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Item 1. Financial Statements

2023-07-27 compared with 2023-04-26 · 383 added, 290 removed, 750 unchanged (47% of the section changed)

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2023 December 31, 2022

(In thousands, except par values)

June 30, 2023 December 31, 2022

Current assets:

Cash and cash equivalents $ 419,974 $ 316,270

Accounts receivable—less allowance for doubtful accounts of $ 9,580 and $ 7,802 at March 31, 2023 and December 31, 2022, respectively

Accounts receivable—less allowance for doubtful accounts of $ 9,281 and $ 7,802 at June 30, 2023 and December 31, 2022, respectively

446,025 408,432

Investments—current 20,018 15,441

Prepaid income taxes — 4,643

Prepaid expenses and other current assets 41,618 40,982

7 unchanged sentences

Goodwill 76,869 76,869

Other indefinite-lived intangibles 3,972 3,972

TOTAL ASSETS $ 3,952,356 $ 3,452,022

18 unchanged sentences

$ 0.001 par value;

100,000 shares authorized;

59,276 and 55,907 shares issued and outstanding at March 31, 2023, respectively, and 59,029 and 55,661 shares issued and outstanding at December 31, 2022, respectively

150,000 , 59,583 and 56,193 shares authorized, shares issued and outstanding at June 30, 2023, respectively, and 100,000 , 59,029 and 55,661 shares authorized, shares issued and outstanding at December 31, 2022, respectively

Additional paid-in capital 440,532 415,560

Retained earnings 1,063,738 946,339

Common stock in treasury, at cost, 3,369 and 3,368 shares at March 31, 2023 and December 31, 2022, respectively ( Note 20)

Common stock in treasury, at cost, 3,390 and 3,368 shares at June 30, 2023 and December 31, 2022, respectively

( 116,555 ) ( 114,626 )

7 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31,

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

2023 2022 2023 2022

(In thousands, except per share data)

38 unchanged sentences

Net income attributable to noncontrolling interest — — — — — — 117 117

Distribution to noncontrolling interest holder and other changes — — 6 — — — ( 4 ) 2

Noncontrolling interests attributable to subsidiary equity plan — — 6 — — — ( 4 ) 2

Net income attributable to the Ensign Group, Inc.

1 unchanged sentence

BALANCE - MARCH 31, 2023 55,907 $ 60 $ 429,783 $ 1,002,976 3,369 $ ( 114,646 ) $ 1,581 $ 1,319,754

Issuance of common stock to employees and directors resulting from the exercise of stock options 253 — 5,905 — — — — 5,905

Issuance of restricted stock, net of forfeitures 54 — — — — — — —

Shares of common stock used to satisfy tax withholding obligations ( 21 ) — — — 21 ( 1,909 ) — ( 1,909 )

Dividends declared ($ 0.0575 per share)

— — — ( 3,231 ) — — — ( 3,231 )

Employee stock award compensation — — 8,881 — — — — 8,881

Acquisition of noncontrolling interest shares — — ( 100 ) — — — — ( 100 )

Net income attributable to noncontrolling interest — — — — — — 97 97

Noncontrolling interests attributable to subsidiary equity plan — — ( 3,937 ) — — — 3,940 3

Net income attributable to the Ensign Group, Inc.

— — — 63,993 — — — 63,993

BALANCE - JUNE 30, 2023 56,193 $ 60 $ 440,532 $ 1,063,738 3,390 $ ( 116,555 ) $ 5,618 $ 1,393,393

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

14 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 20)

( 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

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) 2023 2022

5 unchanged sentences

Non-cash leasing arrangement 481 240

Write-off of deferred financing fees — 566

Deferred income taxes 47 264

1 unchanged sentence

Stock-based compensation 15,454 10,783

Loss on insurance claims, legal finding and asset disposals 62 4,054

Cash received from insurance proceeds 750 —

Gain on sale of assets — ( 2,567 )

(Gain)/loss on insurance claims, legal adjustments and asset disposals ( 1,567 ) 4,474

Change in operating assets and liabilities

10 unchanged sentences

Accrued self-insurance liabilities 8,832 14,696

Other long-term liabilities ( 23 ) ( 23 )

NET CASH PROVIDED BY OPERATING ACTIVITIES

4 unchanged sentences

Cash payments for asset acquisitions (Note 8)

( 399 ) ( 17,492 )

Escrow deposits ( 1,202 ) ( 15,571 )

Cash proceeds from the sale of assets and insurance proceeds 13 431

Cash from insurance proceeds 913 653

Cash proceeds from the sale of assets 18 7,665

Purchases of investments ( 18,425 ) ( 3,518 )

4 unchanged sentences

Cash flows from financing activities:

Proceeds from debt (Note 15)

Payments on debt (Note 15)

4 unchanged sentences

Dividends paid ( 6,415 ) ( 6,077 )

Proceeds from sale of subsidiary shares (Note 6)

Non-controlling interest distribution ( 4 ) ( 8 )

3 unchanged sentences

$ ( 1,943 ) $ ( 29,838 )

Net increase (decrease) in cash and cash equivalents 10,699 ( 13,655 )

Net increase in cash and cash equivalents 103,704 23,379

Cash and cash equivalents beginning of period 316,270 262,201

Cash and cash equivalents end of period $ 419,974 $ 285,580

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands) 2023 2022

2 unchanged sentences

Interest $ 3,534 $ 3,950

Income taxes $ 6,030 $ 41,905

Lease liabilities $ 95,938 $ 72,919

1 unchanged sentence

Accrued capital expenditures $ 5,000 $ 3,800

Accrued dividends declared $ 3,215 $ 3,042

Right-of-use assets obtained in exchange for new and modified operating lease obligations $ 352,131 $ 194,342

7 unchanged sentences

The Company's independent operating subsidiaries provide health care services across the post-acute care continuum and engage 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, 2023, the Company's independent operating subsidiaries operated 290 facilities and other ancillary operations located in Arizona, California, Colorado, Idaho, Iowa, Kansas, Nebraska, Nevada, South Carolina, Texas, Utah, Washington and Wisconsin.

As of June 30, 2023, the Company's independent operating subsidiaries operated 290 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 independent operating subsidiaries have a collective capacity of approximately 29,900 operational skilled nursing beds and 3,000 senior living units.

