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Item 1. Financial Statements

2022-04-28 compared with 2021-10-27 · 341 added, 488 removed, 741 unchanged (53% of the section changed)

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(In thousands, except par values)

1 unchanged sentence

Cash and cash equivalents $ 248,546 $ 262,201

Accounts receivable—less allowance for doubtful accounts of $ 11,267 and $ 8,718 at September 30, 2021 and December 31, 2020, respectively

Accounts receivable—less allowance for doubtful accounts of $ 13,212 and $ 11,213 at March 31, 2022 and December 31, 2021, respectively

339,886 328,731

20 unchanged sentences

Accrued self-insurance liabilities—current 43,728 40,831

Advance payment liabilities (Note 3)

Other accrued liabilities 100,161 89,410

4 unchanged sentences

Accrued self-insurance liabilities—less current portion 71,602 69,308

Other long-term liabilities (Note 3)

48,821 39,686

Other long-term liabilities 28,272 27,135

Total liabilities $ 1,972,546 $ 1,828,909

5 unchanged sentences

100,000 shares authorized;

58,059 and 55,247 shares issued and outstanding at September 30, 2021, respectively, and 57,417 and 54,626 shares issued and outstanding at December 31, 2020, respectively

58,385 and 55,308 shares issued and outstanding at March 31, 2022, respectively, and 58,134 and 55,190 shares issued and outstanding at December 31, 2021, respectively

Additional paid-in capital 383,181 369,760

Retained earnings 781,290 733,992

Common stock in treasury, at cost, 2,812 and 2,791 shares at September 30, 2021 and December 31, 2020, respectively (Note 19)

Common stock in treasury, at cost, 3,077 and 2,944 shares at March 31, 2022 and December 31, 2021, respectively (Note 20)

( 92,939 ) ( 83,042 )

7 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

2021 2020 2021 2020

Three Months Ended March 31,

(In thousands, except per share data)

10 unchanged sentences

Interest expense ( 2,068 ) ( 1,641 )

Other income (expense), net 248 850 2,117 2,630

Other (expense) income ( 816 ) 748

Other expense, net ( 2,884 ) ( 893 )

2 unchanged sentences

Net income 50,088 49,837

Net income attributable to noncontrolling interests 1,063 253 2,852 1,045

Net (loss) income attributable to noncontrolling interests ( 252 ) 631

Net income attributable to The Ensign Group, Inc.

18 unchanged sentences

Employee stock award compensation — — 5,167 — — — — 5,167

Net income attributable to noncontrolling interest — — — — — — 631 631

Distribution to noncontrolling interest holder — — — — — — ( 1,248 ) ( 1,248 )

Net income attributable to the Ensign Group, Inc.

— — — 49,206 — — — 49,206

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

Issuance of common stock to employees and directors resulting from the exercise of stock options 148 — 2,982 — — — — 2,982

Issuance of restricted stock, net of forfeitures 49 — — — — — — —

Shares of common stock used to satisfy tax withholding obligations ( 20 ) — — — 20 ( 1,600 ) — ( 1,600 )

Dividends declared ($ 0.0525 per share)

— — — ( 2,894 ) — — — ( 2,894 )

Employee stock award compensation — — 4,633 — — — — 4,633

Net income attributable to noncontrolling interest — — — — — — 1,158 1,158

Distribution to noncontrolling interest holder — — — — — — ( 641 ) ( 641 )

Net income attributable to the Ensign Group, Inc.

— — — 49,425 — — — 49,425

Balance - June 30, 2021 55,130 $ 58 $ 357,451 $ 643,906 2,811 $ ( 72,822 ) $ 50 $ 928,643

Issuance of common stock to employees and directors resulting from the exercise of stock options 69 — 1,246 — — — — 1,246

Issuance of restricted stock, net of forfeitures 49 — — — — — — —

Shares of common stock used to satisfy tax withholding obligations ( 1 ) — — — 1 ( 102 ) — ( 102 )

Dividends declared ($ 0.0525 per share)

Repurchase of common stock (Note 20)

( 133 ) — — — 133 ( 9,882 ) — ( 9,882 )

Employee stock award compensation — — 5,082 — — — — 5,082

Net income attributable to noncontrolling interest — — — — — — 1,063 1,063

Distribution to noncontrolling interest holder — — — — — — ( 1,019 ) ( 1,019 )

Acquisition of noncontrolling interest — — 245 — — — ( 271 ) ( 26 )

Net loss attributable to noncontrolling interest — — — — — — ( 252 ) ( 252 )

Net income attributable to the Ensign Group, Inc.

— — — 50,340 — — — 50,340

Balance - September 30, 2021 55,247 $ 58 $ 363,779 $ 688,287 2,812 $ ( 72,924 ) $ 94 $ 979,294

Balance - March 31, 2022 55,308 $ 58 $ 383,181 $ 781,290 3,077 $ ( 92,939 ) $ 423 $ 1,072,013

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

3 unchanged sentences

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

Dividends declared ($ 0.0500 per share)

— — — ( 2,683 ) — — — ( 2,683 )

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

Repurchase of common stock (Note 19)

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

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

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

Net income attributable to the Ensign Group, Inc.

— — — 40,849 — — — 40,849

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

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

Issuance of restricted stock, net of forfeitures 75 — — — — — — —

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

6 unchanged sentences

— — — 49,206 — — — 49,206

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

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

Issuance of restricted stock, net of forfeitures 43 — — — — — — —

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

Dividends declared ($ 0.0500 per share)

— — — ( 2,725 ) — — — ( 2,725 )

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

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

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

Net income attributable to the Ensign Group, Inc.

— — — 43,060 — — — 43,060

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

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

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands) 2022 2021

3 unchanged sentences

Depreciation and amortization 14,676 13,659

Impairment of long-lived assets — 2,681

Amortization of deferred financing fees 223 210

3 unchanged sentences

Stock-based compensation 5,167 4,054

Loss on sale of asset disposals 155 282

Loss/(gain) on insurance claims, legal finding and asset disposals 4,054 ( 236 )

Change in operating assets and liabilities

16 unchanged sentences

Cash payments for asset acquisitions (Note 9)

( 5,183 ) ( 23,077 )

Escrow deposits ( 400 ) ( 250 )

Escrow deposits used to fund acquisitions — 14,050

Cash from insurance proceeds 431 6,250

Cash proceeds from the sale of assets and ancillary business 951 359

Cash proceeds from the sale of assets — 840

Purchases of investments ( 2,340 ) ( 6,869 )

3 unchanged sentences

Cash flows from financing activities:

Proceeds from debt (Note 15)

31,646 380,600

Payments on debt (Note 16)

5 unchanged sentences

Non-controlling interest distribution — ( 1,248 )

Purchase of non-controlling interest ( 26 ) —

Payments of deferred financing costs ( 120 ) —

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

11,637 235,976

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

1 unchanged sentence

Net cash used in financing activities ( 11,289 ) ( 103,117 )

Net increase in cash and cash equivalents 68,058 116,205

Net decrease in cash and cash equivalents ( 13,655 ) ( 81,035 )

Cash and cash equivalents beginning of period 262,201 236,562

Cash and cash equivalents end of period $ 248,546 $ 155,527

See accompanying notes to condensed consolidated financial statements.

THE ENSIGN GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands) 2022 2021

2 unchanged sentences

Interest $ 2,107 $ 1,427

Income taxes $ 45,440 $ 48,620

Lease liabilities $ 35,972 $ 33,339

11 unchanged sentences

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

As of September 30, 2021, the Company operated 242 facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

As of March 31, 2022, the Company operated 250 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 25,500 operational skilled nursing beds and 2,700 senior living units.

As of September 30, 2021, the Company operated 177 facilities under long-term lease arrangements, and had options to purchase 11 of those 177 facilities.

The Company's real estate portfolio includes 95 owned real estate properties, which included 65 facilities operated and managed by the Company, 31 senior living operations leased to and operated by The Pennant Group, Inc., or Pennant, as part of the spin-off transaction that occurred in October 2019, and the Service Center location.

