UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, ~~2021.~~2022.


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to .

Commission file number: 001-38900

__________________________

THE PENNANT GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware			83-3349931
(State or Other Jurisdiction of			(I.R.S. Employer
Incorporation or Organization)			Identification No.)

1675 East Riverside Drive, Suite 150, Eagle, ID 83616

(Address of Principal Executive Offices and Zip Code)

(208) 506-6100

(Registrant’s Telephone Number, Including Area Code)

None

(Former name, former address and former fiscal year, if changed since last report)

________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	PNTG	Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☐☒

Accelerated filer

☒☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of November ~~8, 2021, 28,477,119~~4, 2022, 29,676,611 shares of the registrant’s common stock were outstanding.

Table of Contents

THE PENNANT GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022

TABLE OF CONTENTS

Part I. Financial Information

Item 1.

Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021

Condensed Consolidated Statements of Income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021

Notes to the Condensed Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

2425

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

4445

Item 4.

Controls and Procedures

4445

Part II. Other Information

~~Risk Factors~~

PART I. FINANCIAL INFORMATION

Item I. Financial Statements

THE PENNANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except par value)

September 30, 2021 December 31, 2020
Assets
Current assets:
Cash $ 3,707 $ 43
Accounts receivable—less allowance for doubtful accounts of $933 and $643, respectively 53,402 47,221
Prepaid expenses and other current assets 17,850 12,335
Total current assets 74,959 59,599
Property and equipment, net 18,509 17,884
Right-of-use assets 299,685 308,650
Escrow deposits — 525
Deferred tax assets, net 2,011 2,097
Restricted and other assets 6,041 4,289
Goodwill 73,785 66,444
Other indefinite-lived intangibles 54,210 47,488
Total assets $ 529,200 $ 506,976
Liabilities and equity
Current liabilities:
Accounts payable $ 9,763 $ 9,761
Accrued wages and related liabilities 22,229 26,873
Operating lease liabilities—current 15,399 14,106
Other accrued liabilities 29,140 38,275
Total current liabilities 76,531 89,015
Long-term operating lease liabilities—less current portion 287,239 296,615
Other long-term liabilities 8,841 11,897
Long-term debt, net 42,742 8,277
Total liabilities 415,353 405,804
Commitments and contingencies 0 0
Equity:
Common stock, $0.001 par value; 100,000 shares authorized; 28,800 and 28,464 shares issued and outstanding, respectively, at September 30, 2021, and 28,696 and 28,243 shares issued and outstanding, respectively, at December 31, 2020 28 28
Additional paid-in capital 92,843 84,671
Retained earnings 16,790 11,945
Treasury stock, at cost, 3 shares at September 30, 2021 and December 31, 2020 (65) (65)
Total Pennant Group, Inc. stockholders’ equity 109,596 96,579
Noncontrolling interest 4,251 4,593
Total equity 113,847 101,172
Total liabilities and equity $ 529,200 $ 506,976


	September 30, 2022		December 31, 2021
Assets
Current assets:
Cash	$	2,955	$	5,190
Accounts receivable—less allowance for doubtful accounts of $822 and $902, respectively	51,604		53,940
Prepaid expenses and other current assets	12,324		16,711
Total current assets	66,883		75,841
Property and equipment, net	23,914		16,788
Right-of-use assets	262,636		300,997
Deferred tax assets, net	3,097		3,848
Restricted and other assets	10,686		4,828
Goodwill	79,190		74,265
Other indefinite-lived intangibles	58,474		53,730
Total assets	$	504,880	$	530,297
Liabilities and equity
Current liabilities:
Accounts payable	$	12,754	$	10,553
Accrued wages and related liabilities	24,758		23,480
Operating lease liabilities—current	15,948		16,118
Other accrued liabilities	19,299		21,484
Total current liabilities	72,759		71,635
Long-term operating lease liabilities—less current portion	249,421		287,753
Other long-term liabilities	6,098		5,293
Long-term debt, net	55,762		51,372
Total liabilities	384,040		416,053
Commitments and contingencies
Equity:
Common stock, $0.001 par value; 100,000 shares authorized; 30,146 and 29,665 shares issued and outstanding, respectively, at September 30, 2022; and 28,826 and 28,499 shares issued and outstanding, respectively, at December 31, 2021	29		28
Additional paid-in capital	98,634		95,595
Retained earnings	17,810		14,641
Treasury stock, at cost, 3 shares at September 30, 2022 and December 31, 2021	(65)		(65)
Total Pennant Group, Inc. stockholders’ equity	116,408		110,199
Noncontrolling interest	4,432		4,045
Total equity	120,840		114,244
Total liabilities and equity	$	504,880	$	530,297

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE PENNANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, in thousands, except for per-share amounts)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021

Revenue	Revenue	$	111,921	$	98,397	$	327,929	$	282,986	Revenue	$	118,350	$	111,921	$	348,576	$	327,929

Expense	Expense									Expense
Cost of services	Cost of services	89,619		75,486		259,908		213,834		Cost of services	94,680		89,619		277,658		259,908
Rent—cost of services	Rent—cost of services	10,334		9,721		30,455		29,194		Rent—cost of services	9,391		10,334		28,520		30,455
General and administrative expense	General and administrative expense	9,066		7,500		27,137		21,699		General and administrative expense	5,879		9,066		25,653		27,137
Depreciation and amortization	Depreciation and amortization	1,200		1,212		3,545		3,434		Depreciation and amortization	1,251		1,200		3,677		3,545
Loss on asset dispositions and impairment, net										Loss on asset dispositions and impairment, net	5		—		6,713		—
Total expenses	Total expenses	110,219		93,919		321,045		268,161		Total expenses	111,206		110,219		342,221		321,045
Income from operations	Income from operations	1,702		4,478		6,884		14,825		Income from operations	7,144		1,702		6,355		6,884
Other income (expense):
Other income (expense)		—		225		(24)		225
Other (expense):										Other (expense):
Other expense										Other expense	(18)		—		(50)		(24)
Interest expense, net	Interest expense, net	(512)		(192)		(1,344)		(896)		Interest expense, net	(1,058)		(512)		(2,508)		(1,344)
Other income (expense), net		(512)		33		(1,368)		(671)
Other (expense), net										Other (expense), net	(1,076)		(512)		(2,558)		(1,368)
Income before provision for income taxes	Income before provision for income taxes	1,190		4,511		5,516		14,154		Income before provision for income taxes	6,068		1,190		3,797		5,516
Provision for income taxes	Provision for income taxes	69		104		1,013		2,430		Provision for income taxes	1,074		69		241		1,013
Net income	Net income	1,121		4,407		4,503		11,724		Net income	4,994		1,121		3,556		4,503
Less: net loss attributable to noncontrolling interest		(124)		—		(342)		—
Less: net income (loss) attributable to noncontrolling interest										Less: net income (loss) attributable to noncontrolling interest	163		(124)		387		(342)
Net income and other comprehensive income attributable to The Pennant Group, Inc.	Net income and other comprehensive income attributable to The Pennant Group, Inc.	$	1,245	$	4,407	$	4,845	$	11,724	Net income and other comprehensive income attributable to The Pennant Group, Inc.	$	4,831	$	1,245	$	3,169	$	4,845
Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.04	$	0.16	$	0.17	$	0.42	Basic	$	0.16	$	0.04	$	0.11	$	0.17
Diluted	Diluted	$	0.04	$	0.15	$	0.16	$	0.39	Diluted	$	0.16	$	0.04	$	0.10	$	0.16
Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	28,444		28,055		28,364		27,967		Basic	29,335		28,444		28,840		28,364
Diluted	Diluted	30,556		30,243		30,719		29,955		Diluted	30,172		30,556		30,182		30,719

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE PENNANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited, in thousands)
Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Non-Controlling Interest
Shares Amount Shares Amount Total
Balance at December 31, 2020 28,696 $ 28 $ 84,671 $ 11,945 3 $ (65) $ 4,593 $ 101,172
Net income attributable to The Pennant Group, Inc. — — — 950 — — — 950
Net loss attributable to Non-Controlling Interests — — — — — — (37) (37)
Stock-based compensation — — 2,416 — — — — 2,416
Issuance of common stock from the exercise of stock options 21 — 218 — — — — 218
Net issuance of restricted stock 3 — — — — — — —
Balance at March 31, 2021 28,720 $ 28 $ 87,305 $ 12,895 3 $ (65) $ 4,556 $ 104,719
Net income attributable to The Pennant Group, Inc. — — — 2,650 — — — 2,650
Net loss attributable to Non-Controlling Interests — — — — — — (181) (181)
Stock-based compensation — — 2,499 — — — — 2,499
Issuance of common stock from the exercise of stock options 35 — 295 — — — — 295
Net issuance of restricted stock 4 — — — — — — —
Balance at June 30, 2021 28,759 $ 28 $ 90,099 $ 15,545 3 $ (65) $ 4,375 $ 109,982
Net income attributable to The Pennant Group, Inc. — — — 1,245 — — — 1,245
Net loss attributable to Non-Controlling Interests — — — — — — (124) (124)
Stock-based compensation — — 2,568 — — — — 2,568
Issuance of common stock from the exercise of stock options 36 — 176 — — — — 176
Net issuance of restricted stock 5 — — — — — — —
Balance at September 30, 2021 28,800 $ 28 $ 92,843 $ 16,790 3 $ (65) $ 4,251 $ 113,847


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

Balance at December 31, 2021	28,826	$	28	$	95,595	$	14,641	3	$	(65)	$	4,045	$	114,244
Net income attributable to The Pennant Group, Inc.	—	—		—		1,014		—	—		—		1,014
Net income attributable to Non-Controlling Interests	—	—		—		—		—	—		144		144
Share-based compensation	—	—		2,440		—		—	—		—		2,440
Issuance of common stock from the exercise of stock options	21	1		89		—		—	—		—		90
Net issuance of restricted stock	2	—		—		—		—	—		—		—
Balance at March 31, 2022	28,849	$	29	$	98,124	$	15,655	3	$	(65)	$	4,189	$	117,932
Net loss attributable to The Pennant Group, Inc.	—	—		—		(2,676)		—	—		—		(2,676)
Net income attributable to Non-Controlling Interests	—	—		—		—		—	—		80		80
Stock-based compensation	—	—		2,380		—		—	—		—		2,380
Issuance of common stock from the exercise of stock options	33	—		271		—		—	—		—		271
Net issuance of restricted stock	4	—		—		—		—	—		—		—
Balance at June 30, 2022	28,886	$	29	$	100,775	$	12,979	3	$	(65)	$	4,269	$	117,987
Net income attributable to The Pennant Group, Inc.	—	—		—		4,831		—	—		—		4,831
Net loss attributable to Non-Controlling Interests	—	—		—		—		—	—		163		163
Stock-based compensation	—	—		(2,747)		—		—	—		—		(2,747)
Issuance of common stock from the exercise of stock options	52	—		606		—		—	—		—		606
Net issuance of restricted stock	1,208	—		—		—		—	—		—		—
Balance at September 30, 2022	30,146	$	29	$	98,634	$	17,810	3	$	(65)	$	4,432	$	120,840

Table of Contents

~~THE PENNANT GROUP, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~~

~~(unaudited, in thousands)~~


		Common Stock			Additional Paid-In Capital				Retained Earnings/ (Accumulated Deficit)				Treasury Stock							Non-Controlling Interest									Common Stock				Additional Paid-In Capital			Retained Earnings		Treasury Stock					Non-Controlling Interest
		Shares	Amount								Shares				Amount							Total				Shares				Amount					Shares			Amount				Total

Balance at December 31, 2019		28,435	$	28			$	74,882			$	(3,799)			—			$	—			$	—				$	71,111
Balance at December 31, 2020																											Balance at December 31, 2020		28,696		$	28	$	84,671		$	11,945	3		$	(65)		$	4,593	$	101,172
Net income attributable to The Pennant Group, Inc.	Net income attributable to The Pennant Group, Inc.	—	—		—				2,980				—			—				—				2,980			Net income attributable to The Pennant Group, Inc.		—		—		—			950		—		—			—		950
Stock-based compensation		—	—		1,956				—				—			—				—				1,956
Issuance of common stock from the exercise of stock options		38	—		138				—				—			—				—				138
Net issuance of restricted stock		3	—		—				—				—			—				—				—
Balance at March 31, 2020		28,476	$	28	$	76,976			$	(819)			—			$	—			$	—			$	76,185
Net income attributable to The Pennant Group, Inc.		—	—		—				4,337				—			—				—				4,337
Net loss attributable to Non-Controlling Interests																											Net loss attributable to Non-Controlling Interests		—		—		—			—		—		—			(37)		(37)
Share-based compensation	Share-based compensation	—	—		1,959				—				—			—				—				1,959			Share-based compensation		—		—		2,416			—		—		—			—		2,416
Issuance of common stock from the exercise of stock options	Issuance of common stock from the exercise of stock options	20	—		77				—				—			—				—				77			Issuance of common stock from the exercise of stock options		21		—		218			—		—		—			—		218
Net issuance of restricted stock	Net issuance of restricted stock	20	—		—				—				—			—				—				—			Net issuance of restricted stock		3		—		—			—		—		—			—		—
Shares of common stock withheld to satisfy tax withholding obligations		(2)	—		—				—				2			(57)				—				(57)
Balance at June 30, 2020		28,514	$	28	$	79,012			$	3,518			$	2		$	(57)			$	—			$	82,501
Balance at March 31, 2021																											Balance at March 31, 2021		28,720		$	28	$	87,305		$	12,895	3		$	(65)		$	4,556	$	104,719
Net income attributable to The Pennant Group, Inc.	Net income attributable to The Pennant Group, Inc.	—	—		—				4,407				—			—				—				4,407			Net income attributable to The Pennant Group, Inc.		—		—		—			2,650		—		—			—		2,650
Net loss attributable to Non-Controlling Interests																											Net loss attributable to Non-Controlling Interests		—		—		—			—		—		—			(181)		(181)
Share-based compensation	Share-based compensation	—	—		2,102				—				—			—				—				2,102			Share-based compensation		—		—		2,499			—		—		—			—		2,499
Issuance of common stock from the exercise of stock options	Issuance of common stock from the exercise of stock options	70	—		337				—				—			—				—				337			Issuance of common stock from the exercise of stock options		35		—		295			—		—		—			—		295
Net issuance of restricted stock	Net issuance of restricted stock	2	—		—				—				—			—				—				—			Net issuance of restricted stock		4		—		—			—		—		—			—		—
Shares of common stock withheld to satisfy tax withholding obligations		(1)	—		—				—				1			(8)				—				(8)
Balance at September 30, 2020		28,585	$	28	$	81,451			$	7,925			$	3		$	(65)			$	—			$	89,339
Balance at June 30, 2021																											Balance at June 30, 2021		28,759		$	28	$	90,099		$	15,545	3		$	(65)		$	4,375	$	109,982
Net income attributable to The Pennant Group, Inc.																											Net income attributable to The Pennant Group, Inc.		—		—		—			1,245		—		—			—		1,245
Net loss attributable to Non-Controlling Interests																											Net loss attributable to Non-Controlling Interests		—		—		—			—		—		—			(124)		(124)
Share-based compensation																											Share-based compensation		—		—		2,568			—		—		—			—		2,568
Issuance of common stock from the exercise of stock options																											Issuance of common stock from the exercise of stock options		36		—		176			—		—		—			—		176
Net issuance of restricted stock																											Net issuance of restricted stock		5		—		—			—		—		—			—		—
Balance at September 30, 2021																											Balance at September 30, 2021		28,800		$	28	$	92,843		$	16,790	$	3	$	(65)		$	4,251	$	113,847

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE PENNANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2021		2020			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	4,503	$	11,724	Net income	$	3,556	$	4,503
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:						Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization	3,545		3,434		Depreciation and amortization	3,677		3,545
Amortization of deferred financing fees	Amortization of deferred financing fees	358		248		Amortization of deferred financing fees	390		358
Impairment of long-lived assets						Impairment of long-lived assets	218		—
Provision for doubtful accounts	Provision for doubtful accounts	528		397		Provision for doubtful accounts	603		528
Share-based compensation	Share-based compensation	7,483		6,017		Share-based compensation	2,073		7,483
Deferred income taxes	Deferred income taxes	87		—		Deferred income taxes	752		87

Change in operating assets and liabilities, net of acquisitions:	Change in operating assets and liabilities, net of acquisitions:					Change in operating assets and liabilities, net of acquisitions:
Accounts receivable	Accounts receivable	(6,708)		(4,201)		Accounts receivable	1,734		(6,708)
Prepaid expenses and other assets	Prepaid expenses and other assets	(6,861)		(3,055)		Prepaid expenses and other assets	(1,429)		(6,861)
Operating lease obligations	Operating lease obligations	883		2,177		Operating lease obligations	(140)		883
Accounts payable	Accounts payable	(49)		(946)		Accounts payable	1,655		(49)
Accrued wages and related liabilities	Accrued wages and related liabilities	(4,644)		2,199		Accrued wages and related liabilities	1,278		(4,644)
Other accrued liabilities	Other accrued liabilities	2,709		7,096		Other accrued liabilities	4,333		2,709
Contract liabilities (CARES Act advance payments)	Contract liabilities (CARES Act advance payments)	(14,638)		27,997		Contract liabilities (CARES Act advance payments)	(6,211)		(14,638)

Other long-term liabilities	Other long-term liabilities	(261)		—		Other long-term liabilities	485		(261)
Net cash (used in) provided by operating activities		(13,065)		53,087
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	12,974		(13,065)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchase of property and equipment	Purchase of property and equipment	(4,144)		(7,692)		Purchase of property and equipment	(10,426)		(4,144)
Cash payments for business acquisitions, net of escrow		(13,550)		(14,093)
Cash payments for business acquisitions						Cash payments for business acquisitions	(9,680)		(13,550)

Escrow deposits		—		(5,287)

Other	Other	(372)		(506)		Other	(70)		(372)
Net cash used in investing activities	Net cash used in investing activities	(18,066)		(27,578)		Net cash used in investing activities	(20,176)		(18,066)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Proceeds from Revolving Credit Facility	Proceeds from Revolving Credit Facility	97,000		28,500		Proceeds from Revolving Credit Facility	82,000		97,000
Payments on Revolving Credit Facility	Payments on Revolving Credit Facility	(61,500)		(46,500)		Payments on Revolving Credit Facility	(78,000)		(61,500)
Repurchase of shares of common stock to satisfy tax withholding obligations		—		(65)
Payments for deferred financing costs	Payments for deferred financing costs	(1,394)		(78)		Payments for deferred financing costs	—		(1,394)
Issuance of common stock upon the exercise of options	Issuance of common stock upon the exercise of options	689		552		Issuance of common stock upon the exercise of options	967		689
Net cash provided by (used in) financing activities		34,795		(17,591)
Net increase in cash		3,664		7,918
Net cash provided by financing activities						Net cash provided by financing activities	4,967		34,795
Net (decrease) increase in cash						Net (decrease) increase in cash	(2,235)		3,664
Cash beginning of period	Cash beginning of period	43		402		Cash beginning of period	5,190		43
Cash end of period	Cash end of period	$	3,707	$	8,320	Cash end of period	$	2,955	$	3,707

See accompanying notes to condensed consolidated financial statements.

