — — 1,552

Issuance of restricted stock, net of forfeitures 723 1 3,085 — — — — 3,086

Dividends declared ($ 0.0500 per share)

1 unchanged sentence

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

Noncontrolling interest attributable to subsidiary equity plan (Note 17) — — — ( 317 ) — — 658 341

Cumulative effect of accounting change, net of tax — — — 9,030 — — — 9,030

Net income attributable to noncontrolling interest — — — — — — 235 235

Net income attributable to the Ensign Group, Inc.

— — — 27,372 — — — 27,372

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

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

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

Dividends declared ($ 0.0475 per share)

Repurchase of common stock (Note 19)

( 692 ) — — — 692 ( 25,000 ) — ( 25,000 )

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

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

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

Net income attributable to noncontrolling interest — — — — — — 352 352

Net income attributable to the Ensign Group, Inc.

— — — 28,609 — — — 28,609

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

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 — — — — — — ( 720 ) ( 720 )

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

Net income attributable to the Ensign Group, Inc.

— — — 40,849 — — — 40,849

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

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

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands) 2021 2020

1 unchanged sentence

Net income $ 49,837 $ 41,201

Net income from discontinued operations, net of tax — ( 19,473 )

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 13,659 13,720

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

Amortization of deferred financing fees 210 210

Non-cash leasing arrangement (Note 18) 337 134

Non-cash leasing arrangement 112 125

Deferred income taxes — 1,003

1 unchanged sentence

Stock-based compensation 4,054 3,235

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

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

(Gain)/loss on sale of asset disposals ( 236 ) 101

Change in operating assets and liabilities

2 unchanged sentences

Prepaid expenses and other assets ( 4,271 ) ( 1,589 )

Cash surrender value of life insurance policy premiums ( 7,440 ) ( 3,712 )

Operating lease obligations ( 133 ) ( 181 )

Deferred compensation liability 7,459 3,660

Accounts payable 2,768 ( 3,257 )

Accrued wages and related liabilities ( 34,562 ) ( 16,381 )

Income taxes payable 11,791 10,882

Other accrued liabilities ( 1,737 ) ( 4,040 )

1 unchanged sentence

Other long-term liabilities ( 167 ) ( 45 )

Net cash provided by continuing operating activities 282,161 109,077

Net cash provided by discontinued operating activities (Note 4) — 23,296

Net cash provided by operating activities 34,294 27,123

1 unchanged sentence

Purchase of property and equipment ( 15,334 ) ( 15,810 )

Cash payments for business acquisitions (Note 9) — ( 6,455 )

Cash payments for asset acquisitions (Note 8)

1 unchanged sentence

Escrow deposits used to fund acquisitions — 14,050

Cash proceeds from the sale of assets and insurance proceeds 359 7,835

Cash proceeds from insurance proceeds 6,250 —

Cash proceeds from the sale of assets and ancillary business 840 121

Purchases of investments ( 6,869 ) ( 1,008 )

1 unchanged sentence

Other restricted assets ( 279 ) ( 237 )

Net cash used in continuing investing activities ( 48,485 ) ( 121,183 )

Net cash used in discontinued investing activities (Note 4) — ( 22,985 )

Net cash used in investing activities ( 12,212 ) ( 15,542 )

2 unchanged sentences

Payments on revolving credit facility and other debt (Note 15)

( 849 ) ( 240,666 )

Issuance of common stock upon exercise of options 3,880 1,552

Repurchase of shares of common stock to satisfy tax withholding obligations ( 9 ) —

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

Repurchase of shares of common stock (Note 19)

1 unchanged sentence

Non-controlling interest distribution ( 1,248 ) ( 720 )

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 and cash equivalents 116,205 13,313

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

Cash and cash equivalents end of period, including cash of discontinued operations 175,380 44,396

Less cash of discontinued operations at end of period — 47

Proceeds from CARES Act Provider Relief Fund (Note 3)

Repayments of CARES Act Provider Relief Fund and Medicare Advance Payment

Program(Note 3)

( 111,162 ) —

Net cash used in financing activities ( 103,117 ) ( 7,539 )

Net (decrease)/increase in cash and cash equivalents ( 81,035 ) 4,042

Cash and cash equivalents beginning of period 236,562 59,175

Cash and cash equivalents end of period $ 155,527 $ 63,217

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands) 2021 2020

2 unchanged sentences

Interest $ 1,427 $ 4,835

Income taxes $ 48,620 $ 16,358

Lease liabilities $ 33,339 $ 32,481

10 unchanged sentences

(collectively, Ensign or the Company), is a holding company with no direct operating assets, employees or revenue.

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

As of 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, through its operating subsidiaries, is a provider of health care services across the post-acute care continuum, engaged in the ownership, acquisition, development and leasing of skilled nursing, senior living and other healthcare-related properties, and other ancillary businesses.

As of March 31, 2021, the Company operated 232 facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, 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 23,600 operational skilled nursing beds and 2,200 senior living units.

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.

Of those 31 senior living operations, two are located on the same real estate properties as the skilled nursing facilities.

As of March 31, 2021, the Company operated 168 facilities under long-term lease arrangements, and had options to purchase 11 of those 168 facilities.

The Company's real estate portfolio includes 94 owned real estate properties, which included 64 facilities operated and managed by the Company, 31 senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019, and the Service Center location.

Of those 31 senior living operations, two are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.

Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide specific accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries.

The Company also has a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.

The Company also has a wholly-owned captive insurance subsidiary (the Captive) that provides some claims-made coverage to the Company’s operating subsidiaries for general and professional liabilities, as well as coverage for certain workers’ compensation insurance liabilities.

Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets.

References herein to the consolidated “Company” and “its” assets and activities in this Report is not meant to imply, nor should it be construed as meaning that The Ensign Group, Inc.

References herein to the consolidated “Company” and “its” assets and activities in this Quarterly Report is not meant to imply, nor should it be construed as meaning that The Ensign Group, Inc.

has direct operating assets, employees or revenue, or that any of the subsidiaries, are operated by The Ensign Group, Inc.

Spin-Off Transaction — On October 1, 2019, the Company completed the separation of its transitional and skilled nursing services, home health and hospice operations and substantially all of its senior living operations into two separate, publicly traded companies (the Spin-Off).

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

The Company operates and reports one reportable operating segment:

transitional and skilled services.

The Company believes that this structure reflects its current operational and financial management, and provides the best structure for the Company to focus on growth opportunities while maintaining financial discipline.

As a result of the Spin-Off, the condensed consolidated financial statements reflect the Spin-Off operations, assets and liabilities, and cash flows as discontinued operations for 2019 periods presented.

Unless otherwise noted, amounts in the Notes to the Condensed Consolidated Financial Statements exclude amounts attributable to discontinued operations.

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

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

Segment Updates — In the fourth quarter of 2020, the Company began reporting the results of its real estate portfolio as a new segment.

The Company has two reportable segments:

(1) transitional and skilled services and (2) real estate.

Refer to Note 7, Business Segments , for additional information.

Corresponding items of segment information for prior periods have been recast to reflect the change of the Company’s segment structure.

This structure reflects its current operational and financial management, and provides the best structure for the Company to focus on growth and investing opportunities while maintaining financial discipline.

Other Information — The accompanying condensed consolidated financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 (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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All intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest.

The Company presents noncontrolling interests within the equity section of its condensed consolidated balance sheets and the amount of consolidated net income that is attributable to The Ensign Group, Inc.