As of March 31, 2023, the Company's independent operating subsidiaries operated 211 facilities under long-term lease arrangements, and had options to purchase 11 of those 211 facilities.

As of June 30, 2023, the Company's independent operating subsidiaries operated 211 facilities under long-term lease arrangements, and had options to purchase 11 of those 211 facilities.

The Company's real estate portfolio includes 108 owned real estate properties, which included 79 facilities operated and managed by the Company's independent operating subsidiaries, 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.

(Pennant) as part of the spin-off transaction that occurred in 2019, 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.

8 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, 2023 and for the three months ended March 31, 2023 and 2022 (collectively, the Interim Financial Statements) are unaudited.

Other Information — The accompanying condensed consolidated financial statements as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022 (collectively, the Interim Financial Statements) are unaudited.

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

8 unchanged sentences

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

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

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

The Interim Financial Statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest.

4 unchanged sentences

Actual results could differ from those estimates.

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

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

See Note 5, Fair Value Measurements.

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

These tiers include:

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

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

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

See Note 5., Fair Value Measurements for additional information.

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).

See Note 3, Revenue and Accounts Receivable.

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

See Note 3, Revenue and Accounts Receivable.

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

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

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

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

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

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

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

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

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

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

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

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

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

Revenue for operating leases is recognized on a straight-line basis over the lease term when collectability of all minimum lease payments is probable in accordance with FASB ASC Topic 842, Leases (ASC 842).

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.

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

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

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

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

THE ENSIGN GROUP, INC.

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

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

3 unchanged sentences

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

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

Leases commencing prior to the ASC 842 adoption date were classified as operating leases under historical guidance.

As the Company has elected the package of practical expedients allowing it to not reassess lease classification, these leases are classified as operating leases under ASC 842 as well.

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, 2023, the Company has one financing lease which is not material to the condensed consolidated balance sheets.

The Company determines if an arrangement is a lease and 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 June 30, 2023, the Company has one financing lease that is not material to the condensed consolidated balance sheets.

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

14 unchanged sentences

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

THE ENSIGN GROUP, INC.

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

The Company subleases skilled nursing facilities to third-party operators and considers the subleases to be separate contracts under ASC 842 because the Company is not relieved of its primary obligation under its operating lease.

The Company subleases skilled nursing facilities to third-party operators and considers the subleases to be separate contracts because the Company is not relieved of its primary obligation under its operating lease.

The rental income from third-parties related to these subleases is presented on a gross basis from the rent expense associated with the Company's lease obligations and is not material to the condensed consolidated statements of income.

3 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, 2023 and 2022.

Management has evaluated its long-lived assets and determined there was no impairment during the three and six months ended June 30, 2023 and 2022.

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

1 unchanged sentence

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

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

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

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

THE ENSIGN GROUP, INC.

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

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

2 unchanged sentences

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

Management has evaluated its long-lived assets and determined there was no impairment during the three months ended March 31, 2023 and 2022.

Management has evaluated its intangible assets and determined there was no impairment during the three and six months ended June 30, 2023 and 2022.

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.

8 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 $ 88,843 and $ 79,781 as of March 31, 2023 and December 31, 2022, respectively.

THE ENSIGN GROUP, INC.

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

Accrued general liability and professional malpractice liabilities on an undiscounted basis, net of anticipated insurance recoveries, were $ 87,521 and $ 79,781 as of June 30, 2023 and December 31, 2022, 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 $ 27,607 and $ 27,301 as of March 31, 2023 and December 31, 2022, respectively.

In addition, the Company has recorded an asset and equal liability of $ 13,765 and $ 10,512 as of March 31, 2023 and December 31, 2022, 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 $ 27,918 and $ 27,301 as of June 30, 2023 and December 31, 2022, respectively.

In addition, the Company has recorded an asset and corresponding liability of $ 12,699 and $ 10,512 as of June 30, 2023 and December 31, 2022, respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance recoveries on a gross basis.

See Note 12, Restricted and Other Assets.

1 unchanged sentence

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

To protect itself against loss exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that exceed $ 525 for each covered person for fiscal years 2023.

As of March 31, 2023 and December 31, 2022, the Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 14,088 for both periods.

As of June 30, 2023 and December 31, 2022, the Company’s accrued liability under these plans recorded on an undiscounted basis in the accompanying condensed consolidated balance sheets was $ 14,563 and $ 14,088 , respectively.

THE ENSIGN GROUP, INC.

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

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

12 unchanged sentences

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

THE ENSIGN GROUP, INC.

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

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

11 unchanged sentences

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

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

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

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

REVENUE AND ACCOUNTS RECEIVABLE

Service Revenue

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

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

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

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

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

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

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

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

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

THE ENSIGN GROUP, INC.

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

Revenue from the Medicare and Medicaid programs accounted for 73.3 % and 73.4 % of all service revenue for the three months ended March 31, 2023 and 2022, respectively.

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

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

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

The Company recorded adjustments to revenue which were not material to the Company's revenue for the three months ended March 31, 2023 and 2022.

Rental Revenue

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

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

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

State relief funding

The Company receives state relief funding through Medicaid programs from various states, including healthcare relief funding under the American Rescue Plan Act (ARPA), increases in the Federal Medical Assistance Percentage (FMAP) under the Families First Coronavirus Response Act (FFCRA) and other state specific relief programs.

The funding generally incorporates specific use requirements primarily for direct patient care including labor related expenses that are attributable to the COVID-19 pandemic or are associated with providing patient care.

Revenues from these additional payments are recognized in accordance with ASC 606, subject to variable consideration constraints.

In certain operations where the Company received additional payments that exceeded expenses incurred related to the specific qualifiers, 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 related expenses incurred.

As of March 31, 2023 and December 31, 2022, the Company had $ 1,907 and $ 1,001 in unapplied state relief funds, respectively.

During the three months ended March 31, 2023 and 2022, the Company received an additional $ 27,264 and $ 17,317 , respectively, in state relief funding and recognized $ 26,358 and $ 17,599 , respectively, as revenue.

Disaggregation of Revenue

1 unchanged sentence

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

THE ENSIGN GROUP, INC.

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

Revenue by Payor

1 unchanged sentence

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.

THE ENSIGN GROUP, INC.