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THE PENNANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(unaudited, in thousands)


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2021		2020			2022		2021
Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	980	$	854	Interest	$	2,114	$	980
Income taxes	Income taxes	$	2,594	$	6,447	Income taxes	$	77	$	2,594
Lease liabilities	Lease liabilities	$	29,327	$	28,999	Lease liabilities	$	27,092	$	29,327
Right-of-use assets obtained in exchange for new operating lease obligations	Right-of-use assets obtained in exchange for new operating lease obligations	$	2,842	$	4,161	Right-of-use assets obtained in exchange for new operating lease obligations	$	10,326	$	2,842
Net non-cash adjustment to right-of-use assets and lease liabilities from lease modifications		$	159	$	860
Non-cash adjustment to right-of-use assets and lease liabilities from lease modifications						Non-cash adjustment to right-of-use assets and lease liabilities from lease modifications	$	6,270	$	159
Non-cash adjustment to right-of-use assets and lease liabilities from lease terminations and assignments						Non-cash adjustment to right-of-use assets and lease liabilities from lease terminations and assignments	$	(43,136)	$	—
Non-cash investing activity:	Non-cash investing activity:					Non-cash investing activity:
Capital expenditures in accounts payable	Capital expenditures in accounts payable	$	551	$	510	Capital expenditures in accounts payable	$	1,100	$	551

See accompanying notes to condensed consolidated financial statements.

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THE PENNANT GROUP INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data and operational senior living units)

1. DESCRIPTION OF BUSINESS

The Pennant Group, Inc. (herein referred to as “Pennant,” the “Company,” “it,” or “its”), is a holding company with no direct operating assets, employees or revenue. The Company, through its independent operating subsidiaries, provides healthcare services across the post-acute care continuum. As of September 30, ~~2021,~~2022, the Company’s subsidiaries operated 8894 home health, hospice and home care agencies and 5449 senior living communities located in Arizona, California, Colorado, Idaho, Iowa, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming.

On October 1, 2019, The Ensign Group, Inc. (NASDAQ: ENSG) (“Ensign” or the “Parent”) completed the separation of Pennant (the “Spin-Off”). To accomplish the Spin-Off, Ensign contributed all of its home health and hospice and substantially all of its senior living businesses into Pennant. Each Ensign stockholder received a distribution of one share of Pennant’s common stock for every two shares of Ensign’s common stock, plus cash in lieu of fractional shares. The noncontrolling interest was converted into shares of Pennant at the established conversion ratio. As a result of the Spin-Off on October 1, 2019, Pennant began trading as an independent company on the NASDAQ under the symbol “PNTG.”

Certain of the Company’s subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management, and other services to the operations through contractual relationships.

Each of the Company’s affiliated operations are operated by separate, independent subsidiaries that have their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities is not meant to imply, nor should it be construed as meaning, that Pennant has direct operating assets, employees or revenue, or that any of the subsidiaries are operated by Pennant.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited condensed consolidated financial statements of the Company (the “Interim Financial Statements”) reflect the Company’s financial position, results of operations and cash flows of the business. The Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the regulations of the Securities and Exchange Commission (“SEC”). Management believes that the Interim Financial Statements reflect, in all material respects, all adjustments which are of a normal and recurring nature necessary to present fairly the Company’s financial position, results of operations, and cash flows for the periods presented in conformity with GAAP. The results reported in these Interim Financial Statements are not necessarily indicative of results that may be expected for the entire year.

The Condensed Consolidated Balance Sheet as of December 31, ~~2020~~2021 is derived from the Company’s annual audited Consolidated Financial Statements for the fiscal year ended December 31, ~~2020~~2021, which should be read in conjunction with these Interim Financial Statements. Certain information in the accompanying footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with GAAP.

All significant intercompany transactions and balances between the various legal entities comprising the Company have been eliminated in consolidation. 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 Company and the noncontrolling interest in its Condensed Consolidated Statements of Income.

The Company consists of various limited liability companies and corporations established to operate home health, hospice, home care, and senior living operations. The Interim Financial Statements include the accounts of all entities controlled by the Company through its ownership of a majority voting interest.

Certain prior quarter amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations in the current period or prior period.

Estimates and Assumptions - The preparation of the Interim Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates in the Interim Financial Statements relate to revenue, intangible assets and goodwill, right-of-use assets and lease liabilities for leases greater than 12 months, self-insurance reserves, and income taxes. Actual results could differ from those estimates.

CARES Act: The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the United States. The CARES Act allowed for deferred payment of the employer-paid portion of social security taxes through the end of 2020, with 50% due on December 31, 2021 and the remainder due on December 31, 2022. The Company deferred approximately $7,836 of the employer-paid portion of social security taxes, of which $4,129 remains as of September 30, 2022 and is included in current liabilities in accrued wages and related liabilities. The CARES Act also expanded the

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

through the end of 2020, with 50% due on December 31, 2021 and the remainder due on December 31, 2022. As of September 30, 2021, the Company deferred approximately $7,836 of the employer-paid portion of social security taxes, of which $3,918 is included in other long-term liabilities and the current portion of $3,918 in accrued wages and related liabilities. The CARES Act also expanded the Centers for Medicare & Medicaid Services’ (“CMS”) ability to provide accelerated/advance payments intended to increase the cash flow of healthcare providers and suppliers impacted by COVID-19. During ~~the prior year,~~2020, the Company applied for and received $27,997 in funds under the Accelerated and Advance Payment (“AAP”) Program, all of which ~~$14,638 had been~~was recouped as of ~~September 30, 2021. See Note 10,~~ ~~Other Accrued Liabilities~~ ~~for further discussion of the AAP.~~

The American Rescue Plan Act of 2021 (the “ARP Act”) was enacted on March 11, 2021 in the United States. The ARP Act was designed to assist the country with the effects of the COVID-19 pandemic and included a number of tax components. The ARP Act’s primary tax impact on the Company requires the Company to include the next five highest paid employees to the list of covered officers already subject to the IRC Section 162(m) wage limitation beginning in the 2027 tax year. The Company will continue to assess the effect of the ARP Act and ongoing other government legislation related to the COVID-19 pandemic that may be issued.

~~Recent Accounting Standards Adopted by the Company~~

~~FASB Accounting Standards Update, or ASU, ASU 2021-01 “Reference Rate Reform (Topic 848): Scope” or ASU 2020-4 -~~ On January 7, 2021, the FASB issued ASU 2021-01 to amend the scope of the guidance in ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” or ASU 2020-4. Specifically, the amendments in ASU 2021-01 clarify that “certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.” The amendment in ASU 2021-1 is available to all entities: (i) on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 through the date that the final update to the standard was issued or (ii) on a prospective basis for new contract modifications through December 31,June 23, 2022. The Company has adopted ASU 2021-01 on a prospective basis effective as of January 7, 2021. There was no material impact to the Company’s Interim Financial Statements or related disclosures as a result of the adoption of ASU 2021-01.

3. ~~RELATED PARTY~~ TRANSACTIONS

The Company leases 31 of its senior living communities from subsidiaries of Ensign, and each of the leases have a term of between 14 and 20 years from the lease commencement date. The total amount of rent expense included in Rent - cost of services paid to subsidiaries of Ensign was $3,169 and $9,415 for the three and nine months ended September 30, 2021, respectively, and $3,131 and $9,363 for the three and nine months ended September 30, 2020, respectively.

The Company’s subsidiaries received services from Ensign’s subsidiaries. Services included in cost of services were $760 and $2,377 for the three and nine months ended September 30, 2021 and $1,111 and $3,299 for the three and nine months ended September 30, 2020, respectively.

WITH ENSIGN

On October 1, 2019, inThe Ensign Group, Inc. (“Ensign”) completed the separation of Pennant (the “Spin-Off”). In connection with the Spin-Off, Pennant entered into several agreements with Ensign that set forth the principal actions taken or to be taken in connection with the Spin-Off and govern the relationship of the parties following the Spin-Off. The Transitions Services Agreement with Ensign (the “Transition Services Agreement”) provided Pennant primarily administrative support. The Transitions Services Agreement expired two years from the Spin-Off date. The Company ~~has~~ incurred costs of $231 and $1,332 for the three and nine months ended September 30, 2022 and $706 and $2,441 for the three and nine months ended September 30, 2021, respectively that related primarily to shared administrative support and ~~$1,502~~other services at proximate operations.

Services included in cost of services were $812 and ~~$4,583~~$2,035 for the three and nine months ended September 30, ~~2020,~~2022 and $760 and $2,377 for the three and nine months ended September 30, 2021, respectively, ~~which costs~~that related primarily to ~~administrative support~~room and board charges at skilled nursing facilities for hospice patients. Additionally, the Company’s independent operating subsidiaries leased 29 and 31 communities from subsidiaries of Ensign under a master lease arrangement as of September 30, 2022 and September 30, 2021, respectively. See further discussion below at Note 8, Leases.

On January 27, 2022, affiliates of the ~~Transitions Services Agreement~~Company, entered into certain operations transfer agreements (collectively, the “Transfer Agreements”) with affiliates of Ensign, providing for the transfer of the operations of five senior living communities (the ~~“Transition Services Agreement”~~“Transaction”)~~, which expired two years from~~. The Transfer Agreements require one of the ~~Spin-Off date.~~transferors to place $6.5 million in escrow to cover post-closing capital expenditures and operating losses related to one of the communities, and such escrow is funded by an initial payment by the transferor at closing followed by eight equal monthly installments. The Transaction closed in April 2022.

4. COMPUTATION OF NET INCOME PER COMMON SHARE

Basic net income per share is computed by dividing net income attributable to stockholders of the Company by the weighted average number of outstanding common shares for the period. The computation of diluted net income per share is similar to the computation of basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table sets forth the computation of basic and diluted net income per share for the periods presented:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Numerator:	Numerator:									Numerator:
Net income		$	1,121	$	4,407	$	4,503	$	11,724
Add: net loss attributable to noncontrolling interests		(124)		—		(342)		—

Net income attributable to The Pennant Group, Inc.	Net income attributable to The Pennant Group, Inc.	$	1,245	$	4,407	$	4,845	$	11,724	Net income attributable to The Pennant Group, Inc.	$	4,831	$	1,245	$	3,169	$	4,845

Denominator:	Denominator:									Denominator:
Weighted average shares outstanding for basic net income per share	Weighted average shares outstanding for basic net income per share	28,444		28,055		28,364		27,967		Weighted average shares outstanding for basic net income per share	29,335		28,444		28,840		28,364
Plus: assumed incremental shares from exercise of options and assumed conversion or vesting of restricted stock(a)	Plus: assumed incremental shares from exercise of options and assumed conversion or vesting of restricted stock(a)	2,112		2,188		2,355		1,988		Plus: assumed incremental shares from exercise of options and assumed conversion or vesting of restricted stock(a)	837		2,112		1,342		2,355
Adjusted weighted average common shares outstanding for diluted income per share	Adjusted weighted average common shares outstanding for diluted income per share	30,556		30,243		30,719		29,955		Adjusted weighted average common shares outstanding for diluted income per share	30,172		30,556		30,182		30,719

Earnings Per Share:	Earnings Per Share:									Earnings Per Share:
Basic net income per common share	Basic net income per common share	$	0.04	$	0.16	$	0.17	$	0.42	Basic net income per common share	$	0.16	$	0.04	$	0.11	$	0.17
Diluted net income per common share	Diluted net income per common share	$	0.04	$	0.15	$	0.16	$	0.39	Diluted net income per common share	$	0.16	$	0.04	$	0.10	$	0.16


(a)						The ~~calculation of dilutive~~diluted per share amounts do not reflect common equivalent shares outstanding ~~excludes out-of-the-money stock options (i.e., such options’ exercise prices were greater than the average market price~~ of ~~our common shares~~1,858 and 1,806 for the ~~period) because their inclusion would have been antidilutive. Options outstanding which are anti-dilutive~~three and ~~therefore not factored into the weighted average common shares amount above were~~nine months ended September 30, 2022 and 815 and 437 for the three and nine months ended September 30, 2021, ~~and 224 and 45 for the three and nine months ended September 30, 2020.~~respectively, because of their anti-dilutive effect.

5. REVENUE AND ACCOUNTS RECEIVABLE

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 managed care programs (Commercial, Medicare Advantage and Managed Medicaid plans), in exchange for providing patient care. The healthcare services in home health and hospice 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 within the context of the contract. Additionally, there may be ancillary services which are not included in the 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, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the variable component that should be used to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The amount of variable consideration which is included in the transaction price may be constrained, and is included in the 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 service revenue in the period such variances become known.

Revenue from the Medicare and Medicaid programs accounted for ~~62.2%~~62.4% and ~~62.6%~~62.3% of the Company’s revenue, for the three and nine months ended September 30, ~~2021,~~2022, and ~~60.4%~~62.2% and ~~59.3%~~62.6% for the three and nine months ended September 30, ~~2020,~~2021, respectively. The Company records revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. The Company’s revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement.

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Disaggregation of Revenue

The Company disaggregates revenue from contracts with its patients by reportable operating segments and payors. The Company has determined 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 Company’s service specific revenue recognition policies are as follows:

Home Health Revenue

Medicare Revenue

~~For Medicare episodes that began after January 1, 2020, net~~Net service revenue is recognized in accordance with the Patient Driven Groupings Model (“PDGM”). This new reimbursement structure involves case mix calculation methodology refinements, changes to low-utilization payment adjustment (“LUPA”) thresholds, the elimination of therapy thresholds, a change to the unit of payment from a 60-day episode to a 30-day payment period, and reduction of requests for anticipated payments (“RAPs”) to 20% of the estimated payment for a patient’s initial or subsequent period of care up-front (after the initial assessment is completed and upon initial billing). The RAPs were phased out effective January 1, 2021. Under PDGM, Medicare provides agencies with payments for each 30-day payment period provided to beneficiaries. If a beneficiary is still eligible for care after the end of the first 30-day payment period, a second 30-day payment period can begin. There are no limits to the number of periods of care a beneficiary who remains eligible for the home health benefit can receive. While payment for each 30-day payment period is adjusted to reflect the beneficiary’s health condition and needs, a special outlier provision exists to ensure appropriate payment for those beneficiaries that have the most expensive care needs. The payment under the Medicare program is also adjusted for certain variables including, but not limited to: (a) a ~~LUPA~~low utilization payment adjustment if the number of visits is below an established threshold that varies based on the diagnosis of a beneficiary; (b) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the period of care; (c) adjustment to the admission source of claim if it is determined that the patient had a qualifying stay in a post-acute care setting within 14 days prior to the start of a 30-day payment period; (d) the timing of the 30-day payment period provided to a patient in relation to the admission date, regardless of whether the same home health provider provided care for the entire series of episodes; (e) changes to the acuity of the patient during the previous 30-day payment period; (f) changes in the base payments established by the Medicare program; (g) adjustments to the base payments for case mix and geographic wages; and (h) recoveries of overpayments.

For all episodes that began prior to January 1, 2020, net service revenue was recorded under the Medicare prospective payment system based on a 60-day episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if the patient’s care was unusually costly; (b) a LUPA if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider or transferred from another provider before completing the episode; (d) a payment adjustment based upon the level of covered therapy services; (e) the number of episodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h) recoveries of overpayments.