3 unchanged sentences

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

The Company's relationship with variable interest entities was not material during the three 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 .

The sale transaction did not meet the criteria of discontinued operations as it did not represent a strategic shift that had, or will have, a major effect on the Company's operations and financial results.

The Company's relationship with variable interest entities was not material during the three months ended March 31, 2021 and 2020.

Reclassifications — Certain prior period results have been reclassified to be consistent with the current period presentation.

Prior period results also reflect reclassifications, for comparative purposes, related to the change in the Company's segment structure.

Refer to Note 7, Business Segments , for additional information related to segments.

Prior to the fourth quarter of 2020, the Company only presented total revenue for all revenue services.

As a result of the change in segments, the presentation of the Company's service revenue and rental revenue are presented separately on the Company's Condensed Consolidated Statements of Income.

The reclassifications had no effect on the reported condensed consolidated results of operations.

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

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

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

Actual results could differ from those estimates.

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The fair value of the pooled investment funds is derived using Level 2 inputs.

Revenue Recognition — The Company recognizes revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606).

Service Revenue Recognition — The Company recognizes revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606).

S ee Note 4, Revenue and Accounts Receivable.

Rental Revenue Recognition — The Company recognizes rental revenue for operating leases on a straight-line basis over the lease term when collectability of all minimum lease payments is probable (ASC 842).

See Note 4, Revenue and Accounts Receivable.

9 unchanged sentences

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

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

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

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

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

As of March 31, 2021, 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.

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The Company does not have material subleases.

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

Management has evaluated its long-lived assets and determined there was no impairment during the three months ended March 31, 2021 and 2020.

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

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Goodwill is subject to annual testing for impairment.

In addition, goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a reporting unit below its carrying amount.

In addition, goodwill is tested for impairment if events occur or circumstances indicate that its carrying value may not be recoverable.

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 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.

The Company did no t identify any goodwill or intangible asset impairment during the three months ended March 31, 2021 and 2020.

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

Losses beyond these amounts are insured through third-party policies with coverage limits per claim, per location and on an aggregate basis for the Company.

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

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

The self-insured retention and deductible limits for general and professional liabilities and workers' compensation liabilities 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.

2 unchanged sentences

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 $ 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.

Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 60,761 and $ 57,628 as of March 31, 2021 and December 31, 2020, respectively.

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

To protect itself against loss exposure in California with this policy, the Company has purchased individual specific excess insurance coverage that insures individual claims that exceed $ 625 per occurrence.

3 unchanged sentences

The claims and benefit payments are managed through a state insurance pool.

Outside of California, Texas and Washington, the Company has purchased insurance coverage that insures individual claims that exceed $ 350 per accident.

Outside of California, Texas and Washington, the Company has purchased insurance coverage that insures individual claims that exceed $ 350 per occurrence.

In all states except Washington, the Company accrues amounts equal to the estimated costs to settle open claims, as well as an estimate of the cost of claims that have been incurred but not reported.

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

Accrued workers’ compensation liabilities are recorded on an undiscounted basis, 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.

Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $ 25,078 and $ 24,499 as of March 31, 2021 and December 31, 2020, respectively.

Effective April 1, 2021, the Company's operating subsidiaries in Washington are covered under the Company's self-insured program and the Company purchased individual specific excess insurance coverage that insures individual claims that exceed $ 500 per occurrence.

In addition, the Company has recorded an asset and equal liability of $ 7,602 and $ 7,138 as of March 31, 2021 and December 31, 2020, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

See Note 12 Restricted and Other Assets.

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

The Company is fully liable for all financial and legal aspects of these benefit plans.

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

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

The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 8,810 and $ 6,964 as of September 30, 2020 and December 31, 2019, respectively.

To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $ 500 for each covered person for fiscal year 2021.

The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 8,436 and $ 7,533 as of March 31, 2021 and December 31, 2020, 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.

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Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses that could be material to net income.

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

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

The Company generally expects to fully utilize its deferred tax assets;

however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.

If the Company’s actual liabilities exceed its estimates of losses, its future earnings, cash flows and financial condition would be adversely affected.

Table Contents

1 unchanged sentence

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

The Company generally expects to fully utilize its deferred tax assets;

however, when necessary, the Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.

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

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Recent Accounting Standards Adopted by the Company

In August 2018, the FASB issued amended guidance to simplify fair value measurement disclosure requirements.

The new provisions eliminate the requirements to disclose (1) transfers between Level 1 and Level 2 of the fair value hierarchy, (2) policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy, and (3) net asset value disclosure of estimates of timing of future liquidity events.

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

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

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

The new provisions eliminate step 2 from the goodwill impairment test and shifts the concept of impairment from a measure of loss when comparing the implied fair value of goodwill to its carrying amount to comparing the fair value of a reporting unit with its carrying amount.

The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment or step 2 of the goodwill impairment test.

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

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

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

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

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

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THE ENSIGN GROUP, INC.

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.

In December 2019, the FASB issued Accounting Standards Update (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.

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

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

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

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

The Company adopted this standard on January 1, 2021 and determined there was no material impact on the Company's financial position, results of operations and liquidity.

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

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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

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

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

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

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

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act), 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).

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.

The Company adopted this standard on January 1, 2021 and determined there was no material impact on the Company's condensed consolidated financial statements.

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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.

Accounting Standards Recently Issued but Not Yet Adopted by the Company

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 reference rates which are expected to replace LIBOR reference rates.

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

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

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

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

In November 2020, the SEC issued final rules 33-10890 and 34-90459 “ Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information ,” which modernizes and simplifies certain disclosure requirements of Regulation S-K.

Certain key rule amendments eliminate the requirement to disclose Selected Financial Data;

Selected Quarterly Financial Data, with certain exceptions;

the impact of inflation and changing prices, provided the impact is not material;

off-balance sheet arrangements in tabular form;

and the aggregate amount of contractual obligations in tabular form.

The final rules also amended various aspects of Item 303, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” among others.

The final rules are effective for all registration statements, annual reports and quarterly reports filed on or after August 9, 2021, with early adoption permitted.

The Company is currently evaluating the impact of the disclosure changes in its annual and quarterly report.

COVID-19 UPDATE

The Company's affiliated operations continued to be impacted by the worldwide outbreak of the 2019 coronavirus disease (COVID-19).

The Company received cash distribution of relief fund payments (Provider Relief Funds) from the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) and funds authorized by U.S.

Department of Health and Human Services (HHS) to be used to protect residents of nursing homes and long-term care facilities from the impact of COVID-19 throughout 2020 and continued into 2021.

During the first quarter of 2021, the Company received $ 9,139 in Provider Relief Funds and as of March 31, 2021 had returned all of the funds.

The Company may continue to receive additional funding in future periods.

Subsequent to March 31, 2021, the Company received and returned another $ 2,083 in Provider Relief Funds.

Additionally, the Company applied for and received $ 105,255 through the Medicare Accelerated and Advance Payment Program under the CARES Act during fiscal year 2020.

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

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.

In March 2021, the Company repaid the remaining funds of $ 102,023 .

The Family First Coronavirus Response Act was signed into law in 2020 to provide a temporary 6.2% increase to the Federal Medical Assistance Percentage (FMAP) effective January 1, 2020.

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

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

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

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

In addition, increases in Medicaid rates can come from other areas of the state's budget outside of FMAP funding.