As of March 31, 2022, the Company operated 179 facilities under long-term lease arrangements, and had options to purchase 11 of those 179 facilities.

The Company's real estate portfolio includes 102 owned real estate properties, which included 71 facilities operated and managed by the Company, 32 senior living operations leased to and operated by The Pennant Group, Inc.

(Pennant) as part of the spin-off transaction that occurred in October 2019, and the Service Center location.

Of those 32 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.

The Company also has a wholly-owned captive insurance subsidiary 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.

In January of 2022, the Company formed a captive real estate investment trust (REIT), which owns and manages its real estate business, called Standard Bearer Healthcare REIT, Inc.

(Standard Bearer).

The Company expects the REIT structure will provide it with an efficient vehicle for future acquisitions of properties that could be operated by Ensign affiliates or other third parties.

Refer to Note 7, Standard Bearer for additional information on Standard Bearer.

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

1 unchanged sentence

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 has two reportable segments:

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

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

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

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

Other Information — The accompanying condensed consolidated financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 (collectively, the Interim Financial Statements) are unaudited.

Other Information — The accompanying condensed consolidated financial statements as of March 31, 2022 and for the three months ended March 31, 2022 and 2021 (collectively, the Interim Financial Statements) are unaudited.

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

3 unchanged sentences

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

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THE ENSIGN GROUP, INC.

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

4 unchanged sentences

and the noncontrolling interest in its condensed consolidated statements of income.

THE ENSIGN GROUP, INC.

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

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

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

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

The Company's relationship with variable interest entities was not material during the three and nine months ended September 30, 2021 and 2020.

Reclassifications — Certain prior period results have been reclassified to be consistent with the current period presentation, including presenting the change of the deferred compensation separately on the Company's Consolidated Statements of Cash Flows.

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

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 impacts" 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.

On October 1, 2021, the Company deconsolidated its VIE, which was not material, as this entity no longer met the requirements for consolidation.

At the end of fiscal year 2021, the Company had no VIEs.

Reclassifications — Prior period results reflect reclassifications, for comparative purposes, related to the change in the Company's segment structure as a result of the formation of Standard Bearer.

Refer to Note 8, Business Segments , for additional information related to segments.

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

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

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

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

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

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

9 unchanged sentences

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.

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THE ENSIGN GROUP, INC.

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

Accounts Receivable — 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.

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

7 unchanged sentences

For leases commencing subsequent to the ASC 842 adoption date, the Company performs an evaluation to determine whether the lease should be classified as an operating or finance lease at the inception of the lease.

As of September 30, 2021, the Company does not have any leases that are classified as finance leases.

As of March 31, 2022, the Company does not have any leases that are classified as finance leases.

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

1 unchanged sentence

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

THE ENSIGN GROUP, INC.

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

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

6 unchanged sentences

For leases where the Company is reasonably certain to exercise its renewal option, the option periods are included within the lease term and, therefore, the measurement of the right-of-use asset and lease liability.

The payment structure of the Company's leases generally contain annual escalation clauses that are either fixed or variable in nature, some of which are dependent upon published indices.

The Company's leases generally contain annual escalation clauses that are either fixed or variable in nature, some of which are dependent upon published indices.

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.

7 unchanged sentences

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

Management has evaluated its long-lived assets and determined there was no impairment during the three and nine months ended September 30, 2021.

The Company recorded an impairment charge of $ 2,681 during the three and nine months ended September 30, 2020.

Management has evaluated its long-lived assets and determined there was no impairment during the three months ended March 31, 2022 and 2021.

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

3 unchanged sentences

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.

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THE ENSIGN GROUP, INC.

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

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

2 unchanged sentences

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

The Company did no t identify any goodwill or intangible asset impairment during the three and nine months ended September 30, 2021 and 2020.

The Company did no t identify any goodwill or intangible asset impairment during the three months ended March 31, 2022 and 2021.

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.

3 unchanged sentences

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

The majority of the self-insured retention and deductible limits for general and professional liabilities and workers' compensation liabilities are self-insured through the Captive, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets.

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

The majority of the self-insured retention and deductible limits for general and professional liabilities and workers' compensation liabilities are self-insured through the captive insurance subsidiary, the related assets and liabilities of which are included in the accompanying condensed consolidated balance sheets.

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

THE ENSIGN GROUP, INC.

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

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

1 unchanged sentence

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

Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 63,689 and $ 57,628 as of September 30, 2021 and December 31, 2020, respectively.

Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 67,798 and $ 66,158 as of March 31, 2022 and December 31, 2021, respectively.

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

5 unchanged sentences

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

Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $ 25,968 and $ 24,499 as of September 30, 2021 and December 31, 2020, respectively.

In addition, the Company has recorded an asset and equal liability of $ 7,573 and $ 7,138 as of September 30, 2021 and December 31, 2020, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $ 28,116 and $ 27,335 as of March 31, 2022 and December 31, 2021, respectively.

In addition, the Company has recorded an asset and equal liability of $ 7,206 and $ 6,755 as of March 31, 2022 and December 31, 2021, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

See Note 13, Restricted and Other Assets.

2 unchanged sentences

To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $ 525 for each covered person for fiscal year 2022.

The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 9,799 and $ 7,533 as of September 30, 2021 and December 31, 2020, respectively.

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THE ENSIGN GROUP, INC.

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

The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 12,210 and $ 9,891 as of March 31, 2022 and December 31, 2021, respectively.

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

12 unchanged sentences

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

THE ENSIGN GROUP, INC.

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

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

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

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

in its condensed consolidated statements of income.

7 unchanged sentences

Recent Accounting Standards Adopted by the Company

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

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

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

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

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THE ENSIGN GROUP, INC.

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

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.

In November 2021, the FASB issued ASU 2021-10 “ Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance, ” which created FASB ASC Topic 832, Government Assistance (ASC 832) .

ASC 832 requires business entities to disclose information about certain government assistance they receive.

The Company adopted this standard on January 1, 2022 and determined there was no material impact on the Company's condensed consolidated financial statements.

4 unchanged sentences

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

Subsequent to March 31, 2022, the Company and its subsidiaries including Standard Bearer, entered into the Second Amendment to Third Amended and Restated Credit Agreement (the Amended Credit Facility), which increased the revolving credit facility by $ 250,000 to an aggregate principal amount of up to $ 600,000 .

The amendment modifies the reference rate from LIBOR to Secured Overnight Financing Rate (SOFR).

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

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

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

Selected Quarterly Financial Data, with certain exceptions;

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

off-balance sheet arrangements in tabular form;

and the aggregate amount of contractual obligations in tabular form.

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

The final rules are effective for all registration statements and annual 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 reports.

In July 2021, the FASB issued ASU 2021-05 “ Lessors—Certain Leases with Variable Lease Payments (Topic 842), ” which amends the lessor classification guidance to introduce additional criteria when classifying leases with variable lease payments that do not depend on a reference index or a rate.

This guidance is effective for annual periods beginning after December 15, 2021, which will be the Company's fiscal year 2022, with early adoption permitted.

The Company has not yet determined the effect of the ASU 2021-05 on its results of operations, financial condition or cash flows.

COVID-19 UPDATE

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

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

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

During the three and nine months ended September 30, 2021, the Company received and returned $ 99 and $ 11,637 , respectively, in Provider Relief Funds.

During both the three and nine months ended September 30, 2020, the Company received $ 23,296 and $ 132,052 , respectively, in Provider Relief Funds, of which $ 108,756 was returned in the third quarter of 2020.

The remaining amount received was subsequently returned in the fourth quarter of 2020.

The COVID-19 pandemic has continued to impact the Company's affiliated operations.

In prior years, as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act), the Company received cash distributions of relief fund payments (Provider Relief Funds) and funds authorized by U.S.

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

During the three months ended March 31, 2022, the Company did not receive Provider Relief Funds.

