What changed in this filing

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Item 9A. Controls and Procedures

2022-02-09 compared with 2021-02-03 · 33 added, 1823 removed, 163 unchanged (92% of the section changed)

16 unchanged sentences

Table Contents

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, that occurred during the fourth quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

26 unchanged sentences

Costa Mesa, California February 9, 2022

Table Contents

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

OTHER INFORMATION

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

11 unchanged sentences

The information required by this Item is hereby incorporated by reference to our definitive proxy statement for the 2022 Annual Meeting of Stockholders.

Our principal accountant is Deloitte & Touche LLP (PCAOB ID No.

EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

5 unchanged sentences

The following exhibits are filed or furnished with or incorporated by reference this Annual Report on Form 10-K.

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Separation and Distribution Agreement, dated as of May 23, 2014, by and between The Ensign Group, Inc.

and CareTrust REIT, Inc.

8-K 001-33757 2.1 6/5/2014

Master Separation Agreement, dated as of October 1, 2019, by and between The Ensign Group, Inc.

and The Pennant Group, Inc.

8-K 001-33757 2.1 10/1/2019

Table Contents

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Exhibit File Exhibit Filing Filed

6 unchanged sentences

10-Q 001-33757 3.2 12/21/2007

Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of the State of Delaware on November 7, 2013 8-K 001-33757 3.1 11/7/2013

Certificate of Elimination of Series A Junior Participating Preferred Stock 8-K 001-33757 3.1 6/5/2014

Description of the Common stock of The Ensign Group, Inc.

2 unchanged sentences

+ The Ensign Group, Inc.

2001 Stock Option, Deferred Stock and Restricted Stock Plan, form of Stock Option Grant Notice for Executive Officers and Directors, stock option agreement and form of restricted stock agreement for Executive Officers and Directors S-1 333-142897 10.1 7/26/2007

+ The Ensign Group, Inc.

2005 Stock Incentive Plan, form of Nonqualified Stock Option Award for Executive Officers and Directors, and form of restricted stock agreement for Executive Officers and Directors S-1 333-142897 10.2 7/26/2007

+ The Ensign Group, Inc.

2007 Omnibus Incentive Plan S-1 333-142897 10.3 10/5/2007

6 unchanged sentences

and its directors, officers and certain key employees S-1 333-142897 10.6 10/5/2007

Fourth Amended and Restated Loan Agreement, dated as of November 10, 2009, by and among certain subsidiaries of The Ensign Group, Inc.

as Borrowers, and General Electric Capital Corporation as Agent and Lender 8-K 001-33757 10.1 11/17/2009

Consolidated, Amended and Restated Promissory Note, dated as of December 29, 2006, in the original principal amount of $64,692,111.67, by certain subsidiaries of The Ensign Group, Inc.

in favor of General Electric Capital Corporation S-1 333-142897 10.8 7/26/2007

Third Amended and Restated Guaranty of Payment and Performance, dated as of December 29, 2006, by The Ensign Group, Inc.

as Guarantor and General Electric Capital Corporation as Agent and Lender, under which Guarantor guarantees the payment and performance of the obligations of certain of Guarantor's subsidiaries under the Third Amended and Restated Loan Agreement S-1 333-142897 10.9 7/26/2007

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Form of Amended and Restated Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Desert Terrace Nursing Center, Desert Sky Nursing Home, Highland Manor Health and Rehabilitation Center and North Mountain Medical and Rehabilitation Center), by and among Terrace Holdings AZ LLC, Sky Holdings AZ LLC, Ensign Highland LLC and Valley Health Holdings LLC as Grantors, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein S-1 333-142897 10.10 7/26/2007

Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Park Manor), by and among Plaza Health Holdings LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary S-1 333-142897 10.11 7/26/2007

Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of June 30, 2006 (filed against Catalina Care and Rehabilitation Center), by and among Rillito Holdings LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary S-1 333-142897 10.12 7/26/2007

Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of October 16, 2006 (filed against Park View Gardens at Montgomery), by and among Mountainview Communitycare LLC as Grantor, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary S-1 333-142897 10.13 7/26/2007

Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of October 16, 2006 (filed against Sabino Canyon Rehabilitation and Care Center), by and among Meadowbrook Health Associates LLC as Grantor, Chicago Title Insurance Company as Trustee and General Electric Capital Corporation as Beneficiary S-1 333-142897 10.14 7/26/2007

Form of Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of December 29, 2006 (filed against Upland Care and Rehabilitation Center and Camarillo Care Center), by and among Cedar Avenue Holdings LLC and Granada Investments LLC as Grantors, Chicago Title Insurance Company as Trustee and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein S-1 333-142897 10.15 7/26/2007

Form of First Amendment to (Amended and Restated) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement, dated as of December 29, 2006 (filed against Desert Terrace Nursing Center, Desert Sky Nursing Home, Highland Manor Health and Rehabilitation Center, North Mountain Medical and Rehabilitation Center, Catalina Care and Rehabilitation Center, Park Manor, Park View Gardens at Montgomery, Sabino Canyon Rehabilitation and Care Center), by and among Terrace Holdings AZ LLC, Sky Holdings AZ LLC, Ensign Highland LLC, Valley Health Holdings LLC, Rillito Holdings LLC, Plaza Health Holdings LLC, Mountainview Communitycare LLC and Meadowbrook Health Associates LLC as Grantors, Chicago Title Insurance Company as Trustee, and General Electric Capital Corporation as Beneficiary and Schedule of Material Differences therein S-1 333-142897 10.16 7/26/2007

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Amended and Restated Loan and Security Agreement, dated as of March 25, 2004, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Agent and Lender S-1 333-142897 10.19 5/14/2007

Amendment No.

1, dated as of December 3, 2004, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Lender S-1 333-142897 10.20 5/14/2007

Second Amended and Restated Revolving Credit Note, dated as of December 3, 2004, in the original principal amount of $20,000,000, by The Ensign Group, Inc.

and certain of its subsidiaries in favor of General Electric Capital Corporation S-1 333-142897 10.19 7/26/2007

Amendment No.

2, dated as of March 25, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Borrower, and General Electric Capital Corporation as Lender S-1 333-142897 10.22 5/14/2007

Amendment No.

3, dated as of June 22, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Borrower and General Electric Capital Corporation as Lender S-1 333-142897 10.21 7/26/2007

Amendment No.

4, dated as of August 1, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Borrowers and General Electric Capital Corporation as Lender S-1 333-142897 10.42 8/17/2007

Amendment No.

5, dated September 13, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Borrowers and General Electric Capital Corporation as Lender S-1 333-142897 10.43 10/5/2007

Revolving Credit Note, dated as of September 13, 2007, in the original principal amount of $5,000,000 by The Ensign Group, Inc.

and certain of its subsidiaries in favor of General Electric Capital Corporation S-1 333-142897 10.44 10/5/2007

Commitment Letter, dated October 3, 2007, from General Electric Capital Corporation to The Ensign Group, Inc., setting forth the general terms and conditions of the proposed amendment to the revolving credit facility, which will increase the available credit thereunder to $50.0 million S-1 333-142897 10.46 10/5/2007

Amendment No.

6, dated November 19, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Borrowers and General Electric Capital Corporation as Lender 8-K 001-33757 10.1 11/21/2007

Amendment No.

7, dated December 21, 2007, to the Amended and Restated Loan and Security Agreement, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Borrowers and General Electric Capital Corporation as Lender 8-K 001-33757 10.1 12/27/2007

Amendment No.

1 and Joinder Agreement to Second Amended and Restated Loan and Security Agreement, by certain subsidiaries of The Ensign Group, Inc.

as Borrower and General Electric Capital Corporation as Lender 8-K 001-33757 10.1 2/9/2009

Second Amended and Restated Revolving Credit Note, dated February 4, 2009, by certain subsidiaries of The Ensign Group, Inc.

as Borrowers for the benefit of General Electric Capital Corporation as Lender 8-K 001-33757 10.2 2/9/2009

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Amended and Restated Revolving Credit Note, dated February 21, 2008, by certain subsidiaries of The Ensign Group, Inc.

as Borrowers for the benefit of General Electric Capital Corporation as Lender 8-K 001-33757 10.2 2/27/2008

Ensign Guaranty, dated February 21, 2008, between The Ensign Group, Inc.

as Guarantor and General Electric Capital Corporation as Lender 8-K 001-33757 10.3 2/27/2008

Holding Company Guaranty, dated February 21, 2008, by and among The Ensign Group, Inc.

and certain of its subsidiaries as Guarantors and General Electric Capital Corporation as Lender 8-K 001-33757 10.4 2/27/2008

Pacific Care Center Loan Agreement, dated as of August 6, 1998, by and between G&L Hoquiam, LLC as Borrower and GMAC Commercial Mortgage Corporation as Lender (later assumed by Cherry Health Holdings, Inc.

as Borrower and Wells Fargo Bank, N.A.

as Lender) S-1 333-142897 10.23 5/14/2007

Deed of Trust and Security Agreement, dated as of August 6, 1998, by and among G&L Hoquiam, LLC as Grantor, Ticor Title Insurance Company as Trustee and GMAC Commercial Mortgage Corporation as Beneficiary S-1 333-142897 10.24 7/26/2007

Promissory Note, dated as of August 6, 1998, in the original principal amount of $2,475,000, by G&L Hoquiam, LLC in favor of GMAC Commercial Mortgage Corporation S-1 333-142897 10.25 7/26/2007

Loan Assumption Agreement, by and among G&L Hoquiam, LLC as Prior Owner;

G&L Realty Partnership, L.P.

as Prior Guarantor;

Cherry Health Holdings, Inc.

and Wells Fargo Bank, N.A., the Trustee for GMAC Commercial Mortgage Securities, Inc., as Lender S-1 333-142897 10.26 5/14/2007

Exceptions to Nonrecourse Guaranty, dated as of October 2006, by The Ensign Group, Inc.

as Guarantor and Wells Fargo Bank, N.A.

as Trustee for GMAC Commercial Mortgage Securities, Inc., under which Guarantor guarantees full and prompt payment of all amounts due and owing by Cherry Health Holdings, Inc.

under the Promissory Note S-1 333-142897 10.22 7/26/2007

Deed of Trust with Assignment of Rents, dated as of January 30, 2001, by and among Ensign Southland LLC as Trustor, Brian E.

Callahan as Trustee and Continental Wingate Associates, Inc.

as Beneficiary S-1 333-142897 10.27 7/26/2007

Deed of Trust Note, dated as of January 30, 2001, in the original principal amount of $7,455,100, by Ensign Southland, LLC in favor of Continental Wingate Associates, Inc.

S-1 333-142897 10.28 5/14/2007

Security Agreement, dated as of January 30, 2001, by and between Ensign Southland, LLC and Continental Wingate Associates, Inc.

