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Item 1. Financial Statements

2022-08-01 compared with 2022-04-28 · 393 added, 236 removed, 846 unchanged (43% of the section changed)

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(In thousands, except par values)

1 unchanged sentence

Cash and cash equivalents $ 285,580 $ 262,201

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

Accounts receivable—less allowance for doubtful accounts of $ 7,827 and $ 11,213 at June 30, 2022 and December 31, 2021, respectively

339,001 328,731

34 unchanged sentences

100,000 shares authorized;

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

58,646 and 55,278 shares issued and outstanding at June 30, 2022, respectively, and 58,134 and 55,190 shares issued and outstanding at December 31, 2021, respectively

Additional paid-in capital 398,793 369,760

Retained earnings 835,941 733,992

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

Common stock in treasury, at cost, 3,368 and 2,944 shares at June 30, 2022 and December 31, 2021, respectively (Note 20)

( 114,626 ) ( 83,042 )

2 unchanged sentences

Non-controlling interest 527 946

1,072,013 1,021,714

Total equity $ 1,120,693 $ 1,021,714

TOTAL LIABILITIES AND EQUITY $ 3,124,671 $ 2,850,623

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31,

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

2022 2021 2022 2021

(In thousands, except per share data)

8 unchanged sentences

Income from operations 78,232 64,854 147,342 128,533

Other income (expense):

Other (expense) income:

Interest expense ( 2,688 ) ( 1,634 ) ( 4,756 ) ( 3,275 )

4 unchanged sentences

NET INCOME 57,803 50,583 107,891 100,420

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

Net income (loss) attributable to noncontrolling interests 112 1,158 ( 140 ) 1,789

Net income attributable to The Ensign Group, Inc.

20 unchanged sentences

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

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

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

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

2 unchanged sentences

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

Issuance of common stock to employees and directors resulting from the exercise of stock options 223 — 3,303 — — — — 3,303

Issuance of restricted stock, net of forfeitures 38 — — — — — — —

Shares of common stock used to satisfy tax withholding obligations ( 20 ) — — — 20 ( 1,687 ) — ( 1,687 )

Dividends declared ($ 0.0550 per share)

— — — ( 3,040 ) — — — ( 3,040 )

Employee stock award compensation — — 5,616 — — — — 5,616

Repurchase of common stock (Note 19) ( 271 ) — — — 271 ( 20,000 ) — ( 20,000 )

Issuance of noncontrolling interests through subsidiary equity plan — — 6,693 — — — — 6,693

Net income attributable to noncontrolling interest — — — — — — 112 112

Distribution to noncontrolling interest holder — — — — — — ( 8 ) ( 8 )

Net income attributable to the Ensign Group, Inc.

— — — 57,691 — — — 57,691

BALANCE - JUNE 30, 2022 55,278 $ 58 $ 398,793 $ 835,941 3,368 $ ( 114,626 ) $ 527 $ 1,120,693

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

12 unchanged sentences

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

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands) 2022 2021

5 unchanged sentences

Non-cash leasing arrangement 240 221

Write-off of deferred financing fees 566 —

Deferred income taxes 264 27

1 unchanged sentence

Stock-based compensation 10,783 8,687

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

Gain on sale of assets ( 2,567 ) ( 540 )

Loss on insurance claims, legal finding and asset disposals 4,474 745

Change in operating assets and liabilities

3 unchanged sentences

Cash surrender value of life insurance policy premiums ( 5,621 ) ( 8,861 )

Operating lease obligations ( 162 ) ( 133 )

Deferred compensation liability 5,617 8,930

Operating lease obligations ( 547 ) ( 131 )

Accounts payable 2,197 7,725

5 unchanged sentences

NET CASH PROVIDED BY OPERATING ACTIVITIES

129,813 108,397

Cash flows from investing activities:

1 unchanged sentence

Cash payments for business acquisitions (Note 9)

( 16,400 ) ( 6,000 )

Cash payments for asset acquisitions (Note 9)

( 17,492 ) ( 5,183 )

Escrow deposits ( 15,571 ) —

5 unchanged sentences

NET CASH USED IN INVESTING ACTIVITIES

( 76,596 ) ( 40,862 )

Cash flows from financing activities:

Proceeds from debt (Note 16)

Payments on debt (Note 16)

4 unchanged sentences

Dividends paid ( 6,077 ) ( 5,754 )

Proceeds from sale of subsidiary shares (Note 7)

Non-controlling interest distribution ( 8 ) ( 1,889 )

5 unchanged sentences

NET CASH USED IN FINANCING ACTIVITIES

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

( 29,838 ) ( 105,686 )

Net increase (decrease) in cash and cash equivalents 23,379 ( 38,151 )

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

Cash and cash equivalents end of period $ 285,580 $ 198,411

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands) 2022 2021

2 unchanged sentences

Interest $ 3,950 $ 2,836

Income taxes $ 41,905 $ 34,540

Lease liabilities $ 72,919 $ 67,539

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 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.