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

Service revenue for the three months ended March 31, 2023 and 2022 is summarized in the following tables:

Three Months Ended March 31,

Revenue from the Medicare and Medicaid programs accounted for 73.1 % and 73.2 % for the three and six months ended June 30, 2023, respectively, and 73.4 % for both the three and six months ended June 30, 2022.

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

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

The Company recorded adjustments to revenue which were not material to the Company's revenue for the three and six months ended June 30, 2023 and 2022.

Service revenue for the three and six months ended June 30, 2023 and 2022 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 was $ 4,923 and $ 4,289 , respectively, for the three months ended March 31, 2023 and 2022.

Six Months Ended June 30,

Revenue % of Revenue Revenue % of Revenue

$ 700,045 38.9 % $ 560,476 39.0 %

Medicare 495,804 27.6 398,905 27.7

Medicaid — skilled 119,942 6.7 95,712 6.7

Total Medicaid and Medicare 1,315,791 73.2 1,055,093 73.4

Managed care 317,764 17.7 256,373 17.8

Private and other (2)

164,464 9.1 126,037 8.8

SERVICE REVENUE $ 1,798,019 100.0 % $ 1,437,503 100.0 %

(1) Medicaid payor includes revenue for senior living operations and revenue related to state relief funding.

(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 $ 5,244 and $ 10,167 , respectively, for the three and six months ended June 30, 2023 and $ 4,139 and $ 8,428 , respectively, for the three and six months ended June 30, 2022.

State relief funding

THE ENSIGN GROUP, INC.

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

Revenues from these additional payments are recognized in accordance with ASC 606, subject to variable consideration constraints.

In certain operations where the Company received additional payments that exceeded expenses incurred related to the specific qualifiers, and additional expenses are required for recognition.

Accordingly, the amount of state relief revenue recognized is limited to the actual related expenses incurred.

As of June 30, 2023 and December 31, 2022, the Company had $ 1,034 and $ 1,001 in unapplied state relief funds, respectively.

During the three and six months ended June 30, 2023, the Company received $ 17,580 and $ 44,844 in state relief funding and recognized $ 18,453 and $ 44,811 , respectively, as revenue.

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

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, 2023 and December 31, 2022, or activity during the three months ended March 31, 2023 and 2022.

Accounts receivable as of March 31, 2023 and December 31, 2022, is summarized in the following table:

March 31, 2023 December 31, 2022

The Company had no material contract liabilities and contract assets as of June 30, 2023 and December 31, 2022, or activity during the three and six months ended June 30, 2023 and 2022.

Accounts receivable as of June 30, 2023 and December 31, 2022, is summarized in the following table:

June 30, 2023 December 31, 2022

Medicaid $ 173,443 $ 157,878

9 unchanged sentences

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

THE ENSIGN GROUP, INC.

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

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Net income $ 64,090 $ 57,803 $ 124,059 $ 107,891

5 unchanged sentences

$ 1.15 $ 1.05 $ 2.23 $ 1.97

THE ENSIGN GROUP, INC.

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

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Net income $ 64,090 $ 57,803 $ 124,059 $ 107,891

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incremental shares from assumed conversion (1)

1,649 1,947 1,734 2,074

Adjusted weighted average common shares outstanding 57,260 56,853 57,190 56,862

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$ 1.12 $ 1.01 $ 2.17 $ 1.90

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 1,178 and 647 for the three months ended March 31, 2023 and 2022, respectivel y.

(1) Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 1,419 and 1,317 for th e three and six months ended June 30, 2023, respectively, and 789 and 697 for the three and six months ended June 30, 2022, respectivel y.

FAIR VALUE MEASUREMENTS

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

These tiers include:

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

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

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

The Company's other financial assets include the captive insurance subsidiary's deposits and investments designated to support long-term insurance subsidiary liabilities and are carried at cost basis of $ 58,870 and $ 53,924 as of March 31, 2023 and December 31, 2022, respectively.

Also included are 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 Company's financial assets include the captive insurance subsidiary's deposits and investments designated to support long-term insurance subsidiary liabilities and are carried at a cost basis of $ 59,417 and $ 53,924 as of June 30, 2023 and December 31, 2022, respectively.

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

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 March 31, 2023, and December 31, 2022, the adjusted cost basis of the investment funds was $ 35,228 and $ 25,144 , respectively.

As of March 31, 2023 and December 31, 2022, the cost basis of the Company's financial assets included in the captive insurance subsidiary's investments, deferred compensation plan investment funds and other cost method investments are considered to approximate the fair value of these financial assets and are derived using Level 2 and 3 inputs.

The Company believes its investments that were in an unrealized loss position as of March 31, 2023 and December 31, 2022 do not require an allowance for expected credit losses, nor has any event occurred through the filing date of this report that would indicate differently.

THE ENSIGN GROUP, INC.

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

As of June 30, 2023, and December 31, 2022, the adjusted cost basis of the investment funds was $ 37,276 and $ 25,144 , respectively.

As of June 30, 2023 and December 31, 2022, the cost basis of the Company's financial assets included in the captive insurance subsidiary's investments and deferred compensation plan investment funds are considered to approximate the fair value of these financial assets and are derived using Level 2 inputs.

Additionally, the Company has other investments where the fair value is derived using Level 3 inputs which are not material.

The Company believes its investments that were in an unrealized loss position as of June 30, 2023 and December 31, 2022 do not require an allowance for expected credit losses, nor has any event occurred through the filing date of this report that would indicate differently.

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

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federal income tax purposes, commencing with its taxable year ended 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 .

Standard Bearer did not have any real estate acquisitions during the three months ended March 31, 2023.

Standard Bearer did not have any real estate acquisitions during the six months ended June 30, 2023 .

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 .

Refer to Note 8, Operation Expansions , for additional information.

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Refer to Note 7, Business Segments , for additional information related to these intercompany eliminations as well as Standard Bearer as a reportable segment.

THE ENSIGN GROUP, INC.

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

Intercompany master lease agreements

Certain of the Company's operating subsidiaries and the 75 Standard Bearer subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer Master Leases) in January 2022.

Certain of the Company's operating subsidiaries and the 75 Standard Bearer subsidiaries entered into five "triple-net" master lease agreements (collectively, the Standard Bearer Master Leases).

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.