The Company adjusts Medicare revenue on completed episodes to reflect differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation and other reasons unrelated to credit risk. Therefore, the Company believes that its reported net service revenue and patient accounts receivable will be the net amounts to be realized from Medicare for services rendered.

In addition to revenue recognized on completed episodes and periods, the Company also recognizes a portion of revenue associated with episodes and periods in progress. Episodes in progress are 30-day payment periods ~~if the episode started after January 1, 2020, or 60-day episodes of care, if the episode started prior to January 1, 2020,~~ that begin during the reporting period but were not completed as of the end of the period. As such, the Company estimates revenue and recognizes it on a daily basis. The primary factors underlying this estimate are the number of episodes in progress at the end of the reporting period, expected Medicare revenue per period of care or episode of care and the Company’s estimate of the average percentage complete based on the scheduled end of period and end of episode dates.

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~~THE PENNANT GROUP, INC.~~

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

Non-Medicare Revenue

Episodic Based Revenue - The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for episodic-based rates that are paid by other insurance carriers, including Medicare Advantage programs. These rates can vary based upon the negotiated terms.

Non-episodic Based Revenue - Revenue is recognized on an accrual basis based upon the date of service at amounts equal to its established or estimated per visit rates, as applicable.

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Hospice Revenue

Revenue is recognized on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The estimated payment rates are calculated as daily rates for each of the levels of care the Company delivers. Revenue is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap and an overall payment cap, the Company monitors its provider numbers and estimates amounts due back to Medicare if a cap has been exceeded. The Company regularly evaluates and records these adjustments as a reduction to revenue and an increase to other accrued liabilities.

Senior Living Revenue

The Company has elected the lessor practical expedient within ASC Topic 842, Leases (“ASC 842”) and therefore recognizes, measures, presents, and discloses the revenue for services rendered under the Company’s senior living residency agreements based upon the predominant component, either the lease or non-lease component, of the contracts. The Company has determined that the services included under the Company’s senior living residency agreements each have the same timing and pattern of transfer. The Company recognizes revenue under ASC Topic 606, Revenue from Contracts with Customers for its senior residency agreements, for which it has determined that the non-lease components of such residency agreements are the predominant component of each such contract.

The Company’s senior living revenue consists of fees for basic housing and assisted living care. Accordingly, the Company records revenue when services are rendered on the date services are provided at amounts billable to individual residents. Residency agreements are generally for a term of 30 days, with resident fees billed monthly in advance. For residents under reimbursement arrangements with Medicaid, revenue is recorded based on contractually agreed-upon amounts or rates on a per resident, daily basis or as services are rendered.

Revenue By Payor

Revenue by payor for the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, is summarized in the following tables:


		Three Months Ended September 30, 2021											Three Months Ended September 30, 2022
		Home Health and Hospice Services											Home Health and Hospice Services
		Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %			Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	Medicare	$	20,227	$	35,059	$	—	$	55,286	49.4	%	Medicare	$	23,040	$	35,367	$	—	$	58,407	49.4	%
Medicaid	Medicaid	1,938		3,074		9,330		14,342		12.8		Medicaid	2,151		4,065		9,127		15,343		13.0
Subtotal	Subtotal	22,165		38,133		9,330		69,628		62.2		Subtotal	25,191		39,432		9,127		73,750		62.4
Managed care	Managed care	11,969		879		—		12,848		11.5		Managed care	14,594		1,062		—		15,656		13.2
Private and other(a)	Private and other(a)	5,800		57		23,588		29,445		26.3		Private and other(a)	5,472		28		23,444		28,944		24.4
Total revenue	Total revenue	$	39,934	$	39,069	$	32,918	$	111,921	100.0	%	Total revenue	$	45,257	$	40,522	$	32,571	$	118,350	100.0	%


(a)						Private and other payors in ~~our~~the Company’s home health and hospice services segment includes revenue from all payors generated in ~~our~~the Company’s home care operations.

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


		Three Months Ended September 30, 2020											Three Months Ended September 30, 2021
		Home Health and Hospice Services											Home Health and Hospice Services
		Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %			Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	Medicare	$	15,156	$	30,321	$	—	$	45,477	46.2	%	Medicare	$	20,227	$	35,059	$	—	$	55,286	49.4	%
Medicaid	Medicaid	1,938		2,813		9,181		13,932		14.2		Medicaid	1,938		3,074		9,330		14,342		12.8
Subtotal	Subtotal	17,094		33,134		9,181		59,409		60.4		Subtotal	22,165		38,133		9,330		69,628		62.2
Managed care	Managed care	7,923		251		—		8,174		8.3		Managed care	11,969		879		—		12,848		11.5
Private and other(a)	Private and other(a)	5,922		55		24,837		30,814		31.3		Private and other(a)	5,800		57		23,588		29,445		26.3
Total revenue	Total revenue	$	30,939	$	33,440	$	34,018	$	98,397	100.0	%	Total revenue	$	39,934	$	39,069	$	32,918	$	111,921	100.0	%


(a)						Private and other payors in ~~our~~the Company’s home health and hospice services segment includes revenue from all payors generated in ~~our~~the Company’s home care operations.

Revenue by payor for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, is summarized in the following tables:


		Nine Months Ended September 30, 2021											Nine Months Ended September 30, 2022
		Home Health and Hospice Services											Home Health and Hospice Services
		Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %			Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	Medicare	$	61,055	$	101,771	$	—	$	162,826	49.7	%	Medicare	$	67,861	$	103,322	$	—	$	171,183	49.1	%
Medicaid	Medicaid	6,659		8,507		27,266		42,432		12.9		Medicaid	7,389		11,189		27,502		46,080		13.2
Subtotal	Subtotal	67,714		110,278		27,266		205,258		62.6		Subtotal	75,250		114,511		27,502		217,263		62.3
Managed care	Managed care	34,586		2,241		—		36,827		11.2		Managed care	42,106		2,999		—		45,105		13.0
Private and other(a)	Private and other(a)	16,594		302		68,948		85,844		26.2		Private and other(a)	16,538		194		69,476		86,208		24.7
Total revenue	Total revenue	$	118,894	$	112,821	$	96,214	$	327,929	100.0	%	Total revenue	$	133,894	$	117,704	$	96,978	$	348,576	100.0	%


(a)						Private and other payors in ~~our~~the Company’s home health and hospice services segment includes revenue from all payors generated in ~~our~~the Company’s home care operations.


		Nine Months Ended September 30, 2020											Nine Months Ended September 30, 2021
		Home Health and Hospice Services											Home Health and Hospice Services
		Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %			Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	Medicare	$	39,540	$	85,551	$	—	$	125,091	44.2	%	Medicare	$	61,055	$	101,771	$	—	$	162,826	49.7	%
Medicaid	Medicaid	5,491		9,779		27,369		42,639		15.1		Medicaid	6,659		8,507		27,266		42,432		12.9
Subtotal	Subtotal	45,031		95,330		27,369		167,730		59.3		Subtotal	67,714		110,278		27,266		205,258		62.6
Managed care	Managed care	21,885		1,064		—		22,949		8.1		Managed care	34,586		2,241		—		36,827		11.2
Private and other(a)	Private and other(a)	15,706		109		76,492		92,307		32.6		Private and other(a)	16,594		302		68,948		85,844		26.2
Total revenue	Total revenue	$	82,622	$	96,503	$	103,861	$	282,986	100.0	%	Total revenue	$	118,894	$	112,821	$	96,214	$	327,929	100.0	%


(a)						Private and other payors in ~~our~~the Company’s home health and hospice services segment includes revenue from all payors generated in ~~our~~the Company’s home care operations.

Balance Sheet Impact

Included in the Company’s Condensed Consolidated Balance Sheets are contract assets, 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. As of September 30, 2021, the Company had contract liabilities in the amount of $13,359 related to Advance Payments received in connection with the CARES Act reported in other current liabilities. As further discussed in Note 10, ~~Other Accrued Liabilities,~~ ~~the repayment terms for Medicare advance payments were modified through the passage of the Continuing Appropriations Act, 2021 and Other Extensions Act on October 1, 2020.~~

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Accounts receivable, net as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 is summarized in the following table:


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
Medicare	Medicare	$	30,127	$	28,569	Medicare	$	31,125	$	31,327
Medicaid	Medicaid	9,655		7,669		Medicaid	9,127		11,793
Managed care	Managed care	9,754		7,590		Managed care	8,990		7,901
Private and other	Private and other	4,799		4,036		Private and other	3,184		3,821
Accounts receivable, gross	Accounts receivable, gross	54,335		47,864		Accounts receivable, gross	52,426		54,842
Less: allowance for doubtful accounts	Less: allowance for doubtful accounts	(933)		(643)		Less: allowance for doubtful accounts	(822)		(902)
Accounts receivable, net	Accounts receivable, net	$	53,402	$	47,221	Accounts receivable, net	$	51,604	$	53,940

Concentrations- Credit Risk

The Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an appropriate allowance has been recorded for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company’s gross receivables from the Medicare and Medicaid programs accounted for approximately 76.8% and 78.6% of its total gross accounts receivable as of September 30, 2022 and December 31, 2021, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 62.4% and 62.3% for the three and nine months ended September 30, 2022, and 62.2% and 62.6% of the Company’s revenue for the three and nine months ended September 30, 2021.

Practical Expedients and Exemptions

As the Company’s contracts have an original duration of one year or less, the Company uses the practical expedient applicable to its contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue. In addition, the Company has applied the practical expedient provided by ASC 340, Other Assets and Deferred Costs (“ASC 340”), and all incremental customer contract acquisition costs are expensed as they are incurred because the amortization period would have been one year or less.

6. BUSINESS SEGMENTS

The Company classifies its operations into the following reportable operating segments: (1) home health and hospice services, which includes the Company’s home health, hospice and home care businesses; and (2) senior living services, which includes the operation of assisted living, independent living and memory care communities. The reporting segments are business units that offer different services and are managed separately to provide greater visibility into those operations. ~~Our~~The Company’s Chief Executive Officer, who is ~~our~~the Company’s Chief Operating Decision Maker (“CODM”), reviews financial information at the operating segment level. WeThe Company also ~~report~~reports an “all other” category that includes general and administrative expense from ~~our~~the Company’s Service Center.

As of September 30, ~~2021,~~2022, the Company provided services through 8894 affiliated home health, hospice and home care agencies, and 5449 affiliated senior living operations. The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. The Company’s Service Center provides various services to all lines of business. The Company does not review assets by segment and therefore assets by segment are not disclosed below.

The CODM uses Segment Adjusted EBITDAR from Operations as the primary measure of profit and loss for the Company's reportable segments and to compare the performance of its operations with those of its competitors. Segment Adjusted EBITDAR from Operations is net income ~~(loss)~~ attributable to the Company's reportable segments excluding interest expense, provision for income taxes, depreciation and amortization expense, rent, and, in order to view the operations performance on a comparable basis from period to period, certain adjustments including: (1) costs at start-up operations, (2) share-based compensation, (3) acquisition related costs and credit allowances, (4) redundant and nonrecurring costs associated with the Transition Services Agreement, (5) the loss related to senior living operations transferred to Ensign, (6) unusual or

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

non-recurring charges, and ~~(5)~~(7) net ~~loss~~income attributable to noncontrolling interest. General and administrative expenses are not allocated to the reportable segments, and are included as “All Other”, accordingly the segment earnings measure reported is before allocation of corporate general and administrative expenses. The Company's segment measures may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

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~~THE PENNANT GROUP, INC.~~

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

The following tables present certain financial information regarding ~~our~~the Company’s reportable segments, general and administrative expenses are not allocated to the reportable segments and are included in “All Other” for the three and nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:


		Home Health and Hospice Services		Senior Living Services		All Other		Total			Home Health and Hospice Services		Senior Living Services		All Other		Total
Three Months Ended September 30, 2022										Three Months Ended September 30, 2022
Revenue										Revenue	$	85,779	$	32,571	$	—	$	118,350
Segment Adjusted EBITDAR from Operations										Segment Adjusted EBITDAR from Operations	$	15,380	$	9,370	$	(7,779)	$	16,971
Three Months Ended September 30, 2021	Three Months Ended September 30, 2021									Three Months Ended September 30, 2021
Revenue	Revenue	$	79,003	$	32,918	$	—	$	111,921	Revenue	$	79,003	$	32,918	$	—	$	111,921
Segment Adjusted EBITDAR from Operations	Segment Adjusted EBITDAR from Operations	$	14,409	$	9,106	$	(6,783)	$	16,732	Segment Adjusted EBITDAR from Operations	$	14,409	$	9,106	$	(6,783)	$	16,732
Three Months Ended September 30, 2020
Revenue		$	64,379	$	34,018	$	—	$	98,397
Segment Adjusted EBITDAR from Operations		$	13,530	$	11,684	$	(6,857)	$	18,357


		Home Health and Hospice Services		Senior Living Services		All Other		Total			Home Health and Hospice Services		Senior Living Services		All Other		Total
Nine Months Ended September 30, 2022										Nine Months Ended September 30, 2022
Revenue										Revenue	$	251,598	$	96,978	$	—	$	348,576
Segment Adjusted EBITDAR from Operations										Segment Adjusted EBITDAR from Operations	$	45,056	$	27,573	$	(23,795)	$	48,834
Nine Months Ended September 30, 2021	Nine Months Ended September 30, 2021									Nine Months Ended September 30, 2021
Revenue	Revenue	$	231,715	$	96,214	$	—	$	327,929	Revenue	$	231,715	$	96,214	$	—	$	327,929
Segment Adjusted EBITDAR from Operations	Segment Adjusted EBITDAR from Operations	$	43,131	$	27,692	$	(19,249)	$	51,574	Segment Adjusted EBITDAR from Operations	$	43,131	$	27,692	$	(19,249)	$	51,574
Nine Months Ended September 30, 2020
Revenue		$	179,125	$	103,861	$	—	$	282,986
Segment Adjusted EBITDAR from Operations		$	34,681	$	37,673	$	(15,638)	$	56,716

This following table provides a reconciliation of Segment Adjusted EBITDAR from Operations to income from operations:

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Segment Adjusted EBITDAR from Operations $ 16,732 $ 18,357 $ 51,574 $ 56,716
Less: Depreciation and amortization 1,200 1,212 3,545 3,434
Rent—cost of services 10,334 9,721 30,455 29,194
Other expense — 225 (24) 225
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations(a)
532 717 991 1,422
Share-based compensation expense(b)
2,568 2,102 7,483 6,017
Acquisition related costs(c)
36 — 73 —
Transition services costs(d)
236 209 1,825 746��
Net COVID-19 related costs(e)
— (307) — 853
Add: Net loss attributable to noncontrolling interest (124) — (342) —
Condensed Consolidated Income from Operations $ 1,702 $ 4,478 $ 6,884 $ 14,825


~~(a)~~						~~Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.~~
~~(b)~~						~~Share-based compensation expense incurred which is included in cost of services and general and administrative expense.~~
~~(c)~~						~~Acquisition related costs related to business combinations during the periods.~~


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Segment Adjusted EBITDAR from Operations	$	16,971	$	16,732	$	48,834	$	51,574
Less: Depreciation and amortization	1,251		1,200		3,677		3,545
Rent—cost of services	9,391		10,334		28,520		30,455
Other expense	(18)		—		(50)		(24)
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations(a)	430		532		938		991
Share-based compensation expense and related taxes(b)	(2,501)		2,568		2,319		7,483
Acquisition related costs & credit allowances(c)	1,000		36		1,014		73
Transition services costs(d)	—		236		77		1,825
Loss related to senior living operations transferred to Ensign(e)	144		—		6,078		—
Unusual or non-recurring charges(f)	293		—		293		—
Add: Net income (loss) attributable to noncontrolling interest	163		(124)		387		(342)
Condensed Consolidated Income from Operations	$	7,144	$	1,702	$	6,355	$	6,884

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(a)						Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
(b)						Share-based compensation expense and related payroll taxes incurred, including the impact of the modification of certain restricted stock units described below in Note 12, Options and Awards, to the Interim Financial Statements. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative expense
(c)						Non-capitalizable costs associated with acquisitions and credit allowances for amounts in dispute with the prior owners of certain acquired operations.
(d)						~~A portion~~Costs identified as redundant or non-recurring incurred by the Company as a result of the Spin-off. The 2021 amounts represents part of the costs incurred under the Transition Services ~~Agreement identified as redundant or nonrecurring that~~Agreement. All amounts are included in general and administrative expense. Fees incurred under the Transition Services Agreement ~~net of~~were $231 and $1,332 for the ~~Company’s payroll reimbursement, were~~three and nine months ended September 30, 2022, and $706 and $2,441 for the three and nine months ended September 30, ~~2021,~~2021.
(e)						On January 27, 2022, affiliates of the Company, entered into certain operations transfer agreements (collectively, the “Transfer Agreements”) with affiliates of Ensign, providing for the transfer of the operations of certain senior living communities (the “Transaction”) from affiliates of the Company to affiliates of Ensign. The closing of the Transaction was completed in two phases with the transfer of two operations on March 1, 2022 and ~~$1,502~~the remainder transferred on April 1, 2022. The amount includes $6,500 for the nine months ended September 30, 2022 to cover post-closing capital expenditures and ~~$4,583~~operating losses related to one of the communities transferred on April 1, 2022. The amount above also includes $144 and $(422) for the three and nine months ended September 30, ~~2020, respectively. During~~2022, respectively, for the ~~fourth quarter~~related net impact on revenue and cost of ~~fiscal 2020, we updated our Transition~~ service ~~costs adjustment to include duplicate software costs. The prior year transition service costs adjustment has been recast to reflect the change. The adjustment~~attributable to the ~~prior year transition service costs was $113~~transferred entities. This amount excludes rent and ~~$333 for the duplicative software costs for the three~~depreciation and ~~nine months ended September 30, 2020 that were included in the 2020 full year amount in the Company’s as filed Form 10-K.~~amortization expense related to such operations.
~~(e)~~(f)						~~Beginning~~Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in the first quarter of fiscal year 2021, we updated our definition of Segment Adjusted EBITDAR to no longer include an adjustment for COVID-19 expenses offset by the amount of sequestration relief. COVID-19 expenses continue to be part of daily operations for which less specific identification is visible. Furthermore, the sequestration relief has been extended through December 31, 2021. Sequestration relief was $867general and ~~$2,685 for the three and nine months ended September 30, 2021, respectively.~~ administrative expenses. The 2020 amounts represent incremental costs incurred as part of the Company's response to COVID-19 including direct medical supplies, labor, and other expenses, net of $1,121 and $1,675 in increased revenue related to the 2% payment increase in Medicare reimbursements for sequestration relief for the three and nine months ended September 30, 2020, respectively.