As of June 30, 2022, the Company operated 251 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 have a collective capacity of approximately 25,500 operational skilled nursing beds and 3,000 senior living units.

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.

As of June 30, 2022, the Company operated 180 facilities under long-term lease arrangements, and had options to purchase 11 of those 180 facilities.

The Company's real estate portfolio includes 100 owned real estate properties, which included 71 facilities operated and managed by the Company, 29 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.

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

Of those 29 senior living operations, one is located on the same real estate property as a skilled nursing facility 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.

7 unchanged sentences

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

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.

Other Information — The accompanying condensed consolidated financial statements as of June 30, 2022 and for the three and six months ended June 30, 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.

15 unchanged sentences

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.

As of June 30, 2022 and December 31, 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.

6 unchanged sentences

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

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

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

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

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

See Note 6, Fair Value Measurements.

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

12 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 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.

As of June 30, 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 sheets.

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

12 unchanged sentences

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

These leases are not recorded on the condensed consolidated balance sheet.

These leases are not recorded on the condensed consolidated balance sheets.

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

5 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 months ended March 31, 2022 and 2021.

Management has evaluated its long-lived assets and determined there was no impairment during the three and six months ended June 30, 2022 and 2021.

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

7 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 months ended March 31, 2022 and 2021.

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

10 unchanged sentences

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

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

Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 76,145 and $ 66,158 as of June 30, 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 $ 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.

Accrued workers’ compensation liabilities are recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets and were $ 28,365 and $ 27,335 as of June 30, 2022 and December 31, 2021, respectively.

In addition, the Company has recorded an asset and equal liability of $ 8,440 and $ 6,755 as of June 30, 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 $ 12,210 and $ 9,891 as of March 31, 2022 and December 31, 2021, respectively.

The Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 13,571 and $ 9,891 as of June 30, 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.

15 unchanged sentences

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 condensed consolidated net income attributable to The Ensign Group, Inc.

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

in its condensed consolidated statements of income.

6 unchanged sentences

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

Recent Accounting Standards Adopted by the Company

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

Recent Accounting Standards Adopted by the Company — 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) .

1 unchanged sentence

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

Accounting Standards Recently Issued but Not Yet Adopted by the Company

In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)," which provides temporary, optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace LIBOR reference rates.

Accounting Standards Recently Issued but Not Yet Adopted by the Company — In February 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)," which provides temporary, optional practical expedients and exceptions to enable a smoother transition to reference rates which are expected to replace London Interbank Offered Rate (LIBOR) reference rates.

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

1 unchanged sentence

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.

During the quarter ended June 30, 2022, the Company and its subsidiaries including Standard Bearer, entered into the Second Amendment to Third Amended and Restated Credit Agreement (such agreement, the Amended Credit Agreement, and the revolving credit facility thereunder, the Revolving Credit Facility), which increased the Revolving Credit Facility by $ 250,000 to an aggregate principal amount of up to $ 600,000 .

Pursuant to the Amended Credit Agreement, the Company transitioned from LIBOR to the Secured Overnight Financing Rate (SOFR) as the applicable reference rate for borrowings under the Revolving Credit Facility and determined there was no resulting material impact on the Company's condensed consolidated financial statements.

COVID-19 UPDATE

2 unchanged sentences

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.

During the three and six months ended June 30, 2022, the Company did not receive Provider Relief Funds.

During the three and six months ended June 30, 2021, the Company received and returned $ 2,399 and $ 11,538 , respectively, in Provider Relief Funds.

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

11 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 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.

As of June 30, 2022 and December 31, 2021, the Company had $ 4,356 and $ 1,781 in unapplied state relief funds, respectively.

During the three and six months ended June 30, 2022, the Company received an additional $ 27,345 and $ 44,662 in state relief funding and recognized $ 24,489 and $ 42,088 , respectively, as revenue.

During the three and six months ended June 30, 2021, the Company received an additional $ 16,776 and $ 32,421 in state relief funding and recognized $ 16,692 and $ 33,157 , 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 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 73.4 % and 74.1 % of all service revenue for the three months ended March 31, 2022 and 2021, respectively.

Revenue from the Medicare and Medicaid programs accounted for 73.4 % of all service revenue for both the three and six months ended June 30, 2022 and 73.1 % and 73.6 % for the three and six months ended June 30, 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 condensed consolidated revenue for the three months ended March 31, 2022 and 2021.

The Company recorded adjustments to revenue which were not material to the Company's revenue for the three and six months ended June 30, 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 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.