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

During the three months ended March 31, 2023, no acquisitions or amendments were made to the Standard Bearer Master Leases.

During the three months ended March 31, 2022, two real estate properties were acquired and added to the Standard Bearer Master Leases.

Rental revenue generated from Ensign affiliated operations for the three months ended March 31, 2023 and 2022 was $ 15,931 and $ 13,425 , respectively.

Rental revenue generated from Ensign affiliated operations was $ 16,128 and $ 32,059 , respectively, for the three and six months ended June 30, 2023 and $ 13,894 and $ 27,319 , respectively, for the three and six months ended June 30, 2022.

Intercompany management agreement

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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, 2023 and 2022 was $ 1,182 and $ 1,022 , respectively, both representing 6 % 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, 2023 was $ 1,195 and $ 2,377 , respectively.

Management fees 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.

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 the Revolving Credit Facility to fund acquisitions and working capital needs.

The intercompany debt arrangements include mortgage loans and the 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.

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Refer to Note 15, 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

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In the second quarter of 2022, Standard Bearer sold fully vested common shares from the Standard Bearer Equity Plan to shareholders for cash of $ 6,544 .

During the three months ended March 31, 2023 and 2022, the Company did not grant any stock options nor restricted shares under the Standard Bearer Equity Plan.

During the six months ended June 30, 2023 and 2022, the Company did not grant any stock options nor restricted shares under the Standard Bearer Equity Plan.

Also in the second quarter of 2022, Standard Bearer established shareholders of its preferred shares through contributions of cash of $ 149 .

1 unchanged sentence

The value of Standard Bearer common and preferred shares held by the Company are eliminated in consolidation and the value held by other shareholders are classified as noncontrolling interests on the Company's consolidated balance sheets.

THE ENSIGN GROUP, INC.

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

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 periods has been recast to reflect the change of the Company’s segment structure.

As of March 31, 2023, the skilled services segment includes 253 skilled nursing operations and 26 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

As of June 30, 2023, the skilled services segment includes 253 skilled nursing operations and 26 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

The Company's Standard Bearer segment consists of 103 owned real estate properties.

These properties include 75 operations the Company operated and managed and 29 senior living operations that are leased to and operated by third parties.

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 26 campus operations that provide both skilled nursing and rehabilitative care services and senior living services.

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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 6, Standard Bearer , as it is part of the CODM financial information.

The following tables set forth financial information for the segments:

Three Months Ended June 30, 2023

Skilled Services Standard Bearer All Other (1)

Intercompany Elimination Total

Service revenue (2)

$ 884,200 $ — $ 35,535 $ ( 3,634 ) $ 916,101

Rental revenue (3)

— 19,914 2,819 ( 17,489 ) 5,244

TOTAL REVENUE $ 884,200 $ 19,914 $ 38,354 $ ( 21,123 ) $ 921,345

Segment income (loss) 117,008 7,133 ( 42,988 ) — 81,153

Loss on real estate insurance recoveries ( 100 )

Income before provision for income taxes $ 81,053

Depreciation and amortization 9,417 6,133 2,046 — 17,596

Interest expense (4)

$ — $ 4,575 $ 304 $ ( 2,856 ) $ 2,023

(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) All Other rental revenue includes rental revenue associated with the Company's subleases to third parties of $ 1,063 for the three months ended June 30, 2023.

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.

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

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, 2023

Three Months Ended June 30, 2022

Skilled Services Standard Bearer All Other (1)

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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) All Other rental revenue includes rental revenue associated with the Company's subleases to third parties of $ 708 for the three months ended March 31, 2023.

(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.

1 unchanged sentence

(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.

Three Months Ended March 31, 2022

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

Six Months Ended June 30, 2023

Skilled Services Standard Bearer All Other (1)

6 unchanged sentences

Segment income (loss) 230,353 14,352 ( 85,170 ) — 159,535

Loss on real estate insurance recoveries ( 100 )

Income before provision for income taxes $ 159,435

Depreciation and amortization 18,481 12,099 4,128 — 34,708

4 unchanged sentences

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

(3) All Other rental revenue includes rental revenue associated with the Company's subleases to third parties of $ 1,771 for the six months ended June 30, 2023.

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.

1 unchanged sentence

(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.

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

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

THE ENSIGN GROUP, INC.

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

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

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.

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

Service revenue by major payor source were as follows:

Three Months Ended March 31, 2023

Skilled Services All Other Total Service Revenue Revenue %

Three Months Ended June 30, 2023

Skilled Services Other Service Revenue Total Service Revenue Revenue %

$ 352,380 $ 7,401 $ 359,781 39.3 %

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(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, 2022

Skilled Services Other Service Revenue 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 state relief funding.

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

Six Months Ended June 30, 2023

Skilled Services Other Service Revenue Total Service Revenue Revenue %

$ 685,825 $ 14,220 $ 700,045 38.9 %

Medicare 495,804 — 495,804 27.6

Medicaid-skilled 119,942 — 119,942 6.7

Subtotal 1,301,571 14,220 1,315,791 73.2

Managed care 317,764 — 317,764 17.7

Private and other (2)

115,788 48,676 164,464 9.1

TOTAL SERVICE REVENUE $ 1,735,123 $ 62,896 $ 1,798,019 100.0 %

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

(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)

Three Months Ended March 31, 2022

Skilled Services All Other Total Service Revenue Revenue %

Six Months Ended June 30, 2022

Skilled Services Other Service Revenue Total Service Revenue Revenue %

$ 549,414 $ 11,062 $ 560,476 39.0 %

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

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

OPERATION EXPANSIONS

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2023 Expansions

During the three months ended March 31, 2023, the Company expanded its operations through long-term leases, with the addition of 19 stand-alone skilled nursing operations.

These new operations added a total of 1,764 operational skilled nursing beds to be operated by the Company's affiliated operating subsidiaries.

During the six months ended June 30, 2023, the Company expanded its operations through long-term leases, with the addition of 19 stand-alone skilled nursing operations.

These new operations added a total of 1,764 operational skilled nursing beds operated by the Company's affiliated operating subsidiaries.

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

In connection with the new operations obtained 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.

1 unchanged sentence

2022 Expansions

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

Of these additions, two are related to purchases 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.