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 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 $ 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

On October 1, 2019, the Company completed the separation of its transitional and skilled nursing services, ancillary businesses, home health and hospice operations and substantially all of its senior living operations into two separate, publicly traded companies:

• Ensign, which includes skilled nursing and senior living services, physical, occupational and speech therapies and other rehabilitative and healthcare services at 226 healthcare facilities and campuses, post-acute-related ancillary operations and real estate investments;

• The Pennant Group, Inc.

(Pennant), which is a holding company of operating subsidiaries that provide home health, hospice and senior living services.

The Company completed the separation through a tax-free distribution of substantially all of the outstanding shares of common stock of Pennant to Ensign stockholders on a pro rata basis.

Ensign stockholders received one share of Pennant common stock for every two shares of Ensign common stock held at the close of business on September 20, 2019, the record date for the Spin-Off.

The number of shares of Ensign common stock each stockholder owns and the related proportionate interest in Ensign did not change as a result of the Spin-Off.

Each Ensign stockholder received only whole shares of Pennant common stock in the distribution, as well as cash in lieu of any fractional shares.

The Spin-Off was effective October 1, 2019, with shares of Pennant common stock distributed on October 1, 2019.

Pennant is listed on the NASDAQ Global Select Market (NASDAQ) and trades under the ticker symbol “PNTG”.

Ensign and Pennant entered into several agreements in connection with the Spin-Off, including a transition services agreement (TSA), separation and distribution agreement, tax matters agreement and an employee matters agreement.

Pursuant to the TSA, Ensign, Pennant and their respective subsidiaries are providing various services to each other on an interim, transitional basis.

Services being provided by Ensign include, among others, certain finance, information technology, human resources, employee benefits and other administrative services.

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

Billings by Ensign under the TSA were not material during the three and 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.

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 state relief revenue recognized is limited to the actual COVID-19 related expenses incurred.

As of December 31, 2020, the Company had $ 6,520 in unapplied state relief funds.

During the three months ended March 31, 2021, the Company received an additional $ 15,645 in state relief funding and recognized $ 16,465 as revenue.

For the three months ended March 31, 2020, the Company received and recognized $ 730 in state relief funding.

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 and the remaining 50% due by December 31, 2022.

The Company recorded $ 48,309 of deferred payments of social security taxes as a liability during 2020.

The total short-term balance of $ 24,155 is included in accrued wages and related liabilities and the remaining $ 24,154 is included in other long-term liabilities within the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020.

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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 September 30, 2019 Nine Months Ended September 30, 2019

(In thousands)

Revenue $ 88,398 $ 249,039

Cost of services 67,289 187,560

Rent—cost of services 5,853 17,295

General and administrative expense 6,196 16,672

Depreciation and amortization 914 2,402

Total expenses 80,252 223,929

Income from discontinued operations 8,146 25,110

Interest income 4 26

Provision for income taxes 2,860 5,663

Income from discontinued operations, net of tax 5,290 19,473

Net income attributable to discontinued noncontrolling interests 279 629

Net income attributable to The Ensign Group, Inc.

$ 5,011 $ 18,844

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.

REVENUE AND ACCOUNTS RECEIVABLE

The Company's revenue is derived primarily from providing healthcare services to its patients.

Revenues are recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare replacement plans), in exchange for providing patient care.

Service Revenue

The Company's service revenue is derived primarily from providing healthcare services to its patients.

Revenue is recognized when services are provided to the patients at the amount that reflects the consideration to which the Company expects to be entitled from patients and third-party payors, including Medicaid, Medicare and insurers (private and Medicare replacement plans), in exchange for providing patient care.

The healthcare services in transitional and skilled patient contracts include routine services in exchange for a contractual agreed-upon amount or rate.

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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 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.

Revenue from the Medicare and Medicaid programs accounted for 74.1 % and 71.0 % of all service revenue for the three months ended March 31, 2021 and 2020, 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.

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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 condensed consolidated revenue for the three and nine months ended September 30, 2020 and 2019.

The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue for the three months ended March 31, 2021 and 2020.

Rental Revenue

The Company's rental revenues are primarily generated by leasing healthcare-related properties through triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property.

Revenue is recognized on a straight-line basis over the lease term if it has been deemed probable of collection.

The Company has elected the single component practical expedient, which allows a lessor, by class of underlying asset, not to allocate the total consideration to the lease and non-lease components based on their relative stand-alone selling prices where certain criteria are met.

This single component practical expedient requires the Company to account for the lease component and non-lease component(s) associated with that lease as a single component if (1) the timing and pattern of transfer of the lease component and the non-lease component(s) associated with it are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately.

If the Company determines that the lease component is the predominant component, it accounts for the single component as an operating lease in accordance with the new lease standards.

Conversely, the Company is required to account for the combined component under the revenue recognition standard if it determines that the non-lease component is the predominant component.

As a result of this assessment, rental revenues from the lease of real estate assets that qualify for this expedient are accounted for as a single component under the new lease standards.

The components of the Company's operating leases qualify for the single component presentation.

Tenant reimbursements related to property taxes and insurance are neither considered lease nor non-lease components under the new lease standards.

Lessee payments for taxes and insurance paid directly to a third party, on behalf of the Company, are excluded from variable lease payments and rental revenue in the Company’s condensed consolidated statements of income.

Otherwise, tenant reimbursements for taxes and insurance that are paid by the Company directly to a third party are classified as additional rental revenue and expense and recognized by the Company on a gross basis.

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

Three Months Ended September 30,

Service revenue for the three months ended March 31, 2021 and 2020 is summarized in the following tables:

Three Months Ended March 31,

Revenue % of Revenue Revenue % of Revenue

Medicaid $ 222,192 37.1 % $ 205,945 40.2 %

Medicare 189,237 31.6 119,633 23.4

Medicaid — skilled 38,232 6.4 34,080 6.6

Total Medicaid and Medicare 449,661 75.1 359,658 70.2

Managed care 87,648 14.6 88,542 17.3

Private and other (1)

$ 231,358 37.1 % $ 224,195 38.3 %

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 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

Medicaid $ 672,506 37.9 % $ 586,222 39.7 %

Medicare 190,303 30.5 155,584 26.6

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53,277 8.5 68,134 11.6

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 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.

Service revenue $ 623,276 100.0 % $ 585,951 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended March 31, 2021 and 2020.

(2) Private and other payors also includes revenue from all payors generated in other an cillary services for the three months ended March 31, 2021 and 2020 .

In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 3,977 and $ 3,662 , respectively for the three months ended March 31, 2021 and 2020.

Balance Sheet Impact

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

The Company had no material contract liabilities and contract assets as of March 31, 2021 and December 31, 2020, or activity during the three months ended March 31, 2021 and 2020.

Accounts receivable as of March 31, 2021 and 2020, is summarized in the following table:

March 31, 2021 December 31, 2020

Medicaid $ 121,942 $ 102,077

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

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THE ENSIGN GROUP, INC.

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

COMPUTATION OF NET INCOME PER COMMON SHARE

Basic net income per share is computed by dividing income from continuing operations attributable to stockholders of The Ensign Group, Inc.

Basic net income per share is computed by dividing income from operations attributable to stockholders of The Ensign Group, Inc.

by the weighted average number of outstanding common shares for the period.

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

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

2020 2019 2020 2019

Net income from continuing operations $ 43,313 $ 22,538 $ 125,202 $ 64,887

net income attributable to noncontrolling interests in continuing operations 253 390 1,045 591

Net income from continuing operations attributable to The Ensign Group, Inc.