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

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

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

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

7 unchanged sentences

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,

Service revenue for the three and six months ended June 30, 2022 and 2021 is summarized in the following tables:

Three Months Ended June 30,

Revenue % of Revenue Revenue % of Revenue

9 unchanged sentences

(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.

Six Months Ended June 30,

Revenue % of Revenue Revenue % of Revenue

$ 560,476 39.0 % $ 482,813 38.4 %

Medicare 398,905 27.7 360,311 28.6

Medicaid — skilled 95,712 6.7 82,733 6.6

Total Medicaid and Medicare 1,055,093 73.4 925,857 73.6

Managed care 256,373 17.8 221,308 17.6

Private and other (2)

126,037 8.8 110,720 8.8

SERVICE REVENUE $ 1,437,503 100.0 % $ 1,257,885 100.0 %

(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.

THE ENSIGN GROUP, INC.

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

In addition to the service revenue above, the Company's rental revenue derived from triple-net lease arrangements with third parties was $ 4,139 and $ 8,428 , respectively, for the three and six months ended June 30, 2022 and $ 3,927 and $ 7,904 , respectively, for the three and six months ended June 30, 2021.

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 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

The Company had no material contract liabilities and contract assets as of June 30, 2022 and December 31, 2021, or activity during the three and six months ended June 30, 2022 and 2021.

Accounts receivable as of June 30, 2022 and December 31, 2021, is summarized in the following table:

June 30, 2022 December 31, 2021

Medicaid $ 125,348 $ 123,647

14 unchanged sentences

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

Three Months Ended March 31,

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

2022 2021 2022 2021

Net income $ 57,803 $ 50,583 $ 107,891 $ 100,420

8 unchanged sentences

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

Three Months Ended March 31,

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

2022 2021 2022 2021

Net income $ 57,803 $ 50,583 $ 107,891 $ 100,420

4 unchanged sentences

incremental shares from assumed conversion (1)

1,947 2,529 2,074 2,614

Adjusted weighted average common shares outstanding 56,853 56,997 56,862 56,945

1 unchanged sentence

$ 1.01 $ 0.87 $ 1.90 $ 1.73

(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.

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 789 and 697 for the three and six months ended June 30, 2022, respectively, and 167 and 80 for the three and six months ended June 30, 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 $ 248,546 and $ 262,201 as of March 31, 2022 and December 31, 2021, respectively, is derived using Level 1 inputs.

The fair value of cash and cash equivalents of $ 285,580 and $ 262,201 as of June 30, 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 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.

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

As of June 30, 2022, and December 31, 2021, the fair value of the investment funds of $ 23,151 and $ 17,530 , respectively, is derived using Level 2 inputs.

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

See Note 13, Restricted and Other Assets.

3 unchanged sentences

Debt Security Investments - Held to Maturity

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.

As of June 30, 2022 and December 31, 2021, the Company had approximately $ 49,068 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 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.

Further, as of June 30, 2022, the debt security investments were held in AA, A and BBB r ated de bt securities.

The Company believes its debt security investments and investment funds that were in an unrealized loss position as of June 30, 2022 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

THE ENSIGN GROUP, INC.

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

STANDARD BEARER

Standard Bearer's real estate portfolio consists of 95 of the Company's 100 owned real estate properties, of which 67 are operated and managed by the Company and 29 are leased to and operated by Pennant.

Of those 29 senior living operations, one is located on the same real estate property as a skilled nursing facility that the Company owns and operates.

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.

During the six months ended June 30, 2022, Standard Bearer acquired the real estate of two skilled nursing facilities for a purchase price of $ 17,412 , both of which 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.

Subsequent to June 30, 2022, Standard Bearer expanded its real estate portfolio with the addition of five skilled nursing properties and one campus property for a total purchase price of $ 47,900 .

As part of the formation of Standard Bearer, certain of the Company's operating subsidiaries, Standard Bearer and Standard Bearer's subsidiaries entered into several agreements that 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 Standard Bearer's segment income during three and six months ended June 30, 2022.

All intercompany transactions have been eliminated in consolidation.

2 unchanged sentences

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 lease periods range from 15 to 19 years with three five-year renewal options 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);

(1) all impositions and taxes levied on or with respect to the leased properties;

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

2 unchanged sentences

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.

The two real estate properties acquired during six months ended June 30, 2022 were added to the Standard Bearer Master Leases.

Rental revenue generated from Ensign affiliated operations was $ 13,894 and $ 27,319 , respectively, for the three and six months ended June 30, 2022 and $ 10,784 and $ 21,375 , respectively, for the three and six months ended June 30, 2021.

Intercompany management agreement

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

Standard Bearer has no employees.

The Service Center provides personnel and 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.

Management fee generated between Standard Bearer and the Service Center for the three and six months ended June 30, 2022 was $ 1,056 and $ 2,078 , respectively, both of which represent 6 % of total Standard Bearer rental revenue.