During the six months ended June 30, 2022, the Company expanded its operations and real estate portfolio through a combination of long-term leases and real estate purchases , with the addition of four stand-alone skilled nursing operations.

Of these additions, two were related to purchases of real estate properties.

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

These new operations added a total of 453 operational skilled nursing beds and 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 aggregate purchase price for these expansions during the six months ended June 30, 2022 was $ 33,892 .

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.

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 during the six months ended June 30, 2022 was concentrated in goodwill of $ 16,400 and accordingly, the transactions were classified as business combinations.

THE ENSIGN GROUP, INC.

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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, 2023 were not material operations to the Company individually or in the aggregate.

The assets added during the six months ended June 30, 2023 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, 2023 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, 2023 condensed consolidated balance sheets of the Company, and the operating results have been included in the condensed consolidated statements of operations of the Company since the date the Company gained effective control.

PROPERTY AND EQUIPMENT - NET

Property and equipment, net consists of the following:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Land $ 134,907 $ 134,864

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PROPERTY AND EQUIPMENT, NET $ 1,008,744 $ 992,010

See also Note 6, Standard Bearer and Note 8, Operation Expansions for information on acquisitions during the three months ended March 31, 2023.

During the three months ended June 30, 2022, the Company completed the sale of assets for a sale price of $ 7,707 and recorded a gain of $ 2,567 included in the condensed consolidated statement of income .

INTANGIBLE ASSETS - NET

Weighted Average Life (Years) March 31, 2023 December 31, 2022

Weighted Average Life (Years) June 30, 2023 December 31, 2022

Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization

4 unchanged sentences

TOTAL $ 5,750 $ ( 3,450 ) $ 2,300 $ 5,750 $ ( 3,285 ) $ 2,465

During the three months ended March 31, 2023 and 2022, amortization expense was $ 404 in both periods, of which $ 298 and $ 289 was related to the amortization of right-of-use assets, respectively.

During the three and six months ended June 30, 2023, amortization expense was $ 357 and $ 761 , respectively, of which $ 298 and $ 596 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.

THE ENSIGN GROUP, INC.

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

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

1 unchanged sentence

Thereafter 1,013

THE ENSIGN GROUP, INC.

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

GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

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

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

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

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

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

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

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

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

The Company anticipates that the majority of goodwill recognized will be fully deductible for tax purposes as of March 31, 2023.

There were no activities in goodwill during the three months ended March 31, 2023.

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 activity in goodwill by skilled service segment and "all other" category as of March 31, 2023 and December 31, 2022:

Skilled Services All Other Total

Goodwill $ 67,886 $ 8,983 $ 76,869

Other indefinite-lived intangible assets consist of the following:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Trade name $ 889 $ 889

1 unchanged sentence

TOTAL $ 3,972 $ 3,972

The Company anticipates that the majority of goodwill recognized will be fully deductible for tax purposes as of June 30, 2023.

The following table represents activity in goodwill by skilled service segment and "all other" category as of June 30, 2023 and December 31, 2022:

Skilled Services All Other Total

Goodwill $ 67,886 $ 8,983 $ 76,869

RESTRICTED AND OTHER ASSETS

Restricted and other assets consist of the following:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Debt issuance costs, net $ 3,326 $ 3,753

2 unchanged sentences

Deposits with landlords 2,651 2,527

Escrow deposits 1,202 —

Other 10,137 14,053

RESTRICTED AND OTHER ASSETS $ 35,534 $ 37,291

Included in restricted and other assets as of March 31, 2023 and December 31, 2022 are anticipated insurance recoveries related to the Company's workers' compensation and general and professional liability claims that are recorded on a gross, rather than net, basis.

Included in restricted and other assets as of June 30, 2023 and December 31, 2022 are anticipated insurance recoveries related to the Company's workers' compensation and general and professional liability claims that are recorded on a gross, rather than net, basis.

THE ENSIGN GROUP, INC.

2 unchanged sentences

Other accrued liabilities consists of the following:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Quality assurance fee $ 8,738 $ 7,701

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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 $ 18,413 and $ 16,138 during the three months ended March 31, 2023 and 2022, respectively, or 23.5 % of earnings before income taxes for the three months ended March 31, 2023, compared to 24.4 % for the three months ended March 31, 2022.

The Company recorded income tax expense of $ 35,376 and $ 31,292 during the six months ended June 30, 2023 and 2022, respectively, or 22.2 % of earnings before income taxes for the six months ended June 30, 2023, compared to 22.5 % for the six months ended June 30, 2022.

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.

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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, 2023 and 2022.

The net balance of unrecognized tax benefits was not material to the Interim Financial Statements for the six months ended June 30, 2023 and 2022.

Debt consists of the following:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Mortgage loans and promissory note $ 154,313 $ 156,271

5 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 Revolving Credit Facility).

The Company maintains a revolving credit facility between the Company and its subsidiaries, including Standard Bearer as co-borrowers, and Truist Securities (Truist) (the Credit Facility) with a revolving line of credit of up to $ 600,000 in aggregate principal amount with a maturity date of April 8, 2027.

Borrowings are supported by a lending consortium arranged by Truist.

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.

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;

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 0.25 % 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 credit agreement).

In addition, there is a commitment fee on the unused portion of the commitments that ranges from 0.20 % to 0.40 % per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio.

When the Company amended the Credit Facility in 2022 with the terms and conditions described above, it wrote off deferred financing costs of $ 566 and additional deferred financing costs of $ 3,197 were capitalized during the three months ended June 30, 2022.

Borrowings made under the 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 such operating subsidiaries' personal property.

The 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.

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, 2023, there was no outstanding debt under the Revolving Credit Facility.

The Company was in compliance with all loan covenants as of March 31, 2023.

As of June 30, 2023, there was no outstanding debt under the Credit Facility.

The Company was in compliance with all loan covenants as of June 30, 2023.

Mortgage Loans and Promissory Note

As of March 31, 2023, the Company's operating subsidiaries had $ 155,264 outstanding under the mortgage loans and notes, of which $ 3,851 is classified as short-term and the remaining $ 151,413 is classified as long-term.

The Company was in compliance with all loan covenants as of March 31, 2023.

As of March 31, 2023, 23 of the Company's subsidiaries have mortgage loans insured with HUD in the aggregate amount of $ 152,686 , which subjects these subsidiaries to HUD oversight and periodic inspections.