43,060 22,148 124,157 64,296

Net income from discontinued operations, net of tax — 5,290 — 19,473

net income attributable to noncontrolling interests in discontinued operations — 279 — 629

Net income from discontinued operations, net of tax — 5,011 — 18,844

Three Months Ended March 31,

Net income $ 49,837 $ 41,201

net income attributable to noncontrolling interests 631 352

Net income attributable to The Ensign Group, Inc.

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Basic net income per common share:

Income from continuing operations $ 0.81 $ 0.41 $ 2.33 $ 1.20

Income from discontinued operations — 0.09 — 0.35

Net income attributable to The Ensign Group, Inc.

$ 0.91 $ 0.76

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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 September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net income from continuing operations $ 43,313 $ 22,538 $ 125,202 $ 64,887

net income attributable to noncontrolling interests in continuing operations 253 390 1,045 591

Net income from continuing operations attributable to The Ensign Group, Inc.

43,060 22,148 124,157 64,296

Net income from discontinued operations, net of tax — 5,290 — 19,473

net income attributable to noncontrolling interests in discontinued operations — 279 — 629

Net income from discontinued operations, net of tax — 5,011 — 18,844

Three Months Ended March 31,

Net income $ 49,837 $ 41,201

net income attributable to noncontrolling interests 631 352

Net income attributable to The Ensign Group, Inc.

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incremental shares from assumed conversion (1)

2,385 2,423 2,286 2,584

Adjusted weighted average common shares outstanding 56,891 55,796

Diluted net income per common share:

Income from continuing operations $ 0.77 $ 0.39 $ 2.23 $ 1.15

Income from discontinued operations — 0.09 — 0.33

Net income attributable to The Ensign Group, Inc.

$ 0.86 $ 0.73

(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.

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 28 and 787 for the three months ended March 31, 2021 and 2020, 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 $ 175,380 and $ 59,175 as of September 30, 2020 and December 31, 2019, respectively, is derived using Level 1 inputs.

The fair value of cash and cash equivalents of $ 155,527 and $ 236,562 as of March 31, 2021 and December 31, 2020, 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 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.

As of March 31, 2021, and December 31, 2020, the fair value of the pooled investment funds of $ 14,017 and $ 6,577 , respectively, is derived using Level 2 inputs.

The pooled investment funds are included in restricted and other assets in the Condensed Consolidated Balance Sheets.

See Note 12 Restricted and Other Assets.

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

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When impairment has occurred, such long-lived assets are written down to fair value.

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THE ENSIGN GROUP, INC.

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

Debt Security Investments - Held to Maturity

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.

As of March 31, 2021 and December 31, 2020, the Company had approximately $ 48,993 and $ 45,554 , 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 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.

Further, as of March 31, 2021, 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 March 31, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

BUSINESS SEGMENTS

In the fourth quarter of 2020, the Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, began reviewing the results of the Company's real estate portfolio.

Accordingly, the Company began reporting a new segment as it continues to expand its real estate investment strategy.

The Company has two reportable segments:

(1) transitional and skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) real estate, which is comprised of properties owned by the Company and leased to skilled nursing and assisted living operations where the properties are subject to triple-net long-term leases, including operations that are owned and operated by the Company.

Prior to this new segment structure, the Company had one reportable segment, transitional and skilled services.

Corresponding items of segment information for prior periods have been recast to reflect the change of the Company’s segment structure.

As of March 31, 2021, the transitional and skilled services segment includes 200 skilled nursing operations and 23 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

The Company's real estate segment includes 94 owned real estate properties.

These properties include 64 operations the Company operated and managed, real estate properties of 31 senior living operations that are leased to and operated by Pennant and the Service Center location, which continues to lease office space to various third parties.

Of the 31 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.

The Company also reports an “All Other” category that includes results from its senior living operations, which includes nine stand-alone senior living operations and 23 campus operations that provide both skilled nursing and rehabilitative care services and senior living services, mobile diagnostics, medical transportation and other ancillary operations.

Services included in the “All Other” category are insignificant individually, and therefore do not constitute a reportable segment.

The Company’s reportable segments are significant operating segments that offer differentiated services.

The Company's CODM reviews financial information for each operating segment to evaluate performance and allocate capital resources.

This structure reflects its current operational and financial management and provides the best structure to maximize the quality of care and investment strategy provided, while maintaining financial discipline.

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

Beginning in the fourth quarter of 2020, segment income and loss was changed from profit or loss from operations before interest and provision for income taxes to profit or loss from operations before provision for income taxes, excluding gain or loss from sale of real estate, insurance recoveries and impairment charges from operations.

Prior period presentation has been revised to reflect the new measurement.

With the exception of intercompany rental revenue, the accounting policies of the reportable segments are the same as those described in Note 2, Summary of Significant Accounting Policies .

Rental revenue from Ensign-affiliated operations are based on mutually agreed-upon base rent that are subject to change from time to time.

Intercompany revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of the related healthcare facilities.

Included in the real estate segment income is interest expense related to the borrowings to fund real estate acquisitions.

Interest revenue is related to the investment accounts that the Service Center manages on behalf of the Company and is included in the "All Other" category.

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

BUSINESS SEGMENTS

Prior to the Spin-Off, the Company had three reportable segments:

(1) transitional and skilled services, (2) home health and hospice services and (3) senior living services.

Upon completion of the Spin-Off, the Company has one reportable operating segment:

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

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

The Company also reports an “all other” category that includes results from its senior living operations, real estate properties leased to third-parties, mobile diagnostics, medical transportation and other ancillary operations.

These operations are neither significant individually nor in the aggregate, and therefore do not constitute a reportable segment.

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

As of 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.

The Company evaluates performance and allocates capital resources to its operations based on an operating model that is designed to maximize the quality of care provided and profitability.

General and administrative expenses are not allocated to the Company's reportable segment for purposes of determining segment profit or loss, and are included in the "all other" category in the selected segment financial data that follows.

The accounting policies of the reporting segment are the same as those described in Note 2 , Summary of Significant Accounting Policies.

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

Segment revenues by major payor source were as follows:

Three Months Ended September 30, 2020

Transitional and Skilled Services All Other Total Revenue Revenue %

Medicaid $ 218,840 $ 3,352 (1) $ 222,192 37.1 %

Medicare 189,237 — 189,237 31.6

Medicaid-skilled 38,232 — 38,232 6.4

Subtotal 446,309 3,352 449,661 75.1

Managed care 87,648 — 87,648 14.6

Private and other 36,427 25,519 (2) 61,946 10.3

The following tables set forth financial information for the segments:

Three Months Ended March 31, 2021

Transitional and Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Service revenue $ 601,036 $ — $ 22,240 $ — $ 623,276

Rental revenue — 15,879 — ( 11,902 ) 3,977

Total revenue $ 601,036 $ 15,879 $ 22,240 $ ( 11,902 ) $ 627,253

(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 %

Segment income (loss) 88,931 8,821 ( 35,406 ) — 62,346

Gain on sale of real estate 440

Income before provision for income taxes $ 62,786

Depreciation and amortization 7,475 4,693 1,491 — 13,659

Other expense (income), net (3)

$ — $ 1,641 $ ( 748 ) $ — $ 893

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

(2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated wholly-owned healthcare facilities.

Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related healthcare facilities.

(3) Other expense (income), net includes interest expense and interest revenue.