No management fees were recorded in 2021, which was prior to the formation of Standard Bearer.

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.

The intercompany debt arrangements include mortgage loans and the Revolving Credit Facility to fund acquisitions and working capital needs.

The interest rate under the Amended Credit Agreement is a base rate plus a margin ranging from 0.25 % to 1.25 % per annum or SOFR plus a margin range from 1.25 % to 2.25 % 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 of 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.

THE ENSIGN GROUP, INC.

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

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.

As part of the formation of Standard Bearer in January of 2022, the Company established 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.

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

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

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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)

During the three months ended June 30, 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $ 6,544 .

During the three and six months ended June 30, 2022, the Company did not grant any stock options nor restricted shares under the Standard Bearer Equity Plan.

During the three months ended June 30, 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $ 149 .

These preferred shares were fully vested at the time of the contributions by the shareholders.

BUSINESS SEGMENTS

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(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.

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

As of June 30, 2022, the skilled services segment includes 215 skilled nursing operations and 25 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 29 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.

Of the 29 real estate operations leased to third parties, one senior living operation is located on the same real estate property as a skilled nursing facility that the Company owns and operates.

The Company also reports an “All Other” category that includes results from its senior living operations, which includes eleven stand-alone senior living operations and the senior living operations at 25 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

In addition, the "All Other" category includes 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.

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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 ENSIGN GROUP, INC.

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

The following tables set forth financial information for the segments:

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Skilled Services Standard Bearer All Other (1)

6 unchanged sentences

Segment income (loss) 102,266 6,838 ( 38,614 ) — 70,490

Gain on sale of assets 2,467

Income before provision for income taxes $ 72,957

Depreciation and amortization 8,113 5,216 1,529 — 14,858

4 unchanged sentences

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.

(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.

1 unchanged sentence

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

THE ENSIGN GROUP, INC.

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

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

Skilled Services Standard Bearer All Other (1)

6 unchanged sentences

Segment income (loss) 90,010 7,906 ( 33,575 ) — 64,341

Gain on sale of real estate — — — — 440

Income before provision for income taxes $ 64,341

1 unchanged sentence

Interest expense $ — $ 1,634 $ — $ 1,634

$ — $ 1,641 $ — $ — $ 1,641

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

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

Six Months Ended June 30, 2022

Skilled Services Standard Bearer All Other (1)

Intercompany Elimination Total

Service revenue (2)

$ 1,389,249 $ — $ 54,254 $ ( 6,000 ) $ 1,437,503

Rental revenue (3)

— 34,791 3,695 ( 30,058 ) 8,428

TOTAL REVENUE $ 1,389,249 $ 34,791 $ 57,949 $ ( 36,058 ) $ 1,445,931

Segment income (loss) 200,522 13,738 ( 77,544 ) — 136,716

Gain on sale of assets 2,467

Income before provision for income taxes $ 139,183

Depreciation and amortization 16,014 10,237 3,283 — 29,534

Interest expense (4)

$ — $ 7,305 $ 1,247 $ ( 3,796 ) $ 4,756

(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 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.

THE ENSIGN GROUP, INC.

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

Six Months Ended June 30, 2021

Skilled Services Standard Bearer All Other (1)

Intercompany Elimination Total

Service revenue (2)

$ 1,213,918 $ — $ 47,347 $ ( 3,380 ) $ 1,257,885

Rental revenue (3)

— 28,283 3,627 ( 24,006 ) 7,904

TOTAL REVENUE $ 1,213,918 $ 28,283 $ 50,974 $ ( 27,386 ) $ 1,265,789

Segment income (loss) 178,941 15,619 ( 67,873 ) — 126,687

Gain on sale of assets 440

Income before provision for income taxes $ 127,127

Depreciation and amortization 15,178 8,403 3,873 — 27,454

Interest expense $ — $ 3,275 $ — $ — $ 3,275

(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.

Service revenue by major payor source were as follows:

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Skilled Services All Other Total Service Revenue Revenue %

$ 287,827 $ 6,301 $ 294,128 40.4 %

Medicare 190,494 — 190,494 26.2

Medicaid-skilled 49,763 — 49,763 6.8

Subtotal 528,084 6,301 534,385 73.4

Managed care 128,587 — 128,587 17.7

Private and other (2)

45,807 19,568 65,375 8.9

TOTAL SERVICE REVENUE $ 702,478 $ 25,869 $ 728,347 100.0 %

(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 June 30, 2021

Skilled Services All Other Total Service Revenue Revenue %

$ 247,671 $ 3,784 $ 251,455 39.6 %

Medicare 170,008 — 170,008 26.8

Medicaid-skilled 42,740 — 42,740 6.7

Subtotal 460,419 3,784 464,203 73.1

Managed care 112,963 — 112,963 17.8

Private and other (2)

39,500 17,943 57,443 9.1

TOTAL SERVICE REVENUE $ 612,882 $ 21,727 $ 634,609 100.0 %

(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.