During the three months ended March 31, 2021, the Company received and returned $ 9,139 in Provider Relief Funds.

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

3 unchanged sentences

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

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THE ENSIGN GROUP, INC.

6 unchanged sentences

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

As of September 30, 2021 and December 31, 2020, the Company had $ 4,392 and $ 6,520 in unapplied state relief funds, respectively.

During the three and nine months ended September 30, 2021, the Company received an additional $ 17,829 and $ 50,250 in state relief funding and recognized $ 19,229 and $ 52,386 , respectively, as revenue.

During the three and nine months ended September 30, 2020, the Company received $ 17,344 and $ 32,455 in state relief funding and recognized $ 11,691 and $ 24,825 , respectively, as revenue.

As of March 31, 2022 and December 31, 2021, the Company had $ 1,499 and $ 1,781 in unapplied state relief funds, respectively.

During the three months ended March 31, 2022 and 2021, the Company received an additional $ 17,317 and $ 15,645 in state relief funding and recognized $ 17,599 and $ 16,465 , respectively, 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 short-term balance of $ 24,155 is included in accrued wages and related liabilities and the remaining $ 24,154 is included in other long-term liabilities within the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020.

The Company paid $ 24,154 during the year ended December 31, 2021 and the remaining short-term balance of $ 24,155 is included in accrued wages and related liabilities within the condensed consolidated balance sheets as of March 31, 2022.

REVENUE AND ACCOUNTS RECEIVABLE

11 unchanged sentences

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

Revenue from the Medicare and Medicaid programs accounted for 73.6 % for both the three and nine months ended September 30, 2021, and 75.5 % and 74.0 % for the three and nine months ended September 30, 2020, respectively.

Revenue from the Medicare and Medicaid programs accounted for 73.4 % and 74.1 % of all service revenue for the three months ended March 31, 2022 and 2021, respectively.

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

1 unchanged sentence

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

The Company recorded adjustments to revenue which were not material to the Company's consolidated revenue for the three and nine months ended September 30, 2021 and 2020.

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The Company recorded adjustments to revenue which were not material to the Company's condensed consolidated revenue for the three months ended March 31, 2022 and 2021.

THE ENSIGN GROUP, INC.

4 unchanged sentences

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.

This single component practical expedient requires the Company to account for the lease component and non-lease components associated with that lease as a single component if (1) the timing and pattern of transfer of the lease component and the non-lease components 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.

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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 three and nine months ended September 30, 2021 and 2020 is summarized in the following tables:

Three Months Ended September 30,

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 rates, adjusted for estimates for variable consideration, on a per patient, daily basis or as services are performed.

Service revenue for the three months ended March 31, 2022 and 2021 is summarized in the following tables:

Three Months Ended March 31,

Revenue % of Revenue Revenue % of Revenue

7 unchanged sentences

Service revenue $ 709,156 100.0 % $ 623,276 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended September 30, 2021 and 2020 .

(2) Private and other payors also includes revenue from all payors generated in other an cillary services for the three months ended September 30, 2021 and 2020 .

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(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 4,289 and $ 3,977 , respectively, for the three months ended March 31, 2022 and 2021.

THE ENSIGN GROUP, INC.

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

Nine Months Ended September 30,

Revenue % of Revenue Revenue % of Revenue

$ 749,821 39.0 % $ 672,506 38.2 %

Medicare 536,971 27.9 519,865 29.5

Medicaid — skilled 128,041 6.7 110,626 6.3

Total Medicaid and Medicare 1,414,833 73.6 1,302,997 74.0

Managed care 336,225 17.5 271,993 15.4

Private and other (2)

171,424 8.9 187,381 10.6

Service revenue $ 1,922,482 100.0 % $ 1,762,371 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the nine months ended September 30, 2021 and 2020.

(2) Private and other payors also includes revenue from all payors generated in other ancillary services for the nine months ended September 30, 2021 and 2020.

In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties is $ 3,933 and $ 11,837 , respectively, for the three and nine months ended September 30, 2021 and $ 3,914 and $ 11,196 , respectively, for the three and nine months ended September 30, 2020.

Balance Sheet Impact

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

The Company had no material contract liabilities and contract assets as of September 30, 2021 and December 31, 2020, or activity during the three and nine months ended September 30, 2021 and 2020.

Accounts receivable as of September 30, 2021 and December 31, 2020, is summarized in the following table:

September 30, 2021 December 31, 2020

The Company had no material contract liabilities and contract assets as of March 31, 2022 and December 31, 2021, or activity during the three months ended March 31, 2022 and 2021.

Accounts receivable as of March 31, 2022 and 2021, is summarized in the following table:

March 31, 2022 December 31, 2021

Medicaid $ 128,574 $ 123,647

13 unchanged sentences

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.

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THE ENSIGN GROUP, INC.

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

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Net income $ 50,088 $ 49,837

net income attributable to noncontrolling interests 1,063 253 2,852 1,045

net (loss) income attributable to noncontrolling interests ( 252 ) 631

Net income attributable to The Ensign Group, Inc.

3 unchanged sentences

$ 0.92 $ 0.91

THE ENSIGN GROUP, INC.

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

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Net income $ 50,088 $ 49,837

net income attributable to noncontrolling interests 1,063 253 2,852 1,045

net (loss) income attributable to noncontrolling interests ( 252 ) 631

Net income attributable to The Ensign Group, Inc.

2 unchanged sentences

incremental shares from assumed conversion (1)

2,344 2,385 2,524 2,286

Adjusted weighted average common shares outstanding 56,871 56,891

1 unchanged sentence

$ 0.89 $ 0.86

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 365 and 139 fo r the three and nine months ended September 30, 2021, respectively, and 1,144 and 979 for the three and nine months ended September 30, 2020, respectivel y.

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 647 and 28 for the three months ended March 31, 2022 and 2021, respectively.

FAIR VALUE MEASUREMENTS

4 unchanged sentences

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 $ 304,620 and $ 236,562 as of September 30, 2021 and December 31, 2020, respectively, is derived using Level 1 inputs.

The fair value of cash and cash equivalents of $ 248,546 and $ 262,201 as of March 31, 2022 and December 31, 2021, respectively, is derived using Level 1 inputs.

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

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

As of September 30, 2021, and December 31, 2020, the fair value of the pooled investment funds of $ 16,082 and $ 6,577 , respectively, is derived using Level 2 inputs.

As of March 31, 2022, and December 31, 2021, the fair value of the pooled investment funds of $ 25,446 and $ 17,530 , respectively, is derived using Level 2 inputs.

The pooled investment funds are included in restricted and other assets in the condensed consolidated balance sheets.

3 unchanged sentences

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

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THE ENSIGN GROUP, INC.

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

Debt Security Investments - Held to Maturity

As of September 30, 2021 and December 31, 2020, the Company had approximately $ 48,024 and $ 45,554 , respectively, in debt security investments which were classified as held to maturity and carried at amortized cost.

As of March 31, 2022 and December 31, 2021, the Company had approximately $ 50,117 and $ 50,330 , respectively, in debt security investments which were classified as held to maturity and carried at amortized cost.

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

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

Further, as of September 30, 2021, the debt security investments were held in AA, A and BBB r ated de bt securities.

The Company believes its debt security investments that were in an unrealized loss position as of September 30, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

Further, as of March 31, 2022, the debt security investments were held in AA, A and BBB r ated de bt securities.

The Company believes its debt security investments that were in an unrealized loss position as of March 31, 2022 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

STANDARD BEARER

Standard Bearer's real estate portfolio consists of 95 of the Company's 102 owned real estate properties, of which 67 are operated and managed by the Company and 30 are leased to and operated by Pennant.

Standard Bearer intends to qualify and elect to be taxed as a REIT, for U.S.

federal income tax purposes, commencing with its taxable year ending December 31, 2022.

During the three months ended March 31, 2022, Standard Bearer acquired the real estate of two skilled nursing facilities for a purchase price of $ 17,010 , of which both are operated and managed by Ensign's affiliated operations.