S-1 333-142897 10.29 5/14/2007

Master Lease Agreement, dated July 3, 2003, between Adipiscor LLC as Lessee and LTC Partners VI, L.P., Coronado Corporation and Park Villa Corporation collectively as Lessor S-1 333-142897 10.30 5/14/2007

Lease Guaranty, dated July 3, 2003, between The Ensign Group, Inc.

as Guarantor and LTC Partners VI, L.P., Coronado Corporation and Park Villa Corporation collectively as Lessor, under which Guarantor guarantees the payment and performance of Adipiscor LLC's obligations under the Master Lease Agreement S-1 333-142897 10.31 5/14/2007

Master Lease Agreement, dated September 30, 2003, between Permunitum LLC as Lessee, Vista Woods Health Associates LLC, City Heights Health Associates LLC, and Claremont Foothills Health Associates LLC as Sublessees, and OHI Asset (CA), LLC as Lessor S-1 333-142897 10.32 5/14/2007

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Lease Guaranty, dated September 30, 2003, between The Ensign Group, Inc.

as Guarantor and OHI Asset (CA), LLC as Lessor, under which Guarantor guarantees the payment and performance of Permunitum LLC's obligations under the Master Lease Agreement S-1 333-142897 10.33 5/14/2007

Lease Guaranty, dated September 30, 2003, between Vista Woods Health Associates LLC, City Heights Health Associates LLC and Claremont Foothills Health Associates LLC as Guarantors and OHI Asset (CA), LLC as Lessor, under which Guarantors guarantee the payment and performance of Permunitum LLC's obligations under the Master Lease Agreement S-1 333-142897 10.34 5/14/2007

Master Lease Agreement, dated January 31, 2003, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor S-1 333-142897 10.35 5/14/2007

Lease Guaranty, between The Ensign Group, Inc.

as Guarantor and Healthcare Property Investors, Inc.

as Owner, under which Guarantor guarantees the payment and performance of Moenium Holdings LLC's obligations under the Master Lease Agreement S-1 333-142897 10.36 5/14/2007

First Amendment to Master Lease Agreement, dated May 27, 2003, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor S-1 333-142897 10.37 5/14/2007

Second Amendment to Master Lease Agreement, dated October 31.

2004, between Moenium Holdings LLC as Lessee and Healthcare Property Investors, Inc., d/b/a in the State of Arizona as HC Properties, Inc., and Healthcare Investors III collectively as Lessor S-1 333-142897 10.38 5/14/2007

Lease Agreement, by and between Mission Ridge Associates LLC as Landlord and Ensign Facility Services, Inc.

and Guaranty of Lease, dated August 2, 2003, by The Ensign Group, Inc.

as Guarantor in favor of Landlord, under which Guarantor guarantees Tenant's obligations under the Lease Agreement S-1 333-142897 10.39 5/14/2007

First Amendment to Lease Agreement dated January 15, 2004, by and between Mission Ridge Associates LLC as Landlord and Ensign Facility Services, Inc.

as Tenant S-1 333-142897 10.40 5/14/2007

Second Amendment to Lease Agreement dated December 13, 2007, by and between Mission Ridge Associates LLC as Landlord and Ensign Facility Services, Inc.

and Reaffirmation of Guaranty of Lease, dated December 13, 2007, by The Ensign Group, Inc.

as Guarantor in favor of Landlord, under which Guarantor reaffirms its guaranty of Tenants obligations under the Lease Agreement 10-K 001-33757 10.52 3/6/2008

Third Amendment to Lease Agreement dated February 21, 2008, by and between Mission Ridge Associates LLC as Landlord and Ensign Facility Services, Inc.

as Tenant 10-K 001-33757 10.54 2/17/2010

Fourth Amendment to Lease Agreement dated July 15, 2009, by and between Mission Ridge Associates LLC as Landlord and Ensign Facility Services, Inc.

as Tenant 10-K 001-33757 10.55 2/17/2010

Form of Independent Consulting and Centralized Services Agreement between Ensign Facility Services, Inc.

2 unchanged sentences

participate in the Medicare program S-1 333-142897 10.48 10/19/2007

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Form of Medi-Cal Provider Agreement pursuant to which certain subsidiaries of The Ensign Group, Inc.

10 unchanged sentences

participates in the Idaho Medicaid program S-1 333-142897 10.54 10/19/2007

Six Project Promissory Note dated as of November 10, 2009, in the original principal amount of $40,000,000, by certain subsidiaries of the Ensign Group, Inc.

in favor of General Electric Capital Corporation 8-K 001-33757 10.2 11/17/2009

Note, dated December 31, 2010 by certain subsidiaries of the Company.

8-K 001-33757 10.1 1/6/2011

Revolving Credit and Term Loan Agreement, dated as of July 15, 2011, among the Ensign Group, Inc.

and the several banks and other financial institutions and lenders from time to time party thereto (the "Lenders") and SunTrust Bank, now known as Truist, in its capacity as administrative agent for the Lenders, as issuing bank and as swingline lender.

8-K 001-33757 10.1 7/19/2011

Commercial Deeds of Trust, Security Agreements, Assignment of Leases and Rents and Future Filing, dated as of February 17, 2012, made by certain subsidiaries of the Company for the benefit of RBS Asset Finance, Inc.

8-K 001-33757 10.1 2/22/2012

First Amendment to Revolving Credit and Term Loan Agreement, dated as of October 27, 2011, among The Ensign Group, Inc.

10-K 001-33757 10.70 2/13/2013

Second Amendment to Revolving Credit and Term Loan Agreement, dated as of April 30, 2012, among The Ensign Group, Inc.

10-K 001-33757 10.71 2/13/2013

Third Amendment to Revolving Credit and Term Loan Agreement, dated as of February 1, 2013, among The Ensign Group, Inc.

8-K 001-33757 10.1 2/6/2013

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Fourth Amendment to Revolving Credit and Term Loan Agreement, dated as of April 16, 2013, among the Ensign Group, Inc.

and the several banks and other financial institutions and lenders from time to time party thereto(the "Lenders") and SunTrust Bank, now known as Truist, in its capacity as administrative agent for the Lenders, as issuing bank and as swingline lender.

8-K 001-33757 10.1 4/22/2013

Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and The Ensign Group, Inc.

3 unchanged sentences

8-K 001-33757 10.75 5/8/2014

Table Contents

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Form of Master Lease by and among certain subsidiaries of The Ensign Group, Inc.

3 unchanged sentences

in favor of certain subsidiaries of CareTrust REIT, Inc., as landlords under the Master Leases 8-K 001-33757 10.2 6/5/2014

Opportunities Agreement, dated as of May 30, 2014, by and between The Ensign Group, Inc.

and CareTrust REIT, Inc.

8-K 001-33757 10.3 6/5/2014

Transition Services Agreement, dated as of May 30, 2014, by and between The Ensign Group, Inc.

and CareTrust REIT, Inc.

8-K 001-33757 10.4 6/5/2014

Tax Matters Agreement, dated as of May 30, 2014, by and between The Ensign Group, Inc.

and CareTrust REIT, Inc.

8-K 001-33757 10.5 6/5/2014

Employee Matters Agreement, dated as of May 30, 2014, by and between The Ensign Group, Inc.

and CareTrust REIT, Inc.

8-K 001-33757 10.6 6/5/2014

Contribution Agreement, dated as of May 30, 2014, by and among CTR Partnership L.P., CareTrust GP, LLC, CareTrust REIT, Inc.

and The Ensign Group, Inc.

8-K 001-33757 10.7 6/5/2014

Credit Agreement, dated as of May 30, 2014, by and among The Ensign Group, Inc., SunTrust Bank, now known as Truist, as administrative agent, and the lenders party thereto 8-K 001-33757 10.8 6/5/2014

Amended and Restated Credit Agreement as of February 5, 2016, by and among The Ensign Group, Inc., SunTrust Bank, now known as Truist, as administrative agent, and the lenders party thereto 8-K 001-33757 10.1 2/8/2016

Second Amended Credit Agreement as of July 19, 2016, by and among The Ensign Group, Inc., SunTrust Bank, now known as Truist, as administrative agent, and the lenders party thereto 8-K 001-33757 10.1 7/25/2016

Cornerstone Healthcare, Inc.

2016 Omnibus Incentive 10-Q 001-33757 10.2 8/1/2016

Cornerstone Healthcare, Inc.

Stockholders Agreement 10-Q 001-33757 10.3 8/1/2016

The Ensign Group, Inc.

3 unchanged sentences

Form of 2017 Omnibus Incentive Plan Restricted Stock Agreement 10-K 001-33757 10.88 2/8/2018

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Department of Housing and Urban Development Healthcare Facility Note and schedule of individual subsidiary loans, by and among The Ensign Group, Inc.'s subsidiaries listed therein and U.S.

14 unchanged sentences

+ The Ensign Services, Inc.

Deferred Compensation Plan X

Deferred Compensation Plan 10-K 001-33757 10.1 2/3/2021

+ First Amendment to The Ensign Services, Inc.

Deferred Compensation Plan X

Deferred Compensation Plan 10-K 001-33757 10.2 2/3/2021

First Amendment to Third Amended and Restated Credit Agreement, dated as of February 8, 2022, by and among The Ensign Group, Inc., Standard Bearer Healthcare REIT, Inc., Truist Bank (as successor by merger to SunTrust Bank), as administrative agent, and the lenders party thereto X

Subsidiaries of The Ensign Group, Inc., as amended X

2 unchanged sentences

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X

Table Contents

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Exhibit File Exhibit Filing Filed

Exhibit Description* Form No.

Date Herewith

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X

6 unchanged sentences

Not applicable

Table Contents

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

2 unchanged sentences

/s/ SUZANNE D.

Chief Financial Officer and Executive Vice President (Principal Financial Officer and Accounting Officer and Duly Authorized Officer)

Chief Financial Officer, Executive Vice President and Director (Principal Financial Officer and Accounting Officer and Duly Authorized Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature Title Date

PORT Chief Executive Officer, President and Director (principal executive officer) February 3, 2021

PORT Chief Executive Officer and Director (principal executive officer) February 9, 2022

/s/ SUZANNE D.

SNAPPER Chief Financial Officer and Executive Vice President (principal financial officer and accounting officer and duly authorized officer) February 3, 2021

CHRISTENSEN Chairman Emeritus February 3, 2021

SNAPPER Chief Financial Officer, Executive Vice President and Director (principal financial officer and accounting officer and duly authorized officer) February 9, 2022

/s/ CHRISTOPHER R.

6 unchanged sentences

SMITH Director February 9, 2022

THE ENSIGN GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2020, 2019 and 2018

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of

The Ensign Group, Inc.

San Juan Capistrano, California

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of The Ensign Group, Inc.

and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 3, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Self-Insurance Liabilities (General and Professional Liability Claims) - Refer to Notes 2 and 18 to the financial statements

Critical Audit Matter Description

The Company's self-insurance liabilities for general and professional liability claims totaled $60.9 million at December 31, 2020.

The Company develops information about the size of the ultimate claims based on historical experience, current industry information, and actuarial analysis.

The determination of case reserves for known general and professional liability claims, which is used in developing the actuarial estimated liability, is highly subjective.

Given the significant judgments in estimating the case reserves for known claims, we have determined the reserve for general and professional liabilities to be a critical audit matter.

This required a high

degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management estimates of case reserves for known claims.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures relating to management’s judgment regarding the estimation of the reserve for general and professional liability claims included the following, among others:

• We tested the effectiveness of controls over the reserve for general and professional liabilities, including those over the determination of the case reserves for known claims.

• We obtained an understanding of the factors considered and assumptions made by management and the actuaries in developing the estimate of the general and professional liability reserves, the sources of data relevant to these factors and assumptions and the procedures used to obtain the data, and the methods used to calculate the estimate.

• We performed a retrospective review in which we compared the current portion of the total liability at the end of the prior year with what was actually paid in the current year in order to assess the ability of the Company to forecast the timing of reserve payouts.

• We tested known case reserves by making selections and obtaining the associated notice of claim and settlement support (if applicable), as well as inquiring with the Company as to the nature of each case reserve selection and the judgment rationale for the established reserve amount.

Additionally, we selected external legal counsel and inquired about open cases handled by each legal firm, and agreed those cases are appropriately included in the claims data.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

February 3, 2021

We have served as the Company's auditor since 1999.