7. ACQUISITIONS

The Company’s acquisition focus is to ~~purchase or lease~~acquire operations that are complementary to the Company’s current businesses, accretive to the Company’s business or otherwise advance the Company’s strategy. The results of all the Company’s independent operating subsidiaries are included in the Interim Financial Statements subsequent to the date of acquisition. Acquisitions are accounted for using the acquisition method of accounting.

2022 Acquisitions

During the nine months ended September 30, 2022, the Company expanded its operations with the addition of two home health and four hospice agencies as well as one senior living community. A subsidiary of the Company entered into a separate operations transfer agreement with the prior operator of each acquired operation as part of each transaction.

The fair value of assets for the Company’s home health and hospice acquisitions was mostly concentrated in goodwill and intangible assets and as such, these transactions were classified as a business combination in accordance with ASC Topic 805, Business Combinations (“ASC 805”). The purchase price for the business combinations was $9,680, which consisted of equipment and other assets of $188, goodwill of $4,925, and indefinite-lived intangible assets of $4,714 related to Medicare and Medicaid licenses, and other intangible assets of $40, net of assumed liabilities of $187. The Company anticipates that the total goodwill recognized will be fully deductible for tax purposes. There were no material acquisition costs that were expensed related to the business combination during the nine months ended September 30, 2022.

2021 Acquisitions

During the nine months ended September 30, 2021, the Company expanded its operations with the addition of 5five home health 4and four hospice and 2two home care agencies. The aggregate purchase price for these acquisitions was $14,135. A subsidiary of the Company entered into a separate operations transfer agreement with the prior operator of each acquired operation as part of each transaction.

The fair value of assets for home health, hospice, ~~and~~ home care acquisitions ~~was~~were mostly concentrated in goodwill and intangible assets and as such, these transactions were classified as business combinations in accordance with ASC Topic 805, Business Combinations (“ASC 805”). The purchase price for the business combinations was $13,550, which consisted of equipment and other assets of $72, goodwill of $7,341, and indefinite-lived intangible assets of $6,137 related to Medicare and Medicaid licenses. The Company anticipates that the total goodwill recognized will be fully deductible for tax purposes. There were no material acquisition costs that were expensed related to the business combinations during the nine months ended September 30, 2021.

~~NaN~~Two of the hospice agencies were acquired Medicare licenses and are considered asset acquisitions. The fair value of assets for the hospice licenses acquired totaled $585 and was allocated to indefinite-lived intangible assets.

~~2020 Acquisitions~~

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

~~During~~

Unaudited Pro Forma Data

The Company’s acquisition strategy has been focused on identifying both opportunistic and strategic acquisitions within its target markets that offer strong opportunities for return. The operating subsidiaries acquired by the Company are frequently underperforming financially and can have regulatory and clinical challenges to overcome. From time to time, these acquisitions are more strategic in nature that may or may not have positive operational results. Financial information, especially with underperforming operating subsidiaries, is often inadequate, inaccurate or unavailable. Consequently, the Company believes that prior operating results are not a meaningful representation of the Company’s current operating results or indicative of the integration potential of its newly acquired operating subsidiaries. Revenue and income (loss) before tax included in the condensed consolidated statement of income relating to the business combinations completed in the current year was $720 and $(106) during the three months ended September 30, 2022, respectively, and $3,674 and $(1,058) during the nine months ended September 30, ~~2020,~~2022, respectively. Acquisition costs related to the business combinations were immaterial during the three and nine months ended September 30, 2022, respectively.

Pro forma financial information has been included for the business combinations completed during the three and nine months ended September 30, 2022 and the three and nine months ended September 30, 2021, respectively. The acquisitions during the three and nine months ended September 30, 2022 have been included in the September 30, 2022 condensed consolidated balance sheets of the Company, ~~expanded its~~and the operating results have been included in the condensed consolidated statements of income of the Company since the dates the Company gained effective control.

Revenues and operating costs were based on actual results from the prior operator or from regulatory filings where available. If actual results were not available, revenue and operating costs were estimated based on available partial operating results of the prior operator of the operation, or if no information was available, estimates were derived from the Company’s post-acquisition operating results for that particular operation.

The following tables represent unaudited pro forma results of condensed consolidated operations ~~with~~as if the ~~addition~~business combinations to date in fiscal year 2022 had occurred at the beginning of 42021, after giving effect to certain adjustments. The unaudited pro forma information is not indicative of what the results of operations would have been if the acquisitions had actually occurred at the beginning of the periods presented, and is not intended as a projection of future results or trends.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	119,070	$	114,149	$	352,250	$	334,612
Net income attributable to The Pennant Group, Inc.(a)	$	4,751	$	1,143	$	2,370	$	4,561


(a)						Net income attributable to The Pennant Group, Inc. for the three and nine months ended September 30, 2022 and 2021 includes a tax impact of 24.5% and 24.7%, which are the respective statutory tax rates.

Subsequent Events

On November 1, 2022, the Company closed on the purchase of one home health agency ~~5 hospice agencies, and 2 senior living communities.~~that expands the Company’s footprint in Wisconsin. The ~~aggregate~~ purchase ~~price for these acquisitions was $14,493. In connection with the addition~~ of the senior living communities, the Company entered into new long-term “triple-net” leases with subsidiaries of Ensign. The addition of these operations added a total of 164 operational senior living units to be operated by the Company’s independent operating subsidiaries.home health agency was $450. A subsidiary of the Company entered into ~~a separate~~an operations transfer agreement with the prior ~~operator of each acquired operation as part of each transaction.~~

The fair value of assets for all home health, hospice and home care acquisitions was concentrated in goodwill and as such, these transactions were classified as business combinations in accordance with ASC 805. The purchase price for the business combinations was $14,493, which mostly consisted of equipment of $78, goodwill of $7,860, indefinite-lived intangible assets of $6,636 related to Medicare and Medicaid licenses, net of assumed liabilities of $81. The majority of total goodwill recognized is fully deductible for tax purposes. There were no acquisition costs that were expensed related to the business combinations of home health, hospice, and home care during the nine months ended September 30, 2020.

operator.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8. PROPERTY AND EQUIPMENT—NET

Property and equipment, net consist of the following:

September 30, 2021 December 31, 2020
Leasehold improvements $ 11,844 $ 9,984
Equipment 24,729 22,420
Furniture and fixtures 1,199 1,186
37,772 33,590
Less: accumulated depreciation (19,263) (15,706)
Property and equipment, net $ 18,509 $ 17,884


	September 30, 2022		December 31, 2021
Land	$	96	$	—
Building	1,890		—
Leasehold improvements	16,161		11,660
Equipment	26,593		22,415
Furniture and fixtures	1,283		1,199
	46,023		35,274
Less: accumulated depreciation	(22,109)		(18,486)
Property and equipment, net	$	23,914	$	16,788

Depreciation expense was $1,244 and $3,640 for the three and nine months ended September 30, 2022 and $1,189 and $3,527 for the three and nine months ended September 30, 2021, ~~respectively,~~respectively.

The Company acquired one building and ~~$1,209 and $3,424 for~~related assets during the ~~three and~~ nine months ended September 30, ~~2020, respectively.~~2022 associated with an existing senior living community operation. The total acquisition price of the land, building and related equipment was $2,007.

The Company measures certain assets at fair value on a non-recurring basis, including long-lived assets, which are evaluated for impairment. Long-lived assets include assets such as property and equipment, operating lease assets and certain intangible assets. The inputs used to determine the fair value of long-lived assets and a reporting unit are considered Level 3 measurements due to their subjective nature. Management has evaluated its long-lived assets and determined there was no impairment during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

9. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

The following table represents activity in goodwill by segment for the nine months ended September 30, ~~2021:~~2022:

Home Health and Hospice Services Senior Living Services Total
December 31, 2020 $ 62,802 $ 3,642 $ 66,444
Additions 7,341 — 7,341
September 30, 2021 $ 70,143 $ 3,642 $ 73,785


	Home Health and Hospice Services		Senior Living Services		Total
December 31, 2021	$	70,623	$	3,642	$	74,265
Additions	4,925		—		4,925

September 30, 2022	$	75,548	$	3,642	$	79,190

Other indefinite-lived intangible assets consist of the following:


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
Trade name	Trade name	$	1,355	$	1,355	Trade name	$	1,385	$	1,355
Medicare and Medicaid licenses	Medicare and Medicaid licenses	52,855		46,133		Medicare and Medicaid licenses	57,089		52,375
Total	Total	$	54,210	$	47,488	Total	$	58,474	$	53,730

As of September 30, 2021, we evaluated potential triggering events that might be indicators that our goodwill and indefinite lived intangibles were impaired. The Company concluded that the current economic and business conditions did not result in a triggering event requiring a quantitative goodwill or intangible asset impairment analysis. No goodwill or intangible asset impairments were recorded during the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

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10. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
Refunds payable	Refunds payable	$	2,786	$	2,664	Refunds payable	$	2,969	$	3,095
Deferred revenue	Deferred revenue	1,366		1,271		Deferred revenue	1,570		1,456
Contract Liabilities (CARES Act advance payments)		13,359		22,771
Contract liabilities (CARES Act advance payments)						Contract liabilities (CARES Act advance payments)	—		6,211
Resident deposits	Resident deposits	5,361		5,647		Resident deposits	4,752		5,111
Property taxes	Property taxes	1,120		982		Property taxes	1,034		1,102
Accrued self-insurance liabilities - current portion		2,191		1,354
Accrued self-insurance liabilities						Accrued self-insurance liabilities	3,538		1,613
Accrued fee for transfer of senior living community						Accrued fee for transfer of senior living community	1,875		—
Other	Other	2,957		3,586		Other	3,561		2,896
Other accrued liabilities	Other accrued liabilities	$	29,140	$	38,275	Other accrued liabilities	$	19,299	$	21,484

Refunds payable includes payables related to overpayments, duplicate payments and credit balances from various payor sources. Deferred revenue occurs when the Company receives payments in advance of services provided. Resident deposits include refundable deposits to residents and a small portion consists of non-refundable deposits recognized into revenue over a period of time. The CARES Act also expanded the ability of CMS to provide accelerated or advance payments intended to increase the cash flow of healthcare providers and suppliers impacted by COVID-19. During the prior year the Company applied for and received $27,997 in funds under the AAP Program. On October 1, 2020, the Continuing Appropriations Act, 2021 and Other Extensions Act (the “CA Act”) was signed into law. Among other things, the CARES Act significantly changed the repayment terms for AAP. In April 2021 CMS began automatic recoupment of these amounts through offsets to new claims. Medicare will automatically recoup 25% of Medicare payments for 11 months. At the end of the 11 months and assuming full repayment has not occurred, recoupment will increase to 50% for another six months. Any balance outstanding after these two recoupment periods will be subject to repayment at a 4% interest rate. As of September 30, 2021, CMS had recouped $14,638 of the AAP. The Company anticipates completing repayment of the AAP within the allotted recoupment periods.residents.

11. DEBT

Long-term debt, net consists of the following:


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
Revolving Credit Facility	Revolving Credit Facility	$	45,000	$	9,500	Revolving Credit Facility	$	57,500	$	53,500
Less: unamortized debt issuance costs(a)	Less: unamortized debt issuance costs(a)	(2,258)		(1,223)		Less: unamortized debt issuance costs(a)	(1,738)		(2,128)
Long-term debt, net	Long-term debt, net	$	42,742	$	8,277	Long-term debt, net	$	55,762	$	51,372


(a)						Amortization expense for debt issuance costs was $130 and $390 for three and nine months ended September 30, 2022 and $129 and $358 for the three and nine months ended September 30, 2021, ~~respectively, and $86 and $248 for the three and nine months ended September 30, 2020,~~ respectively, and is recorded in interest expense, net on the Condensed Consolidated Statements of Income.

On February 23, 2021, Pennant entered into an amendment to its existing credit agreement (as amended, the “Credit Agreement”), which provides for an increased revolving credit facility with a syndicate of banks with a borrowing capacity of $150,000 (the “Revolving Credit Facility”). The interest rates applicable to loans under the Revolving Credit Facility are, at the Company’s election, either (i) Adjusted LIBOR (as defined in the Credit Agreement) plus a margin ranging from 2.3% to 3.3% per annum or (ii) Base Rate plus a margin ranging from 1.3% to 2.3% per annum, in each case, based on the ratio of Consolidated Total Net Debt to Consolidated EBITDA (each, as defined in the Credit Agreement). In addition, Pennant pays a commitment fee on the undrawn portion of the commitments under the Revolving Credit Facility which ranges from 0.35% to 0.50% per annum, depending on the Consolidated Total Net Debt to Consolidated EBITDA ratio of the Company and its subsidiaries. The Company is not required to repay any loans under the Credit Agreement prior to maturity in 2026, other than to the extent the outstanding borrowings exceed the aggregate commitments under the Credit Agreement. As of September 30, ~~2021,~~2022, the Company’s weighted average interest rate on its outstanding debt was ~~2.97%~~5.27%. As of September 30, ~~2021,~~2022, the Company had available borrowing on the Revolving Credit Facility of ~~$101,664,~~$88,314, which is net of outstanding letters of credit of ~~$3,336.~~$4,186.

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

The fair value of the Revolving Credit Facility approximates carrying value, due to the short-term ~~nature~~nature and variable interest rates. The fair value of this debt is categorized within Level 2 of the fair value hierarchy based on the observable market borrowing rates.

The Credit Agreement is guaranteed, jointly and severally, by certain of the Company’s independent operating subsidiaries, and is secured by a pledge of stock of the Company's material independent operating subsidiaries as well as a first lien on substantially all of each material operating subsidiary's personal property. The Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its independent operating subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions,

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mergers or consolidations, amend certain material agreements and pay certain dividends and other restricted payments. Financial covenants require compliance with certain levels of leverage ratios that impact the amount of interest. As of September 30, ~~2021,~~2022, the Company was compliant with all such financial covenants.

12. OPTIONS AND AWARDS

Outstanding options ~~held by employees of the Company under the~~ ~~Ensign stock plans (collectively the “Ensign Plans”) and outstanding options~~ and restricted stock awards ~~under~~of the Company ~~Subsidiary Equity Plan (together with the Ensign Plans the “Pre-Spin Plans”)~~ were modified and replaced with Pennant awards under the Pennant Plans at the Spin-Off date. Additionally, in connection with the Spin-Off, the Company issued new options and restricted stock awards to Pennant and Ensign employeesgranted under the 2019 Omnibus Incentive Plan (the “OIP”) and Long-Term Incentive Plan (the “LTIP”), together referred to as the “Pennant Plans”).

Under the ~~Ensign Plans and~~ the Pennant Plans, stock-based payment awards, including employee stock options, restricted stock awards (“RSA”), and restricted stock units (“RSU” and together with RSA, “Restricted Stock”) are issued based on estimated fair value. The following disclosures represent share-based compensation expense relating to employees of the Company’s subsidiaries and non-employee directors who have awards under the ~~Ensign and~~ Pennant Plans.