Refer to Note 9, Operation Expansions for additional information.

THE ENSIGN GROUP, INC.

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

As part of the formation of Standard Bearer, certain of the Company's operating subsidiaries and Standard Bearer and its subsidiaries entered into several agreements which include leasing, management services and debt arrangements between the operations.

As these intercompany arrangements were entered into when Standard Bearer was formed in January 2022, the transactions related to these agreements are reflected in the Standard Bearer's segment income during three months ended March 31, 2022.

All intercompany transactions have been eliminated in consolidation.

Refer to Note 8, Business Segments , for additional information related to these intercompany eliminations as well as Standard Bearer as a reportable segment.

Intercompany master lease agreements

Certain of the Company's operating subsidiaries and the 67 Standard Bearer subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer Master Leases) in January 2022.

The lease periods range from 15 to 19 years with three five-year renewal option beyond the initial term, on the same terms and conditions.

The rent structure under the Standard Bearer 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 operating subsidiaries are 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 two real estate properties acquired during three months ended March 31, 2022 were added to the Standard Bearer Master Leases.

Rental revenue generated from Ensign affiliated operations for the three months ended March 31, 2022 and 2021 was $ 13,425 and $ 10,591 , respectively.

Intercompany management agreement

The Service Center provides services to Standard Bearer pursuant to the management agreement between Standard Bearer and the Service Center.

The management agreement provides for a base management fee that is equal to 5 % of total rental revenue and an incentive management fee that is equal to 5 % of funds from operations (FFO) and is capped at 1 % of total rental revenue.

Management fee generated between Standard Bearer and the Service Center for the three months ended March 31, 2022 was $ 1,022 or 6.0 % of total Standard Bearer rental revenue.

Intercompany debt arrangements

Standard Bearer obtains its funding through various sources including operating cash flows, access to debt arrangements and intercompany loans.

The intercompany debt arrangements include mortgage loans and a credit revolver between the Ensign Group, Inc., the real estate properties and Standard Bearer to fund acquisitions and working capital needs.

The interest rate under the credit revolver is a base rate plus a margin ranging from 0.50 % to 1.50 % per annum or LIBOR (or an alternative reference rate) plus a margin range from 1.50 % to 2.50 % per annum.

In addition, as the Department of Housing and Urban Development (HUD) mortgage loans and promissory notes are entered into by real estate subsidiaries held by Standard Bearer, the interest expense incurred from these debts are included in Standard Bearer's segment income.

Refer to Note 16, Debt , for additional information related to these debts.

Equity Instrument Denominated in the Shares of a Subsidiary

As part of the formation of Standard Bearer in January of 2022, the Company implemented the Standard Bearer Healthcare REIT, Inc.

2022 Omnibus Incentive Plan (Standard Bearer Equity Plan).

The Company may grant stock options and restricted stock awards under the Standard Bearer Equity Plan to employees and management of the Company's affiliated subsidiaries.

These awards generally vest over a period of five years or upon the occurrence of certain prescribed events.

The value of the stock options and restricted stock awards is tied to the value of the common stock of Standard Bearer, which is determined based on an independent valuation of Standard Bearer.

The awards can be put to the Company at various prescribed dates, which in no event is earlier than six months after vesting of the restricted awards or exercise of the stock options.

The Company can also call the awards, generally upon employee termination.

During the three months ended March 31, 2022, the Company did not grant any stock options nor restricted shares.

THE ENSIGN GROUP, INC.

NOTES TO THE UNAUDITED CONDENSED 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 the Company's real estate portfolio.

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

The Company has two reportable segments:

(1) 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, 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 September 30, 2021, the skilled services segment includes 211 skilled nursing operations and 22 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

The Company's real estate segment includes 95 owned real estate properties.

These properties include 65 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 22 campus operations that provide both skilled nursing and rehabilitative care services and senior living services, mobile diagnostics, medical transportation and other ancillary operations.

In conjunction with the formation Standard Bearer in January 2022, the Company's Chief Executive Officer, who is its chief operating decision maker, or CODM, began reviewing the results of Standard Bearer instead of all real estate properties.

Accordingly, the Company revised its former real estate segment to include only real estate properties that are part of Standard Bearer.

This change in organizational structure demonstrates that Standard Bearer's real estate is a core part of the Company's expansion of its real estate investment strategy.

As of the first quarter of 2022, the Company has two reportable segments:

(1) skilled services, which includes the operation of skilled nursing facilities and rehabilitation therapy services and (2) Standard Bearer, which is comprised of selected real estate properties owned by Standard Bearer and leased to skilled nursing and senior living operators.

Segment information for prior period has been recast to reflect the change of the Company’s segment structure.

As of March 31, 2022, the skilled services segment includes 217 skilled nursing operations and 23 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

The Company's Standard Bearer segment consists of 95 owned real estate properties.

These properties include 67 operations the Company operated and managed and 30 senior living operations that are leased to and operated by third parties.

Of the 30 real estate operations leased to third parties, 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 ten stand-alone senior living operations and 23 campus operations that provide both skilled nursing and rehabilitative care services and senior living services, mobile diagnostics, medical transportation, other real estate and other ancillary operations.

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

3 unchanged sentences

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

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

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

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

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

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

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

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THE ENSIGN GROUP, INC.

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

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

Intercompany revenue is eliminated in consolidation, along with corresponding intercompany expenses.

Segment income and loss is defined as profit or loss from operations before provision for income taxes, excluding gain or loss from sale of real estate, insurance recoveries and impairment charges from operations.

Included in segment income for Standard Bearer is expense for intercompany services provided by the Service Center as described in Note 7, Standard Bearer , as it is part of the CODM financial information.

The following tables set forth financial information for the segments:

Three Months Ended September 30, 2021

Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Three Months Ended March 31, 2022

Skilled Services Standard Bearer All Other (1)

Intercompany Elimination Total

Service revenue (2)

Rental revenue — 16,271 — ( 12,338 ) 3,933

Total revenue $ 642,075 $ 16,271 $ 22,522 $ ( 12,338 ) $ 668,530

Segment income (loss) 94,429 8,910 ( 38,482 ) — 64,857

Income before provision for income taxes $ 64,857

Depreciation and amortization 7,715 4,936 1,278 — 13,929

Other expense (income), net (3)

$ 686,771 $ — $ 25,467 $ ( 3,082 ) $ 709,156

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

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

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

(3) Other expense (income), net includes interest expense, interest income and gain and loss on investments.

Three Months Ended September 30, 2020

Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Service revenue $ 570,282 $ — $ 25,059 $ — $ 595,341

Rental revenue (3)

Total revenue $ 570,282 $ 15,536 $ 25,059 $ ( 11,622 ) $ 599,255

Segment income (loss) 84,747 8,474 ( 36,289 ) — 56,932

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

Income before provision for income taxes $ 54,179

Depreciation and amortization 7,094 4,522 2,141 — 13,757

Other expense (income), net (3)

— 17,193 1,863 ( 14,767 ) 4,289

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

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

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

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

Nine Months Ended September 30, 2021

Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Service revenue $ 1,855,993 $ — $ 66,489 $ — $ 1,922,482

Rental revenue — 48,181 — ( 36,344 ) 11,837

Total revenue $ 686,771 $ 17,193 $ 27,330 $ ( 17,849 ) $ 713,445

Segment income (loss) 98,256 6,900 ( 38,930 ) — 66,226

Gain on sale of real estate 440

Income before provision for income taxes $ 191,984

Depreciation and amortization 7,901 5,021 1,754 — 14,676

Other expense (income), net (3)

Interest expense (4)

$ — $ 3,562 $ 358 $ ( 1,852 ) $ 2,068

(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, interest income and gain and loss on investments.

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(1) All other primarily includes all ancillary operations, stand-alone senior living operations and the Service Center.

(2) Intercompany service revenue represents service revenue generated by ancillary operations provided to the Company's affiliated wholly-owned healthcare facilities and management service revenue generated by the Service Center with Standard Bearer.