THE ENSIGN GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

Current assets:

Cash and cash equivalents $ 236,562 $ 59,175

Accounts receivable—less allowance for doubtful accounts of $ 8,718 and $ 2,472 at December 31, 2020 and 2019, respectively

305,062 308,985

Investments—current 13,449 17,754

Prepaid income taxes 1,224 739

Prepaid expenses and other current assets 26,659 24,428

Total current assets 582,956 411,081

Property and equipment, net 778,244 767,565

Right-of-use assets 1,025,510 1,046,901

Insurance subsidiary deposits and investments 32,105 30,571

Escrow deposits 100 14,050

Deferred tax assets 32,424 4,615

Restricted and other assets 33,155 26,207

Intangible assets, net 2,899 3,382

Goodwill 54,469 54,469

Other indefinite-lived intangibles 3,716 3,068

Total assets $ 2,545,578 $ 2,361,909

Liabilities and equity

Current liabilities:

Accounts payable $ 50,901 $ 44,973

Accrued wages and related liabilities (Note 3)

236,614 151,009

Lease liabilities—current 48,187 44,964

Accrued self-insurance liabilities—current 34,396 29,252

Advance payment liabilities (Note 3)

Other accrued liabilities 87,318 70,273

Current maturities of long-term debt 2,960 2,702

Total current liabilities 562,399 343,173

Long-term debt—less current maturities 112,544 325,217

Long-term lease liabilities—less current portion 950,320 973,983

Accrued self-insurance liabilities—less current portion 62,402 58,114

Other long-term liabilities (Note 3)

Total liabilities 1,727,351 1,705,765

Commitments and contingencies (Notes 15, 17 and 20)

Ensign Group, Inc.

stockholders' equity:

Common stock:

$ 0.001 par value;

100,000 shares authorized;

57,417 and 54,626 shares issued and outstanding at December 31, 2020, respectively, and 56,176 and 53,487 shares issued and outstanding at December 31, 2019, respectively

Additional paid-in capital 338,177 307,914

Retained earnings 551,055 391,523

Common stock in treasury, at cost, 2,791 and 2,079 shares at December 31, 2020 and 2019, respectively (Note 22)

( 71,213 ) ( 45,296 )

Total Ensign Group, Inc.

stockholders' equity 818,077 654,197

Non-controlling interest 150 1,947

818,227 656,144

Total liabilities and equity $ 2,545,578 $ 2,361,909

See accompanying notes to consolidated financial statements.

THE ENSIGN GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

2020 2019 2018

(In thousands, except per share data)

Service revenue $ 2,387,439 $ 2,031,266 $ 1,752,991

Rental revenue 15,157 5,258 1,610

Total revenue $ 2,402,596 $ 2,036,524 $ 1,754,601

Cost of services 1,865,201 1,620,628 1,418,249

Return of unclaimed class action settlement (Note 20)

— — ( 1,664 )

Rent—cost of services 129,926 124,789 117,676

General and administrative expense 129,743 110,873 90,563

Depreciation and amortization 54,571 51,054 44,864

Total expenses 2,179,441 1,907,344 1,669,688

Income from operations 223,155 129,180 84,913

Other income (expense):

Interest expense ( 9,362 ) ( 15,662 ) ( 15,182 )

Interest and other income 3,813 2,649 2,016

Other expense, net ( 5,549 ) ( 13,013 ) ( 13,166 )

Income before provision for income taxes 217,606 116,167 71,747

Provision for income taxes 46,242 23,954 12,685

Net income from continuing operations 171,364 92,213 59,062

Net income from discontinued operations, net of tax (Note 21)

— 19,473 33,466

Net income 171,364 111,686 92,528

Net income/(loss) attributable to noncontrolling interests in continuing operations 886 523 ( 431 )

Net income attributable to noncontrolling interests in discontinued operations (Note 21)

Net income attributable to noncontrolling interests 886 1,152 164

Net income attributable to The Ensign Group, Inc.

$ 170,478 $ 110,534 $ 92,364

Amounts attributable to The Ensign Group, Inc.:

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

$ 170,478 $ 91,690 $ 59,493

Income from discontinued operations, net of income tax (Note 21)

— 18,844 32,871

Net income attributable to The Ensign Group, Inc.

$ 170,478 $ 110,534 $ 92,364

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

Continuing operations $ 3.19 $ 1.72 $ 1.14

Discontinued operations — 0.35 0.64

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

$ 3.19 $ 2.07 $ 1.78

Continuing operations $ 3.06 $ 1.64 $ 1.09

Discontinued operations — 0.33 0.61

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

$ 3.06 $ 1.97 $ 1.70

Weighted average common shares outstanding:

Basic 53,434 53,452 52,016

Diluted 55,787 55,981 54,397

See accompanying notes to consolidated financial statements.

THE ENSIGN GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

(In thousands) Shares Amount Shares Amount Total

Balance - January 1, 2018 51,360 $ 53 $ 266,058 $ 264,691 1,932 $ ( 38,405 ) $ 7,662 $ 500,059

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards 1,224 2 9,367 — — — — 9,369

Dividends declared ($ 0.1825 per share)

— — — ( 9,615 ) — — — ( 9,615 )

Employee stock award compensation — — 8,959 — — — — 8,959

Noncontrolling interest attributable to subsidiary equity plan — — — ( 2,539 ) — — 3,917 1,378

Noncontrolling interest attributable to distribution — — — — — — ( 338 ) ( 338 )

Net income attributable to noncontrolling interest — — — — — — 164 164

Net income attributable to the Ensign Group, Inc.

— — — 92,364 — — — 92,364

Balance - December 31, 2018 52,584 $ 55 $ 284,384 $ 344,901 1,932 $ ( 38,405 ) $ 11,405 $ 602,340

Issuance of common stock to employees and directors resulting from the exercise of stock options and grant of stock awards 1,050 1 11,784 — — — — 11,785

Repurchase of common stock (Note 22)

( 138 ) — — — 138 ( 6,406 ) — ( 6,406 )

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

Dividends declared ($ 0.1925 per share)

— — — ( 10,370 ) — — — ( 10,370 )

Employee stock award compensation — — 11,746 — — — — 11,746

Distribution of net assets to Pennant (Note 21)

— — — ( 71,181 ) — — ( 13,252 ) ( 84,433 )

Dividends received from Pennant (Note 21)

— — — 11,600 — — — 11,600

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

Noncontrolling interest attributable to subsidiary equity plan — — — ( 2,991 ) — — 3,585 594

Cumulative effect of accounting change, net of tax (Note 17)

— — — 9,030 — — — 9,030

Distribution to noncontrolling interest holder — — — — — — ( 549 ) ( 549 )

Net income attributable to noncontrolling interest — — — — — — 1,152 1,152

Net income attributable to the Ensign Group, Inc.

— — — 110,534 — — — 110,534

Balance - December 31, 2019 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 1,851 2 15,739 — — — — 15,741

Shares of common stock used to satisfy tax withholding obligations ( 20 ) — — — 20 ( 917 ) — ( 917 )

Dividends declared ($ 0.2025 per share)

— — — ( 10,946 ) — — — ( 10,946 )

Employee stock award compensation — — 14,524 — — — — 14,524

Repurchase of common stock (Note 22)

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

Net income attributable to noncontrolling interest — — — — — — 886 886

Distribution to noncontrolling interest holder — — — — — — ( 2,683 ) ( 2,683 )

Net income attributable to the Ensign Group, Inc.

— — — 170,478 — — — 170,478

Balance - December 31, 2020 54,626 $ 58 $ 338,177 $ 551,055 2,791 $ ( 71,213 ) $ 150 $ 818,227

See accompanying notes to consolidated financial statements.

THE ENSIGN GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

(In thousands) 2020 2019 2018

Cash flows from operating activities:

Net income $ 171,364 $ 111,686 $ 92,528

Net income from discontinued operations, net of tax — ( 19,473 ) ( 33,466 )

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

Depreciation and amortization 54,571 51,054 44,864

Impairment of long-lived assets 2,681 4,144 9,145

Amortization of deferred financing fees 840 1,090 1,175

Amortization of deferred gain on sale-leaseback — — ( 658 )

Non-cash leasing arrangement 451 318 —

Write-off of deferred financing fees — 329 —

Deferred income taxes ( 27,809 ) 3,490 1,353

Provision for doubtful accounts 7,058 2,444 2,477

Stock-based compensation 14,524 11,322 8,367

Cash received from insurance proceeds related to reconstruction of damaged properties and business interruptions — 1,599 2,568

Loss/(gain) on insurance claims and disposal of assets 625 ( 3,026 ) ( 1,038 )

Income tax refund — — 11,000

Change in operating assets and liabilities

Accounts receivable 2,171 ( 60,424 ) ( 10,459 )

Prepaid income taxes ( 485 ) 5,600 2,228

Prepaid expenses and other assets ( 9,474 ) ( 7,247 ) 1,677

Deferred employer portion of social security taxes under CARES Act 48,309 — —

Operating lease obligations ( 724 ) ( 7,763 ) —

Accounts payable 6,627 4,457 1,768

Accrued wages and related liabilities 64,539 47,386 27,565

Other accrued liabilities 17,536 11,353 4,550

Accrued self-insurance liabilities 10,293 6,286 5,740

Other long-term liabilities 10,254 4,302 ( 1,232 )

Net cash provided by continuing operating activities 373,351 168,927 170,152

Net cash provided by discontinued operating activities (Note 21)

— 23,296 40,150

Net cash provided by operating activities 373,351 192,223 210,302

Cash flows from investing activities:

Purchase of property and equipment ( 50,326 ) ( 71,541 ) ( 50,894 )

Cash payments for business acquisitions (Note 8)

— ( 6,455 ) —

Cash payments for asset acquisitions (Note 8)

( 24,997 ) ( 141,595 ) ( 84,721 )

Escrow deposits ( 100 ) ( 14,050 ) ( 7,271 )

Escrow deposits used to fund acquisitions 14,050 7,271 137

Cash proceeds from the sale of assets and insurance proceeds 1,212 8,051 4,772

Purchases of investments ( 21,708 ) ( 12,332 ) ( 3,074 )

Maturities of investments 24,479 8,857 —

Other restricted assets ( 1,276 ) ( 2,236 ) ( 289 )

Net cash used in continuing investing activities ( 58,666 ) ( 224,030 ) ( 141,340 )

Net cash used in discontinued investing activities (Note 21)

— ( 22,985 ) ( 9,871 )

Net cash used in investing activities ( 58,666 ) ( 247,015 ) ( 151,211 )

Cash flows from financing activities:

Proceeds from revolving credit facility and other debt (Note 15)

417,200 1,380,000 845,000

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

( 629,745 ) ( 1,296,654 ) ( 914,939 )

Issuance of common stock upon exercise of options 12,654 8,503 9,369

Repurchase of shares of common stock to satisfy tax withholding obligations ( 917 ) ( 485 ) —

Repurchase of shares of common stock (Note 22)

( 25,000 ) ( 6,406 ) —

Dividends paid ( 10,830 ) ( 10,190 ) ( 9,419 )

Dividends received from Pennant — 11,600 —

Cash retained by Pennant at spin-off — ( 47 ) —

Non-controlling interest distribution ( 2,683 ) ( 549 ) ( 338 )

Payments of deferred financing costs — ( 2,494 ) ( 18 )

Proceeds from CARES Act Provider Relief Fund and Medicare Advance Payment

Program(Note 3)

Repayments of CARES Act Provider Relief Fund and Medicare Advance Payment

Program(Note 3)

( 144,932 ) — —

Net cash (used in)/provided by continuing financing activities ( 137,298 ) 83,278 ( 70,345 )

Net cash used in discontinued financing activities — ( 394 ) —

Net cash (used in)/provided by financing activities ( 137,298 ) 82,884 ( 70,345 )

Net increase/(decrease) in cash and cash equivalents 177,387 28,092 ( 11,254 )

Cash and cash equivalents beginning of period, including cash of discontinued operations 59,175 31,083 42,337

Cash and cash equivalents end of period, including cash of discontinued operations 236,562 59,175 31,083

Less cash of discontinued operations at end of period — — 41

Cash and cash equivalents end of period $ 236,562 $ 59,175 $ 31,042

See accompanying notes to consolidated financial statements.