Total share-based compensation expense for all Plans for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 was:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Share-based compensation expense related to stock options	Share-based compensation expense related to stock options	$	834	444		$	2,216	$	1,076	Share-based compensation expense related to stock options	$	859	834		$	2,480	$	2,216
Share-based compensation expense related to Restricted Stock	Share-based compensation expense related to Restricted Stock	1,547		1,558		4,597		4,643		Share-based compensation expense related to Restricted Stock	(3,664)		1,547		(643)		4,597
Share-based compensation expense related to Restricted Stock to non-employee directors	Share-based compensation expense related to Restricted Stock to non-employee directors	187		100		670		298		Share-based compensation expense related to Restricted Stock to non-employee directors	58		187		236		670
Total share-based compensation	Total share-based compensation	$	2,568	$	2,102	$	7,483	$	6,017	Total share-based compensation	$	(2,747)	$	2,568	$	2,073	$	7,483

In future periods, the Company estimates it will recognize the following share-based compensation expense for unvested stock options and unvested Restricted Stock ~~which were unvested~~ as of September 30, ~~2021:~~2022:


		Unrecognized Compensation Expense		Weighted Average Recognition Period (in years)		Unrecognized Compensation Expense		Weighted Average Recognition Period (in years)
Unvested Stock Options	Unvested Stock Options	$	12,715	4.0	Unvested Stock Options	$	11,041	3.4
Unvested Restricted Stock	Unvested Restricted Stock	6,325		1.1	Unvested Restricted Stock	3,577		4.7
Total unrecognized share-based compensation expense	Total unrecognized share-based compensation expense	$	19,040		Total unrecognized share-based compensation expense	$	14,618

On July 25, 2022 the Company modified certain outstanding RSUs granted in connection with the Spin-off. All the RSUs had an original vesting date of October 1, 2022. The modification resulted in the forfeiture of 250,000 outstanding RSUs and accelerated the vesting on the remaining 942,842 RSUs from October 1, 2022 to July 31, 2022. The modification of the award resulted in a net reduction of share-based compensation expense related to the awards of $3,812 in recorded general and administrative expense during the third quarter. Additionally, the Company granted 250,000 RSAs to certain executives and employees on July 25, 2022 under The Pennant Group, Inc. 2019 Omnibus Incentive Plan. The RSAs vest in five equal annual installments beginning on the first anniversary of the date of the grant.

Stock Options

Under the Pennant Plans, options granted to employees of the subsidiaries of Pennant generally vest over five years at 20% per year on the anniversary of the grant date. Options expire ten years after the date of grant.

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~~THE PENNANT GROUP, INC.~~

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

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for share-based payment awards under the Plans. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility and expected option life. The Company develops estimates based on historical data and market information, which can change significantly over time.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The fair value of each option is estimated on the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions for stock options ~~granted:~~granted as of June 30:

Grant Year Options Granted Risk-Free Interest Rate
Expected Life(a)
Expected Volatility(b)
Dividend Yield Weighted Average Fair Value of Options
2021 364 1.0 % 6.5 38.2 % — % $ 14.82
2020 494 0.5 % 6.5 35.8 % — % $ 9.81


Grant Year	Options Granted	Risk-Free Interest Rate		Expected Life(a)	Expected Volatility(b)		Dividend Yield		Weighted Average Fair Value of Options
2022	349	2.3	%	6.5	39.8	%	—	%	$	6.71
2021	364	1.0	%	6.5	38.2	%	—	%	$	14.82


(a)						Under the midpoint method, the expected option life is the midpoint between the contractual option life and the average vesting period for the options being granted. This resulted in an expected option life of 6.5 years for the options granted.
(b)						Because the Company’s equity shares have been traded for a relatively short period of time, expected volatility assumption was based on the volatility of related industry stocks.

The following table represents the employee stock option activity during the nine months ended September 30, ~~2021:~~2022:

Number of
Options
Outstanding
Weighted
Average
Exercise Price
Number of
Options Vested
Weighted
Average
Exercise Price
of Options
Vested
December 31, 2020 1,982 $ 17.48 615 $ 7.52
Granted 364 37.70
Exercised (92) 7.48
Forfeited & Expired (63) 22.49
September 30, 2021 2,191 $ 21.12 683 $ 10.16


	Number of Options Outstanding	Weighted Average Exercise Price		Number of Options Vested	Weighted Average Exercise Price of Options Vested
December 31, 2021	2,242	$	21.38	840	$	12.28
Granted	349	15.40
Exercised	(106)	9.12
Forfeited	(162)	23.58
Expired	(50)	17.28
September 30, 2022	2,273	$	20.97	880	$	15.57

Restricted Stock

A summary of the status of Pennant’s non-vested Restricted Stock, and changes during the nine months ended September 30, ~~2021,~~2022, is presented below:

Non-Vested Restricted Stock Weighted Average Grant Date Fair Value
December 31, 2020 1,635 $ 14.80
Granted 15 44.67
Vested (143) 16.26
Forfeited (4) 14.30
September 30, 2021 1,503 $ 14.96


	Non-Vested Restricted Stock	Weighted Average Grant Date Fair Value
December 31, 2021	1,493	$	15.00
Granted	276	13.63
Vested	(1,070)	14.97
Forfeited	(256)	15.05
September 30, 2022	443	$	14.18

13. LEASES

The Company’s independent operating subsidiaries lease 5449 senior living communities and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 21 years. Most of these leases contain renewal options, most involve rent increases and none contain purchase options. The lease term excludes lease renewals because the renewal rents are not at a bargain, there are no economic penalties for the Company to renew the lease, and it is not reasonably certain that the Company will exercise the extension options. ~~As of September 30, 2021, the~~The Company’s independent operating subsidiaries leased 29 and 31 communities from subsidiaries of Ensign (the “Ensign Leases”) under a master lease arrangement. as of September 30, 2022 and September 30, 2021, respectively. Each of the leases have a initial term of between 14 and 20 years from the lease commencement date. The ~~existing leases with~~total amount of rent expense included in rent - cost of services paid to subsidiaries of Ensign ~~are generally~~was $3,760 and $10,250 for ~~initial terms~~the three and nine months ended September 30, 2022, respectively, and $3,169 and $9,415 for the three and nine months ended September 30, 2021, respectively. In addition to rent, each of ~~between 14 to 20 years. In~~the

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~~addition to rent, each of the~~ operating companies are required to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties and the business conducted on the leased properties; (4) all community maintenance and repair costs; and (5) all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased properties.

~~NaN~~Twelve of the Company’s affiliated senior living communities, excluding the communities that are operated under the Ensign Leases (as defined herein), are operated under 2two separate master lease arrangements. Under these master leases, a breach at a single community could subject one or more of the other communities covered by the same master lease to the same default risk. Failure to comply with Medicare and Medicaid provider requirements is a default under several of the Company’s leases and master leases. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the master lease without the consent of the landlord.

On January 27, 2022, affiliates of the Company, entered into Transfer Agreements with affiliates of Ensign, providing for the transfer of the operations of senior living communities. The closing of the Transaction was completed in two phases with the transfer of two operations on March 1, 2022 and the remainder transferred on April 1, 2022. As a result of the lease terminations, the Company reduced both the right of use assets and the lease liabilities by $42,515. Four of the terminated leases were part of master lease agreements. As a result of the transferred leases being removed from master lease arrangements, the remaining lease components under the master lease arrangements were modified which resulted in a net increase to the lease liability and ROU asset balance of $6,522 for the nine months ended September 30, 2022.

The components of operating lease cost, are as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Operating Lease Costs:	Operating Lease Costs:									Operating Lease Costs:
Facility Rent—cost of services		$	9,052	$	8,876	$	26,844	$	26,624
Community Rent—cost of services										Community Rent—cost of services	$	8,129	$	9,052	$	24,755	$	26,844
Office Rent—cost of services	Office Rent—cost of services	1,282		914		3,611		2,713		Office Rent—cost of services	1,262		1,282		3,765		3,611
Sublease Income		—		(69)		—		(143)
Rent—cost of services	Rent—cost of services	$	10,334	$	9,721	$	30,455	$	29,194	Rent—cost of services	$	9,391	$	10,334	$	28,520	$	30,455

General and administrative expense	General and administrative expense	$	51	$	76	$	192	$	218	General and administrative expense	$	86	$	51	$	241	$	192
Variable lease cost (a)	Variable lease cost (a)	$	1,609	$	1,299	$	4,598	$	3,975	Variable lease cost (a)	$	1,590	$	1,609	$	4,463	$	4,598


(a)						Represents variable lease cost for operating leases, which costs include property taxes and insurance, common area maintenance, and consumer price index increases, incurred as part of ~~our~~the Company’s triple net lease, and which is included in cost of services for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table shows the lease maturity analysis for all leases as of September 30, ~~2021,~~2022, for the years ended December 31:


Year	Year	Amount		Year	Amount
2021 (Remainder)		$	9,778
2022		38,645
2022 (Remainder)				2022 (Remainder)	$	8,800
2023	2023	37,686		2023	34,844
2024	2024	36,645		2024	34,100
2025	2025	35,681		2025	32,770
2026				2026	31,955
Thereafter	Thereafter	356,306		Thereafter	276,631
Total lease payments	Total lease payments	514,741		Total lease payments	419,100
Less: present value adjustments	Less: present value adjustments	(212,103)		Less: present value adjustments	(153,731)
Present value of total lease liabilities	Present value of total lease liabilities	302,638		Present value of total lease liabilities	265,369
Less: current lease liabilities	Less: current lease liabilities	(15,399)		Less: current lease liabilities	(15,948)
Long-term operating lease liabilities	Long-term operating lease liabilities	$	287,239	Long-term operating lease liabilities	$	249,421

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 each lease’s commencement date to determine each lease's operating lease liability. As of September 30, ~~2021,~~2022, the weighted average remaining lease term is ~~14.3~~12.9 years and the weighted average discount rate is ~~8.1%~~7.6%.

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

14. INCOME TAXES

The Company recorded income tax expense of $1,074 and $69 or 17.7% and 5.8% of earnings before income taxes for the three months ended September 30, 2022 and 2021, respectively. The increase in tax is primarily due to less excess tax benefits on equity compensation.

The Company recorded income tax expense of $241 and $1,013 or ~~5.8%~~6.3% and 18.4% of earnings before income taxes for the ~~three and~~ nine months ended September 30, ~~2021, respectively~~2022 and ~~income tax expense of $104 and $2,430 or 2.3% and 17.2% of earnings before income taxes for the three and nine months ended September 30, 2020,~~2021, respectively. The ~~effective~~decrease in tax ~~rate for both three~~is primarily due to less non-deductible equity compensation and ~~nine month periods includes excess~~ tax ~~benefits from share-based compensation which were offset by non-deductible expenses including non-deductible compensation.~~benefit related to the Transfer Agreements with Ensign.

15. COMMITMENTS AND CONTINGENCIES

Regulatory Matters - The Company provides services in complex and highly regulated industries. The Company’s compliance with applicable U.S. federal, state and local laws and regulations governing these industries may be subject to governmental review and adverse findings may result in significant regulatory action, which could include sanctions, damages, fines, penalties (many of which may not be covered by insurance), and even exclusion from government programs. The Company is a party to various regulatory and other governmental audits and investigations in the ordinary course of business and cannot predict the ultimate outcome of any federal or state regulatory survey, audit or investigation. While governmental audits and investigations are the subject of administrative appeals, the appeals process, even if successful, may take several years to ~~resolve.~~resolve and penalties subject to appeal may remain in place during such appeals. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's businesses. The Company believes that it is presently in compliance in all material respects with all applicable laws and regulations.

Cost-Containment Measures - Government and third-party payors have instituted cost-containment measures designed to limit payments made to providers of healthcare services, may propose future cost-containment measures, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company.

Indemnities - From time to time, the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which the Company may be required to indemnify property owners or prior operators for post-transfer environmental or other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer agreements, in which the Company agrees to indemnify past operators of agencies and communities the Company acquires against certain

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liabilities arising from the transfer of the operation and/or the operation thereof after the transfer, (iii) certain Ensign lending agreements, and (iv) certain agreements with management, directors and employees, under which the subsidiaries of the Company may be required to indemnify such persons for liabilities arising out of their employment relationships. The terms of such obligations vary by contract and, in most instances, a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on the Company’s Condensed Consolidated Balance Sheets for any of the periods presented.

Litigation - The Company’s businesses involve a significant risk of liability given the age and health of the patients and residents served by its independent operating subsidiaries. The Company, its operating companies, and others in the industry may be subject to a number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal injury, elder abuse, wrongful death or other related claims. Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and theories, and the Company is routinely subjected to these claims in the ordinary course of business, including potential claims related to patient care and treatment, and professional negligence, as well as employment related claims. If there were a significant increase in the number of these claims or an increase in amounts owing should plaintiffs be successful in their prosecution of these claims, this could materially adversely affect the Company’s business, financial condition, results of operations and cash flows. In addition, the defense of these lawsuits may result in significant legal costs, regardless of the outcome, and may result in large settlement amounts or damage awards.

In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the False Claims Act (the “FCA”) and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payor. A violation may provide the basis for exclusion from federally funded healthcare programs. Such exclusions could have a correlative negative impact on the Company’s financial performance. Some states, including California, Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. In addition, the Deficit Reduction Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the ~~FCA.~~FCA, for which 18 states have qualified, including California and Texas, where we conduct business. As

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

such, the Company could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which it conducts business.

Under the Fraud Enforcement and Recovery Act (“FERA”) and its associated rules, healthcare providers face significant penalties for the knowing retention of government overpayments, even if no false claim was involved. Providers have an obligation to proactively exercise “reasonable diligence” to identify overpayments and return those overpayments to CMS within 60 days of “identification” or the date any corresponding cost report is due, whichever is later. Retention of overpayments beyond this period may create liability under the FCA. In addition, FERA protects whistleblowers (including employees, contractors, and agents) from retaliation.

The Company cannot predict or provide any assurance as to the possible outcome of any litigation. If any litigation were to proceed, and the Company and its operating companies are subjected to, alleged to be liable for, or agree to a settlement of, claims or obligations under federal Medicare statutes, the FCA, or similar state and federal statutes and related regulations, the Company’s business, financial condition and results of operations and cash flows could be materially and adversely affected. Among other things, any settlement or litigation could involve the payment of substantial sums to settle any alleged civil violations, and may also include the assumption of specific procedural and financial obligations by the Company or its independent operating subsidiaries going forward under a corporate integrity agreement and/or other arrangement with the government.

Medicare Revenue Recoupments - The Company is subject to probe reviews relating to Medicare services, billings and potential overpayments by Unified Program Integrity Contractors (“UPIC”), Recovery Audit Contractors (“RAC”), Zone Program Integrity Contractors (“ZPIC”), Program Safeguard Contractors (“PSC”), Supplemental Medical Review Contractors (“SMRC”) and Medicaid Integrity Contributors (“MIC”) programs, each of the foregoing collectively referred to as “Reviews.”

As of September 30, ~~2021, 8~~2022, seven of the Company’s independent operating subsidiaries had Reviews scheduled, on appeal or in dispute resolution process, both pre- and post-payment. If an operation fails an initial or subsequent Review, the operation could then be subject to extended Review, suspension of payment, or extrapolation of the identified error rate to all billing in the same time period. The Company, from time to time, receives record requests in reviews which have resulted in claim denials on paid claims. The Company has appealed substantially all denials arising from these reviews using the applicable appeals process. As of September 30, ~~2021,~~2022, and through the filing of this Quarterly Report on Form 10-Q, the

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Company’s independent operating subsidiaries have responded to the Reviews that are currently ongoing, on appeal or in dispute resolution process. The Company cannot predict the ultimate outcome of any regulatory and other governmental reviews. While such reviews are the subject of administrative appeals, the appeals process, even if successful, may take several years to resolve. The costs to respond to and defend such reviews may be significant and an adverse determination in such reviews may subject the ~~Company.~~Company to sanctions, damages, extrapolation of damage findings, additional recoupments, fines, other penalties (some of which may not be covered by insurance), and termination from Medicare programs which may, either individually or in the aggregate, have a material adverse effect on the Company's business and financial condition.

~~One~~From June 2021 to May 2022, one hospice provider number iswas subject to a Medicare payment suspension imposed by a ~~Uniform Program Integrity Contractor (UPIC).~~UPIC. As of September 30, 2022, the total amount due from the government payor impacted by the suspension was $5,181 and was recorded in long-term other assets. The amounts suspended represent all Medicare payments due to the provider number during the suspension.

In May 2022, the Company received communication that the Medicare payment suspension was terminated and the UPIC’s review was complete. The UPIC ~~is reviewing 42~~reviewed 107 patient records covering a ~~4-month~~10-month period to determine whether, in its view, a Medicare overpayment was made. ~~Medicare payments to that provider number are suspended pending~~Based on the ~~conclusion~~results of the ~~UPIC’s~~review, the UPIC has alleged sampled and extrapolated overpayments of $5,165, and has withheld that amount through continued recoupment of Medicare payments. The Company is pursuing its appeal rights through the administrative appeals process, including contesting the methodology used by the UPIC to perform statistical extrapolation. At this stage of the review, based on the information currently available to the Company, the Company cannot predict the timing or the ultimate outcome of this review. ~~The payments suspended as~~As of September 30, ~~2021 total $2.7 million. The suspended amounts represent all Medicare payments due~~2022, we have an accrued liability that is immaterial for this review which was recorded as an offset to the provider number since the start of the suspension and are not an overpayment finding. If the UPIC concludes that an overpayment exists, it will recover the overpayment from the suspended funds and release the excess funds, if any, to the provider. The UPIC has not specified when the payment suspension will end or when it will reach an over-payment determination.revenue.

Insurance - The Company retains risk for a substantial portion of potential claims for general and professional liability, workers’ compensation and automobile liability. ~~The Company does not retain risk related to its employee health plans.~~

The Company recognizes obligations associated with these costs, up to specified deductible limits in the period in which a claim is incurred, including with respect to both reported claims and claims incurred but not reported. The general and professional liability insurance has a retention limit of $150 per claim with a $500 corridor as an additional out-of-pocket retention we must satisfy for claims within the policy year before the carrier will reimburse losses. The workers’ compensation insurance has a retention limit of $250 per claim, except for policies held in Texas and Washington which are subject to state insurance and possess their own limits.