Intercompany service revenue is eliminated in consolidation along with corresponding intercompany cost of service.

(3) Intercompany rental revenue represents rental income generated by both Standard Bearer and other real estate properties with Company's affiliated wholly-owned healthcare facilities.

Intercompany rental revenue is eliminated in consolidation along with corresponding intercompany rent expense.

(4) Included in interest expense in Standard Bearer is interest expense incurred from intercompany debt arrangements between Standard Bearer and The Ensign Group, Inc.

The intercompany interest expense is eliminated in the "Intercompany Elimination" column.

THE ENSIGN GROUP, INC.

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

Nine Months Ended September 30, 2020

Skilled Services Real Estate All Other (1)

Intercompany Elimination (2)

Three Months Ended March 31, 2021

Skilled Services Standard Bearer All Other (1)

Intercompany Elimination Total

Service revenue (2)

$ 601,036 $ — $ 23,919 $ ( 1,679 ) $ 623,276

Rental revenue (3)

— 14,069 1,810 ( 11,902 ) 3,977

Total revenue $ 601,036 $ 14,069 $ 25,729 $ ( 13,581 ) $ 627,253

Segment income (loss) 88,931 7,713 ( 34,298 ) — 62,346

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

Gain on sale of real estate — — — — 440

Income before provision for income taxes — — — — $ 62,786

Depreciation and amortization 7,475 4,155 2,029 — 13,659

Other expense (income), net (3)

Interest expense (4)

$ — $ 1,641 $ — $ — $ 1,641

(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 income.

(1) All other primarily includes all ancillary operations, stand-alone senior living operations and the Service Center.

(2) Intercompany service revenue represents service revenue generated by ancillary operations provided to the Company's affiliated wholly-owned healthcare facilities.

Intercompany service revenue is eliminated in consolidation along with corresponding intercompany cost of service.

(3) Intercompany rental revenue represents rental income generated by both Standard Bearer and other real estate properties with the Company's affiliated wholly-owned healthcare facilities.

Intercompany rental revenue is eliminated in consolidation along with corresponding intercompany rent expense.

(4) Included in interest expense in Standard Bearer is interest expense incurred from intercompany debt arrangements between Standard Bearer and The Ensign Group, Inc.

The intercompany interest expense is eliminated in the "Intercompany Elimination" column.

Service revenue by major payor source were as follows:

Three Months Ended September 30, 2021

Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 263,072 $ 3,936 (1) $ 267,008 40.2 %

Medicare 176,660 — 176,660 26.6

Medicaid-skilled 45,308 — 45,308 6.8

Subtotal 485,040 3,936 488,976 73.6

Managed care 114,917 — 114,917 17.3

Private and other 42,118 18,586 (2) 60,704 9.1

Total service revenue $ 642,075 $ 22,522 $ 664,597 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended September 30, 2021.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the three months ended September 30, 2021.

Three Months Ended September 30, 2020

Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 218,840 $ 3,352 (1) $ 222,192 37.3 %

Three Months Ended March 31, 2022

Skilled Services Other Service Revenue Total Service Revenue Revenue %

$ 261,587 $ 4,761 $ 266,348 37.6 %

Medicare 208,411 — 208,411 29.4

3 unchanged sentences

Private and other (2)

43,038 17,624 60,662 8.6

Total service revenue $ 686,771 $ 22,385 $ 709,156 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to FMAP for the three months ended September 30, 2020.

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

Nine Months Ended September 30, 2021

Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 738,484 $ 11,337 (1) $ 749,821 39.0 %

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

Three Months Ended March 31, 2021

Skilled Services Other Service Revenue Total Service Revenue Revenue %

$ 227,741 $ 3,617 $ 231,358 37.1 %

Medicare 190,303 — 190,303 30.5

3 unchanged sentences

Private and other (2)

34,654 18,623 53,277 8.5

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

(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP for the nine months ended September 30, 2021.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services for the nine months ended September 30, 2021.

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(1) Medicaid payor includes revenue generated from senior living operations and revenue related to FMAP.

(2) Private and other payors also includes revenue from senior living operations and all payors generated in other ancillary services.

This revenue is included in both Standard Bearer and the all other category.

THE ENSIGN GROUP, INC.

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

Nine Months Ended September 30, 2020

Skilled Services All Other Total Service Revenue Revenue %

Medicaid $ 662,733 $ 9,773 (1) $ 672,506 38.2 %

Medicare 519,865 — 519,865 29.5

Medicaid-skilled 110,626 — 110,626 6.3

Subtotal 1,293,224 9,773 1,302,997 74.0

Managed care 271,993 — 271,993 15.4

Private and other 120,046 67,335 (2) 187,381 10.6

Total service revenue $ 1,685,263 $ 77,108 $ 1,762,371 100.0 %

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

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

OPERATION EXPANSIONS

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

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

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

Acquisitions are accounted for using the acquisition method of accounting.

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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.

FASB ASC 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.

2022 Expansions

During the nine months ended September 30, 2021, the Company expanded its operations through a combination of long-term leases and a real estate purchase, with the addition of fourteen stand-alone skilled nursing operations.

Of these additions, one is related to a purchase of owned property, further expanding the Company's real estate portfolio.

These new operations added a total of 1,504 operational skilled nursing beds operated by the Company's affiliated operating subsidiaries.

The aggregate purchase price for these acquisitions during the nine months ended September 30, 2021 was $ 11,183 .

During the three months ended March 31, 2022, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of four stand-alone skilled nursing operations.

Of these additions, two are related to purchases of real estate properties, further expanding the Company's real estate portfolio.

Refer to Note 7, Standard Bearer, for additional information on the purchase of real estate properties.

In addition, the Company added two senior living operations that were transferred from Pennant, one of which is part of a campus operated by the Company's affiliated operating subsidiaries.

These new operations added a total of 453 operational skilled nursing beds and 403 operational senior living units to be operated by the Company's affiliated operating subsidiaries.

The aggregate purchase price for these expansions during the three months ended March 31, 2022 was $ 33,410 .

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

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

The fair value of assets for ten of the acquisitions was concentrated in property and equipment and as such, the transaction was classified as an asset acquisition.

The aggregate purchase price for the asset acquisitions during the nine months ended September 30, 2021 was $ 5,183 , which primarily consists of building and improvements of $ 4,547 .

The fair value of assets for the remaining four additions was concentrated in goodwill of $ 6,000 and as such, the transaction was classified as a business combination.

Subsequent to September 30, 2021, the Company expanded its operations through long-term leases with the addition of three stand-alone skilled nursing operations.

These new operations added 328 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries.

The aggregate purchase price for the two real estate properties acquired during the three months ended March 31, 2022 was $ 17,010 and was classified as asset acquisitions.

The remaining aggregate purchase price during the three months ended March 31, 2022 of $ 16,400 is concentrated in goodwill and accordingly, the transactions were classified as business combinations.

Subsequent to March 31, 2022, the Company expanded its operations through long-term leases, which added three senior living operations that were transferred from Pennant, two of which are part of healthcare campuses operated by the Company's affiliated operating subsidiaries.

These new operations added 281 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.

2021 Expansions

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

Of these additions, three are related to purchases of owned properties, further expanding the Company's real estate portfolio.

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

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

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

The Company did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and obligations under the long-term lease.

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

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THE ENSIGN GROUP, INC.

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

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

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

The purchase price for the asset acquisitions primarily consists of building and improvements of $ 13,365 and land of $ 8,938 .

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.

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

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

The assets added during the nine months ended September 30, 2021 were not material operations to the Company individually or in the aggregate.

The assets added during the three months ended March 31, 2022 were not material operations to the Company individually or in the aggregate.

Accordingly, pro forma financial information is not presented.

These additions have been included in the September 30, 2021 condensed consolidated balance sheets of the Company, and the operating results have been included in the condensed consolidated statements of operations of the Company since the date the Company gained effective control.