THE ENSIGN GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

Year Ended December 31,

(In thousands) 2020 2019 2018

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest $ 9,920 $ 14,275 $ 15,992

Income taxes $ 74,365 $ 20,158 $ 19,653

Lease liabilities $ 129,569 $ 141,541 $ —

Non-cash financing and investing activity:

Accrued capital expenditures $ 3,400 $ 4,100 $ 3,500

Accrued dividends declared $ 2,868 $ 2,705 $ 2,525

Note receivable from insurance settlement and sale of ancillary business $ 5,500 $ — $ 126

Right-of-use assets obtained in exchange for new operating lease obligations $ 24,599 $ 203,163 $ —

Distribution of net assets to Pennant $ — $ 84,433 $ —

See accompanying notes to consolidated financial statements.

THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars, shares and options in thousands, except per share data)

DESCRIPTION OF BUSINESS

The Company - The Ensign Group, Inc.

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

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

As of December 31, 2020, the Company operated 228 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 23,200 operational skilled nursing beds and 2,300 senior living units.

As of December 31, 2020, the Company operated 164 facilities under long-term lease arrangements, and had options to purchase 11 of those 164 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.

as part of the Spin-Off, 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 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.

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

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 now 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.

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 and investing opportunities while maintaining financial discipline.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying consolidated financial statements (the Financial Statements) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).

The Company is the sole member or stockholder of various consolidated limited liability companies and corporations established to operate various acquired skilled nursing operations, senior living operations and related ancillary services.

All intercompany transactions and balances have been eliminated in consolidation.

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

and the noncontrolling interest in its consolidated statements of income.

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

Additionally, the accounts of any variable interest entities (VIEs) where the Company is subject to a majority of the risk of loss from the VIE's activities are entitled to receive a majority of the entity's residual returns, or both.

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

The Company's relationship with variable interest entities was not material during the years ended December 31, 2020, 2019 and 2018.

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.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reclassifications — Prior period results 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.

Historically, 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 Consolidated Statements of Income.

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

Estimates and Assumptions — The preparation of 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 Financial Statements and the reported amounts of revenue and expenses during the reporting periods.

The most significant estimates in the Company’s 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.

Fair Value of Financial Instruments — The Company’s financial instruments consist principally of cash and cash equivalents, debt security investments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings.

The Company believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations.

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

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

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

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.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources, net of estimates for variable consideration.

The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance.

The Company determines the allowance based on known troubled accounts and other currently available evidence.

Cash and Cash Equivalents — Cash and cash equivalents consist of bank term deposits, money market funds and treasury bill related investments with original maturities of three months or less at time of purchase and therefore approximate fair value.

The fair value of money market funds is determined based on “Level 1” inputs, which consist of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

The Company places its cash and short-term investments with high credit quality financial institutions.

Insurance Subsidiary Deposits and Investments — The Company's captive insurance subsidiary cash and cash equivalents, deposits and investments are designated to support long-term insurance subsidiary liabilities and have been classified as short-term and long-term assets based on the timing of expected future payments of the Company's captive insurance liabilities.

The majority of these deposits and investments are currently held in AA, A and BBB rated debt security investments and the remainder is held in a bank account with a high credit quality financial institution.

The Company evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

If securities are in an unrealized loss position, the Company considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.

The Company also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.

For the years ended December 31, 2020, 2019 and 2018, the Company did not recognize any OTTI for its investments.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment — Property and equipment are initially recorded at their historical cost.

Repairs and maintenance are expensed as incurred.

Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 59 years).

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

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

On January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases (ASC 842), electing the transition method that allows it to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings.

The Company determines if an arrangement is a lease at the inception of each lease.

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

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

Rights and obligations of operating leases are included as right-of-use assets, current lease liabilities and long-term lease liabilities on the Company's consolidated balance sheet.

As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments.

The Company utilized a third-party valuation specialist to assist in estimating the incremental borrowing rate.

The Company records rent expense for operating leases on a straight-line basis over the term of the lease.

The lease term used for straight-line rent expense is calculated from the date the Company is given control of the leased premises through the end of the lease term.

Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease.

The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements.

The Company recognizes lease expense for leases with an initial term of 12 months or less on a straight-line basis over the lease term.

These leases are not recorded on the consolidated balance sheet.

Certain of the Company's lease agreements include rental payments that are adjusted periodically for inflation.

The lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company does not have material subleases.

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 , $ 3,203 and $ 5,492 during the years ended December 31, 2020, 2019 and 2018, respectively.

The Company also recorded an impairment charge of $ 443 to right-of-use assets during the year ended December 31, 2019.

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

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

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

The Company's indefinite-lived intangible assets consist of trade names, and Medicare and Medicaid licenses.

The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations.

Goodwill is subject to annual testing for impairment.

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

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

During the years ended December 31, 2019 and 2018, the Company recorded impairment charges of $ 498 and $ 3,653 , respectively, to goodwill and intangible assets.

The Company did no t identify any goodwill or intangible asset impairment during the year ended December 31, 2020.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

The combined self-insured retention is $ 500 per claim, subject to an additional one-time deductible of $ 750 for California affiliated operations and a separate, one-time, deductible of $ 1,000 for non-California operations.

For all affiliated operations, except those located in Colorado, the third-party coverage above these limits is $ 1,000 per claim, $ 3,000 per operation, with a $ 5,000 blanket aggregate limit and an additional state-specific aggregate where required by state law.

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

The self-insured retention and deductible limits for general and professional 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 consolidated balance sheets.

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

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

The Company develops information about the size of the ultimate claims based on historical experience, current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis.

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

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 $ 500 per occurrence.

Subsequently, for the 2021 fiscal year, the individual claims level increased to $ 625 per occurrence.

In Texas, the operating subsidiaries have elected non-subscriber status for workers’ compensation claims and the Company has purchased individual stop-loss coverage that insures individual claims that exceed $ 750 per occurrence.

The Company’s operating subsidiaries in all other states, with the exception of Washington, are under a loss sensitive plan that insures individual claims that exceed $ 350 per occurrence.

In Washington, the operating subsidiaries' coverage is financed through premiums paid by the employers and employees.

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

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

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

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

In addition, the Company has recorded an asset and equal liability of $ 7,138 and $ 7,999 at December 31, 2020 and 2019, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

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

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

To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $ 300 for each covered person for fiscal year 2020.

The individual claims level increased to $ 500 for each covered person for the 2021 fiscal year.

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

The amount of the Company’s reserves was determined based on an estimation process that uses information obtained from both company-specific and industry data.

This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims.

Using data obtained from this monitoring and the Company’s assumptions about emerging trends, the Company, with the assistance of an independent actuary, develops information about the size of ultimate claims based on the Company’s historical experience and other available industry information.

The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with respect to unpaid claims.

The self-insured liabilities are based upon estimates, and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than the recorded amounts.

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

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

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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

Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the acquisition date and is presented within total equity in the Company's consolidated balance sheets.

The Company presents the noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc.

in its consolidated statements of income.

Net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s stockholders.

The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

Stock-Based Compensation — The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite service period of the award.

Net income has been reduced as a result of the recognition of the fair value of all stock options and restricted stock awards issued, the amount of which is contingent upon the number of future grants and other variables.

Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws and a limited number of grandfathered standards, the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company.

For any new pronouncements announced, the Company considers whether the new pronouncements could alter previous generally accepted accounting principles and determines whether any new or modified principles will have a material impact on the Company's reported financial position or operations in the near term.

The applicability of any standard is subject to the formal review of the Company's financial management and certain standards are under consideration.

Recent Accounting Standards Adopted by the Company

In August 2020, the SEC issued final rules 33-10825 and 34-89670 “ Modernization of Regulation S-K Items 101, 103, and 105 ,” which amend the disclosure requirements in Item 101, Description of Business ;

Item 103, Legal Proceedings ;

and Item 105, Risk Factors of Regulation S-K.

Consistent with the SEC’s ongoing efforts to modernize Regulation S-K disclosure requirements, the amendments aim to improve the readability of disclosures, reduce repetition, and eliminate immaterial information.

Amendments to disclosure requirements include changes to the description of business and risk factors to a principles-based approach, providing more flexibility to tailor disclosures, while disclosure amendments to legal proceedings continue to reflect the current, more prescriptive approach.

The final rules are effective for all registration statements, annual reports and quarterly reports filed on or after November 9, 2020.

The Company has reflected the changes throughout this Annual Report.

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 consolidated financial statements.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 consolidated financial statements.

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

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

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

Accounting Standards Recently Issued but Not Yet Adopted by the Company

In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740)" as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes.

ASU 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP.

The guidance is effective for interim and annual periods beginning after December 15, 2020, which will be the Company's fiscal year 2021, with early adoption permitted.

The Company has 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 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.

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

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

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

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

(3) acquiree financial statement requirements;

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

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

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

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 Report.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 Company monitors the impact 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).

In July 2020, HHS announced a new $5.0 billion Provider Relief Fund distribution to be used to protect residents of nursing homes and long-term care facilities from the impact of COVID-19.

The amount of funding received is 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 which 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, are eligible for additional funds based upon their aggregate performance on these infection and mortality measures.

During 2020 , the Company's affiliated operations have directly or indirectly received, in the aggregate, approximately $ 141,700 in Provider Relief Funds.

As of December 31, 2020, the Company has returned all of the funds received to an agent of HHS;

however the Company may continue to receive additional funding related to the $5.0 billion Provider Relief Fund distribution in future periods.

Subsequent to December 31, 2020, the Company received and returned another $ 5,060 in funding.

Additionally, the Company applied for and received $ 105,255 through the Medicare Accelerated and Advance Payment Program under the CARES Act for the year ended December 31, 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.

The repayments may occur 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 required repayment period is currently scheduled to start in April 2021.

As of December 31, 2020, the Company has classified $ 102,023 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.

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.

In addition, increases in Medicaid rates can also come from other areas of the state budgets outside of the 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 state relief revenue recognized is limited to the actual COVID-19 related expenses incurred.

For the year ended December 31, 2020, the Company received $ 51,927 in state relief funding, of which, $ 45,407 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 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 balance is included in accrued wages and related liabilities of $ 24,155 for the short-term amount and the remaining $ 24,154 is included in other long-term liabilities within the consolidated balance sheets as of December 31, 2020.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

REVENUE AND ACCOUNTS RECEIVABLE

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.

Routine services are treated as a single performance obligation satisfied over time as services are rendered.

As such, patient care services represent a bundle of services that are not capable of being distinct.

Additionally, there may be ancillary services which are not included in the daily rates for routine services, but instead are treated as separate performance obligations satisfied at a point in time, if and when those services are rendered.

Revenue recognized from healthcare services are adjusted for estimates of variable consideration to arrive at the transaction price.

The Company determines the transaction price based on contractually agreed-upon amounts or rate on a per day basis, adjusted for estimates of variable consideration.

The Company uses the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type.

The amount of variable consideration which is included in the transaction price may be constrained, and is included in net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

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

Revenue from the Medicare and Medicaid programs accounted for 74.5 %, 70.6 % and 71.0 % for the years ended December 31, 2020, 2019 and 2018, 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.

These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity.

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

The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue for the years ended December 31, 2020, 2019 and 2018.

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 consolidated statements of income (net presentation).

Otherwise, tenant reimbursements for taxes and insurance which 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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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Disaggregation of Revenue

The Company disaggregates revenue from contracts with its patients by payors.

The Company determines that disaggregating revenue into these categories achieves the disclosure objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Revenue by Payor

The Company’s revenue is derived primarily from providing healthcare services to patients and is recognized on the date services are provided at amounts billable to individual patients, adjusted for estimates for variable consideration.