The Company has 23 subsidiaries that have mortgage loans insured with HUD in the aggregate amount of $ 151,877 , 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 bears a fixed interest rate of 5.3 % per annum and has a term of 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.

In addition to the HUD mortgage loans above, the Company has a promissory note of $ 2,436 that bears a fixed interest rate of 5.3 % per annum and has a term of 12 years.

The note, which was assumed as part of 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 inputs, 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, 2023, the Company had approximately $ 6,710 of borrowing capacity under the Revolving Credit Facility pledged as collateral to secure outstanding letters of credit.

THE ENSIGN GROUP, INC.

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

As of June 30, 2023, the Company had approximately $ 6,710 of borrowing capacity under the 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, 2023 and 2022 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, 2023 and 2022 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.

THE ENSIGN GROUP, INC.

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

2022 Omnibus Incentive Plan (2022 Plan) — The Company has one active stock incentive plan, the 2022 Omnibus Incentive Plan (the 2022 Plan).

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Options expire ten years from the date of grant.

At March 31, 2023, the total number of shares available for issuance under the 2022 Plan was 2,429 .

At June 30, 2023, the total number of shares available for issuance under the 2022 Plan was 2,133 .

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

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

The Company develops estimates based on historical data which can change significantly over time.

Stock Options

The Company granted 222 stock options during the three months ended March 31, 2023.

The Company used the following assumptions for stock options granted during the three months ended March 31, 2023 and 2022:

The Company granted 191 and 413 stock options during the three and six months ended June 30, 2023, respectively.

The Company used the following assumptions for stock options granted during the three months ended June 30, 2023 and 2022:

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

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2022 154 2.7 % 6.1 years 42.1 % 0.3 %

For the three months ended March 31, 2023 and 2022, 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, 2023 and 2022:

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

2023 413 3.9 % 6.3 years 41.5 % 0.3 %

2022 318 2.3 % 6.1 years 42.2 % 0.3 %

For the six months ended June 30, 2023 and 2022, 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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2022 318 $ 80.18 $ 34.29

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, 2023 and 2022 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, 2023:

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the six month periods ended June 30, 2023 and 2022 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, 2023:

Number of Options Outstanding Weighted Average

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Exercised ( 398 ) 21.52

March 31, 2023 3,891 $ 50.17 2,058 $ 31.41

June 30, 2023 3,805 $ 53.84 2,007 $ 34.73

THE ENSIGN GROUP, INC.

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

The following summary information reflects stock options outstanding, vested and related details as of March 31, 2023:

Stock Options Outstanding Stock Options Vested

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

Year of Grant Exercise Price

2013 $ 6.76 - $ 9.74 43 $ 193 0 43

2014 8.94 - 16.05 335 1,617 1 335

2015 18.20 - 21.39 200 1,556 2 200

2016 15.93 - 16.86 184 1,082 3 184

2017 15.80 - 19.41 227 1,331 4 227

2018 22.49 - 32.71 439 4,241 5 351

2019 41.07 - 45.76 581 9,126 6 344

2020 44.84 - 59.49 532 10,498 7 214

2021 73.47 - 83.64 558 18,307 8 129

2022 79.79 - 94.88 570 21,580 9 31

2023 $ 89.83 - $ 89.86 222 9,779 10 —

TOTAL 3,891 $ 79,310 2,058

The aggregate intrinsic value of options outstanding, vested and expected to vest as of March 31, 2023 and December 31, 2022 is as follows:

Options March 31, 2023 December 31, 2022

The aggregate intrinsic value of options outstanding, vested and expected to vest as of June 30, 2023 and December 31, 2022 is as follows:

Options June 30, 2023 December 31, 2022

Outstanding $ 158,347 $ 183,593

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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, 2023 and 2022 was $ 5,337 and $ 6,351 , respectively.

The total intrinsic value of options exercised during the three months ended March 31, 2023 and 2022 was $ 10,950 and $ 9,502 , respectively.

The aggregate intrinsic value of options that vested during the six months ended June 30, 2023 and 2022 was $ 13,639 and $ 10,409 , respectively.

The total intrinsic value of options exercised during the six months ended June 30, 2023 and 2022 was $ 29,741 and $ 25,642 , respectively.

Restricted Stock Awards

The Company granted 105 and 112 restricted stock awards during the three months ended March 31, 2023 and 2022 , respectively.

The Company granted 61 and 166 restricted stock awards during the three and six months ended June 30, 2023, respectively.

The Company granted 46 and 158 restricted stock awards during the three and six months ended June 30, 2022, 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, 2023 and 2022 ranged from $ 89.83 to $ 94.63 and $ 73.17 to $ 79.79 , respectively.

The fair value per share of restricted awards granted during the six months ended June 30, 2023 and 2022 ranged from $ 89.83 to $ 94.63 and $ 73.17 to $ 83.93 , 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, 2023 and changes during the three months ended March 31, 2023 is presented below:

A summary of the status of the Company's non-vested restricted stock awards as of June 30, 2023 and changes during the six months ended June 30, 2023 is presented below:

Non-Vested Restricted Awards Weighted Average Grant Date Fair Value

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Forfeited ( 10 ) 68.36

Nonvested at March 31, 2023 494 $ 67.68

THE ENSIGN GROUP, INC.

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

During the three months ended March 31, 2023, the Company granted 4 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 $ 94.63 based on the market price on the grant date.

Nonvested at June 30, 2023 460 $ 74.52

During the three and six months ended June 30, 2023, the Company granted 5 and 9 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors, respectively.

The fair value per share of these stock awards ranged from $ 94.63 to $ 98.31 based on the market price on the grant date.

Long-Term Incentive Plan

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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 $ 191 and $ 195 for the three months ended March 31, 2023 and 2022, 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, 2023 and 2022 was as follows:

Three Months Ended March 31,

The total stock-based compensation related to the 2019 LTI Plan was approximately $ 211 and $ 402 for the three and six months ended June 30, 2023, respectively, compared to $ 195 and $ 390 for the three and six months ended June 30, 2022, respectively.

THE ENSIGN GROUP, INC.