Three Months Ended March 31, 2020

Transitional and Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Service revenue $ 558,304 $ — $ 27,647 $ — $ 585,951

Rental revenue — 14,944 — ( 11,282 ) 3,662

Total revenue $ 558,304 $ 14,944 $ 27,647 $ ( 11,282 ) $ 589,613

Segment income (loss) 80,591 6,325 ( 33,090 ) — 53,826

Income before provision for income taxes $ 53,826

Depreciation and amortization 7,148 4,515 2,057 — 13,720

Other expense (income), net (3)

$ — $ 3,665 $ ( 698 ) $ — $ 2,967

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

(2) Intercompany elimination represents rental income at the real estate segment generated from triple-net lease arrangements with the Company's affiliated wholly-owned healthcare facilities.

Intercompany rental revenue is eliminated in consolidation, along with corresponding intercompany rent expenses of related healthcare facilities.

(3) Other expense (income), net includes interest expense and interest revenue.

Service revenue by major payor source were as follows:

Three Months Ended March 31, 2021

Transitional and Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 227,741 $ 3,617 (1) $ 231,358 37.1 %

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Private and other 34,654 18,623 (2) 53,277 8.5

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 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.

Total service revenue $ 601,036 $ 22,240 $ 623,276 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended March 31, 2021.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the three months ended March 31, 2021.

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

Nine Months Ended September 30, 2020

Transitional and Skilled Services All Other Total Revenue Revenue %

Medicaid $ 662,733 $ 9,773 (1) $ 672,506 37.9 %

Medicare 519,865 — 519,865 29.3

Medicaid-skilled 110,626 — 110,626 6.3

Subtotal 1,293,224 9,773 1,302,997 73.5

Managed care 271,993 — 271,993 15.3

Private and other 120,351 78,226 (2) 198,577 11.2

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

(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 %

Three Months Ended March 31, 2020

Transitional and Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 220,969 $ 3,226 (1) $ 224,195 38.3 %

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Private and other 43,713 24,421 (2) 68,134 11.6

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

(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 September 30, 2020

Transitional and Skilled Services All Other (1)

Revenue $ 570,384 $ 28,871 $ 599,255

Segment income (loss) 91,171 ( 36,102 ) 55,069

Interest expense, net of interest and other income ( 890 )

Income before provision for income taxes $ 54,179

Depreciation and amortization $ 10,225 $ 3,532 $ 13,757

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

Three Months Ended September 30, 2019

Transitional and Skilled Services All Other (1)

Revenue $ 485,973 $ 26,136 $ 512,109

Segment income (loss) 56,838 ( 26,039 ) 30,799

Interest expense, net of interest and other income ( 3,168 )

Income before provision for income taxes $ 27,631

Depreciation and amortization $ 9,331 $ 4,074 $ 13,405

(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)

Nine Months Ended September 30, 2020

Transitional and Skilled Services All Other (1)

Revenue $ 1,685,568 $ 87,999 $ 1,773,567

Segment income (loss) 263,253 ( 95,957 ) 167,296

Interest expense, net of interest and other income ( 5,068 )

Income before provision for income taxes $ 162,228

Depreciation and amortization $ 30,682 $ 10,400 $ 41,082

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

Nine Months Ended September 30, 2019

Transitional and Skilled Services All Other (1)

Revenue $ 1,404,469 $ 71,864 $ 1,476,333

Segment income (loss) 172,254 ( 82,767 ) 89,487

Interest expense, net of interest and other income ( 9,656 )

Income before provision for income taxes $ 79,831

Depreciation and amortization $ 26,883 $ 10,817 $ 37,700

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

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.

Total service revenue $ 558,304 $ 27,647 $ 585,951 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended March 31, 2020.

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

In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 3,977 and $ 3,662 for the three months ended March 31, 2021 and 2020, respectively.

This revenue is included in our real estate segment.

OPERATION EXPANSIONS

The Company's subsidiaries expansion focus is to purchase or lease operations that are complementary to the current affiliated operations, accretive to the business, or otherwise advance the Company's strategy.

The results of all operating subsidiaries are included in the accompanying Interim Financial Statements subsequent to the date of acquisition.

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The Company's affiliated operations also enter into long-term leases that may include options to purchase the facilities.

As a result, from time to time, the affiliated operations will acquire the real estate of facilities that have been operating under third-party leases.

2020 Acquisitions

During the 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.

As a result, from time to time, a real estate affiliated subsidiary will acquire the property of facilities that have previously been operated under third-party leases.

2021 Expansions

During the three months ended March 31, 2021, the Company expanded its operations through long-term leases, with the addition of four stand-alone skilled nursing operations.

These new operations added a total of 447 operational skilled nursing beds operated by the Company's affiliated operating subsidiaries.

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 acquisitions was concentrated in property and equipment and, accordingly these transactions were classified as asset acquisitions.

Subsequent to March 31, 2021, the Company expanded its operations through long-term leases with the addition of three stand-alone skilled nursing operations.

These new operations added 322 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries.

2020 Expansions

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

Of these additions, two are related to purchases of owned properties, further expanding our real estate portfolio.

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

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

In connection with the new operations 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 our purchases of these properties was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions.

The purchase price for the asset acquisitions consists of building and improvements of $ 9,669 ;

land of $ 4,080 ;

equipment, furniture and fixtures of $ 236 ;

and assembled occupancy of $ 69 .

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

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

2019 Acquisitions

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.

The addition of these operations added a total of 1,454 operational skilled nursing beds and 312 operational senior living units to be operated by the Company's affiliated operating subsidiaries.

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

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

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 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.

The operating subsidiaries acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome.

Financial information, especially with underperforming operating subsidiaries, is often inadequate, inaccurate or unavailable.

The operations added by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome.

Financial information, especially with underperforming operations, is often inadequate, inaccurate or unavailable.

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

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

The assets added during the three months ended March 31, 2021 were not material operations to the Company individually or in the aggregate.

Accordingly, pro forma financial information is not presented.

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

Building and improvements 13,365 48,383

Equipment, furniture, and fixtures 454 3,770

Assembled occupancy 89 305

Definite-lived intangible assets — 440

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)

These additions have been included in the March 31, 2021 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 date the Company gained effective control.

PROPERTY AND EQUIPMENT - NET

Property and equipment, net consists of the following:

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Land $ 101,236 $ 101,236

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Property and equipment, net $ 779,269 $ 778,244

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

See also Note 8, Operation Expansions for information on acquisitions during the three months ended March 31, 2021 and 2020.

INTANGIBLE ASSETS - NET

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Weighted Average Life (Years)

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Intangible Assets Net Net

Lease acquisition costs 1.7 $ 360 $ ( 360 ) $ — $ 360 $ ( 349 ) $ 11

Favorable leases 2.1 534 ( 534 ) — 534 ( 448 ) 86

Assembled occupancy 0.4 $ 39 $ ( 39 ) $ — $ 39 $ ( 26 ) $ 13

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Total $ 5,354 $ ( 2,526 ) $ 2,828 $ 5,412 $ ( 2,513 ) $ 2,899

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.

During the three months ended March 31, 2021 and 2020, amortization expense was $ 361 and $ 674 , respectively, of which $ 290 and $ 354 was related to the amortization of right-of-use assets, respectively.

Additionally, the Company identified intangible assets which became fully amortized during the prior year and removed these fully amortized balances from the gross asset and accumulated amortization amounts.

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

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This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, a "Step 0" analysis.

If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs "Step 1" of the traditional two-step goodwill impairment test by comparing the net assets of each reporting unit to their respective fair values.

If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a goodwill impairment test by comparing the carrying value of each reporting unit to its respective fair value.