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

Service revenue for the years ended December 31, 2020, 2019 and 2018 is summarized in the following tables:

Year Ended December 31,

2020 2019 2018

Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue

Medicaid $ 900,249 37.7 % $ 802,952 39.5 % $ 691,276 39.4 %

Medicare 727,374 30.5 499,353 24.6 436,580 24.9

Medicaid — skilled 149,846 6.3 132,889 6.5 117,686 6.7

Total Medicaid and Medicare 1,777,469 74.5 1,435,194 70.6 1,245,542 71.0

Managed care 367,095 15.4 351,054 17.3 301,866 17.2

Private and other (1)

242,875 10.1 245,018 12.1 205,583 11.8

Service revenue $ 2,387,439 100.0 % $ 2,031,266 100.0 % $ 1,752,991 100.0 %

(1) Private and other payors also includes revenue from all payors generated in other an cillary services for the years ended December 31, 2020, 2019 and 2018 .

In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 15,157 , $ 5,258 and $ 1,610 for the years ended December 31, 2020, 2019 and 2018.

Balance Sheet Impact

Included in the Company’s 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 December 31, 2020 and 2019, or activity during the years ended December 31, 2020 and 2019.

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

Year Ended December 31,

Medicaid $ 102,077 $ 125,443

Managed care 61,743 70,015

Medicare 80,904 53,163

Private and other payors 69,056 62,836

313,780 311,457

allowance for doubtful accounts ( 8,718 ) ( 2,472 )

Accounts receivable, net $ 305,062 $ 308,985

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Practical Expedients and Exemptions

As the Company’s contracts with its patients have an original duration of one year or less, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money.

Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue.

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

COMPUTATION OF NET INCOME PER COMMON SHARE

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

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

The computation of diluted net income per share is similar to the computation of basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

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

Year Ended December 31,

2020 2019 2018

Net income from continuing operations $ 171,364 $ 92,213 $ 59,062

net income/(loss) attributable to noncontrolling interests in continuing operations 886 523 ( 431 )

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

170,478 91,690 59,493

Net income from discontinued operations, net of tax — 19,473 33,466

net income attributable to noncontrolling interests in discontinued operations — 629 595

Net income from discontinued operations, net of tax — 18,844 32,871

Net income attributable to The Ensign Group, Inc.

$ 170,478 $ 110,534 $ 92,364

Weighted average shares outstanding for basic net income per share 53,434 53,452 52,016

Basic net income per common share:

Income from continuing operations $ 3.19 $ 1.72 $ 1.14

Income from discontinued operations — 0.35 0.64

Net income attributable to The Ensign Group, Inc.

$ 3.19 $ 2.07 $ 1.78

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Year Ended December 31,

2020 2019 2018

Net income from continuing operations $ 171,364 $ 92,213 $ 59,062

net income/(loss) attributable to noncontrolling interests in continuing operations 886 523 ( 431 )

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

170,478 91,690 59,493

Net income from discontinued operations, net of tax — 19,473 33,466

net income attributable to noncontrolling interests in discontinued operations — 629 595

Net income from discontinued operations, net of tax — 18,844 32,871

Net income attributable to The Ensign Group, Inc.

$ 170,478 $ 110,534 $ 92,364

Weighted average common shares outstanding 53,434 53,452 52,016

incremental shares from assumed conversion (1)

2,353 2,529 2,381

Adjusted weighted average common shares outstanding 55,787 55,981 54,397

Diluted net income per common share:

Income from continuing operations $ 3.06 $ 1.64 $ 1.09

Income from discontinued operations — 0.33 0.61

Net income attributable to The Ensign Group, Inc.

$ 3.06 $ 1.97 $ 1.70

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 956 , 250 and 220 for th e years ended December 31, 2020, 2019 and 2018, respectively .

FAIR VALUE MEASUREMENTS

Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value.

These tiers include:

Level 1, defined as observable inputs such as quoted market prices in active markets;

Level 2, defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly;

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

The fair value of cash and cash equivalents of $ 236,562 and $ 59,175 as of December 31, 2020 and 2019, respectively, is derived using Level 1 inputs.

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

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

As of December 31, 2020, the fair value of the pooled investment funds of $ 6,577 is derived using Level 2 inputs.

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

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

However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, the Company assesses its long-lived assets for impairment.

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

Debt Security Investments - Held to Maturity

At December 31, 2020 and 2019, the Company had approximately $ 45,554 and $ 48,325 , respectively, in debt security investments which were classified as held to maturity and carried at amortized cost.

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

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

Further, as of December 31, 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 December 31, 2020 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date, including the developments related to Coronavirus (COVID-19), that would indicate any other-than-temporary impairment.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 its real estate portfolio.

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

The Company now 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 December 31, 2020, transitional and skilled services segment includes 195 skilled nursing operations and 24 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 24 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.

The Company believes 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 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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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables set forth financial information for the segments:

Year Ended December 31, 2020

Transitional and Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Service revenue $ 2,288,182 $ — $ 99,257 $ — $ 2,387,439

Rental revenue — 61,275 — ( 46,118 ) 15,157

Total revenue $ 2,288,182 $ 61,275 $ 99,257 $ ( 46,118 ) $ 2,402,596

Segment income (loss) 327,812 31,323 ( 138,776 ) — 220,359

Loss on sale of real estate and impairment charges ( 2,753 )

Income before provision for income taxes $ 217,606

Depreciation and amortization 28,585 18,218 7,768 — 54,571

Other expense, net (3)

$ — $ 9,350 $ ( 3,801 ) $ — $ 5,549

(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, net includes interest expense and interest revenue.

Year Ended December 31, 2019

Transitional and Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Service revenue $ 1,934,243 $ — $ 97,023 $ — $ 2,031,266

Rental revenue — 49,868 — ( 44,610 ) 5,258

Total revenue $ 1,934,243 $ 49,868 $ 97,023 $ ( 44,610 ) $ 2,036,524

Segment income (loss) 225,910 17,479 ( 125,797 ) — 117,592

Loss on sale of real estate and impairment charges ( 1,425 )

Income before provision for income taxes $ 116,167

Depreciation and amortization 27,837 15,196 8,021 — 51,054

Other expense, net (3)

$ — $ 15,612 $ ( 2,599 ) $ — $ 13,013

(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, net includes interest expense and interest revenue.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Year Ended December 31, 2018

Transitional and Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Service revenue $ 1,678,849 $ — $ 74,142 $ — $ 1,752,991

Rental revenue — 40,177 — ( 38,567 ) 1,610

Total revenue $ 1,678,849 $ 40,177 $ 74,142 $ ( 38,567 ) $ 1,754,601

Segment income (loss) 175,552 11,853 ( 106,611 ) — 80,794

Loss on sale of real estate and impairment charges ( 9,047 )

Income before provision for income taxes $ 71,747

Depreciation and amortization 25,016 12,035 7,813 — 44,864

Other expense, net (3)

$ — $ 15,148 $ ( 1,982 ) $ — $ 13,166

(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, net includes interest expense and interest revenue.

Service revenue by major payor source were as follows:

Year Ended December 31, 2020

Transitional and Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 886,991 $ 13,258 (1) $ 900,249 37.7 %

Medicare 727,374 — 727,374 30.5

Medicaid-skilled 149,846 — 149,846 6.3

Subtotal 1,764,211 13,258 1,777,469 74.5

Managed care 367,095 — 367,095 15.4

Private and other 156,876 85,999 (2) 242,875 10.1

Total service revenue $ 2,288,182 $ 99,257 $ 2,387,439 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations for the year ended December 31, 2020.

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

Year Ended December 31, 2019

Transitional and Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 789,873 $ 13,079 (1) $ 802,952 39.5 %

Medicare 499,353 — 499,353 24.6

Medicaid-skilled 132,889 — 132,889 6.5

Subtotal 1,422,115 13,079 1,435,194 70.6

Managed care 351,054 — 351,054 17.3

Private and other 161,074 83,944 (2) 245,018 12.1

Total service revenue $ 1,934,243 $ 97,023 $ 2,031,266 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations for the year ended December 31, 2019.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended December 31, 2019.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Year Ended December 31, 2018

Transitional and Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 678,749 $ 12,527 (1) $ 691,276 39.4 %

Medicare 436,580 — 436,580 24.9

Medicaid-skilled 117,686 — 117,686 6.7

Subtotal 1,233,015 12,527 1,245,542 71.0

Managed care 301,866 — 301,866 17.2

Private and other 143,968 61,615 (2) 205,583 11.8

Total service revenue $ 1,678,849 $ 74,142 $ 1,752,991 100.0 %

(1) Medicaid payor includes revenue generated from senior living operations for the year ended December 31, 2018.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the year ended

December 31, 2018.

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

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

Acquisitions are accounted for using the acquisition method of accounting.

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

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

Accounting Standards Codification Topic 805, Clarifying the Definition of a Business (ASC 805) defined the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business.

Determining whether a transferred set constitutes a business is important because the accounting for a business combination differs from that of an asset acquisition.

The definition of a business also affects the accounting for dispositions.

When substantially all of the fair value of assets acquired is concentrated in a single asset, or a group of similar assets, the assets acquired would not represent a business and business combination accounting would not be required.

All of the Company's acquisitions in 2020 was concentrated in property and equipment and, accordingly these transactions were classified as asset acquisitions.

2020 Acquisitions

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

Of these acquisitions, four relate to purchases of owned properties, increasing our real estate portfolio.

These new operations added a total of 507 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 year ended December 31, 2020 was $ 24,997 .

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

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

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

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

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

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Subsequent Event

Subsequent to December 31, 2020, the Company expanded its operations through long-term leases with the addition of four stand-alone skilled nursing operations.

The addition of these operations added 447 operational skilled nursing beds to be 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.

2019 Acquisitions

During the year ended December 31, 2019, the Company expanded its operations and real estate portfolio through a combination of long-term leases and real estate purchases , with the addition of 22 stand-alone skilled nursing operations, one stand-alone senior living operations and four campus operations.

Of these acquisitions, 15 relate to purchases of owned properties, further expanding our real estate portfolio.

The addition of these operations added a total of 3,142 operational skilled nursing beds and 407 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.

In addition, the Company invested in real estate and Medicare and Medicaid licenses during the year.

The aggregate purchase price for these acquisitions during the year ended December 31, 2019 was $ 148,974 .

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

The fair value of assets for 30 of the acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions.

The purchase price for the asset acquisitions was $ 141,595 .

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.

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 consolidated statement of cash flows.

In connection with the Spin-Off, the Company transferred the assets of two stand-alone senior living operations, two home health agencies, five hospice agencies and two home care agencies that were purchased for an aggregate price of $ 18,780 .

The Company retained the real estate for one stand-alone senior living operation.

2018 Acquisitions

During the year ended December 31, 2018, the Company expanded its operations and real estate portfolio through a combination of long-term leases and real estate purchases, with the addition of four stand-alone skilled nursing operations and three campus operations.

Of these acquisitions, six relate to purchases of owned properties, further expanding our real estate portfolio.

The addition of these operations added 744 operational skilled nursing beds and 264 senior living units to be operated by the Company's affiliated operating subsidiaries.

In addition, with the stand-alone skilled nursing operation acquisition, the Company acquired real estate that included an adjacent long-term acute care hospital that is currently operated by a third party under a lease arrangement.

In addition, in June 2018, the Company acquired an office building for a purchase price of $ 30,959 to accommodate its growing Service Center team.

The aggregate purchase price for these acquisitions during the year ended December 31, 2018 was $ 84,721 , which the fair value of assets for all these acquisitions was concentrated in property and equipment and as such, these transactions were classified as asset acquisitions.

The Company did not acquire any material assets or assume any liabilities other than 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.

In connection with the Spin-Off, the Company transferred the assets of the seven stand-alone senior living operations, four home health agencies, three hospice agencies and two home care agencies which were purchased for an aggregate price of $ 5,318 .

The Company retained the real estate for three stand-alone senior living operations.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below presents the allocation of the purchase price for the operations acquired during the years ended December 31, 2020, 2019 and 2018 , excluding assets that were contributed to Pennant that occurred during the Spin-Off.