THE ENSIGN GROUP, INC.

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

Six Months Ended June 30, 2022

Skilled Services Other Service Revenue Total Service Revenue Revenue %

9 unchanged sentences

(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

Six Months Ended June 30, 2021

Skilled Services Other Service Revenue Total Service Revenue Revenue %

9 unchanged sentences

(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 $ 4,139 and $ 8,428 , respectively, for the three and six months ended June 30, 2022 and $ 3,927 and $ 7,904 , respectively, for the three and six months ended June 30, 2021.

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)

OPERATION EXPANSIONS

8 unchanged sentences

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.

THE ENSIGN GROUP, INC.

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

2022 Expansions

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.

During the six months ended June 30, 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, Standard Bearer acquired the real estate of two of the stand-alone skilled nursing operations, which were leased back to Ensign affiliated entities.

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.

In addition, the Company added five senior living operations that were transferred from Pennant, three of which are part of campuses operated by the Company's affiliated operating subsidiaries.

These new operations added a total of 453 operational skilled nursing beds and 633 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 .

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

The aggregate purchase price for these expansions during the six months ended June 30, 2022 was $ 33,892 .

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 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.

The aggregate purchase price for the transactions that were classified as asset acquisitions during the six months ended June 30, 2022 was $ 17,492 , consisting of real estate properties and indefinite-lived intangible assets.

The remaining aggregate purchase price for transactions during the six months ended June 30, 2022 is concentrated in goodwill of $ 16,400 and accordingly, the transactions were classified as business combinations.

Subsequent to June 30, 2022, the Company expanded its operations through a combination of long-term leases and real estate purchases, with the addition of seven stand-alone skilled nursing operations and one campus operation.

Of these additions, Standard Bearer acquired the real estate of three of these operations, which were leased back to Ensign affiliated entities.

These new operations added 1,100 operational skilled nursing beds and 61 operational senior living units to be operated by the Company's affiliated operating subsidiaries.

In addition, the Company purchased the real estate at three skilled nursing properties that the Company was already operating, further expanding the Company's real estate portfolio.

The aggregate purchase price for these expansions was $ 47,900 .

2021 Expansions

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.

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

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

These new operations added a total of 1,263 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 aggregate purchase price for these acquisitions during the six months ended June 30, 2021 was $ 11,183 .

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

THE ENSIGN GROUP, INC.

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

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

The aggregate purchase price for the asset acquisitions during the six months ended June 30, 2021 was $ 5,183 .

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.

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

The assets added during the six months ended June 30, 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 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.

These additions have been included in the June 30, 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.

THE ENSIGN GROUP, INC.

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

PROPERTY AND EQUIPMENT - NET

Property and equipment, net consists of the following:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Land $ 121,381 $ 121,164

7 unchanged sentences

PROPERTY AND EQUIPMENT, NET $ 908,228 $ 888,434

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.

The Company completed the sale of assets for a sale price of $ 7,707 and recorded a gain of $ 2,567 within the Company's condensed consolidated statement of income as cost of services during the three months ended June 30, 2022.

See also Note 7, Standard Bearer and Note 9, Operation Expansions for information on acquisitions during the six months ended June 30, 2022.

INTANGIBLE ASSETS - NET

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Weighted Average Life (Years)

5 unchanged sentences

TOTAL $ 5,511 $ ( 2,976 ) $ 2,535 $ 5,383 $ ( 2,731 ) $ 2,652

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.

During the three and six months ended June 30, 2022, amortization expense was $ 418 and $ 822 , respectively, of which $ 288 and $ 577 was related to the amortization of right-of-use assets, respectively.

Amortization expense was $ 363 and $ 724 , respectively, of which $ 290 and $ 580 was related to the amortization of right-of-use assets for the three and six months ended June 30, 2021, respectively.

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

12 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 March 31, 2022.

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

The following table represents activity in goodwill by skilled service segment and "all other" category as of and for the six months ended June 30, 2022:

Skilled Services All Other Total

1 unchanged sentence

Additions 16,400 — 16,400

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

June 30, 2022 $ 67,886 $ 8,983 $ 76,869

Other indefinite-lived intangible assets consist of the following:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Trade name $ 889 $ 889

Medicare and Medicaid licenses 2,918 2,838

$ 3,727 $ 3,727

TOTAL $ 3,807 $ 3,727

RESTRICTED AND OTHER ASSETS

Restricted and other assets consist of the following:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Debt issuance costs, net $ 4,195 $ 1,953

4 unchanged sentences

RESTRICTED AND OTHER ASSETS $ 57,010 $ 47,046

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.

Included in restricted and other assets as of June 30, 2022 and December 31, 2021 are anticipated insurance recoveries related to the Company's workers' compensation liabilities and general and professional liability reserves 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.