The Company determines the estimated fair value of each reporting unit using a discounted cash flow analysis.

In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit.

The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.

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

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of 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:

The fair value of the reporting unit is the implied fair value of goodwill.

In the event a reporting unit's carrying value exceeds its fair value, an impairment loss will be recognized.

An impairment loss is measured by the difference between the carrying value of the reporting unit and its fair value.

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of March 31, 2021.

The Company's expansions during the three months ended March 31, 2021 were all through long-term leases and accordingly, no goodwill was recognized for these acquisitions.

There were no activities in goodwill during the three months ended March 31, 2021.

Provided that goodwill corresponds to the acquisition of a business and not merely the acquisition of real estate property, the Company's real estate segment appropriately does not carry a goodwill balance.

The following table represents the goodwill value by transitional and skilled service segment and "all other" category, which includes other ancillary services, as of March 31, 2021 and December 31, 2020:

Transitional and Skilled Services All Other Total

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

Other indefinite-lived intangible assets consists of the following:

September 30, 2020 December 31, 2019

Goodwill $ 45,486 $ 8,983 $ 54,469

Other indefinite-lived intangible assets consist of the following:

March 31, 2021 December 31, 2020

Trade name $ 889 $ 889

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$ 3,546 $ 3,716

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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:

September 30, 2020 December 31, 2019

Restricted and other assets consist of the following:

March 31, 2021 December 31, 2020

Debt issuance costs, net $ 2,486 $ 2,664

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Restricted and other assets $ 41,422 $ 33,155

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.

Included in restricted and other assets as of March 31, 2021 and December 31, 2020 are anticipated insurance recoveries related to the Company's workers' compensation liabilities and general and professional liability claims that are recorded on a gross rather than net basis in accordance with ASU issued by the FASB.

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

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

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

The Company recorded a gain on the deferral investment 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.

The Company recorded a gain on the deferral investment of $ 306 , which is included in interest and other income, and an offsetting expense of $ 351 between cost of services and general and administrative expenses in the accompanying consolidated statements of income for the three months ended March 31, 2021.

During the three months ended March 31, 2020, the Company had an expense of $ 87 , which was recorded between cost of services and general and administrative expenses.

OTHER ACCRUED LIABILITIES

Other accrued liabilities consists of the following:

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Quality assurance fee $ 7,103 $ 6,631

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Resident advances 6,049 8,558

Deferred FMAP revenue 7,629 —

Unapplied state relief funds 5,700 6,520

Cash held in trust for patients 5,611 6,052

Resident deposits 1,717 1,818

Dividends payable 2,886 2,868

Property taxes 7,656 9,222

Income tax payable 11,927 136

Other 11,117 11,008

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

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.

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.

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

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

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

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

The Company recorded income tax expense of $ 12,949 and $ 12,625 during the three months ended March 31, 2021 and 2020, respectively, or 20.6 % of earnings before income taxes for the three months ended March 31, 2021, compared to 23.5 % for the three months ended March 31, 2020.

The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, offset by non-deductible expenses including non-deductible compensation.

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

During 2021, the statutes of limitations will lapse on the Company's 2017 Federal tax year and certain 2016 and 2017 state tax years.

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

The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the three months ended March 31, 2021 and 2020.

Debt consists of the following:

September 30, 2020 December 31, 2019

Revolving credit facility with Truist $ — $ 210,000

March 31, 2021 December 31, 2020

Mortgage loans and promissory notes $ 116,957 $ 117,806

118,695 330,350

current maturities ( 2,828 ) ( 2,960 )

debt issuance costs, net ( 2,270 ) ( 2,302 )

$ 113,222 $ 325,217

Long term debt less current maturities $ 111,859 $ 112,544

Mortgage Loans and Promissory Notes

As of March 31, 2021, the Company's operating subsidiaries had $ 116,957 outstanding under the mortgage loans and notes, of which $ 2,828 is classified as short-term and the remaining $ 114,129 is classified as long-term.

The Company was in compliance with all loan covenants as of March 31, 2021.

As of March 31, 2021, 19 of the Company's subsidiaries have mortgage loans insured with the Department of Housing and Urban Development (HUD) in the aggregate amount of $ 113,304 , which subjects these subsidiaries to HUD oversight and periodic inspections.

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

Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees based on the principal balance on the date of prepayment.

For the majority of the loans, during the first three years, the prepayment fee is 10 % and is reduced by 3 % in the fourth year of the loan, and reduced by 1.0 % per year for years five through ten of the loan.

There is no prepayment penalty after year ten .

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

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

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

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

The note bears a fixed interest rate of 5.3 % per annum and the term of the note is 12 years.

The 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.

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.

Credit Facility with a Lending Consortium Arranged by Truist

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In addition, the Company pays a commitment fee on the unused portion of the commitments that ranges from 0.25 % to 0.45 % per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

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THE ENSIGN GROUP, INC.

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

The Credit Facility is guaranteed, jointly and severally, by certain of the Company’s wholly owned subsidiaries, and is secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of its personal property.

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

As of 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 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.

Amounts borrowed under the mortgage loans may be prepaid, subject to prepayment fees of the principal balance on the date of prepayment.

There is no prepayment penalty after year ten .

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

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

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

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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.

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

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

As of 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.

As of March 31, 2021, and April 26, 2021, there was no outstanding debt under the Credit Facility.

The Company was in compliance with all loan covenants as of March 31, 2021.

Off-Balance Sheet Arrangements

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.

As of March 31, 2021, 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 nine months ended September 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 months ended March 31, 2021 and 2020 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

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

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The 2017 Plan provided for the issuance of 6,881 shares of common stock which are to be proportionally adjusted in the event of any Equity Restructuring.

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

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

The number of shares available to be issued under the 2017 Plan were adjusted to 8,118 shares of common stock in order to reflect the proportional adjustments as part of the spin-off transaction that occurred in October 2019.

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

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Options expire 10 years from the date of grant.

At September 30, 2020, there were approximately 3,334 unissued shares of common stock available for issuance under this plan.

As of March 31, 2021, there were approximately 2,839 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.

Determining the appropriate fair-value model and calculating the fair value of stock option awards at the grant date requires 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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THE ENSIGN GROUP, INC.

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

Modifications of Equity Awards

Effective at the time of the consummation of the Spin-Off, all holders of the Company's restricted stock awards on the date of record for the Spin-Off, received Pennant restricted stock awards consistent with the distribution ratio, with terms and conditions substantially similar to the terms and conditions applicable to the Company's restricted stock awards.

For purposes of the vesting of these equity awards, continued employment or service with Ensign or with Pennant is treated as continued employment for purposes of both Ensign's and Pennant's equity awards and the vesting terms of each converted grant remained unchanged.

Also, effective with the Spin-Off, the holders of the Company's stock options on the date of record received stock options consistent with a conversion ratio that was necessary to maintain the pre Spin-Off intrinsic value of the options.

The stock options terms and conditions are based on the preexisting terms in the 2017 Plan, including nondiscretionary antidilution provisions.

In order to preserve the aggregate intrinsic value of the Company's stock options held by such persons, the exercise prices of such awards were adjusted by using the proportion of the Pennant closing stock price to the total Company closing stock prices on the distribution date.

All of these adjustments were designed to equalize the fair value of each award before and after Spin-Off.

These adjustments were accounted for as modifications to the original awards.

Due to the modification of the equity options as a result of the Spin-Off, the Company compared the fair value of the original equity awards immediately before and after the Spin-Off and no incremental fair value was recognized as a result of the above adjustments due to immateriality.