Year Ended December 31,

2020 2019 2018

Land $ 9,496 $ 34,377 $ 16,851

Building and improvements 14,178 101,217 65,136

Equipment, furniture, and fixtures 568 6,024 1,638

Assembled occupancy 107 638 202

Definite-lived intangible assets — 440 —

Goodwill — 5,382 —

Favorable leases — 294 534

Lease acquisition — — 360

Other indefinite-lived intangible assets 648 602 —

Total acquisitions $ 24,997 $ 148,974 $ 84,721

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 operations acquired 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 assets acquired during the year ended December 31, 2020 were not material acquisitions to the Company individually or in the aggregate.

Accordingly, pro forma financial information is not presented.

These acquisitions have been included in the December 31, 2020 consolidated balance sheets of the Company, and the operating results have been included in the 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:

Land $ 101,236 $ 91,740

Buildings and improvements 555,416 531,538

Leasehold improvements 129,727 127,983

Equipment 233,453 212,808

Furniture and fixtures 4,409 4,453

Construction in progress 3,008 3,409

1,027,249 971,931

accumulated depreciation ( 249,005 ) ( 204,366 )

Property and equipment, net $ 778,244 $ 767,565

The Company completed the sale of real estate for $ 7,138 during the year ended December 31, 2019, of which a gain of $ 2,861 was recognized during the year ended December 31, 2019 related to the transaction.

In addition, the Company evaluated its long-lived assets and recorded an impairment charge of $ 2,681 , $ 3,203 and $ 5,492 for the fiscal years ended 2020, 2019 and 2018, respectively.

See also Note 8, Acquisitions for information on acquisitions during the years ended December 31, 2020, 2019 and 2018.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

INTANGIBLE ASSETS - NET

Weighted Average Life (Years) December 31,

Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization

Intangible Assets Net Net

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

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

Assembled occupancy 0.4 39 ( 26 ) 13 2,982 ( 2,818 ) 164

Facility trade name 30.0 733 ( 366 ) 367 733 ( 342 ) 391

Customer relationships 18.2 4,640 ( 2,121 ) 2,519 4,640 ( 1,910 ) 2,730

Total $ 6,306 $ ( 3,407 ) $ 2,899 $ 9,249 $ ( 5,867 ) $ 3,382

During the years ended December 31, 2020 and 2019, amortization expense was $ 1,813 and $ 3,660 , respectively, of which $ 1,223 and $ 1,981 was related to the amortization of right-of-use assets, respectively.

During the year ended December 31, 2018, amortization expense was $ 2,736 .

In addition, 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.

During the year ended December 31, 2018, the Company recorded an impairment charge to intangible assets of $ 140 .

The Company did no t record any impairment charge to intangible assets during the year ended December 31, 2020 and 2019.

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

Thereafter 1,716

GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

The Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there may be impairment.

The Company performs its analysis for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management and provides services that are distinct from the other components of the operating segment, in accordance with the provisions of Accounting Standards Codification topic 350, Intangibles—Goodwill and Other (ASC 350).

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

If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs 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.

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 performs its goodwill impairment test annually and evaluates goodwill when events or changes in circumstances indicate that its carrying value may not be recoverable.

The Company performs the annual impairment testing of goodwill using October 1 as the measurement date.

The Company completed its goodwill impairment test as of October 1, 2020 and did no t record any impairment charge to goodwill or other intangible assets.

Management determined that the improvements in operations and related forecasted cash flows were slower than anticipated at the time of acquisition, resulting in the impairment to goodwill for fiscal years 2019 and 2018 for other ancillary services.

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

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

All of the Company's acquisitions during the year ended December 31, 2020 were classified as asset acquisitions and accordingly, no goodwill was recognized for these acquisitions.

There were no other activities in goodwill during the year ended December 31, 2020.

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 December 31, 2020:

Transitional and Skilled Services All Other Total

January 1, 2018 $ 45,486 $ 7,612 $ 53,098

Impairments — ( 3,513 ) ( 3,513 )

December 31, 2018 $ 45,486 $ 4,099 $ 49,585

Additions — 5,382 5,382

Impairments — ( 498 ) ( 498 )

December 31, 2019 $ 45,486 $ 8,983 $ 54,469

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

During the year ended December 31, 2020, the Company acquired $ 648 in Medicare and Medicaid licenses compared to $ 602 in the fiscal year 2019.

The Company did no t acquire Medicare and Medicaid licenses during the fiscal year 2018.

Other indefinite-lived intangible assets consist of the following:

Trade name $ 889 $ 889

Medicare and Medicaid licenses 2,827 2,179

$ 3,716 $ 3,068

RESTRICTED AND OTHER ASSETS

Restricted and other assets consist of the following:

Debt issuance costs, net $ 2,664 $ 3,374

Long-term insurance losses recoverable asset 7,138 7,999

Deposits with landlords 12,400 11,765

Capital improvement reserves with landlords and lenders 4,376 3,024

Cash surrender value of life insurance related to deferred compensation plan 6,577 —

Restricted and other assets $ 33,155 $ 26,207

Included in restricted and other assets as of December 31, 2020 and 2019 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 an Accounting Standards Update issued by the FASB.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

OTHER ACCRUED LIABILITIES

Other accrued liabilities consists of the following:

Quality assurance fee $ 6,631 $ 6,461

Refunds payable 36,323 29,412

Resident advances 8,558 8,870

Unapplied state relief funds 6,520 —

Cash held in trust for patients 6,052 3,038

Resident deposits 1,700 1,818

Dividends payable 2,868 2,705

Property taxes 9,222 8,055

Other 9,444 9,914

Other accrued liabilities $ 87,318 $ 70,273

Quality assurance fee represents the aggregate of amounts payable to Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, Utah, Washington and Wisconsin as a result of a mandated fee based on patient days or licensed beds.

Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor sources.

Resident advances occur when the Company receives payments in advance of services provided.

Resident deposits include refundable deposits to patients.

Cash held in trust for patients reflects monies received from or on behalf of patients.

Maintaining a trust account for patients is a regulatory requirement and, while the trust assets offset the liabilities, the Company assumes a fiduciary responsibility for these funds.

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

The provision for income taxes on continuing operations for the years ended December 31, 2020, 2019 and 2018 is summarized as follows:

Year Ended December 31,

2020 2019 2018

Federal $ 60,591 $ 14,363 $ 7,970

State 13,460 5,425 3,362

74,051 19,788 11,332

Federal ( 23,054 ) 4,451 1,995

State ( 4,755 ) ( 285 ) ( 642 )

( 27,809 ) 4,166 1,353

Total $ 46,242 $ 23,954 $ 12,685

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation of the federal statutory rate to the effective tax rate for income from continuing operations for the years ended December 31, 2020, 2019 and 2018, respectively, is comprised as follows:

2020 2019 2018

Income tax expense at statutory rate 21.0 % 21.0 % 21.0 %

State income taxes - net of federal benefit 3.2 3.5 2.6

Non-deductible expenses and compensation 1.8 3.1 4.0

Equity compensation ( 4.3 ) ( 5.2 ) ( 6.9 )

Revaluation of deferred — — ( 2.8 )

Other adjustments ( 0.4 ) ( 1.8 ) ( 0.2 )

Total income tax provision 21.3 % 20.6 % 17.7 %

The Company's effective tax rate was 21.3 % for the year ended December 31, 2020, compared to 20.6 % for the same period in 2019.

The higher effective tax rate is due to lower tax benefits from stock compensation.

The increase in the effective tax rate from fiscal year 2018 to fiscal year 2019 primarily reflects a decrease in tax benefit from stock-based payment awards and a one-time benefit from IRS approval of non-automatic change for 2018 that did not reoccur in 2019.

The Company's deferred tax assets and liabilities as of December 31, 2020 and 2019 are summarized below.

Deferred tax assets (liabilities):

Accrued expenses $ 54,700 $ 22,106

Allowance for doubtful accounts 11,598 11,842

Tax credits 2,497 2,959

Insurance 7,686 5,952

Lease liability 256,216 264,460

State taxes 223 ( 220 )

332,920 307,099

Valuation allowance ( 879 ) ( 791 )

Total deferred tax assets 332,041 306,308

Depreciation and amortization ( 41,801 ) ( 36,220 )

Prepaid expenses ( 3,137 ) ( 2,822 )

Right of use asset ( 254,679 ) ( 262,651 )

Total deferred tax liabilities ( 299,617 ) ( 301,693 )

Net deferred tax assets $ 32,424 $ 4,615

On January 1, 2019, the Company implemented ASC 842 as described in the Summary of Significant Accounting Policies.

The new lease standard reduced net deferred tax assets by $ 3,044 , which is reflected in retained earnings as a day one accounting change adjustment.

The Company had state credit carryforwards as of December 31, 2020 and 2019 of $ 2,497 and $ 2,959 , respectively.

These carryforwards almost entirely relate to state limitations on the application of Enterprise Zone employment-related tax credits.

Unless the Company uses the Enterprise Zone credits beforehand, the carryforward will begin to expire in 2023.

As of December 31, 2019, a valuation allowance of $ 1,000 was recorded against the Enterprise Zone credits as the Company believes it is more likely than not that some of the benefit of the credits will not be realized.

The remainder of these carryforwards relates to credits against the Texas margin tax and is expected to carry forward until 2027.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company's operating loss carry forwards for states were not material during the years ended December 31, 2020 and 2019.

As of December 31, 2020, 2019 and 2018, the Company did not have any unrecognized tax benefits, net of its state benefits that would affect the Company's effective tax rate.

The Company classifies interest and/or penalties on income tax liabilities or refunds as additional income tax expense or income.

Such amounts are not material.

The Federal statutes of limitations on the Company's 2014, 2015, and 2016 income tax years lapsed during the third quarter of 2018, 2019, and 2020, respectively.

During the fourth quarter of each year, various state statutes of limitations also lapsed.

The lapses for the years ended December 31, 2020 and 2019 had no impact on the Company's unrecognized tax benefits.

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

In November 2020, the Company received confirmation 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.

Debt consists of the following:

Revolving credit facility with Truist $ — $ 210,000

Mortgage loans and promissory notes 117,806 120,350

117,806 330,350

current maturities ( 2,960 ) ( 2,702 )

debt issuance costs, net ( 2,302 ) ( 2,431 )

$ 112,544 $ 325,217

Credit Facility with a Lending Consortium Arranged by Truist

The Company maintains a revolving credit facility under the Third Amended and Restated Credit Agreements, dated as of October 1, 2019, between the Company and Truist Financial Corporation (Truist) (formerly known as SunTrust Bank, Inc.) (the Credit Facility).

The Credit Facility includes a revolving line of credit of up to $ 350,000 in aggregate principal amount.

The maturity date of the Credit Facility is October 1, 2024.

Borrowings are supported by a lending consortium arranged by Truist.

The interest rates applicable to loans under the Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.50 % to 1.50 % per annum or LIBOR plus a margin range from 1.50 % to 2.50 % per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement).

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

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

The Credit Facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its operating subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements and pay certain dividends and other restricted payments.

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

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

As of December 31, 2020, there was no outstanding debt under the Credit Facility.

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

As of February 1, 2021, there was no outstanding borrowings under the Credit Facility.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Mortgage Loans and Promissory Notes

As of December 31, 2020, the Company's operating subsidiaries had $ 117,806 outstanding under the mortgage loans and notes, of which $ 2,960 is classified as short-term and the remaining $ 114,846 is classified as long-term.

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

As of December 31, 2020, 19 of the Company's subsidiaries are under mortgage loans insured with the Department of Housing and Urban Development (HUD) in the aggregate amount of $ 113,868 , which subjects these subsidiaries to HUD oversight and periodic inspections.

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

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

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

There is no prepayment penalty after year ten .

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

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

In addition to refinancing existing borrowings, the proceeds of the HUD-insured debt helped fund acquisitions, 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 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.

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.