These additions have been included in the March 31, 2022 condensed consolidated balance sheets of the Company, and the operating results have been included in the condensed consolidated statements of operations of the Company since the date the Company gained effective control.

PROPERTY AND EQUIPMENT - NET

Property and equipment, net consists of the following:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Land $ 123,068 $ 121,164

7 unchanged sentences

Property and equipment, net $ 906,777 $ 888,434

See also Note 8, Operation Expansions for information on acquisitions during the nine months ended September 30, 2021 and 2020.

See also Note 7, Standard Bearer and Note 9, Operation Expansions for information on acquisitions during the three months ended March 31, 2022 and 2021.

INTANGIBLE ASSETS - NET

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Weighted Average Life (Years)

5 unchanged sentences

Total $ 5,511 $ ( 2,846 ) $ 2,665 $ 5,383 $ ( 2,731 ) $ 2,652

During the three and nine months ended September 30, 2021, amortization expense was $ 363 and $ 1,087 , respectively, of which $ 289 and $ 869 was related to the amortization of right-of-use assets, respectively.

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

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

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THE ENSIGN GROUP, INC.

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

During the three months ended March 31, 2022 and 2021, amortization expense was $ 404 and $ 361 , respectively, of which $ 289 and $ 290 was related to the amortization of right-of-use assets, respectively.

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

1 unchanged sentence

Thereafter 1,248

THE ENSIGN GROUP, INC.

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

GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

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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 FASB ASC 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.

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.

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.

3 unchanged sentences

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

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of September 30, 2021.

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

The following table represents the goodwill value by skilled service segment and "all other" category, which includes other ancillary services, as of and for the nine months ended September 30, 2021:

The Company anticipates that the majority of total goodwill recognized will be fully deductible for tax purposes as of March 31, 2022.

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

The following table represents the goodwill value by skilled service segment and "all other" category, which includes other ancillary services, as of March 31, 2022 and December 31, 2021:

Skilled Services All Other Total

1 unchanged sentence

Additions 16,400 — 16,400

September 30, 2021 $ 51,486 $ 8,983 $ 60,469

March 31, 2022 $ 67,886 $ 8,983 $ 76,869

Other indefinite-lived intangible assets consist of the following:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Trade name $ 889 $ 889

1 unchanged sentence

$ 3,727 $ 3,727

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THE ENSIGN GROUP, INC.

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

RESTRICTED AND OTHER ASSETS

Restricted and other assets consist of the following:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Debt issuance costs, net $ 1,776 $ 1,953

2 unchanged sentences

Capital improvement reserves with landlords and lenders 6,315 7,103

Cash surrender value of life insurance related to deferred compensation plan 16,082 6,577

Deferred compensation plan investments 25,446 17,530

Restricted and other assets $ 55,172 $ 47,046

Included in restricted and other assets as of September 30, 2021 and December 31, 2020 are anticipated insurance recoveries related to the Company's workers' compensation liabilities and general and professional liability claims that are recorded on a gross rather than net basis in accordance with ASU issued by the FASB.

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

Included in restricted and other assets as of March 31, 2022 and December 31, 2021 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 GAAP.

THE ENSIGN GROUP, INC.

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

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

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

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

For the three months ended September 30, 2021, the Company recorded loss on the investment acquired in connection with our deferred compensation plan that was not material.

For the nine months ended September 30, 2021, the Company recorded net income on the investment acquired in connection with our deferred compensation plan of $ 940 , which is included in other income (expense), net, and an offsetting expense of $ 1,046 between cost of services and general and administrative expenses.

For the three and nine months ended September 30, 2020, the Company recorded income on the investment acquired in connection with our deferred compensation plan of $ 252 and $ 710 , respectively.

During the same periods, the Company recorded an offsetting expense of $ 268 and $ 657 , respectively, between cost of services and general and administrative expenses.

The Company recorded a loss on the deferral investment of $ 1,202 and a gain on the deferral investment of $ 306 , which is included in other expense, net and offsetting income of $ 1,211 and offsetting expense $ 351 between cost of services and general and administrative expenses in the accompanying condensed consolidated statements of income for the three months ended March 31, 2022 and 2021, respectively.

OTHER ACCRUED LIABILITIES

Other accrued liabilities consists of the following:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Quality assurance fee $ 6,652 $ 6,474

5 unchanged sentences

Property taxes 7,716 9,124

Income tax payable 10,416 —

Legal finding accrued 3,626 —

Other 18,248 18,415

6 unchanged sentences

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

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

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THE ENSIGN GROUP, INC.

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

The Company recorded income tax expense of $ 43,220 and $ 37,026 during the nine months ended September 30, 2021 and 2020, respectively, or 22.5 % of earnings before income taxes for the nine months ended September 30, 2021, compared to 22.8 % for the nine months ended September 30, 2020.

The effective tax rate for both periods is driven by the impact of higher excess tax benefits from stock-based compensation, partially offset by non-deductible expenses, compared to prior year.

During the current quarter, the state of Wisconsin initiated an examination of the Company's income tax returns for fiscal years 2017, 2018 and 2019.

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

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

The Company recorded income tax expense of $ 16,138 and $ 12,949 during the three months ended March 31, 2022 and 2021, respectively, or 24.4 % of earnings before income taxes for the three months ended March 31, 2022, compared to 20.6 % for the three months ended March 31, 2021.

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

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

During 2022, the statutes of limitations will lapse on the Company's 2018 Federal tax year and certain 2017 and 2018 state tax years.

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

The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the nine months ended September 30, 2021 and 2020.

The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the three months ended March 31, 2022 and 2021.

THE ENSIGN GROUP, INC.

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

Debt consists of the following:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Mortgage loans and promissory notes $ 158,988 $ 159,967

2 unchanged sentences

Long-term debt less current maturities $ 152,010 $ 152,883

Mortgage Loans and Promissory Notes

As of September 30, 2021, the Company's operating subsidiaries had $ 147,306 outstanding under the mortgage loans and notes, of which $ 3,548 is classified as short-term and the remaining $ 143,758 is classified as long-term.

The Company was in compliance with all loan covenants as of September 30, 2021.

During nine months ended September 30, 2021, three of the Company's subsidiaries entered into the Department of Housing and Urban Development (HUD) mortgage loans in the aggregate amount of $ 31,420 .

As a result, 22 of the Company's subsidiaries have mortgage loans insured with HUD in the aggregate amount of $ 143,776 , as of September 30, 2021, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates range of 3.1 % to 4.2 %, including fixed interest rates range of 2.4 % to 3.3 % per annum.

In addition to the interest rate, we incur other fees for HUD placement, including but not limited to audit fees.

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

For the majority of the loans, during the first three years, the prepayment fee is 10.0 % and is reduced by 3.0 % 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.

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

The notes bear fixed interest rates of 5.0 % and 5.3 % per annum and the term of the notes are ten months and 12 years, 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.

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THE ENSIGN GROUP, INC.

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

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 Company maintains a revolving credit facility between the Company and its subsidiaries, including Standard Bearer as co-borrowers, and Truist Securities (Truist) (the Credit Facility).

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

2 unchanged sentences

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.

In addition, the Company and Standard Bearer, as co-borrowers, pay 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.

2 unchanged sentences

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

As of September 30, 2021, and October 22, 2021, there was no outstanding debt under the Credit Facility.

The Company was in compliance with all loan covenants as of September 30, 2021.

As of March 31, 2022, and April 26, 2022, there was no outstanding debt under the Credit Facility.

The Company was in compliance with all loan covenants as of March 31, 2022.

Subsequent to March 31, 2022, the Company and its subsidiaries, including Standard Bearer, entered into the Amended Credit Facility with a revolving line of credit of up to $ 600,000 in aggregate principal.

The maturity date of the Amended Credit Facility is April 8, 2027.

Borrowings are supported by a lending consortium arranged by Truist.

The interest rates applicable to loans under the Amended Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.25 % to 1.25 % per annum or Secured Overnight Financing Rate (SOFR) plus a margin range from 1.25 % to 2.25 % per annum, based on the Consolidated Total Net Debt to Consolidated EBITDA ratio (as defined in the agreement).