~~Concentrations~~

~~Credit Risk -~~ ~~The~~Effective January 1, 2022 the Company is self-insured for claims related to employee health, dental, and vision care. To protect itself against loss exposure, the Company has significant accounts receivable balances, the collectability of which is dependent on the availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only significant concentration of credit riskpurchased individual stop-loss insurance coverage that insures individual health claims that exceed $325 for ~~the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an appropriate allowance has been recorded~~each covered person for the possibility of these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company’s gross receivables from the Medicare and Medicaid programs accounted for approximately 73.2% and 75.7% of

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~~THE PENNANT GROUP, INC.~~

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

its total gross accounts receivable as of September 30, 2021 and December 31, 2020, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 62.2% and 62.6% for the three and nine months ended September 30, 2021, and 60.4% and 59.3% of the Company’s revenue for the three and nine months ended September 30, 2020.fiscal year 2022.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with the Interim Financial Statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”). The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (the ~~“2020~~“2021 Annual Report”), which discusses our business and related risks in greater detail, as well as subsequent reports we may file from time to time on Form 10-K, Form 10-Q and 8-K, for additional information. The section entitled “Risk Factors” filed within our ~~2020~~2021 Annual Report describes some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this Quarterly Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

Special Note About Forward-Looking Statements

This Quarterly Report contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “might,” “will,” “should,” “could,” “seeks,” “approximately,” “goals,” “future,” “projects,” “predicts,” “guidance,” “target,” “intends,” “plans,” “estimates,” “anticipates”, the negative version of these words or other comparable words. Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the ~~benefits resulting from the Spin-Off, the~~ effects of competition and the effects of future legislation or regulations and other non-historical statements. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak. The developments with respect to the spread of COVID-19 and its impacts have occurred rapidly, and because of the unprecedented nature of the pandemic, we are unable to predict the extent and duration of the adverse financial impact of COVID-19 on our business, financial condition and results of operations.

The risk factors discussed in this Quarterly Report and the ~~2020~~2021 Annual Report under the heading “Risk Factors,” could cause our results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to:

•uncertainties related to the lingering effect of the COVID-19 ~~outbreak;~~pandemic;

•~~uncertainties regarding the implementation of~~difficulty complying with state and federal vaccination mandates, which widely vary, the enforcement of which is in flux, and the potential ~~affects upon~~effects of such vaccine mandates on our ~~workforce and~~business, including our ability to retain and hire staff and maintain ~~staffing, retain work;~~residents of our senior living communities;

•~~additional regulations relating~~uncertainties related to the end of the COVID-19 ~~imposed~~public health emergency declared by ~~state~~federal and ~~federal~~state authorities, and ~~payors;~~the ongoing expiration of certain waivers granted during that emergency prior to its termination;

•federal and state changes to, or delays receiving, reimbursement and other aspects of Medicaid and Medicare;

•changes in the ~~regulation of~~regulations affecting the healthcare ~~services~~industry;

•proposed changes to payment models and reimbursement amounts within the Medicare and Medicaid fee schedules for future calendar years;

•potential additional regulation affecting the ownership, operating standards, and staffing of businesses in our industry;

•increases in the federal income tax rate;

•increased competition and increased cost of acquisition or retention for, or a shortage of, skilled personnel;

•government reviews, audits and investigations of our business;

•changes in federal and state employment related laws;

•compliance with state and federal employment, immigration, licensing and other laws;

•competition from other healthcare providers;

•actions of national labor unions;

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•the leases of our affiliated senior living communities;

•inability to complete future community or business acquisitions and failure to successfully integrate acquired communities and businesses into our operations;

•general economic ~~conditions;~~conditions, including inflation and increasing interest rates, which raise the costs of goods and borrowing capital, which may affect the delivery and affordability of our services;

•security breaches and other cyber security incidents;

•the performance of the financial and credit markets;

•~~uncertainties related to our ability to realize the anticipated benefits of the Spin-Off;~~ and,

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•uncertainties related to our ability to obtain financing or the terms of such financing.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any forward-looking statements in this Quarterly Report. Although we may from time to time voluntarily update our prior forward-looking statements, we disclaim any commitment to do so except as required by applicable securities laws.

Overview

We are a leading provider of high-quality healthcare services to patients of all ages, including the growing senior population, in the United States. We strive to be the provider of choice in the communities we serve through our innovative operating model. We operate in multiple lines of businesses including home health, hospice and senior living services across Arizona, California, Colorado, Idaho, Iowa, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming. As of September 30, ~~2021,~~2022, our home health and hospice business provided home health, hospice and home care services from 8894 agencies operating across these 14 states, and our senior living business operated 5449 senior living communities throughout ~~seven~~six states.

The following table summarizes our affiliated home health and hospice agencies and senior living communities as of:


		December 31,								September 30,		December 31,								September 30,
		2013	2014	2015	2016	2017	2018	2019	2020	2021		2014	2015	2016	2017	2018	2019	2020	2021	2022
Home health and hospice agencies	Home health and hospice agencies	16	25	32	39	46	54	63	76	88	Home health and hospice agencies	25	32	39	46	54	63	76	88	94
Senior living communities	Senior living communities	12	15	36	36	43	50	52	54	54	Senior living communities	15	36	36	43	50	52	54	54	49
Senior living units	Senior living units	1,256	1,587	3,184	3,184	3,434	3,820	3,963	4,127	4,127	Senior living units	1,587	3,184	3,184	3,434	3,820	3,963	4,127	4,127	3,500
Total number of home health, hospice, and senior living operations	Total number of home health, hospice, and senior living operations	28	40	68	75	89	104	115	130	142	Total number of home health, hospice, and senior living operations	40	68	75	89	104	115	130	142	143

COVID-19

We have been, and we expect to continue to be, impacted by several factors related to the viral disease known as COVID-19 (“COVID-19”) that may cause actual results to differ from our historical results or current expectations. ~~Due~~Although global outbreaks of COVID-19 have decreased and best practices for responding to COVID-19 are now better understood, we cannot predict the ~~COVID-19 pandemic,~~future course of the ~~results presented in this report are not necessarily indicative of future~~virus and its impacts on staffing, on our operating ~~results. The situation surrounding COVID-19 remains fluid. We are actively managing our response in collaboration with government officials, team members~~practices, and ~~business partners, and we are assessing potential impacts to~~on our financial ~~position and operating results, as well as adverse developments in our business.~~results.

Home Health and Hospice

During the third quarter of 2022, the labor challenges experienced throughout the past year ~~were exacerbated~~continued with some moderation. For the third quarter of 2022, hospice average discharged length of stay was impacted slightly as ~~COVID-19 cases rose sharply, leading to further wage pressure, increased overtime and greater use~~a result of ~~agency and registry staffing. Home health admissions during the quarter were impacted as~~a shift of patient referrals from more ~~and more staff entered the quarantine protocol and by~~acute settings, resulting in a ~~significant~~modest decline in ~~elective procedures, particularly~~hospice average length of stay despite an incremental improvement in ~~a few key markets and states that re-imposed temporary halts on such procedures.~~hospice admissions.

Senior Living

COVID-19 continues to impact ~~all aspects of~~ our senior living business and geographies, including impacts on our residents, team members, vendors and business partners. ~~For much of the third quarter of 2021, we saw a continuation of increased occupancy that began in the second quarter, although our occupancy began to decline in September and~~While our overall senior living occupancy has decreased since the onset of the COVID-19 pandemic due to a greater number of move outs net of move ~~ins.~~ins, during the third quarter of 2022 we experienced

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modest improvement in occupancy. We cannot be sure if or when the occupancy levels in our senior living communities will improve over multiple measurement periods or return to pre-pandemic levels.

Labor

WeWage rates have ~~experienced and expect~~increased in response to ~~continue to see increased labor costs due to increased overtime and premium pay~~COVID-driven staffing shortages and the ~~increased need for temporary~~lingering disruption COVID-19 caused to the labor ~~to supplement our existing staffing.~~market. We are monitoring the ongoing impact of ~~our~~ COVID-19 ~~response actions~~ on ~~our revenue~~labor costs due to increased overtime, premium pay, and ~~expenses, including~~temporary labor ~~acquisition and turnover costs that may be imposed by~~to supplement existing ~~and anticipated state and federal vaccination mandates imposed for skilled workers in home health agencies, senior~~

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living communities and other health care service providers. However, the extent to which COVID-19 will continue to impact our operations will depend on future developments, which remain uncertain and cannot be predicted with confidence, including the pace of spread and impact of the B.1.617.2 variant of COVID-19 (the “Delta variant”) and other potential variant strains, and the actions taken to contain COVID-19 or treat its impact, among others.staffing.

Recent Activities

Acquisitions.During the nine months ended September 30, ~~2021,~~2022, we expanded our operations with the addition of ~~five~~two home health and four hospice ~~and two home care agencies. We~~agencies as well as one senior living community. A subsidiary of the Company entered into a separate operations transfer agreement with ~~each respective~~the prior operator of the acquired operation as a part of each transaction. ~~The aggregate purchase price for these acquisitions was $14.1 million. For further discussion of our acquisitions, see Note 7,~~ ~~Acquisitions~~,~~in the Notes to the Interim Financial Statements.~~

On November 1, 2022, we closed on the acquisition of one home health agency that expands our footprint in Wisconsin. The purchase price of the home health agency was $0.5 million.

Trends

Since the pandemic began and ~~until~~throughout the ~~first quarter of~~ 2021 fiscal year, we experienced a steady decline in senior living occupancy as move-ins declined relative to move-outs due to the pandemic. ~~Beginning in the second quarter of 2021, and continuing into~~However, we have experienced modest senior living occupancy improvement through the third quarter ~~we have experienced~~of 2022, partly as a ~~slight increase in our~~result of improving COVID-19 case trends and renewed consideration of senior living ~~occupancy. We~~communities as a home based care setting. Nevertheless, we cannot be sure when the occupancy levels in our senior living communities will return to pre-pandemic levels. As uncertainty regarding the COVID-19 pandemic persists, if there is a resurgence in cases, or if variant strains aggressively emerge, we could see a more prolonged recovery.

When we acquire turnaround or start-up operations, we expect that our combined metrics may be impacted. We expect these metrics to vary from period to period based upon the maturity of the operations within our portfolio. We have generally experienced lower occupancy rates and higher costs at our senior living communities and lower census and higher costs at our home health and hospice agencies for recently acquired operations; as a result, we generally anticipate lower and/or fluctuating consolidated and segment margins during years of acquisition growth. ~~We established one start-up hospice agency in Washington during the three months ended September 30, 2021.~~

Government Regulation

We have disclosed under the heading “Government Regulation” in the ~~2020~~2021 Annual Report a summary of regulations that we believe materially affect our business, financial condition or results of operations. Since the time of the filing of the ~~2020~~2021 Annual Report, the following regulations have been updated.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020, ~~in the United States~~ and subsequent regulatory actions. The CARES Act contained provisions for accelerated or advance Medicare payments (“AAP”) to provide supporting cash flow to providers and suppliers combating the effects of the COVID-19 pandemic. We applied for and received $28.0 million in ~~the prior year.~~2020. These funds ~~are~~were subject to automatic recoupment through offsets to new claims beginning one year after payment were issued. In April, 2021, CMS began to automatically recoup 25% of Medicare payments, which will continue for 11 months. At the end of the 11 months, assuming full repayment has not occurred, recoupment will increase to 50% for another six months. Any balance outstanding after these two recoupment periods will be subject to repayment at a 4% interest rate. We anticipate completingOn June 23, 2022, we completed repayment of all the AAP ~~within the allotted recoupment periods.~~we had received.

The CARES Act temporarily suspended the 2% sequestration payment adjustment on Medicare fee-for-service payment beginning May 1, 2020 until December 31, 2020. The suspension was initially extended to go through March 31, 2021, and in April 2021 was extended through December 31, 2021. We recognized $0.9 million and $2.7 million in revenue related to the suspension of sequestration for the three and nine months ended September 30, 2021, respectively, and $1.1 million and $1.7 million for the three and nine months ended September 30, 2020, respectively, exclusive of our start-up operations. Further, the CARES Act payroll tax deferral program allowed employers to defer the deposit and payment of the employer’s portion of social security taxes that otherwise would be due between March 27, 2020, and December 31, 2020. The CARES Act permits employers to deposit half of these deferred payments by the end of 2021 and the other half by the end of 2022. WeThe Company deferred approximately $7.8 million of the employer-paid portion of social security taxes, of which ~~$3.9~~$4.1 million remains unpaid as of September 30, 2022, all of which is included in ~~other long-term~~current liabilities ~~and the current portion of $3.9 million~~ in accrued wages and related ~~liabilities.~~liabilities and is expected to be paid by the end of 2022.

~~The American Rescue Plan Act of 2021 (the “ARP Act”) was enacted~~As described in our most recent Annual Report on ~~March 11, 2021 in~~Form 10-K, Item 1A, Risks Related to COVID-19, CMS issued, and the United ~~States. The ARP Act was designed~~States Supreme Court upheld, an interim final rule requiring workers of Medicare- or Medicaid-reimbursed operations to assist the country with the effects of the COVID-19 pandemic and included a number of tax components. The ARP Act’s primary tax impact on us is a new revenue raising provision that requires us to include the next five highest paid employees to the list of covered officers alreadybe fully vaccinated or subject to an appropriate exemption. The application of this interim final rule has been extended to all 50 states after litigation before various courts, including the ~~IRC Section 162(m) wage limitation beginning~~United States Supreme Court. The deadline for compliance with this mandate by March 21, 2022, based on the state of operation. In addition, several states in which our independent operating subsidiaries are located issued their own vaccine requirements, most notably California, Colorado,

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Oregon, and Washington. Since then, CMS has issued guidance indicating that its surveys for compliance with the interim final rule’s vaccine mandate will only be enforced in ~~the 2027 tax year. We will continue~~surveys used for initial certification or recertification of providers, and in response to ~~assess the effect~~complaints of non-compliance. Colorado has since allowed its COVID-19 vaccination mandate for healthcare workers to expire. In some of the ~~ARP Act~~states where our independent operating subsidiaries are located, state requirements for vaccination of healthcare workers have been updated to address the availability and ~~ongoing~~necessity of vaccine boosters after receiving an initial one- or two-injection course of vaccination. Still other ~~government legislation related~~states, such as Texas, have prohibited COVID-19 vaccines from being required as a matter of state law, although the interim final rule requires employees of Medicare-participating health care facilities to receive the COVID-19 ~~pandemic that may be issued.~~vaccination. Compliance with the relevant federal and state vaccine mandates or laws is challenging, due to both legal challenges, differing requirements, and changes to those requirements, including their expiration or termination.

~~During~~As of September 30, 2022, our independent operating subsidiaries are substantially in compliance with these mandates. While the ~~third quarter~~mandates have contributed to industry-wide staffing shortages and increased competition for qualified employees, increasing our employee costs, those impacts have been felt across the health care industry and are not unique to our operations. The various federal and state mandates have also created ongoing testing, tracking and other administrative obligations and expenses, which may persist as long as the mandates are in place.

On July 27, 2022, CMS issued the 2023 Hospice Payment Rate Update final rule (“Hospice Payment Final Rule”). The Final Rule provides that a hospice’s wage index (one component of ~~2021, President Biden directed~~its payment rate) will not be reduced more than 5.0% year-over-year. In other words, a hospice’s wage index each fiscal year will be no less than 95.0% of its prior fiscal year wage index. This will help protect hospices against large annual wage-based reimbursement decreases. This change is permanent and will not automatically expire or require renewal. Subject to this wage index change, the ~~Department of Labor, Occupational Safety and Health Administration (“OSHA”~~Hospice Payment Final Rule adopts a 3.8% increase in payments made for hospice services, including the cap amount, which the rule increases from $31,297.61 to $32,486.92. The Hospice Payment Final Rule also outlines reductions in payment ranging from two percent (2.0%) to ~~implement~~four percent (4.0%), beginning in 2024, for hospices that fail to meet quality reporting requirements.

On June 17, 2022, the CMS issued the 2023 Home Health Prospective Payment System Rate Update proposed rule. The proposed rule would apply a ~~rule requiring employers with more than 100 employees~~permanent decrease of nearly 7.7% to ~~require its employees~~the home health 30-day period standard payment rate for assumed behavior changes resulting from implementation of the Patient Driven Grouping Model (“PDGM”), except for low utilization payment adjustments (“LUPAs”). Additionally, CMS proposes a temporary adjustment of payments to ~~be fully vaccinated for COVID-19 or submit to weekly testing~~recover as soon as 2024 $2.0 billion in overpayments made in the PDGM program. Aside from these adjustments, CMS has proposed a 2.9% basket increase for the ~~virus. This OSHA regulation has~~home health payment update in calendar year 2023. Under the proposed rule, CMS would also recalibrate case-mix weights and low utilization payment adjustment thresholds using 2021 data. Additionally, the proposed rule would apply a permanent 5.0% cap on decreases in the wage index, meaning a facility’s wage index for any future year would not ~~yet been announced~~be less than 95.0% of the final wage index for the preceding year. For home health agencies that do not report required quality reporting data to CMS, their increase in payment would only be 0.9%, rather than the full 2.9% contemplated in the proposed rule. Overall, the proposed rule estimates that Medicare payments to all home health agencies would decrease in the aggregate by 4.2%, or $810 million, based on its contents. Home health organizations have submitted comments in response to this proposed rule and expressed their concerns to CMS regarding the methodologies used in the proposed rule resulting in potential adjustments to their reimbursement. The final rule for the 2023 Home Health Prospective Payment System Rate Update is expected in the fourth quarter of ~~2021. Similarly, during the third quarter the Department of Health~~2022 and ~~Human Services, Centers for Medicare and Medicaid Services (“CMS”) announced that it~~ would be issuing a rule requiring workers at home health agencies, and potentially other health care provider services, to be fully vaccinated for COVID-19 without an option for testing in lieu of vaccination. This CMS regulation also has not yet been announced and is expected in the fourth quarter of 2021.effective beginning January 1, 2023.