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

Stock-based compensation expense

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, 2023 and 2022 was as follows:

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

2023 2022 2023 2022

Stock-based compensation expense related to stock options $ 4,963 $ 2,786 $ 8,388 $ 5,306

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TOTAL $ 8,881 $ 5,616 $ 15,454 $ 10,783

In future periods, the Company expects to recognize approximately $ 48,755 and $ 30,109 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of March 31, 2023.

In future periods, the Company expects to recognize approximately $ 50,924 and $ 31,288 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of June 30, 2023.

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

There were 1,833 unvested and outstanding options as of March 31, 2023, of which 1,729 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest as of March 31, 2023 was 6.1 years.

There were 1,798 unvested and outstanding options as of June 30, 2023, of which 1,563 shares are expected to vest.

The weighted average contractual life for options outstanding, vested and expected to vest as of June 30, 2023 was 6.4 years.

The Company leases from CareTrust REIT, Inc.

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

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

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

(1) no event of default under any of the Master Leases have occurred;

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

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

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

THE ENSIGN GROUP, INC.

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

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

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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 $ 16,283 and $ 15,645 for the three months ended March 31, 2023 and 2022, respectively.

Total rent expense under the Master Leases was approximately $ 16,674 and $ 32,957 for the three and six months ended June 30, 2023, respectively, and $ 16,007 and $ 31,652 for the three and six months ended June 30, 2022, 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, 2023.

The Company is in compliance with requirements of the Master Leases as of June 30, 2023.

THE ENSIGN GROUP, INC.

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

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

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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 $ 46,761 and $ 35,785 for the three months ended March 31, 2023 and 2022, respectively.

Total rent expense for continuing operations inclusive of straight-line rent adjustments and rent associated with the Master Leases noted above, was $ 49,885 and $ 96,646 for the three and six months ended June 30, 2023, respectively, and $ 37,251 and $ 73,036 for the three and six months ended June 30, 2022, respectively.

Seventy-eight of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases with CareTrust, are operated under 12 separate master lease arrangements.

During the three months ended March 31, 2023, the Company expanded its operations through two separate master lease arrangements for 20 stand-alone skilled nursing operations, of which 17 are operated by the Company's affiliated operating subsidiaries and the remaining three are subleased to a third-party operator.

In the first quarter of 2023, the Company expanded its operations through two separate master lease arrangements for 20 stand-alone skilled nursing operations, of which 17 are operated by the Company's affiliated operating subsidiaries and the remaining three are subleased to a third-party operator.

These two master leases increased the lease liabilities and right-of-use assets by $ 325,369 to reflect the new lease obligations and have initial lease terms of 18 and 20 years.

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The components of operating lease expense are as follows:

Three Months Ended March 31,

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

2023 2022 2023 2022

Rent - cost of services (1)

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Depreciation and amortization (2)

298 288 596 577

Variable lease costs (3)

5,154 3,772 9,986 9,135

(1) Rent- cost of services includes deferred rent expense adjustments of $ 263 and $ 124 for the three months ended March 31, 2023 and 2022, respectively.

Additionally, rent - cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 2,060 and $ 937 for the three months ended March 31, 2023 and 2022, respectively.

$ 55,337 $ 41,311 $ 107,228 $ 82,748

(1) Rent- cost of services includes deferred rent expense adju stments of $ 218 and $ 481 for the three and six months ended June 30, 2023, respectively, and $ 116 and of $ 240 for the three and six months ended June 30, 2022, respectively.

Additionally, rent- cost of services includes other variable lease costs such as CPI increases and short-term leases of $ 2,398 and $ 4,458 for the three and six months ended June 30, 2023, respectively, and $ 1,302 and $ 2,239 for the three and six months ended June 30, 2022, 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.

THE ENSIGN GROUP, INC.

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

Future minimum lease payments for all leases as of March 31, 2023 are as follows:

Future minimum lease payments for all leases as of June 30, 2023 are as follows:

2023 (remainder) $ 94,489

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LONG-TERM OPERATING LEASE LIABILITIES $ 1,657,782

THE ENSIGN GROUP, INC.

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

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term.

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

As of March 31, 2023, the weighted average remaining lease term is 15.5 years and the weighted average discount rate used to determine the operating lease liabilities is 6.5 %.

As of June 30, 2023, the weighted average remaining lease term is 15.3 years and the weighted average discount rate used to determine the operating lease liabilities is 6.5 %.

Lessor Activities

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

As of March 31, 2023, 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:

The Company leases its owned real estate properties to third party operators, of which 29 senior living operations are operated by The Pennant Group, Inc.

All of these properties are triple-net leases, whereby the respective tenants are responsible for all costs at the properties including:

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

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The initial terms range between 14 to 16 years.

During the three months ended March 31, 2023, the Company entered into a sublease agreement for three stand-alone skilled nursing operations with a third-party operator with an initial lease term of 18 years.

Total rental income from all third-party sources for the three months ended March 31, 2023 and 2022 is as follows:

Three Months Ended March 31,

During the first quarter of 2023, the Company entered into a sublease agreement for three stand-alone skilled nursing operations with a third-party operator with an initial lease term of 18 years.

Total rental income from all third-party sources for the three and six months ended June 30, 2023 and 2022 is as follows:

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

2023 2022 2023 2022

$ 3,742 $ 3,690 $ 7,484 $ 7,505

Other third-party 1,502 449 2,683 923

TOTAL $ 5,244 $ 4,139 $ 10,167 $ 8,428

(1) Pennant rental income includes variable rent such as property taxes of $ 325 and $ 330 during the three months ended March 31, 2023 and 2022, respectively.

In addition, the number of senior living operations leased to and operated by Pennant during the three months ended March 31, 2023 and 2022 was 29 and 32 , respectively.

THE ENSIGN GROUP, INC.

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

Future annual rental income for all leases as of March 31, 2023 were as follows:

(1) Pennant rental income includes variable rent such as property taxes of $ 325 and $ 650 during the three and six months ended June 30, 2023, respectively, and $ 327 and $ 657 for the three and six months ended June 30, 2022, respectively.

In addition, the number of senior living operations leased to and operated by Pennant was 29 during the six months ended June 30, 2023 and decreased from 32 to 29 during the six months ended June 30, 2022.

Future annual rental income for all leases as of June 30, 2023 were as follows:

Year Amount (1)

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TOTAL $ 223,947

(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of March 31, 2023 .