In addition, the Company and its subsidiaries, including Standard Bearer, will pay a commitment fee on the unused portion of the commitments that will range from 0.20 % to 0.40 % per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

Except as set forth in the Amended Credit Facility, all other terms and conditions of the Credit Facility remained in full force and effect as described below.

Mortgage Loans and Promissory Notes

As of March 31, 2022, the Company's operating subsidiaries had $ 158,988 outstanding under the mortgage loans and notes, of which $ 3,723 is classified as short-term and the remaining $ 155,265 is classified as long-term.

The Company was in compliance with all loan covenants as of March 31, 2022.

THE ENSIGN GROUP, INC.

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

As of March 31, 2022, 23 of the Company's subsidiaries have mortgage loans insured with HUD in the aggregate amount of $ 155,858 , which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates in a range of 3.1 % to 4.2 %, including fixed interest rates in a range of 2.4 % to 3.3 % per annum.

In addition to the interest rate, we incur other fees for HUD placement, including but not limited to audit fees.

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

There is no prepayment penalty after year ten .

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

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

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

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

Off-Balance Sheet Arrangements

As of September 30, 2021, the Company had approximately $ 6,544 o n the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit, which is a reduction of $ 1,036 from the second quarter.

As of March 31, 2022, the Company had approximately $ 6,710 on the Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

OPTIONS AND AWARDS

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

As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three months ended March 31, 2022 and 2021 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.

6 unchanged sentences

Options expire ten years from the date of grant.

As of September 30, 2021, there were approximately 2,270 unissued shares of common stock available for issuance under this plan.

As of March 31, 2022, there were approximately 1,723 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.

3 unchanged sentences

Stock Options

The Company granted 151 and 496 stock options during the three and nine months ended September 30, 2021, respectively.

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THE ENSIGN GROUP, INC.

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

The Company used the following assumptions for stock options granted during the three months ended September 30, 2021 and 2020:

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

2021 151 1.0 % 6.1 years 42.5 % 0.3 %

2020 160 0.4 % 6.3 years 41.8 % 0.3 %

The Company used the following assumptions for stock options granted during the nine months ended September 30, 2021 and 2020:

The Company granted 164 stock options during the three months ended March 31, 2022.

The Company used the following assumptions for stock options granted during the three months ended March 31, 2022 and 2021:

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

1 unchanged sentence

2021 136 0.8 % 6.3 years 42.2 % 0.2 %

For the nine months ended September 30, 2021 and 2020, the following represents the exercise price and fair value displayed at grant date for stock option grants:

THE ENSIGN GROUP, INC.

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

For the three months ended March 31, 2022 and 2021, the following represents the exercise price and fair value displayed at grant date for stock option grants:

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

1 unchanged sentence

2021 136 $ 83.64 $ 33.99

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended September 30, 2021 and 2020 and therefore, the intrinsic value was $ 0 at the date of grant.

The following table represents the employee stock option activity during the nine months ended September 30, 2021:

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the three months ended March 31, 2022 and 2021 and therefore, the intrinsic value was $ 0 at the date of grant.

The following table represents the employee stock option activity during the three months ended March 31, 2022:

Number of Options Outstanding Weighted Average

5 unchanged sentences

Exercised ( 147 ) 18.86 — —

September 30, 2021 3,994 $ 35.35 2,129 $ 20.25

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THE ENSIGN GROUP, INC.

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

The following summary information reflects stock options outstanding, vested and related details as of September 30, 2021:

March 31, 2022 4,024 $ 38.89 2,172 $ 22.57

The following summary information reflects stock options outstanding, vested and related details as of March 31, 2022:

Stock Options Outstanding Stock Options Vested

13 unchanged sentences

Total 4,024 $ 60,053 2,172

The aggregate intrinsic value of options outstanding, vested and expected to vest as of September 30, 2021 and December 31, 2020 is as follows:

Options September 30, 2021 December 31, 2020

The aggregate intrinsic value of options outstanding, vested and expected to vest as of March 31, 2022 and December 31, 2021 is as follows:

Options March 31, 2022 December 31, 2021

Outstanding $ 205,704 $ 191,242

2 unchanged sentences

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

The aggregate intrinsic value of options that vested during the nine months ended September 30, 2021 and 2020 was $ 18,500 and $ 13,681 , respectively.

The total intrinsic value of options exercised during the nine months ended September 30, 2021 and 2020 was $ 31,167 and $ 21,044 , respectively.

The aggregate intrinsic value of options that vested during the three months ended March 31, 2022 and 2021 was $ 6,351 and $ 8,545 , respectively.

The total intrinsic value of options exercised during the three months ended March 31, 2022 and 2021 was $ 9,502 and $ 17,241 , respectively.

THE ENSIGN GROUP, INC.

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

Restricted Stock Awards

The Company granted 51 and 195 restricted stock awards during the three and nine months ended September 30, 2021, respectively.

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

The Company granted 112 and 90 restricted stock awards during the three months ended March 31, 2022 and 2021 , respectively.

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

The fair value per share of restricted awards granted during the nine months ended September 30, 2021 and 2020 ranged from $ 82.20 to $ 93.31 and $ 35.47 to $ 58.06 , respectively.

The fair value per share of restricted awards granted during the three months ended March 31, 2022 and 2021 ranged from $ 73.17 to $ 79.79 and $ 83.64 to $ 84.70 , respectively.

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

A summary of the status of the Company's non-vested restricted stock awards as of September 30, 2021 and changes during the nine months ended September 30, 2021 is presented below:

A summary of the status of the Company's non-vested restricted stock awards as of March 31, 2022 and changes during the three months ended March 31, 2022 is presented below:

Non-Vested Restricted Awards Weighted Average Grant Date Fair Value

3 unchanged sentences

Forfeited ( 8 ) 51.13

Nonvested at September 30, 2021 557 $ 50.43

During the three and nine months ended September 30, 2021, the Company granted six and 17 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors.

The fair value per share of these stock awards was $ 84.70 to $ 93.31 based on the market price on the grant date.

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THE ENSIGN GROUP, INC.

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

Nonvested at March 31, 2022 543 $ 54.39

During the three months ended March 31, 2022, the Company granted four automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors.

The fair value per share of these stock awards was $ 77.39 based on the market price on the grant date.

Long-Term Incentive Plan

4 unchanged sentences

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 $ 248 and $ 651 for the three and nine months ended September 30, 2021, respectively, compared to $ 286 and $ 675 for the three and nine months ended September 30, 2020, respectively.

Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the three and nine months ended September 30, 2021 and 2020 was as follows:

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

2021 2020 2021 2020

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 195 and $ 201 for the three months ended March 31, 2022 and 2021, respectively.

Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the three months ended March 31, 2022 and 2021 was as follows:

Three Months Ended March 31,

Stock-based compensation expense related to stock options $ 2,520 $ 1,733

2 unchanged sentences

Total $ 5,167 $ 4,054

In future periods, the Company expects to recognize approximately $ 34,086 and $ 29,021 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of September 30, 2021.

In future periods, the Company expects to recognize approximately $ 37,341 and $ 28,325 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of March 31, 2022.

Future stock-based compensation expense will be recognized over 3.7 and 3.4 weighted average years for unvested options and restricted stock awards, respectively.

There were 1,865 unvested and outstanding options as of September 30, 2021, of which 1,754 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest as of September 30, 2021 was 6.1 years.

There were 1,852 unvested and outstanding options as of March 31, 2022, of which 1,746 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest as of March 31, 2022 was 6.0 years.

THE ENSIGN GROUP, INC.

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

The Company leases from CareTrust REIT, Inc.

7 unchanged sentences

Additionally, four of the 96 facilities leased from CareTrust include an option to purchase that the Company can exercise starting on December 1, 2024.

In the second quarter of 2021, the Company added four operations and extended the term for one of the Master Leases for an additional 15 years.