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.

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

The DCP allows for the employee deferrals to be deposited into a rabbi trust and these funds are generally invested in individual variable life insurance contracts owned by the Company that are specifically designed to fund the deferrals.

The cash surrender value of the insurance contracts is based on funds that shadow the investment allocations specified by participants in the deferred compensation plan.

For the three and six months ended June 30, 2022, the Company recorded a loss on these investments of $ 3,313 and $ 4,515 , respectively, which is included in other (expense) income, net.

During the same periods, the Company recorded an offsetting reduction in expense of $ 3,300 and $ 4,511 , respectively, allocated between cost of services and general and administrative expenses.

For the three and six months ended June 30, 2021, the Company recorded a gain on the deferral investment of $ 751 and $ 1,057 , respectively, which is included in other (expense) income, net.

During the same periods, the Company recorded an offsetting expense of $ 780 and $ 1,131 , respectively, allocated between cost of services and general and administrative expenses.

OTHER ACCRUED LIABILITIES

Other accrued liabilities consists of the following:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Quality assurance fee $ 6,669 $ 6,474

5 unchanged sentences

Property taxes 7,670 9,124

Income tax payable 10,416 —

Legal finding accrued 3,626 —

8 unchanged sentences

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 Company recorded income tax expense of $ 31,292 and $ 26,707 during the six months ended June 30, 2022 and 2021, respectively, or 22.5 % of earnings before income taxes for the six months ended June 30, 2022, compared to 21.0 % for the six months ended June 30, 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.

2 unchanged sentences

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

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

The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the six months ended June 30, 2022 and 2021.

THE ENSIGN GROUP, INC.

1 unchanged sentence

Debt consists of the following:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Mortgage loans and promissory notes $ 158,258 $ 159,967

3 unchanged sentences

Credit Facility with a Lending Consortium Arranged by Truist

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.

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

Borrowings are supported by a lending consortium arranged by Truist.

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

In addition, the Company 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.

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

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

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

As of 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.

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

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).

On April 8, 2022, the Company and its subsidiaries, including Standard Bearer, entered into the Amended Credit Agreement, which amended the Revolving Credit Facility to increase the revolving line of credit from $ 350,000 to $ 600,000 in aggregate principal amount.

The Amended Credit Agreement also extended the maturity date of the Revolving Credit Facility to April 8, 2027 and modified the reference rate from LIBOR to SOFR.

The interest rates applicable to loans under the Amended Credit Facility are, at the Company's option, equal to either a base rate plus a margin ranging from 0.25 % to 1.25 % per annum or 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.

As part of the entry into the Amended Credit Agreement, deferred financing costs of $ 566 were written off and additional deferred financing costs of $ 3,197 were capitalized during the three months ended June 30, 2022.

Borrowings made under the Revolving Credit Facility are guaranteed, jointly and severally, by certain of the Company’s wholly-owned subsidiaries, and are secured by a pledge of stock of the Company's material operating subsidiaries as well as a first lien on substantially all of their personal property.

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

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

As of June 30, 2022, and July 27, 2022, there was no outstanding debt under the Revolving Credit Facility.

The Company was in compliance with all loan covenants as of June 30, 2022.

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.

As of June 30, 2022, the Company's operating subsidiaries had $ 158,258 outstanding under the mortgage loans and notes, of which $ 3,944 is classified as short-term and the remaining $ 154,314 is classified as long-term.

The Company was in compliance with all loan covenants as of June 30, 2022.

As of June 30, 2022, 23 of the Company's subsidiaries have mortgage loans insured with HUD in the aggregate amount of $ 155,074 , 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.

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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.

THE ENSIGN GROUP, INC.

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

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

The notes bear fixed interest rates of 6.3 % and 5.3 % per annum and the term of the notes are 10 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.

Off-Balance Sheet Arrangements

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.

As of June 30, 2022, the Company had approximately $ 6,710 of borrowing capacity under the Revolving Credit Facility 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 months ended March 31, 2022 and 2021 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three and six months ended June 30, 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.

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

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

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

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

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

The Company has an option plan, the 2022 Omnibus Incentive Plan (the 2022 Plan), which was approved by the Company's stockholders on May 26, 2022, and replaced the Company's prior option plan, the 2017 Omnibus Incentive Plan (the 2017 Plan).

The total number of shares available for issuance under the 2022 Plan was 3,268 as of June 30, 2022.

2022 Omnibus Incentive Plan - During the second quarter of 2022, the Company's shareholders approved the 2022 Plan.

Including the shares rolled over from the 2017 Plan, the 2022 Plan provides for the issuance of 3,452 shares of common stock.

The number of shares available to be issued under the 2022 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) two shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award).

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

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

Options expire ten years from the date of grant.