On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted. The IRA introduced changes to U.S. corporate income tax law, including a 15% corporate minimum tax, a 1% excise tax on stock buybacks, and various energy-related deduction and credit provisions. The Company does not anticipate the IRA will have a significant impact on the Company’s income taxes.

Segments

We have two reportable segments: (1) home health and hospice services, which includes our home health, home care and hospice businesses; and (2) senior living services, which includes the operation of assisted living, independent living and memory care communities. Our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), reviews financial information at the operating segment level. We also report an “all other” category that includes general and administrative expense from our Service Center.

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Key Performance Indicators

We manage the fiscal aspects of our business by monitoring key performance indicators that affect our financial performance. These indicators and their definitions include the following:

Home Health and Hospice Services

•Total home health admissions. The total admissions of home health patients, including new acquisitions, new admissions and readmissions.

•Total Medicare home health admissions. Total admissions of home health patients, who are receiving care under Medicare reimbursement programs, including new acquisitions, new admissions and readmissions.

•Average Medicare revenue per completed 60-day home health episode. The average amount of revenue for each completed 60-day home health episode generated from patients who are receiving care under Medicare reimbursement programs.

•Total hospice admissions. Total admissions of hospice patients, including new acquisitions, new admissions and recertifications.

•Average hospice daily census. The average number of patients who are receiving hospice care during any measurement period divided by the number of days during such measurement period.

•Hospice Medicare revenue per day. The average daily Medicare revenue recorded during any measurement period for services provided to hospice patients.

The following table summarizes our overall home health and hospice statistics for the periods indicated:

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		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Home health services:	Home health services:									Home health services:
Total home health admissions	Total home health admissions	9,213		6,771		28,079		18,166		Total home health admissions	10,152		9,213		30,389		28,079
Total Medicare home health admissions	Total Medicare home health admissions	4,211		3,418		13,115		8,686		Total Medicare home health admissions	4,637		4,211		13,952		13,115
Average Medicare revenue per 60-day completed episode(a)	Average Medicare revenue per 60-day completed episode(a)	$	3,404	$	3,448	$	3,382	$	3,311	Average Medicare revenue per 60-day completed episode(a)	$	3,589	$	3,388	$	3,548	$	3,383
Hospice services:	Hospice services:									Hospice services:
Total hospice admissions	Total hospice admissions	2,219		2,133		6,420��		5,763		Total hospice admissions	2,392		2,219		6,920		6,420
Average hospice daily census	Average hospice daily census	2,337		2,177		2,313		1,934		Average hospice daily census	2,293		2,337		2,270		2,313
Hospice Medicare revenue per day	Hospice Medicare revenue per day	$	174	$	164	$	173	$	164	Hospice Medicare revenue per day	$	176	$	174	$	177	$	173


(a)						The year to date average Medicare revenue per 60-day completed episode includes post period claim adjustments for prior quarters.

Senior Living Services

•Occupancy. The ratio of actual number of days our units are occupied during any measurement period to the number of days units are available for occupancy during such measurement period.

•Average monthly revenue per occupied unit. The room and board revenue for senior living services during any measurement period divided by actual occupied senior living units for such measurement period divided by the number of months for such measurement period.

The following table summarizes our senior living statistics for the periods indicated:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
		2021			2020			2021			2020				2022			2021			2022			2021
Occupancy	Occupancy	73.7		%	76.8		%	72.8		%	78.5		%	Occupancy	76.5		%	73.7		%	75.1		%	72.8		%
Average monthly revenue per occupied unit	Average monthly revenue per occupied unit	$	3,174		$	3,173		$	3,179		$	3,195		Average monthly revenue per occupied unit	$	3,560		$	3,174		$	3,465		$	3,179

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Revenue Sources

Home Health and Hospice Services

Home Health. We derive the majority of our home health revenue from Medicare and managed care. The Medicare payment is adjusted for differences between estimated and actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. ~~For Medicare episodes that began prior to January 1, 2020, home health agencies were reimbursed~~Net service revenue is recognized in accordance with the under the ~~Medicare HH PPS, while Medicare periods of care that began on or after that date are reimbursed under the Patient-Driven Groupings Model (“PDGM”)~~PDGM methodology. Under PDGM, Medicare provides agencies with payments for each 30-day period of care provided to beneficiaries. If a beneficiary is still eligible for care after the end of the first 30-day payment period, a second 30-day payment period can begin. There are no limits to the number of periods of care a beneficiary who remains eligible for the home health benefit can receive. While payment for each 30-day period of care is adjusted to reflect the beneficiary’s health condition and needs, a special outlier provision exists to ensure appropriate payment for those beneficiaries that have the most expensive care needs. The payment under the Medicare program is also adjusted for certain variables including, but not limited to: (a) a low utilization payment adjustment if the number of visits is below an established threshold that varies based on the diagnosis of a beneficiary; (b) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the period of care; (c) adjustment to the admission source of claim if it is determined that the patient had a qualifying stay in a post-acute care setting within 14 days prior to the start of a 30-day payment period; (d) the timing of the 30-day payment period provided to a patient in relation to the admission date, regardless of whether the same home health provider provided care for the entire series of episodes; (e) changes to the acuity of the patient during the previous 30-day period of care; (f) changes in the base payments established by the Medicare program; (g) adjustments to the base payments for case mix and geographic wages; and (h) recoveries of overpayments. For further detail regarding PDGM see the Government Regulation section of our ~~2020~~2021 Annual Report.

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Hospice. We derive the majority of our hospice business revenue from Medicare reimbursement. The estimated payment rates are calculated as daily rates for each of the levels of care we deliver. Rates are set based on specific levels of care, are adjusted by a wage index to reflect healthcare labor costs across the country and are established annually through federal legislation. The following are the four levels of care provided under the hospice benefit:

•Routine Home Care (“RHC”). Care that is not classified under any of the other levels of care, such as the work of nurses, social workers or home health aides.

•General Inpatient Care. Pain control or acute or chronic symptom management that cannot be managed in a setting other than an inpatient Medicare-certified facility, such as a hospital, skilled nursing facility or hospice inpatient facility.

•Continuous Home Care. Care for patients experiencing a medical crisis that requires nursing services to achieve palliation and symptom control, if the agency provides a minimum of eight hours of care within a 24-hour period.

•Inpatient Respite Care. Short-term, inpatient care to give temporary relief to the caregiver who regularly provides care to the patient.

CMS has established a two-tiered payment system for RHC. Hospices are reimbursed at a higher rate for RHC services provided from days of service one through 60 and a lower rate for all subsequent days of service. CMS also provides for a Service Intensity Add-On, which increases payments for certain RHC services provided by registered nurses and social workers to hospice patients during the final seven days of life.

Medicare reimbursement is adjusted for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap limit and an overall payment cap, we monitor our provider numbers and estimate amounts due back to Medicare to the extent that the cap has been exceeded.

Senior Living Services. As of September 30, ~~2021,~~2022, we provided assisted living, independent living and memory care services in 5449 communities. Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid or other state-specific programs.

Primary Components of Expense

Cost of Services (excluding rent, general and administrative expense and depreciation and amortization). Our cost of services represents the costs of operating our independent operating subsidiaries, which primarily consists of payroll and related benefits, supplies, purchased services, and ancillary expenses such as the cost of pharmacy and therapy services

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provided to patients. Cost of services also includes the cost of general and professional liability insurance and other general cost of services specifically attributable to our operations.

Rent—Cost of Services. Rent—cost of services consists solely of base minimum rent amounts payable under lease agreements to our landlords. Our subsidiaries lease and operate but do not own the underlying real estate at our operations, and these amounts do not include taxes, insurance, impounds, capital reserves or other charges payable under the applicable lease agreements.

General and Administrative Expense. General and administrative expense consists primarily of payroll and related benefits and travel expenses for our Service Center personnel, including training and other operational support. General and administrative expense also includes professional fees (including accounting and legal fees), costs relating to information systems, stock-based compensation and rent for our Service Center offices.

Depreciation and Amortization. Property and equipment are recorded at their original historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging from three to 15 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on Interim Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the Interim Financial Statements and related disclosures requires us to make judgments, estimates and

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assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review our judgments and estimates, including but not limited to those related to revenue, ~~cost allocations,~~ leases, intangible assets, goodwill, and income taxes. We base our estimates and judgments upon our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty, and actual results could differ materially from the amounts reported. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made. Refer to Note 2, Basis of Presentation and Summary of Significant Accounting Policies, within the ~~2020~~2021 Annual Report for further information on our critical accounting estimates and policies, which are as follows:

•Self-insurance reserves - The valuation methods and assumptions used in estimating costs up to retention amounts to settle open claims of insureds and an estimate of the cost of insured claims up to retention amounts that have been incurred but not reported;

•Revenue recognition - The estimate of variable considerations to arrive at the transaction price, including methods and assumptions used to determine settlements with Medicare and Medicaid payors or retroactive adjustments due to audits and reviews;

•Leases - We use our estimated incremental borrowing rate based on the information available at lease commencement date in determining the present value of future lease payments;

•Acquisition accounting - The assumptions used to allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions; and

•Income taxes - The estimation of valuation allowance or the need for and magnitude of liabilities for uncertain tax position.

Recent Accounting Pronouncements

Information concerning recently issued accounting pronouncements are included in Note 2, Basis of Presentation and Summary of Significant Accounting Policies in the Interim Financial Statements.

Table of Contents

Results of Operations

The following table sets forth details of our revenue, expenses and earnings as a percentage of total revenue for the periods indicated:


		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020				2022		2021		2022		2021

Total revenue	Total revenue	100.0	%	100.0	%	100.0	%	100.0	%		Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Expense:	Expense:										Expense:
Cost of services	Cost of services	80.1		76.7		79.3		75.6			Cost of services	80.0		80.1		79.7		79.3
Rent—cost of services	Rent—cost of services	9.2		9.9		9.3		10.3			Rent—cost of services	7.9		9.2		8.2		9.3
General and administrative expense	General and administrative expense	8.1		7.6		8.2		7.7			General and administrative expense	5.0		8.1		7.4		8.2
Depreciation and amortization	Depreciation and amortization	1.1		1.2		1.1		1.2			Depreciation and amortization	1.1		1.1		1.1		1.1
Loss on asset dispositions and impairment, net											Loss on asset dispositions and impairment, net	—		—		1.9		—
Total expenses	Total expenses	98.5		95.4		97.9		94.8			Total expenses	94.0		98.5		98.3		97.9
Income from operations	Income from operations	1.5		4.6		2.1		5.2			Income from operations	6.0		1.5		1.7		2.1
Other income (expense):
Other income		—		0.2		—		0.1
Other (expense):											Other (expense):

Interest expense, net	Interest expense, net	(0.4)		(0.2)		(0.4)		(0.3)			Interest expense, net	(0.9)		(0.4)		(0.7)		(0.4)
Other expense, net	Other expense, net	(0.4)		—		(0.4)		(0.2)			Other expense, net	(0.9)		(0.4)		(0.7)		(0.4)
Income before provision for income taxes	Income before provision for income taxes	1.1		4.6		1.7		5.0			Income before provision for income taxes	5.1		1.1		1.0		1.7
Provision for income taxes	Provision for income taxes	0.1		0.1		0.3		0.9			Provision for income taxes	0.9		0.1		0.1		0.3
Net income	Net income	1.0		4.5		1.4		4.1			Net income	4.2		1.0		0.9		1.4
Less: net loss attributable to noncontrolling interest		(0.1)		—		(0.1)		—
Less: net (loss) income attributable to noncontrolling interest											Less: net (loss) income attributable to noncontrolling interest	0.1		(0.1)		0.1		(0.1)
Net income attributable to Pennant	Net income attributable to Pennant	1.1	%	4.5	%	1.5	%	4.1	%		Net income attributable to Pennant	4.1	%	1.1	%	0.8	%	1.5	%

~~Table of Contents~~

The following table presents our consolidated GAAP Financial measures for the three and nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:


		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,		Nine Months Ended September 30,
		2021		2020		2021		2020				2022		2021		2022		2021
		(In thousands)								(In thousands)
Consolidated GAAP Financial Measures:	Consolidated GAAP Financial Measures:										Consolidated GAAP Financial Measures:
Total revenue	Total revenue	$	111,921	$	98,397	$	327,929	$	282,986		Total revenue	$	118,350	$	111,921	$	348,576	$	327,929
Total expenses	Total expenses	$	110,219	$	93,919	$	321,045	$	268,161		Total expenses	$	111,206	$	110,219	$	342,221	$	321,045
Income from operations	Income from operations	$	1,702	$	4,478	$	6,884	$	14,825		Income from operations	$	7,144	$	1,702	$	6,355	$	6,884

Table of Contents

The following tables present certain financial information regarding our reportable segments. General and administrative expenses are not allocated to the reportable segments and are included in “All Other”:


	Home Health and Hospice Services		Senior Living Services		All Other		Total
	(In thousands)
Segment GAAP Financial Measures:
Three Months Ended September 30, 2022
Revenue	$	85,779	$	32,571	$	—	$	118,350
Segment Adjusted EBITDAR from Operations	$	15,380	$	9,370	$	(7,779)	$	16,971
Three Months Ended September 30, 2021
Revenue	$	79,003	$	32,918	$	—	$	111,921
Segment Adjusted EBITDAR from Operations	$	14,409	$	9,106	$	(6,783)	$	16,732

Home Health and Hospice Services Senior Living Services All Other Total
(In thousands)
Segment GAAP Financial Measures:
Three Months Ended September 30, 2021
Revenue $ 79,003 $ 32,918 $ — $ 111,921
Segment Adjusted EBITDAR from Operations $ 14,409 $ 9,106 $ (6,783) $ 16,732
Three Months Ended September 30, 2020
Revenue $ 64,379 $ 34,018 $ — $ 98,397
Segment Adjusted EBITDAR from Operations $ 13,530 $ 11,684 $ (6,857) $ 18,357


		Home Health and Hospice Services		Senior Living Services		All Other		Total			Home Health and Hospice Services		Senior Living Services		All Other		Total
		(In thousands)									(In thousands)
Segment GAAP Financial Measures:	Segment GAAP Financial Measures:									Segment GAAP Financial Measures:
Nine Months Ended September 30, 2021
Nine Months Ended September 30, 2022										Nine Months Ended September 30, 2022
Revenue	Revenue	$	231,715	$	96,214	$	—	$	327,929	Revenue	$	251,598	$	96,978	$	—	$	348,576
Segment Adjusted EBITDAR from Operations	Segment Adjusted EBITDAR from Operations	$	43,131	$	27,692	$	(19,249)	$	51,574	Segment Adjusted EBITDAR from Operations	$	45,056	$	27,573	$	(23,795)	$	48,834
Nine Months Ended September 30, 2020
Nine Months Ended September 30, 2021										Nine Months Ended September 30, 2021
Revenue	Revenue	$	179,125	$	103,861	$	—	$	282,986	Revenue	$	231,715	$	96,214	$	—	$	327,929
Segment Adjusted EBITDAR from Operations	Segment Adjusted EBITDAR from Operations	$	34,681	$	37,673	$	(15,638)	$	56,716	Segment Adjusted EBITDAR from Operations	$	43,131	$	27,692	$	(19,249)	$	51,574

The table below provides a reconciliation of Segment Adjusted EBITDAR from Operations to Condensed Consolidated Income from ~~operations:~~o@J


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands)
Segment Adjusted EBITDAR from Operations(a)	$	16,971	$	16,732	$	48,834	$	51,574
Less: Depreciation and amortization	1,251		1,200		3,677		3,545
Rent—cost of services	9,391		10,334		28,520		30,455
Other Expense	(18)		—		(50)		(24)
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations(b)	430		532		938		991
Share-based compensation expense(c)	(2,501)		2,568		2,319		7,483
Acquisition related costs and credit allowances(d)	1,000		36		1,014		73

Transition services costs(e)	—		236		77		1,825

Loss related to senior living operations transferred to Ensign(f)	144		—		6,078		—
Unusual or non-recurring charges(g)	293		—		293		—
Add: Net income (loss) attributable to noncontrolling interest	163		(124)		387		(342)
Condensed Consolidated Income from Operations	$	7,144	$	1,702	$	6,355	$	6,884