In the third quarter of 2021, the Company added two operations and extended the term for one of the Master Leases for an additional 17 years.

As a result, the total lease liabilities and right-of-use assets increased by $ 54,716 and $ 63,374 , respectively, to reflect the new lease obligations.

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 UNAUDITED CONDENSED 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 %.

6 unchanged sentences

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

Total rent expense under the Master Leases was approximately $ 15,445 and $ 43,944 for the three and nine months ended September 30, 2021, respectively, and $ 13,139 and $ 39,394 for the three and nine months ended September 30, 2020, respectively.

Total rent expense under the Master Leases was approximately $ 15,645 and $ 14,080 for the three months ended March 31, 2022 and 2021, 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 September 30, 2021.

The Company is in compliance with requirements of the Master Leases as of March 31, 2022.

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

5 unchanged sentences

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

Total rent expense inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 35,646 and $ 103,598 for the three and nine months ended September 30, 2021, respectively, and $ 32,520 and $ 97,366 for the three and nine months ended September 30, 2020, respectively.

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

Total rent expense inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 35,785 and $ 33,476 for the three months ended March 31, 2022 and 2021, respectively.

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

In the first quarter of 2022, the Company added an operation and extended the term for one of the master leases for an additional 14 years.

As a result, the lease liabilities and right-of-use assets increased by $ 120,349 to reflect the new lease obligations.

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.

2 unchanged sentences

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

THE ENSIGN GROUP, INC.

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

The components of operating lease expense are as follows:

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

2021 2020 2021 2020

Three Months Ended March 31,

Rent - cost of services (1)

2 unchanged sentences

Depreciation and amortization (2)

289 289 869 933

Variable lease costs (3)

$ 41,437 $ 37,209

$ 39,517 $ 36,038 $ 115,186 $ 107,991

(1) Rent - cost of services includes deferred rent expense adju stments of $ 125 and $ 346 for the three and nine months ended September 30, 2021, respectively, and $ 101 and $ 337 for the three and nine months ended September 30, 2020, respectively.

Additionally, rent - cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 1,127 and $ 2,543 for the three and nine months ended September 30, 2021, respectively, and $ 567 and $ 1,781 for the three and nine months ended September 30, 2020, respectively.

(1) Rent- cost of services includes deferred rent expense adju stments of $ 124 and $ 112 for the three months ended March 31, 2022 and 2021, respectively.

Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 937 and $ 584 for the three months ended March 31, 2022 and 2021, respectively.

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

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

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THE ENSIGN GROUP, INC.

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

Future minimum lease payments for all leases as of September 30, 2021 are as follows:

Future minimum lease payments for all leases as of March 31, 2022 are as follows:

2022 (remainder) $ 106,273

7 unchanged sentences

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

As of September 30, 2021, the weighted average remaining lease term is 14.9 years and the weighted average discount rate used to determine the operating lease liabilities is 7.7 %.

Subsequent to September 30, 2021, the Company expanded its operations through a long-term lease arrangement with the addition of three stand-alone skilled nursing facilities under a new triple-net master lease, adding a total of 328 operational skilled nursing beds operated by the Company’s affiliated operating subsidiaries.

The aggregate impact to the fair value of lease liabilities and right-of-use assets related to new master lease is estimated to be approximately $ 22,828 .

As of March 31, 2022, the weighted average remaining lease term is 15.2 years and the weighted average discount rate used to determine the operating lease liabilities is 6.8 %.

Subsequent to March 31, 2022, the Company expanded its operations through long-term leases with the addition of a stand-alone senior living operation and a senior living operation, both of which were transferred from Pennant.

Lessor Activities

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

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

Between October 2019 and March 31, 2022, the Company transferred three senior living operations to Pennant.

Ensign affiliates retained ownership of the real estate for these 32 senior living communities.

6 unchanged sentences

The initial terms range between 14 to 16 years.

Total rental income from all third-party sources for the three and nine months ended September 30, 2021 and 2020 is as follows:

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

2021 2020 2021 2020

THE ENSIGN GROUP, INC.

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

Total rental income from all third-party sources for the three months ended March 31, 2022 and 2021 is as follows:

Three Months Ended March 31,

$ 3,815 $ 3,488

1 unchanged sentence

$ 4,289 $ 3,977

(1) Pennant rental income includes variable rent such as property taxes of $ 301 and $ 881 during the three and nine months ended September 30, 2021 and $ 312 and $ 909 for the three and nine months ended September 30, 2020.

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THE ENSIGN GROUP, INC.

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

Future annual rental income for all leases as of September 30, 2021 were as follows:

(1) Pennant rental income includes variable rent such as property taxes of $ 330 and $ 314 for the three months ended March 31, 2022 and 2021, respectively.

Future annual rental income for all leases as of March 31, 2022 were as follows:

Year Amount (1)

2 unchanged sentences

Total $ 171,458

(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of September 30, 2021 .

(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of March 31, 2022 .

COMMITMENTS AND CONTINGENCIES

10 unchanged sentences

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.

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 fully cooperated with the U.S.

Department of Justice and promptly responded to its requests for information;

in April 2020, the Company was 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.

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THE ENSIGN GROUP, INC.

30 unchanged sentences

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

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THE ENSIGN GROUP, INC.

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

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

1 unchanged sentence

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.

THE ENSIGN GROUP, INC.

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

The Company and its independent operating subsidiaries have been, and continue to be, subject to claims, findings and legal actions that arise in the ordinary course of the various businesses, including healthcare and non-healthcare services.

These claims include, but are not limited to, potential claims filed by residents, customers, patients and responsible parties related to patient care and treatment (professional negligence claims);

to non-care based activities of certain of the subsidiaries;

and to 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 addition, these claims could impact the Company's ability to procure insurance to cover its exposure related to the various services provided by its independent operating subsidiaries to their residents, customers and patients.

The Company and its independent subsidiaries are also subject to requests for information and investigations by other State and Federal governmental entities (e.g., offices of the attorney general and offices of the inspector general).

1 unchanged sentence

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

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 under a corporate integrity agreement and/or other such arrangement.

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 independent operating subsidiaries under a corporate integrity agreement and/or other such arrangement.

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).

3 unchanged sentences

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

As of September 30, 2021 and subsequently, seven of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

As of March 31, 2022 and since, 19 of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

Concentrations

3 unchanged sentences

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 53.7 % and 58.3 % of its total accounts receivable as of September 30, 2021 and December 31, 2020, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 73.6 % of the Company's service revenue for both the three and nine months ended September 30, 2021, and 75.5 % and 74.0 % for the three and nine months ended September 30, 2020, respectively.

The Company’s receivables from Medicare and Medicaid payor programs accounted for 53.9 % and 54.0 % of its total accounts receivable as of March 31, 2022 and December 31, 2021, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 73.4 % and 74.1 % of the Company's revenue for the three months ended March 31, 2022 and 2021, respectively.

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

2 unchanged sentences

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

As of October 22, 2021, the Company had approximately $ 677 in uninsured cash deposits.

As of April 26, 2022, the Company had approximately $ 1,512 in uninsured cash deposits.

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

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THE ENSIGN GROUP, INC.

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

COMMON STOCK REPURCHASE PROGRAM

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.

On February 9, 2022, the Board of Directors approved the Company to enter 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 that started on February 10, 2022.

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.

On October 21, 2021, the Board of Directors approved the Company to enter 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 that starts on October 29, 2021.

During the three months ended March 31, 2022, the Company did not purchase any shares pursuant to this stock repurchase program.

THE ENSIGN GROUP, INC.

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

As approved by the Board of Directors on October 21, 2021, 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 that started on October 29, 2021.

During the three months ended March 31, 2022, the Company repurchased 133 shares of its common stock for $ 9,882 .

During the fourth quarter of 2021, the Company repurchased 132 shares of its common stock for $ 10,118 .

This repurchase program expired upon the repurchase of the full authorized amount under the plan.

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

What changed 10-Q

Item 1. Financial Statements