As of March 31, 2022, there were approximately 1,723 unissued shares of common stock available for issuance under this plan.

As of June 30, 2022, there were approximately 3,268 unissued shares of common stock available for issuance under this plan.

The Company retired the 2017 Plan as a result of the approval of the 2022 Plan.

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for stock option awards.

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Stock Options

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:

The Company granted 154 and 318 stock options from the available plans during the three and six months ended June 30, 2022, respectively.

The Company used the following assumptions for stock options granted during the three months ended June 30, 2022 and 2021:

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

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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:

The Company used the following assumptions for stock options granted during the six months ended June 30, 2022 and 2021:

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

2022 318 2.3 % 6.1 years 42.2 % 0.3 %

2021 345 0.9 % 6.3 years 42.2 % 0.2 %

For the six months ended June 30, 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

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2021 345 $ 82.77 $ 33.86

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:

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended June 30, 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 six months ended June 30, 2022:

Number of Options Outstanding Weighted Average

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Exercised ( 370 ) 16.40 — —

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:

June 30, 2022 3,918 $ 41.69 2,151 $ 25.53

The following summary information reflects stock options outstanding, vested and related details as of June 30, 2022:

Stock Options Outstanding Stock Options Vested

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TOTAL 3,918 $ 63,248 2,151

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

THE ENSIGN GROUP, INC.

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

The aggregate intrinsic value of options outstanding, vested and expected to vest as of June 30, 2022 and December 31, 2021 is as follows:

Options June 30, 2022 December 31, 2021

Outstanding $ 130,564 $ 191,242

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

The 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)

The aggregate intrinsic value of options that vested during the six months ended June 30, 2022 and 2021 was $ 10,409 and $ 17,618 , respectively.

The total intrinsic value of options exercised during the six months ended June 30, 2022 and 2021 was $ 25,642 and $ 26,715 , respectively.

Restricted Stock Awards

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

The Company granted 46 and 158 restricted stock awards from the available plans during the three and six months ended June 30, 2022, respectively.

The Company granted 54 and 144 restricted stock awards during the three and six months ended June 30, 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 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 of restricted awards granted during the six months ended June 30, 2022 and 2021 ranged from $ 73.17 to $ 83.93 and $ 82.20 to $ 93.31 , 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 March 31, 2022 and changes during the three months ended March 31, 2022 is presented below:

A summary of the status of the Company's non-vested restricted stock awards as of June 30, 2022 and changes during the six months ended June 30, 2022 is presented below:

Non-Vested Restricted Awards Weighted Average Grant Date Fair Value

Nonvested at January 1, 2022 549 $ 52.16

Non-vested at January 1, 2022 549 $ 52.16

Granted 158 77.06

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Forfeited ( 16 ) 55.86

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.

Non-vested at June 30, 2022 492 $ 59.01

During the three and six months ended June 30, 2022, respectively, the Company granted 5 and 9 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors from the 2017 Plan.

The fair value per share of these stock awards ranged from $ 77.39 to $ 83.93 based on the market price on the grant date.

Long-Term Incentive Plan

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

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

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

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

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

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 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,

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 195 and $ 390 for the three and six months ended June 30, 2022, respectively, compared to $ 202 and $ 403 for the three and six months ended June 30, 2021, respectively.

THE ENSIGN GROUP, INC.

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

Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the three and six months ended June 30, 2022 and 2021 was as follows:

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

2022 2021 2022 2021

Stock-based compensation expense related to stock options $ 2,786 $ 2,026 $ 5,306 $ 3,759

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TOTAL $ 5,616 $ 4,633 $ 10,783 $ 8,687

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.

In future periods, the Company expects to recognize approximately $ 39,110 and $ 28,748 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of June 30, 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 1,852 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)

There were 1,767 unvested and outstanding options as of June 30, 2022, of which 1,669 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest as of June 30, 2022 was 6.0 years.

The Company leases from CareTrust REIT, Inc.

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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 $ 15,645 and $ 14,080 for the three months ended March 31, 2022 and 2021, respectively.

Total rent expense under the Master Leases was approximately $ 16,007 and $ 31,652 for the three and six months ended June 30, 2022, respectively, and $ 14,419 and $ 28,499 for the three and six months ended June 30, 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 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.

The Company is in compliance with requirements of the Master Leases as of June 30, 2022.

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

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

THE ENSIGN GROUP, INC.

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

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

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

Total rent expense 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.

Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 37,251 and $ 73,036 for the three and six months ended June 30, 2022, respectively, and $ 34,476 and $ 67,952 for the three and six months ended June 30, 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.

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

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

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

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 March 31,

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

2022 2021 2022 2021

Rent - cost of services (1)

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Depreciation and amortization (2)

288 290 577 580

Variable lease costs (3)

3,772 3,694 9,135 7,137

(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.