Accordingly, the Company did not record any incremental compensation expense as a result of the modifications to the awards on the date of the Spin-Off.

The Company's stock-based compensation expense was not significantly impacted by the equity award adjustments that occurred as a result of the Spin-Off.

Deferred compensation costs as of the date of the Spin-Off reflected the unamortized balance of the original grant date fair value of the equity awards held by the employees of the Company's operating subsidiaries (regardless of whether those awards are linked to the Company's stock or Pennant's stock).

Stock Options

The Company granted 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)

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

2020 160 0.4 % 6.3 years 41.8 % 0.3 %

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 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 )

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

The Company granted 136 stock options during the three months ended March 31, 2021.

The Company used the following assumptions for stock options granted during the three months ended March 31, 2021 and 2020:

Grant Year Options Granted Weighted Average Risk-Free Rate Expected Life Weighted Average Volatility Weighted Average Dividend Yield

2021 136 0.8 % 6.3 years 42.2 % 0.2 %

2020 145 1.3 % 6.2 years 32.1 % 0.4 %

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

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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)

Weighted Average Exercise Price (2)

Weighted Average Fair Value of Options (3)

For the three months ended March 31, 2021 and 2020, the following represents the exercise price and fair value displayed at grant date for stock option grants:

Grant Year Granted Weighted Average Exercise Price Weighted Average Fair Value of Options

2021 136 $ 83.64 $ 33.99

2020 145 $ 51.20 $ 16.60

(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.

(2) Weighted average exercise price was calculated using exercise prices reflective of the Spin-Off Conversion for all periods presented.

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

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended 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

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended March 31, 2021 and 2020 and therefore, the intrinsic value was $ 0 at the date of grant.

The following table represents the employee stock option activity during the three months ended March 31, 2021:

Number of Options Outstanding Weighted Average

Exercise Price Number of

Options Vested Weighted Average

Exercise Price of Options Vested

Options Vested Weighted Average Exercise Price of Options Vested

January 1, 2021 4,038 $ 27.71 2,148 $ 16.66

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Exercised ( 246 ) 15.78

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:

March 31, 2021 3,895 $ 30.30 2,034 $ 17.73

The following summary information reflects stock options outstanding, vested and related details as of March 31, 2021:

Stock Options Outstanding Stock Options Vested

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Total 3,895 $ 44,151 2,034

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THE ENSIGN GROUP, INC.

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

The aggregate intrinsic value of options outstanding, vested and expected to vest as of March 31, 2021 and December 31, 2020 is as follows:

Options March 31, 2021 December 31, 2020

Outstanding $ 247,457 $ 182,552

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Expected to vest 80,008 53,366

Exercisable 21,044 29,032

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

The aggregate intrinsic value of options that vested during the three months ended March 31, 2021 and 2020 was $ 8,545 and $ 2,084 , respectively.

The total intrinsic value of options exercised during the three months ended March 31, 2021 and 2020 was $ 17,241 and $ 5,621 , respectively.

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THE ENSIGN GROUP, INC.

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

Restricted Stock Awards

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.

The Company granted 90 and 113 restricted stock awards during the three months ended March 31, 2021 and 2020 , 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 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 of restricted awards granted during the three months ended March 31, 2021 and 2020 ranged from $ 83.64 to $ 84.70 and $ 42.02 to $ 51.20 , respectively.

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

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

A summary of the status of the Company's non-vested restricted stock awards as of March 31, 2021 and changes during the three months ended March 31, 2021 is presented below:

Non-Vested Restricted Awards Weighted Average Grant Date Fair Value

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Forfeited ( 9 ) 45.18

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.

Nonvested at March 31, 2021 592 $ 42.16

During the three months ended March 31, 2021, the Company granted 6 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors.

The fair value per share of these stock awards was $ 84.70 based on the market price on the grant date.

Long-Term Incentive Plan

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

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

The 2019 LTI Plan provides that certain employees of the Company who assisted in the consummation of the spin-off transaction that occurred in October 2019 are granted shares of restricted stock upon the successful completion of the spin-off.

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

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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 $ 286 and $ 675 for the three and nine months ended September 30, 2020, respectively.

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THE ENSIGN GROUP, INC.

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)

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 201 and $ 194 for the three months ended March 31, 2021 and 2020, respectively.

Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the three months ended March 31, 2021 and 2020 was as follows:

Three Months Ended March 31,

Stock-based compensation expense related to stock options $ 1,733 $ 1,419

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Total $ 4,054 $ 3,235

(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.

In future periods, the Company expects to recognize approximately $ 27,178 and $ 26,072 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of March 31, 2021.

Future stock-based compensation expense will be recognized over 3.8 and 3.5 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

On May 26, 2016, the Company granted stock options and restricted stock awards under the Subsidiary Equity Plan to employees and management of the subsidiary.

During 2019, the Company contributed the net assets of the subsidiary to Pennant prior to the consummation of the Spin-Off on October 1, 2019.

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

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 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.

As a result of the conversion of the Subsidiary Equity Plan, the Company's noncontrolling interest in the subsidiary was eliminated.

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

For the three and 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.

There were 1,861 unvested and outstanding options as of March 31, 2021, of which 1,726 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest as of March 31, 2021 was 6.1 years.

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The Company leases from CareTrust REIT, Inc.

(CareTrust) real property associated with 85 affiliated skilled nursing, senior living facilities used in the Company’s operations under eight “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 12 to 20 years.

In connection with the Spin-Off, 11 of the original 94 properties under the CareTrust lease were transferred to Pennant.

Of the 11 properties, two of the senior living operations are located on the same real estate properties as the skilled nursing facilities.

(CareTrust) real property associated with 89 affiliated skilled nursing and senior living facilities used in the Company’s operations, 88 of which are under nine “triple-net” master lease agreements (collectively, the Master Leases), which range in terms from 12 to 20 years.

At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the same terms and conditions.

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If the Company elects to renew the term of a Master Lease, the renewal will be effective to all, but not less than all, of the leased property then subject to the Master Lease.

Additionally, four of the 89 facilities leased from CareTrust include an option to purchase that the Company can exercise starting on December 1, 2024.

The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without CareTrust’s consent.

If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may be liable for damages and incur charges such as continued payment of rent through the end of the lease term as well as maintenance and repair costs for the leased property.

Commencing the third year, the rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5 %.

The rent structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5 %.

In addition to rent, the Company is required to pay the following:

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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 $ 13,139 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.

The terms and conditions of the one stand-alone lease are substantially the same as those for the master leases described above.

Total rent expense under the Master Leases was approximately $ 14,080 and $ 13,125 for the three months ended March 31, 2021 and 2020, 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 September 30, 2020.

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

These amendments terminated the leases related to Pennant and modified the rental payments and lease terms of the operations that remained with Ensign.

In accordance with ASC 842, the amended lease agreements are considered to be modified and subject to lease modification guidance.

The right-of-use (ROU) asset and lease liabilities related to these agreements were remeasured based on the change in the lease conditions such as rent payment and lease terms.

The incremental borrowing rate was adjusted to reflect the revised lease terms which became effective at the date of the modification, which is the date of the Spin-Off.

The net impact of the lease termination, for the 23 leases that transferred to Pennant and modification of lease agreements, is a reduction in ROU asset and lease liabilities of approximately $ 35,000 .

The annual rent expense transferred to Pennant was approximately $ 23,000 .

In connection with the Spin-Off, the Company also guaranteed certain leases of Pennant based on the underlying terms of the leases.