Future principal payments due under the long-term debt arrangements discussed above are as follows:

Years Ending December 31, Amount

Thereafter 102,551

Off-Balance Sheet Arrangements

During the year ended December 31, 2020, the Company increased its outstanding letters of credit by $ 2,238 to $ 7,580 .

As of December 31, 2020, the Company had approximately $ 7,580 o n the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

OPTIONS AND AWARDS

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

As stock-based compensation expense recognized in the Company’s consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 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 ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2017 Omnibus Incentive Plan - The Company has one active stock incentive plan, the 2017 Omnibus Incentive Plan (the 2017 Plan).

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

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

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

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

Granted non-employee director options vest and become exercisable in three equal annual installments, or the length of the term if less than three years , on the completion of each year of service measured from the grant date.

All other options generally vest over 5 years at 20 % per year on the anniversary of the grant date.

Options expire 10 years from the date of grant.

At December 31, 2020, there were approximately 3,148 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 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.

The Black-Scholes model required the Company to make several key judgments including:

• The expected option term is calculated by the average of the contractual term of the options and the weighted average vesting period for all options.

The calculation of the expected option term is based on the Company's experience due to sufficient history.

• The Company utilizes its own experience to calculate estimated volatility for options granted.

• The dividend yield is based on the Company's historical pattern of dividends as well as expected dividend patterns.

• The risk-free rate is based on the implied yield of U.S.

Treasury notes as of the grant date with a remaining term approximately equal to the expected term.

• Estimated forfeiture rate of approximately 9.41 % per year is based on the Company's historical forfeiture activity of unvested stock options.

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.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

The Company granted 669 stock options during the year ended December 31, 2020.

The Company used the following assumptions for stock options granted during the years ended December 31, 2020, 2019 and 2018:

Grant Year Options Granted (1 )

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

2020 669 0.6 % 6.2 years 39.4 % 0.4 %

2019 776 2.0 % 6.2 years 34.0 % 0.4 %

2018 640 2.8 % 6.2 years 32.0 % 0.5 %

(1) Options granted from January 1, 2018 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.

For the years ended December 31, 2020, 2019 and 2018, the following represents the exercise price and fair value displayed at grant date for stock option grants:

Grant Year Granted (1)

Weighted Average Exercise Price (2)

Weighted Average Fair Value of Options (3)

2020 669 $ 52.20 $ 19.52

2019 776 $ 44.31 $ 15.71

2018 640 $ 29.27 $ 10.21

(1) Options granted from January 1, 2018 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 December 31, 2020, 2019 and 2018 and therefore, the intrinsic value was $ 0 at the date of grant.

The following table represents the employee stock option activity during the years ended December 31, 2020, 2019 and 2018:

Outstanding(1) Weighted

Exercise Price(3) Number of

Options Vested(1) Weighted Average

Exercise Price of Options Vested(3)

January 1, 2018 4,739 $ 11.09 2,776 $ 8.53

Granted 640 29.27

Forfeited ( 120 ) 15.86

Exercised ( 1,071 ) 7.26

December 31, 2018 4,188 $ 14.71 2,431 $ 10.48

Granted 776 44.31

Forfeited ( 63 ) 26.84

Exercised ( 809 ) 8.83

Equitable adjustment - due to Spin-Off (2)

December 31, 2019 4,428 $ 20.85 2,557 $ 12.82

Granted 669 52.20

Forfeited ( 80 ) 33.68

Exercised ( 979 ) 12.93

December 31, 2020 4,038 $ 27.71 2,148 $ 16.66

(1) Options activity from January 1, 2018 through September 30, 2019 represents historical grant values prior to the impact of the Spin-Off as discussed above.

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

(2) The equitable adjustment represents equity awards modifications upon the Spin-Off Conversion related to fiscal years prior to October 1, 2019.

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

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Stock Options Outstanding Stock Options Vested

Number Outstanding Black-Scholes Fair Value Remaining Contractual Life (Years) Vested and Exercisable

Year of Grant Exercise Price

2011 5.00 - 6.77 38 86 1 38

2012 5.56 - 6.75 126 390 2 126

2013 6.76 - 9.74 177 762 3 177

2014 8.94 - 16.05 722 3,450 4 722

2015 18.20 - 21.39 328 2,546 5 328

2016 15.93 - 16.86 312 1,841 6 234

2017 15.80 - 19.41 363 2,143 7 183

2018 22.49 - 32.71 594 6,109 8 208

2019 41.07 - 45.76 723 11,342 9 132

2020 44.84 - 59.49 655 12,827 10 —

Total 4,038 $ 41,496 2,148

The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of December 31, 2020, 2019 and 2018 is as follows:

Options 2020 2019 2018

Outstanding $ 182,552 $ 108,623 $ 89,806

Vested 120,867 83,243 64,222

Expected to vest 53,366 22,399 22,963

Exercisable 45,081 29,032 27,646

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 options outstanding, vested, expected to vest and exercisable as of December 31, 2018 were calculated using amounts prior to the Spin-Off.

The options outstanding, vested, expected to vest and exercisable as of December 31, 2020 and 2019 were calculated using amounts reflective of the Spin-Off.

Restricted Stock Awards

The Company granted 281 , 290 and 367 restricted stock awards during the years ended December 31, 2020 , 2019 and 2018, 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 years ended December 31, 2020 , 2019 and 2018 ranged from $ 35.47 to $ 58.06 , $ 35.33 to $ 48.64 and $ 20.01 to $ 32.71 , respectively.

The fair value per share during the year ended December 31, 2018 is reflective of values prior to the Spin-Off, while the fair value per share during years ended December 31, 2020 and 2019 is reflective of values subsequent to the Spin-Off.

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

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status of the Company's non-vested restricted stock awards as of December 31, 2020 and changes during the years ended December 31, 2020, 2019 and 2018 is presented below:

Non-Vested Restricted Awards Weighted Average Grant Date Fair Value(1)

Nonvested at January 1, 2018 383 $ 17.50

Granted 367 29.83

Vested ( 153 ) 19.22

Forfeited ( 24 ) 19.76

Nonvested at December 31, 2018 573 $ 24.84

Granted 290 43.51

Vested ( 241 ) 30.24

Forfeited ( 12 ) 28.49

Nonvested at December 31, 2019 610 $ 31.35

Granted 281 48.73

Vested ( 280 ) 32.84

Forfeited ( 20 ) 31.71

Nonvested at December 31, 2020 591 $ 38.90

(1) Weighted average grant date fair value was calculated using the fair values reflective of the Spin-Off Conversion.

During the year ended December 31, 2020, the Company granted 21 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 $ 58.39 based on the market price on the grant date.

Long-Term Incentive Plan

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

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

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

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

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

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 881 and $ 271 for the years ended December 31, 2020 and 2019, respectively.

Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the years ended December 31, 2020 , 2019 and 2018 was as follows:

Year Ended December 31,

2020 2019 (1)

Stock-based compensation expense related to stock options $ 6,132 $ 5,148 $ 4,545

Stock-based compensation expense related to restricted stock awards 7,373 4,955 2,927

Stock-based compensation expense related to stock options and restricted stock awards to non-employee directors 1,019 1,219 895

Total $ 14,524 $ 11,322 $ 8,367

(1) The amount of stock-based compensation expense that was classified as discontinued operations was $ 424 and $ 592 , respectively, for the years ended December 31, 2019 and 2018.

In future periods, the Company expects to recognize approximately $ 24,751 and $ 25,019 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of December 31, 2020.

Future stock-based compensation expense will be recognized over 3.8 and 3.6 weighted average years for unvested options and restricted stock awards, respectively.

There were 1,890 unvested and outstanding options at December 31, 2020, of which 1,755 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest at December 31, 2020 was 6.1 years.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 during the years ended December 31, 2019 and 2018.

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

During each of the years ended December 31, 2020, 2019 and 2018, there were 976 restricted stock awards that vested, respectively.

The Company did no t grant any options during the fiscal year 2019.

The Company granted 221 stock options during the year ended December 31, 2018.

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

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

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

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 years ended December 31, 2019 and 2018, the Company expensed $ 594 and $ 1,378 , respectively, in stock-based compensation related to the Subsidiary Equity Plan.

The reduction in expense for the year ended December 31, 2019 is related to the vesting completion for certain restricted shares, which vested over a period of three years.

During the years ended December 31, 2019 and 2018, the Company repurchased 534 and 865 shares of common stock under the Subsidiary Equity Plan for $ 2,687 and $ 1,972 , respectively.

The Company subsequently sold the shares and received net proceeds of $ 2,293 and $ 1,972 , respectively during the years ended December 31, 2019 and 2018.

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 consolidated financial statements as discontinued operations.

The Company leases from CareTrust REIT, Inc.

(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.

The extension of the term of any of the Master Leases is subject to the following conditions:

(1) no event of default under any of the Master Leases having occurred and being continuing;

and (2) the tenants providing timely notice of their intent to renew.

The term of the Master Leases is subject to termination prior to the expiration of the then current term upon default by the tenants in their obligations, if not cured within any applicable cure periods set forth in the Master Leases.

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

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.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

(3) all insurance required in connection with the leased properties and the business conducted on the leased properties;

(4) all facility maintenance and repair costs;

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

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 for continuing operations under the Master Leases was approximately $ 52,838 , $ 55,644 and $ 53,501 for the years ended December 31, 2020, 2019 and 2018, 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 in compliance with requirements of the Master Leases as of December 31, 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 right-of-use asset and lease liabilities of approximately $ 35,000 .

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

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

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

The Company also leases certain affiliated operations and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years.

The Company has entered into multiple lease agreements with various landlords to operate newly constructed state-of-the-art, full-service healthcare resorts.

The term of each lease is 15 years with two five-year renewal options and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage.

In addition, the Company leases certain of its equipment under non-cancelable operating leases with initial terms ranging from three to five years .

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

Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 129,990 , $ 125,167 and $ 118,192 for the years ended December 31, 2020, 2019 and 2018, respectively.

Thirty-seven 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.

Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’s leases, master lease agreements and debt financing instruments.

In addition, other potential defaults related to an individual facility may cause a default of an entire master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases.

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

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of operating lease expense are as follows:

Year Ended December 31,

2020 2019 2018

Rent - cost of services (1)

$ 129,926 $ 124,789 $ 117,676

General and administrative expense 64 378 516

Depreciation and amortization (2)

1,223 1,981 1,993

Variable lease costs (3)

12,774 12,194 —

$ 143,987 $ 139,342 $ 120,185

(1) Rent- cost of services includes deferred rent expense adju stments of $ 451 , $ 318 and $ 0 for the years ended December 31, 2020, 2019 and 2018, respectively.

Additionally, rent- cost of services includes other variable lease costs such as consumer price index increases and short-term leases of $ 2,394 and $ 1,486 for the years ended December 31, 2020 and 2019, respectively.

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

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

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

2021 $ 128,251

Thereafter 1,040,860

Total lease payments 1,674,290

present value adjustment ( 675,783 )

Present value of total lease liabilities 998,507

current lease liabilities ( 48,187 )

Long-term operating lease liabilities $ 950,320

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

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

As of December 31, 2020, the weighted average remaining lease term is 13.8 years and the weighted average discount rate used to determine the operating lease liabilities is 8.3 %.

Subsequent to December 31, 2020, the Company expanded its operations through long-term leases with the addition of four stand-alone skilled nursing facilities in Southern California and Texas adding a total of 447 operational skilled nursing beds operated by the Company’s affiliated operating subsidiaries.

The three facilities in California were added to an existing triple-net master lease through an amendment, which also extended the lease term for all facilities under the amended master lease to 15 years from the amendment date, with two consecutive 10 year renewal options.

The aggregate impact to the fair value of lease liabilities and right-of-use assets related to the amended master lease and new facilities is estimated to be approximately $ 37,500 .

Impact of Adopting Topic ASC 842

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No.

which requires lessees to recognize leases with terms longer than 12 months on the balance sheet and disclose key information

about leasing arrangements.