(1) Annual rental income includes base rents and variable rental income pursuant to existing leases as of June 30, 2023.

DEFINED CONTRIBUTION PLANS

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Additionally, the DCP 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 fund savings plans of this nature.

The Company paid for related administrative costs, which were not significant during three months ended March 31, 2023 and 2022.

As of the three months ended March 31, 2023 and 2022, the Company accrued $ 37,613 and $ 27,980 , respectively, as long term deferred compensation in other long term liabilities on the consolidated balance sheet.

The Company paid for related administrative costs, which were not significant during three and six months ended June 30, 2023 and 2022.

THE ENSIGN GROUP, INC.

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

As of June 30, 2023 and December 31, 2022, the Company accrued $ 41,765 and $ 33,017 , respectively, as long term deferred compensation in other long term liabilities on the consolidated balance sheet.

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

Refer to Note 5, Fair Value Measurements for more information on the funds.

For the three months ended March 31, 2023, the Company recorded a gain on the investment acquired in connection with its deferred compensation plan of $ 1,239 , which is included in other income (expense), net.

During the same period, the Company recorded an offsetting expense of $ 1,280 , which is allocated between cost of services and general and administrative expenses.

For the three months ended March 31, 2022, the Company recorded a loss on the investment acquired in connection with its DCP of $ 1,202 , which is included in other income (expense), net.

During the same periods, the Company recorded an offsetting reduction in expense of $ 1,211 , which is allocated between cost of services and general and administrative expenses.

For the three and six months ended June 30, 2023, the Company recorded a gain related to its DCP of $ 1,250 and $ 2,489 , respectively, which is included in other income (expense), net.

During the same periods, the Company recorded an offsetting expense of $ 1,332 and $ 2,612 , respectively, which is allocated between cost of services and general and administrative expenses.

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

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

COMMITMENTS AND CONTINGENCIES

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

THE ENSIGN GROUP, INC.

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

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

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Department of Justice 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.

Additionally, the Company is aware of a claim filed by an individual related to this matter.

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.

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

THE ENSIGN GROUP, INC.

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

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

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

THE ENSIGN GROUP, INC.

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

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

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

THE ENSIGN GROUP, INC.

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

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

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

THE ENSIGN GROUP, INC.

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

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

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

The Company cannot predict or provide any assurance as to the possible outcome of any inquiry, investigation or litigation.

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Among other things, any settlement or litigation could involve the payment of substantial sums to settle any alleged violations, and may also include the assumption of specific procedural and financial obligations by the Company or its independent operating subsidiaries under a corporate integrity agreement and/or other such arrangement.

Medicare Revenue Recoupments — The Company's independent operating entities are subject to regulatory reviews relating to the provision of Medicare services, billings and potential overpayments as a result of Recovery Audit Contractors (RAC), Program Safeguard Contractors, and Medicaid Integrity Contractors programs (collectively referred to as Reviews).

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

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

Medicare Revenue Recoupments — The Company's independent operating subsidiaries are subject to regulatory reviews relating to the provision of Medicare services, billings and potential overpayments as a result of Recovery Audit Contractors (RAC), Program Safeguard Contractors, and Medicaid Integrity Contractors programs (collectively referred to as Reviews).

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

Beginning in August 2020, CMS resumed TPE Program activity.

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

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

As of March 31, 2023 and through the filing date of this report, 17 of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

As of June 30, 2023 and through the filing date of this report, 37 of the Company's independent operating subsidiaries had Reviews scheduled, on appeal, or in a dispute resolution process.

CMS announced a new nationwide audit, the “SNF 5-Claim Probe & Educate Review”, in which the Medicare Administrative Contractors (MACs) will review five claims from each SNF to check for compliance.

In implementing this SNF 5-Claim Probe & Educate Review, CMS acknowledged that the increase in observed improper payments from 2021 to 2022 may have arisen from a "misunderstanding" by SNFs about how to appropriately bill for claims of service after October 1, 2019.

All facilities that are not undergoing TPE reviews, or have not recently passed a TPE review, will be subject to the nationwide audit.

MACs will complete only one round of probe-and-educate for each SNF, rather than three rounds that typically occur in the TPE Program.

Additionally, CMS's education for each SNF will be individualized and based on observed claim review errors, with rationales for denial explained to the SNF on a claim-by-claim basis.

This program will apply only to claims submitted after October 1, 2019, and will exclude claims containing a COVID-19 diagnosis.

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 54.7 % and 56.3 % of its total accounts receivable as of March 31, 2023 and December 31, 2022, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 73.3 % and 73.4 % of the Company's revenue for the three months ended March 31, 2023 and 2022, respectively.

THE ENSIGN GROUP, INC.

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

The Company’s receivables from Medicare and Medicaid payor programs accounted for 55.2 % and 56.3 % of its total accounts receivable as of June 30, 2023 and December 31, 2022, respectively.

Revenue from reimbursement under the Medicare and Medicaid programs accounted for 73.1 % and 73.2 % of the Company's revenue for the three and six months ended June 30, 2023, respectively, and 73.4 % for both the three and six months ended June 30, 2022.

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 March 31, 2023, the Company's uninsured cash deposits are not material.

As of June 30, 2023, the Company's uninsured cash deposits are not material.

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

3 unchanged sentences

The share repurchase program does not obligate the Company to acquire any specific number of shares.

The Company did not purchase any shares pursuant to this stock repurchase program in the three months ended March 31, 2023.

The Company did not purchase any shares pursuant to this stock repurchase program during the six months ended June 30, 2023.

On February 9, 2022, the Board of Directors approved 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.

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

In 2022, this repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

THE ENSIGN GROUP, INC.

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

On October 21, 2021, the Board of Directors approved 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 June 30, 2022, the Company repurchased 271 shares of its common stock for $ 20,000 .

This repurchase program expired in 2022 upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

The Company repurchased 133 shares of its common stock for $ 9,882 pursuant to this stock repurchase program during the three months ended March 31, 2022.

In 2022, this repurchase program expired upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

During the first quarter of 2022, the Company repurchased 133 shares of its common stock for $ 9,882 pursuant to this stock repurchase program.

This repurchase program expired in 2022 upon the repurchase of the fully authorized amount under the plan and is no longer in effect.

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