The Company is in compliance with requirements of the Master Leases as of March 31, 2021.

In connection with the spin-off transaction that occurred in October 2019, the Company guaranteed certain leases of Pennant based on the underlying terms of the leases.

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.

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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 $ 32,520 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.

Total rent expense inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 33,476 and $ 32,347 for the three months ended March 31, 2021 and 2020, respectively.

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

Under these master leases, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk.

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With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.

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THE ENSIGN GROUP, INC.

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

The components of operating lease expense are as follows:

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

2020 2019 2020

Three Months Ended March 31,

Rent - cost of services (1)

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Depreciation and amortization (2)

289 495 933 1,485

Variable lease costs (3)

$ 37,209 $ 35,912

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

(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.

(1) Rent- cost of services includes deferred rent expense adju stments of $ 112 and $ 125 for the three months ended March 31, 2021 and 2020, respectively.

Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 584 and $ 594 for the three months ended March 31, 2021 and 2020, 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 September 30, 2020 are as follows:

Future minimum lease payments for all leases as of March 31, 2021 are as follows:

2021 (remainder) $ 98,448

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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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THE ENSIGN GROUP, INC.

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

As of March 31, 2021, the weighted average remaining lease term is 13.7 years and the weighted average discount rate used to determine the operating lease liabilities is 8.2 %.

Subsequent to March 31, 2021, the Company expanded its operations through long-term lease arrangements with the addition of three stand-alone skilled nursing facilities under a new triple-net master lease, adding a total of 322 operational skilled nursing beds operated by the Company’s affiliated operating subsidiaries.

The aggregate impact to the fair value of lease liabilities and right-of-use assets related to new master lease is estimated to be approximately $ 20,005 .

Lessor Activities

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

In connection with the spin-off transaction that occurred in October 2019, Ensign affiliates retained ownership of the real estate at 29 senior living operations that were contributed to Pennant.

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

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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.

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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THE ENSIGN GROUP, INC.

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

Total rental income from all third-party sources for the three months ended March 31, 2021 and 2020 is as follows:

Three Months Ended March 31,

$ 3,488 $ 3,101

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$ 3,977 $ 3,662

(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:

(1) Pennant rental income includes variable rent such as property taxes of $ 314 and $ 466 during the three months ended March 31, 2021 and 2020.

Future annual rental income for all leases as of March 31, 2021 were as follows:

Year Amount (1)

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Total $ 168,689

(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 .

(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of March 31, 2021 .

COMMITMENTS AND CONTINGENCIES

Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation.

Compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs.

Included in these laws and regulations is the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which requires healthcare providers (among other things) to safeguard the privacy and security of certain health information.

Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to review and interpretation.

Compliance with such laws and regulations can likewise be subject to future governmental review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs.

Included in these laws and regulations is the Health Insurance Portability and Accountability Act of 1996, which requires healthcare providers (among other things) to safeguard the privacy and security of certain health information.

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

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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.

These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of facilities the Company acquires against certain liabilities arising from the transfer of the operation and/or the operation thereof after the transfer to the Company's independent operating subsidiary, (iii) certain lending agreements, under which the Company may be required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship or relationship to the Company.

The terms of such obligations vary by contract and, in most instances, do not expressly state or include a specific or maximum dollar amount.

Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted.

Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s consolidated balance sheets for any of the periods presented.

Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s condensed consolidated balance sheets for any of the periods presented.

In connection with the spin-off transaction that occurred in October 2019, certain landlords required, in exchange for their consent to the transaction, that the Company's lease guarantees remain in place for a certain period of time following the spin-off.

These guarantees could result in significant additional liabilities and obligations for the Company if Pennant were to default on their obligations under their leases with respect to these properties.

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THE ENSIGN GROUP, INC.

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

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 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.

Department of Justice stating that it was investigating whether there had 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.

As a general matter, the Company’s independent operating entities have established and 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.

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

House of Representatives Select Subcommittee Request — The U.S.

House of Representatives Select Subcommittee on the Coronavirus Crisis has launched a nation-wide investigation into the COVID-19 pandemic, which includes the impact of the coronavirus on residents and employees in nursing homes.

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

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.

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

The Company, its independent operating subsidiaries, and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims.

In addition, the Company, its independent operating subsidiaries, and others in the industry are subject to claims and lawsuits in connection with COVID-19 and a facility's preparation for and/or response to COVID-19.

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.

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 in responding to this inquiry.

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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Under the qui tam or "whistleblower" provisions of the False Claims Act, a private individual with knowledge of fraud may bring a claim on behalf of the Federal Government and receive a percentage of the Federal Government's recovery.

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

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

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

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

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

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

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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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.

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

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

Following changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved.

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This includes the retention of any government overpayment.

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

The government can argue, therefore, that a Federal False Claims Act violation can occur without any affirmative fraudulent action or statement, as long as the action or statement is knowingly improper.

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

Thus, an employment relationship is generally not required in order to qualify for protection against retaliation for whistleblowing.

Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company's independent operating subsidiaries are routinely subjected to varying types of claims.

One particular type of suit arises from alleged violations of minimum staffing requirements for skilled nursing facilities in those states which have enacted such requirements.

The alleged failure to meet these requirements can, among other things, jeopardize a facility's compliance with the requirements of participation under certain state and federal healthcare programs;

it may also subject the facility to a deficiency, a citation, a civil money penalty, or litigation.

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

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

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

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

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

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

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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.

If any such inquiry, investigation or 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.

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, and Medicaid Integrity Contractors programs (collectively referred to as Reviews).

For several months during the COVID-19 pandemic, the Centers for Medicare and Medicaid Services (CMS) suspended its Targeted Probe and Educate Program.

Beginning in August 2020, CMS resumed Targeted Probe and Educate Program activity.

As of March 31, 2021, two of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

Subsequently, during April, one facility review was resolved and closed.

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)

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

District Court for the Central District of California.

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

The Company and its independent operating entities have denied engaging in any illegal conduct and agreed to the settlement amount without any admission of wrongdoing in order to resolve the allegations and to avoid the uncertainty and expense of protracted litigation.

In connection with the settlement and effective as of October 1, 2013, the Company and its independent operating entities entered into a five-year corporate integrity agreement (the CIA) with the Office of Inspector General-HHS.

CMS acknowledged the existence of the Company’s current compliance program, which is in accord with the Office of the Inspector General (OIG)’s guidance related to an effective compliance program, and required that the Company and its independent operating entities continue during the term of the CIA to maintain a program designed to promote compliance with the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federally-funded health care programs.

In the first quarter of 2019, the Company received notice from the OIG that the Company’s five-year CIA with the OIG had been completed.

Upon receipt of the Company’s fifth and final annual report, the OIG confirmed that the term of the CIA is concluded.

As of March 31, 2021, the Company's independent operating subsidiaries have responded to the requests with respect to the claims currently under review, on appeal or in a dispute resolution process.

Concentrations

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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 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.

The Company’s receivables from Medicare and Medicaid payor programs accounted for 57.2 % and 58.3 % of its total accounts receivable as of March 31, 2021 and December 31, 2020, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 74.1 % and 71.0 % of the Company's service revenue for the three months ended March 31, 2021 and 2020, respectively.

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THE ENSIGN GROUP, INC.

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

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

As of April 26, 2021, the Company had approximately $ 424 in uninsured cash deposits.

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

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THE ENSIGN GROUP, INC.

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

COMMON STOCK REPURCHASE PROGRAM

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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