$ 41,311 $ 38,460 $ 82,748 $ 75,669

(1) Rent- cost of services includes deferred rent expense adju stments of $ 116 and $ 240 for the three and six months ended June 30, 2022, respectively and $ 109 and $ 221 for the three and six months ended June 30, 2021, respectively.

Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 1,302 and $ 2,239 for the three and six months ended June 30, 2022, respectively, and $ 832 and $ 1,416 for the three and six months ended June 30, 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.

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

Future minimum lease payments for all leases as of June 30, 2022 are as follows:

2022 (remainder) $ 71,530

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

As of 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.

As of June 30, 2022, the weighted average remaining lease term is 15.1 years and the weighted average discount rate used to determine the operating lease liabilities is 6.8 %.

THE ENSIGN GROUP, INC.

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

Subsequent to June 30, 2022, the Company expanded its operations through long-term lease arrangements with the addition of five stand-alone skilled nursing operations, four of which are part of an amended separate master lease agreement, adding a total of 779 operational skilled nursing beds operated by the Company's affiliated operating subsidiaries.

The term of the amended separate master lease agreement was extended to 20 remaining years.

The aggregate impact to the fair value of lease liabilities and right-of-use assets related to both the new long-term lease arrangement and the amended separate master lease agreement is estimated to be approximately $ 70,614 .

Additionally, Standard Bearer acquired the real estate of three skilled nursing operations, which were previously under long-term lease arrangements.

The aggregate reduction in the fair value of lease liabilities and right-of-use assets related to this acquisition is estimated to be approximately $ 10,080 .

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.

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.

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

Between October 2019 and June 30, 2022, the Company transferred three additional senior living operations to Pennant.

During the three months ended June 30, 2022, the Company completed the sale of real estate associated with two of the senior living operations operated by Pennant and also transferred one senior living operation operated by Pennant back to Ensign affiliates.

As of June 30, 2022, Ensign affiliates retained ownership of the real estate for these 29 senior living communities.

All of these properties are leased to Pennant on a triple-net basis, whereas the respective Pennant affiliates are responsible for all costs at the properties including:

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The initial terms range between 14 to 16 years.

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,

Total rental income from all third-party sources for the three and six months ended June 30, 2022 and 2021 is as follows:

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

2022 2021 2022 2021

$ 3,690 $ 3,440 $ 7,505 $ 6,928

Other third-party 449 487 923 976

$ 4,139 $ 3,927 $ 8,428 $ 7,904

(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:

(1) Pennant rental income includes variable rent such as property taxes of $ 327 and $ 657 during the three and six months ended June 30, 2022 and $ 266 and $ 580 for the three and six months ended June 30, 2021.

Future annual rental income for all leases as of June 30, 2022 were as follows:

Year Amount (1)

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TOTAL $ 161,334

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

(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of June 30, 2022 .

THE ENSIGN GROUP, INC.

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

COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

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

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

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

THE ENSIGN GROUP, INC.

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

Department of Justice Civil Investigative Demand — On May 31, 2018, the Company received a Civil Investigative Demand (CID) from the U.S.

Department of Justice stating that it was investigating whether there 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.

House of Representatives Select Subcommittee Request — In 2020, the U.S.

2 unchanged sentences

The Company has cooperated in responding to this inquiry.

In July 2022, the Company received a follow up request for additional documents and information.

The Company is cooperating in responding to this inquiry.

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

THE ENSIGN GROUP, INC.

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

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

8 unchanged sentences

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

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

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

32 unchanged sentences

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

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.

As of June 30, 2022 and since, 22 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 53.9 % 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.

The Company’s receivables from Medicare and Medicaid payor programs accounted for 52.9 % and 54.0 % of its total accounts receivable as of June 30, 2022 and December 31, 2021, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 73.4 % of the Company's revenue for both the three and six months ended June 30, 2022, and 73.1 % and 73.6 % for the three and six months ended June 30, 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 April 26, 2022, the Company had approximately $ 1,512 in uninsured cash deposits.

As of July 27, 2022, the Company had approximately $ 567 in uninsured cash deposits.

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

COMMON STOCK REPURCHASE PROGRAM

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.

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

On February 9, 2022, the Board of Directors approved the Company to enter into a stock repurchase program pursuant to which the Company could repurchase up to $ 20,000 of its common stock under the program for a period of approximately 12 months from February 10, 2022.

Under this program, the Company was authorized to repurchase its issued and outstanding common shares from time to time in open-market and privately negotiated transactions and block trades in accordance with federal securities laws.

During the three months ended June 30, 2022, the Company repurchased 271 shares of its common stock for $ 20,000 .

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

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.

As approved by the Board of Directors on October 21, 2021, the Company entered into a stock repurchase program pursuant to which the Company could 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.

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

On July 28, 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 from August 2, 2022.

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