The Company adopted the standard as of January 1, 2019.

The adoption of this standard resulted in recognition of right-of-use assets and lease liabilities of $ 1,015,937 and $ 1,006,907 , respectively, on its consolidated balance sheets as of January 1, 2019.

The Company recorded an adjustment, net of tax, of $ 9,030 to retained earnings, on the adoption date, related to a deferred gain on a previous sale-leaseback transaction as the Company was no longer able to recognize the gain in its consolidated statement of income as a result of the new lease standard.

In addition, initial direct costs associated with its lease agreements and favorable lease assets of $ 26,939 were classified into right-of-use assets on the adoption date.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Lessor Activities

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

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

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

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

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

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

(3) all insurance required in connection with the leased properties and the business conducted on the leased properties;

(4) all facility maintenance and repair costs;

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

The initial terms range between 14 to 16 years.

Total rental income from all third-party sources for the years ended December 31, 2020, 2019 and 2018 is as follows:

Year Ended December 31,

2020 2019 2018

$ 13,163 $ 3,041 $ —

Other third-party 1,994 2,217 1,610

$ 15,157 $ 5,258 $ 1,610

(1) Pennant rental income includes variable rent such as property taxes of $ 1,224 during the year ended December 31, 2020.

Variable rent was immaterial for the year ended December 31, 2019.

Future annual rental income for all leases as of December 31, 2020 were as follows:

Year Amount (1)

2021 $ 15,772

Thereafter 98,987

Total $ 172,268

(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of December 31, 2020 .

SELF INSURANCE LIABILITIES

The following table represents activity in our insurance liabilities as of and for the years ended December 31, 2020 and 2019:

General and Professional Liability Workers' Compensation Health Total

Balance January 1, 2019

$ 45,366 $ 28,862 $ 5,823 $ 80,051

Current year provisions 25,718 13,479 45,498 84,695

Claims paid and direct expenses ( 21,369 ) ( 12,684 ) ( 44,357 ) ( 78,410 )

Change in long-term insurance losses recoverable 353 677 — 1,030

Balance December 31, 2019

$ 50,068 $ 30,334 $ 6,964 $ 87,366

Current year provisions 38,741 13,397 49,213 101,351

Claims paid and direct expenses ( 28,097 ) ( 14,317 ) ( 48,644 ) ( 91,058 )

Change in long-term insurance losses recoverable 182 ( 1,043 ) — ( 861 )

Balance December 31, 2020

$ 60,894 $ 28,371 $ 7,533 $ 96,798

Included in long-term insurance losses recoverable as of as of December 31, 2020 and 2019, are anticipated insurance recoveries related to the Company's general and professional liability claims that are recorded on a gross rather than net basis in accordance with GAAP.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DEFINED CONTRIBUTION PLANS

The Company has a 401(k) defined contribution plan (the 401(k) Plan), whereby eligible employees may contribute up to 15 % of their annual basic earnings.

Additionally, the 401(k) Plan provides for discretionary matching contributions (as defined in the 401(k) Plan) by the Company.

The Company expensed matching contributions to the 401(k) Plan of $ 1,889 , $ 1,328 and $ 1,283 during the years ended December 31, 2020, 2019 and 2018, respectively.

The 401(k) Plan allowed eligible employees to contribute up to 90 % of their eligible compensation, subject to applicable annual Internal Revenue Code limits.

During the year ended December 31, 2019, the Company implemented non-qualified deferred compensation plan (the DCP) that was effective in 2019 for certain executives.

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

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

The DCP allows participating employees to defer the receipt of a portion of their base compensation and certain employees up to 100% of their eligible bonuses.

Additionally, 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.

The Company paid for related administrative costs, which were not significant during the fiscal years 2020 and 2019.

As of the years ended December 31, 2020 and 2019, the Company accrued $ 14,232 and $ 3,792 , respectively as long term deferred compensation in other long term liabilities on the consolidated balance sheet.

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 $ 1,396 , which is included in interest and other income and an offsetting expense of $ 1,355 between cost of services and general and administrative expenses in the accompanying consolidated statements of income for the year ended December 31, 2020.

No such gain no r offsetting expense occurred for the year ended December 31, 2019.

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, which requires healthcare providers (among other things) to safeguard the privacy and security of certain health information.

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

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

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

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

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

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

In connection with the Spin-Off, certain landlords required, in exchange for their consent to the Spin-Off, 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 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 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 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.

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

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

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

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 operation subsidiaries, and others in the industry are subject to claims and lawsuits in connection with the novel 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 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.

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

A violation may provide the basis for exclusion from Federally-funded healthcare programs.

Such exclusions could have a correlative negative impact on the Company’s financial performance.

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

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

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

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

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

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, 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.

Health care providers can now be liable for knowingly and improperly avoiding or decreasing an obligation to pay money or property to the government.

This includes the retention of any government overpayment.

The government can argue, therefore, that an 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.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 monetary penalty, or litigation.

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

The Company expects the plaintiffs' bar to continue to be aggressive in their pursuit of these staffing and similar claims.

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

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

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

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

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

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

In August of 2011, the Company was named as a Defendant in a class action litigation alleging violations of state and federal wage and hour law.

Following multiple meditations, in April of 2017, the Company reached an agreement to settle the subject class action litigation, without any admission of liability.

The Company recorded an accrual for estimated probable losses of $ 11,000 , exclusive of legal fees, in the first quarter of 2017.

The Company funded the settlement amount of $ 11,000 in December of 2017, and the funds were distributed to participating class members in the first quarter of 2018.

The Company received back $ 1,664 related to unclaimed class settlement funds remaining after completion of the settlement process, and the recoveries were recorded in the first quarter of 2018.

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

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

However, beginning in August 2020, CMS resumed Targeted Probe Educate program activity.

As of December 31, 2020, four of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

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

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

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

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THE ENSIGN GROUP, INC.

NOTES TO THE 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 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.

Concentrations

Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid.

These receivables represent the only significant concentration of credit risk for the Company.

The Company does not believe there are significant credit risks associated with these governmental programs.

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

The Company’s receivables from Medicare and Medicaid payor programs accounted for 58.3 % and 57.3 % of its total accounts receivable as of December 31, 2020 and 2019, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 74.5 %, 70.6 % and 71.0 % of the Company's revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

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

that exceed FDIC insurance limits.

FDIC insurance provides protection for bank deposits up to $250.

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

As of February 1, 2021, the Company had approximately $ 1,659 in uninsured cash deposits.

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

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 228 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”.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In connection with the Spin-Off, Pennant's operations consist of 63 home health, hospice and home care agencies and 52 senior living communities.

Ensign affiliates retained ownership of all the real estate, which includes the real estate of 29 of the 52 senior living operations that were contributed to Pennant.

These assets are leased to Pennant on a triple-net basis.

Pennant affiliates are responsible for all costs at the properties, including property taxes, insurance and maintenance and repair costs.

The initial terms range between 14 to 16 years.

Pennant's remaining 23 senior living operations are leasing the underlying real estate from unrelated third parties.

The Company received $ 11,600 from Pennant as a dividend payment in connection with the distribution of assets to Pennant.

The Company used the funds to repay certain outstanding third-party bank debt.

The assets and liabilities were contributed to Pennant based on their historical carrying values, which were as follows:

Cash and cash equivalents $ 47

Accounts receivable, net 30,064

Prepaid expenses and other current assets 4,483

Property and equipment, net 13,728

Right-of-use assets 150,385

Goodwill and intangibles, net 74,747

Accounts payable ( 4,725 )

Accrued wages and related liabilities ( 14,544 )

Other accrued liabilities - current ( 17,531 )

Lease liabilities, net ( 152,221 )

Net contribution $ 84,433

In accordance with Accounting Standards Codification (ASC) 505-60, Equity-Spinoffs and Reverse Spinoffs, the accounting for the separation of the Company follows its legal form, with Ensign as the legal and accounting spinnor and Pennant as the legal and accounting spinnee, due to the relative significance of Ensign’s healthcare business, the relative fair values of the respective companies, the retention of all senior management, and other relevant indicators.

As a result of the Spin-Off, the Company recorded a $ 71,181 reduction in retained earnings which included net assets of $ 84,433 as of October 1, 2019.

The Company transferred cash of $ 47 to Pennant, with the remainder considered a non-cash activity in the consolidated statements of cash flows.

The Spin-Off also resulted in a reduction of noncontrolling interest of $ 13,252 .

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 year ended December 31, 2020 and 2019.

Prior to the consummation of the Spin-Off, Pennant granted awards to certain employees and directors of Ensign under the Pennant Long-Term Incentive Plan (LTIP), in recognition of their performance in assisting with the Spin-Off.

These awards were exchanged for Pennant common stock prior to the distribution.

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 year ended December 31, 2019 presented have been classified as discontinued operations within the Consolidated Financial Statements.

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Year Ended December 31,

(In thousands)

Service revenue $ 249,039 $ 286,058

Cost of services 187,560 209,423

Rent—cost of services 17,295 20,836

General and administrative expense 16,672 9,744

Depreciation and amortization 2,402 2,480

Total expenses 223,929 242,483

Income from discontinued operations 25,110 43,575

Interest income 26 47

Provision for income taxes 5,663 10,156

Income from discontinued operations, net of tax 19,473 33,466

Net income attributable to discontinued noncontrolling interests 629 595

Net income attributable to The Ensign Group, Inc.

$ 18,844 $ 32,871

The Company incurred transaction costs of $ 9,119 related to the Spin-Off since commencing in 2018, of which $ 7,909 and $ 746 are reflected in the Company's consolidated statement of operations as discontinued operations for the years ended December 31, 2019 and 2018, 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.

Transaction costs for 2019 incurred prior to October 1, 2019 are reflected in discontinued operations.

The following table presents the aggregate carrying amounts of the classes of assets and liabilities of the discontinued operations of Pennant:

As of December 31, 2018

(In thousands)

Current assets:

Cash and cash equivalents $ 41

Accounts receivable—less allowance for doubtful accounts of $ 616

Prepaid expenses and other current assets 4,554

Total current assets as classified as discontinued operations on the consolidated balance sheet 28,779

Property and equipment, net 10,458

Restricted and other assets(1) 2,286

Intangible assets, net 78

Goodwill 30,892

Other indefinite-lived intangibles 25,136

Long-term assets as discontinued operations on the consolidated balance sheet 68,850

Total assets as discontinued operations on the consolidated balance sheet $ 97,629

Current liabilities:

Accounts payable 4,390

Accrued wages and related liabilities 12,786

Other accrued liabilities 13,073

Total current liabilities as discontinued operations on the consolidated balance sheet 30,249

Other long-term liabilities 3,316

Long-term liabilities as discontinued operations on the consolidated balance sheet 3,316

Total liabilities as discontinued operations on the consolidated balance sheet $ 33,565

(1) Restricted and other assets is net of deferred tax liabilities .

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THE ENSIGN GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

COMMON STOCK REPURCHASE PROGRAM

As approved by the Board of Directors on March 4, 2020 and March 13, 2020, the Company entered into two stock repurchase programs pursuant to which the Company was authorized to repurchase up to $ 20,000 and $ 5,000 , respectively, of its common stock under the programs for a period of approximately 12 months.

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

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

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

As approved by the Board of Directors on August 26, 2019, the Company entered into a stock repurchase program pursuant to which the Company may repurchase up to $ 20,000 of its common stock under the program for a period of approximately 12 months.

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

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

As approved by the Board of Directors on April 3, 2018, the Company entered into a stock repurchase program pursuant to which the Company was authorized to repurchase up to $ 30,000 of its common stock under the program for a period of approximately 11 months.

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

The stock repurchase program expired on February 20, 2019.

The Company did not purchase any shares pursuant to this stock repurchase program.

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-K

Item 9A. Controls and Procedures