Table of Contents

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(In thousands)
Segment Adjusted EBITDAR from Operations(a)
$ 16,732 $ 18,357 $ 51,574 $ 56,716
Less: Depreciation and amortization 1,200 1,212 3,545 3,434
Rent—cost of services 10,334 9,721 30,455 29,194
Other Expense — 225 (24) 225
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations(b)
532 717 991 1,422
Share-based compensation expense(c)
2,568 2,102 7,483 6,017
Acquisition related costs(d)
36 — 73 —
Transition services costs(e)
236 209 1,825 746
Net COVID-19 related costs(f)
— (307) — 853
Add: Net loss attributable to noncontrolling interest (124) — (342) —
Condensed Consolidated Income from Operations $ 1,702 $ 4,478 $ 6,884 $ 14,825


(a)						Segment Adjusted EBITDAR from Operations is net income ~~(loss)~~ attributable to the Company's reportable segments excluding interest expense, provision for income taxes, depreciation and amortization expense, rent, and, in order to view the operations performance on a comparable basis from period to period, certain adjustments including: (1) costs at start-up operations, (2) share-based compensation, (3) acquisition related costs and credit allowances, (4) redundant and nonrecurring costs associated with the Transition Services Agreement, (5) the loss related to senior living operations transferred to Ensign, (6) unusual or non-recurring charges, and ~~(5)~~(7) net ~~loss~~income attributable to noncontrolling interest. General and administrative expenses are not allocated to the reportable segments, and are included as “All Other”, accordingly the segment earnings measure reported is before allocation of corporate general and administrative expenses. The Company's segment measures may be different from the calculation methods used by other companies and, therefore, comparability may be limited.
(b)						Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
(c)						Share-based compensation expense and related payroll taxes incurred, ~~which is~~including the impact of the modification of certain restricted stock units described below in Note 12, Options and Awards, to the Interim Financial Statements. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative ~~expense.~~expense
(d)						~~Acquisition related~~Non-capitalizable costs ~~related to business combinations during~~associated with acquisitions and credit allowances for amounts in dispute with the ~~periods.~~prior owners of certain acquired operations.
(e)						~~A portion~~Costs identified as redundant or non-recurring incurred by the Company as a result of the Spin-off. The 2021 amounts represents part of the costs incurred under the Transition Services ~~Agreement identified as redundant or nonrecurring that~~Agreement. All amounts are included in general and administrative expense. Fees incurred under the Transition Services Agreement ~~net of~~were $231 and $1,332 for the ~~Company’s payroll reimbursement, were~~three and nine months ended September 30, 2022, and $706 and $2,441 for the three and nine months ended September 30, ~~2021,~~2021.
(f)						On January 27, 2022, affiliates of the Company, entered into certain operations transfer agreements (collectively, the “Transfer Agreements”) with affiliates of Ensign, providing for the transfer of the operations of certain senior living communities (the “Transaction”) from affiliates of the Company to affiliates of Ensign. The closing of the Transaction was completed in two phases with the transfer of two operations on March 1, 2022 and ~~$1,502~~the remainder transferred on April 1, 2022. The amount includes $6,500 for the nine months ended September 30, 2022 to cover post-closing capital expenditures and ~~$4,583~~operating losses related to one of the communities transferred on April 1, 2022. The amount above also includes $144 and $(422) for the three and nine months ended September 30, ~~2020, respectively. During~~2022, respectively, for the ~~fourth quarter~~related net impact on revenue and cost of ~~fiscal 2020, we updated our Transition~~ service ~~costs adjustment to include duplicate software costs. The prior year transition service costs adjustment has been recast to reflect the change. The adjustment~~attributable to the ~~prior year transition service costs was $113~~transferred entities. This amount excludes rent and ~~$333 for the duplicative software costs for the three~~depreciation and ~~nine months ended September 30, 2020 that were included in the 2020 full year amount in the Company’s as filed Form 10-K.~~amortization expense related to such operations.
~~(f)~~(g)						~~Beginning~~Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in the first quarter of fiscal year 2021, we updated our definition of Segment Adjusted EBITDAR to no longer include an adjustment for COVID-19 expenses offset by the amount of sequestration relief. COVID-19 expenses continue to be part of daily operations for which less specific identification is visible. Furthermore, the sequestration relief has been extended through December 31, 2021. Sequestration relief was $867general and ~~$2,685 for the three and nine months ended September 30, 2021, respectively.~~ The 2020 amounts represent incremental costs incurred as part of the Company's response to COVID-19 including direct medical supplies, labor, and other expenses, net of $1,121 and $1,675 in increased revenue related to the 2% payment increase in Medicare reimbursements for sequestration relief for the three and nine months ended September 30, 2020, respectively.administrative expenses.

~~Table of Contents~~

Performance and Valuation Measures:


		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,		Nine Months Ended September 30,
		2021		2020		2021		2020				2022		2021		2022		2021
		(In thousands)								(In thousands)
Consolidated Non-GAAP Financial Measures:	Consolidated Non-GAAP Financial Measures:										Consolidated Non-GAAP Financial Measures:
Performance Metrics	Performance Metrics										Performance Metrics
Consolidated EBITDA	Consolidated EBITDA	$	3,026	$	5,915	$	10,747	$	18,484		Consolidated EBITDA	$	8,214	$	3,026	$	9,595	$	10,747
Consolidated Adjusted EBITDA	Consolidated Adjusted EBITDA	$	6,495	$	8,684	$	21,415	$	27,619		Consolidated Adjusted EBITDA	$	7,895	$	6,495	$	21,648	$	21,415
Valuation Metric	Valuation Metric										Valuation Metric
Consolidated Adjusted EBITDAR	Consolidated Adjusted EBITDAR	$	16,732			$	51,574				Consolidated Adjusted EBITDAR	$	16,971			$	48,834


		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,		Nine Months Ended September 30,
		2021		2020		2021		2020				2022		2021		2022		2021
		(In thousands)								(In thousands)
Segment Non-GAAP Measures:(a)	Segment Non-GAAP Measures:(a)										Segment Non-GAAP Measures:(a)
Segment Adjusted EBITDA from Operations	Segment Adjusted EBITDA from Operations										Segment Adjusted EBITDA from Operations
Home health and hospice services	Home health and hospice services	$	13,194	$	12,702	$	39,836	$	32,158		Home health and hospice services	$	14,208	$	13,194	$	41,452	$	39,836
Senior living services	Senior living services	$	84	$	2,839	$	828	$	11,099		Senior living services	$	1,466	$	84	$	3,991	$	828


(a)						General and administrative expenses are not allocated to any segment for purposes of determining segment profit or loss.

3334

Table of Contents

The tables below reconcile Consolidated Net Income to the consolidated Non-GAAP financial measures, Consolidated EBITDA and Consolidated Adjusted EBITDA, and to the Non-GAAP valuation measure, Consolidated Adjusted EBITDAR, for the periods presented:


		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,		Nine Months Ended September 30,
		2021		2020		2021		2020				2022		2021		2022		2021
		(In thousands)								(In thousands)
Consolidated Net income	Consolidated Net income	$	1,121	$	4,407	$	4,503	$	11,724		Consolidated Net income	$	4,994	$	1,121	$	3,556	$	4,503
Less: Net loss attributable to noncontrolling interest		(124)		—		(342)		—
Less: Net income attributable to noncontrolling interest											Less: Net income attributable to noncontrolling interest	163		(124)		387		(342)
Add: Provision for income taxes	Add: Provision for income taxes	69		104		1,013		2,430			Add: Provision for income taxes	1,074		69		241		1,013
Interest expense, net	Interest expense, net	512		192		1,344		896			Interest expense, net	1,058		512		2,508		1,344
Depreciation and amortization	Depreciation and amortization	1,200		1,212		3,545		3,434			Depreciation and amortization	1,251		1,200		3,677		3,545
Consolidated EBITDA	Consolidated EBITDA	3,026		5,915		10,747		18,484			Consolidated EBITDA	8,214		3,026		9,595		10,747
Adjustments to Consolidated EBITDA	Adjustments to Consolidated EBITDA										Adjustments to Consolidated EBITDA
Add: Costs at start-up operations(a)	Add: Costs at start-up operations(a)	532		717		991		1,422			Add: Costs at start-up operations(a)	430		532		938		991
Share-based compensation expense(b)	Share-based compensation expense(b)	2,568		2,102		7,483		6,017			Share-based compensation expense(b)	(2,501)		2,568		2,319		7,483
Acquisition related costs(c)		36		—		73		—
Acquisition related costs and credit allowances(c)											Acquisition related costs and credit allowances(c)	1,000		36		1,014		73

Transition services costs(d)	Transition services costs(d)	236		209		1,825		746			Transition services costs(d)	—		236		77		1,825
Net COVID-19 related costs(e)		—		(307)		—		853
Rent related to item (a) above		97		48		296		97
Loss related to senior living operations transferred to Ensign(e)											Loss related to senior living operations transferred to Ensign(e)	144		—		6,078		—
Unusual or non-recurring charges(f)											Unusual or non-recurring charges(f)	293		—		293		—
Rent related to items (a) and (e) above											Rent related to items (a) and (e) above	315		97		1,334		296
Consolidated Adjusted EBITDA	Consolidated Adjusted EBITDA	6,495		8,684		21,415		27,619			Consolidated Adjusted EBITDA	7,895		6,495		21,648		21,415
Rent—cost of services	Rent—cost of services	10,334		9,721		30,455		29,194			Rent—cost of services	9,391		10,334		28,520		30,455
Rent related to item (a) above		(97)		(48)		(296)		(97)
Rent related to items (a) and (e) above											Rent related to items (a) and (e) above	(315)		(97)		(1,334)		(296)
Adjusted rent—cost of services	Adjusted rent—cost of services	10,237		9,673		30,159		29,097			Adjusted rent—cost of services	9,076		10,237		27,186		30,159
Consolidated Adjusted EBITDAR	Consolidated Adjusted EBITDAR	$	16,732			$	51,574				Consolidated Adjusted EBITDAR	$	16,971			$	48,834


(a)						Represents results related to start-up operations. This amount excludes rent and depreciation and amortization expense related to such operations.
(b)						Share-based compensation expense and related payroll taxes incurred, ~~which is~~including the impact of the modification of certain restricted stock units described below in Note 12, Options and Awards, to the Interim Financial Statements. Share-based compensation expense and related payroll taxes are included in cost of services and general and administrative ~~expense.~~expense
(c)						~~Acquisition related~~Non-capitalizable costs ~~related to business combinations during~~associated with acquisitions and credit allowances for amounts in dispute with the ~~periods.~~prior owners of certain acquired operations.
(d)						~~A portion~~Costs identified as redundant or non-recurring incurred by the Company as a result of the Spin-off. The 2021 amounts represents part of the costs incurred under the Transition Services ~~Agreement identified as redundant or nonrecurring that~~Agreement. All amounts are included in general and administrative expense. Fees incurred under the Transition Services Agreement ~~net of~~were $231 and $1,332 for the ~~Company’s payroll reimbursement, were~~three and nine months ended September 30, 2022, and $706 and $2,441 for the three and nine months ended September 30, ~~2021,~~2021.
(e)						On January 27, 2022, affiliates of the Company, entered into certain operations transfer agreements (collectively, the “Transfer Agreements”) with affiliates of Ensign, providing for the transfer of the operations of certain senior living communities (the “Transaction”) from affiliates of the Company to affiliates of Ensign. The closing of the Transaction was completed in two phases with the transfer of two operations on March 1, 2022 and ~~$1,502~~the remainder transferred on April 1, 2022. The amount includes $6,500 for the nine months ended September 30, 2022 to cover post-closing capital expenditures and ~~$4,583~~operating losses related to one of the communities transferred on April 1, 2022. The amount above also includes $144 and $(422) for the three and nine months ended September 30, ~~2020, respectively. During~~2022, respectively, for the ~~fourth quarter~~related net impact on revenue and cost of ~~fiscal 2020, we updated our Transition~~ service ~~costs adjustment to include duplicate software costs. The prior year transition service costs adjustment has been recast to reflect the change. The adjustment~~attributable to the ~~prior year transition service costs was $113~~transferred entities. This amount excludes rent and ~~$333 for the duplicative software costs for the three~~depreciation and ~~nine months ended September 30, 2020 that were included in the 2020 full year amount in the Company’s as filed Form 10-K.~~amortization expense related to such operations.
~~(e)~~(f)						~~Beginning~~Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in the first quarter of fiscal year 2021, we updated our definition of Segment Adjusted EBITDAR to no longer include an adjustment for COVID-19 expenses offset by the amount of sequestration relief. COVID-19 expenses continue to be part of daily operations for which less specific identification is visible. Furthermore, the sequestration relief has been extended through December 31, 2021. Sequestration relief was $867general and ~~$2,685 for the three and nine months ended September 30, 2021, respectively.~~ The 2020 amounts represent incremental costs incurred as part of the Company's response to COVID-19 including direct medical supplies, labor, and other expenses, net of $1,121 and $1,675 in increased revenue related to the 2% payment increase in Medicare reimbursements for sequestration relief for the three and nine months ended September 30, 2020, respectively.administrative expenses.

Table of Contents

The tables below reconcile Segment Adjusted EBITDAR from Operations to Segment Adjusted EBITDA from Operations for the periods presented:


		Three Months Ended September 30,									Three Months Ended September 30,
		Home Health and Hospice				Senior Living					Home Health and Hospice				Senior Living
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands)									(In thousands)
Segment Adjusted EBITDAR from Operations	Segment Adjusted EBITDAR from Operations	$	14,409	$	13,530	$	9,106	$	11,684	Segment Adjusted EBITDAR from Operations	$	15,380	$	14,409	$	9,370	$	9,106
Less: Rent—cost of services	Less: Rent—cost of services	1,282		846		9,052		8,875		Less: Rent—cost of services	1,262		1,282		8,129		9,052
Rent related to start-up operations		(67)		(18)		(30)		(30)
Rent related to start-up and transferred operations										Rent related to start-up and transferred operations	(90)		(67)		(225)		(30)
Segment Adjusted EBITDA from Operations	Segment Adjusted EBITDA from Operations	$	13,194	$	12,702	$	84	$	2,839	Segment Adjusted EBITDA from Operations	$	14,208	$	13,194	$	1,466	$	84


		Nine Months Ended September 30,							Nine Months Ended September 30,
		Home Health and Hospice				Senior Living			Home Health and Hospice			Senior Living
		2021		2020			2021			2020				2022		2021		2022		2021
		(In thousands)							(In thousands)
Segment Adjusted EBITDAR from Operations	Segment Adjusted EBITDAR from Operations	$	43,131	$	34,681		$	27,692		$	37,673		Segment Adjusted EBITDAR from Operations	$	45,056	$	43,131	$	27,573	$	27,692
Less: Rent—cost of services	Less: Rent—cost of services	3,611		2,570			26,844			26,624			Less: Rent—cost of services	3,765		3,611		24,755		26,844
Rent related to start-up operations		(316)		(47)			20			(50)
Rent related to start-up and transferred operations													Rent related to start-up and transferred operations	(161)		(316)		(1,173)		20
Segment Adjusted EBITDA from Operations	Segment Adjusted EBITDA from Operations	$	39,836	$	32,158		$	828		$	11,099		Segment Adjusted EBITDA from Operations	$	41,452	$	39,836	$	3,991	$	828

The following discussion includes references to certain performance and valuation measures, which are non-GAAP financial measures, including Consolidated EBITDA, Consolidated Adjusted EBITDA, Segment Adjusted EBITDA from Operations, and Consolidated Adjusted EBITDAR (collectively, “Non-GAAP Financial Measures”). Non-GAAP Financial Measures are used in addition to, and in conjunction with, results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. Non-GAAP Financial Measures reflect an additional way of viewing aspects of our operations and company that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, we believe can provide a more comprehensive understanding of factors and trends affecting our business.

We believe these Non-GAAP Financial Measures are useful to investors and other external users of our financial statements regarding our results of operations because:

•they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall performance of companies in our industry without regard to items such as interest expense, rent expense and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, the method by which assets were acquired, and differences in capital structures;

•they help investors evaluate and compare the results of our operations from period to period by removing the impact of our asset base and capital structure from our operating results; and

•Consolidated Adjusted EBITDAR is used by investors and analysts in our industry to value the companies in our industry without regard to capital structures.

We use Non-GAAP Financial Measures:

•as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis from period to period;

•to allocate resources to enhance the financial performance of our business;

•to assess the value of a potential acquisition;

•to assess the value of a transformed operation’s performance;

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•to evaluate the effectiveness of our operational strategies; and

•to compare our operating performance to that of our competitors.

We typically use Non-GAAP Financial Measures to compare the operating performance of each operation from period to period. We find that Non-GAAP Financial Measures are useful for this purpose because they do not include such costs as interest expense, income taxes, depreciation and amortization expense, which may vary from period-to-period depending upon various factors, including the method used to finance operations, the date of acquisition of a community or business, and the tax law of the state in which a business unit operates.

We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of Consolidated Adjusted EBITDAR targets.

Non-GAAP Financial Measures have no standardized meaning defined by GAAP. Therefore, our Non-GAAP Financial Measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP. Some of these limitations are:

•they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;

•they do not reflect changes in, or cash requirements for, our working capital needs;

•they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

•in the case of Consolidated Adjusted EBITDAR, it does not reflect rent expenses, which are normal and recurring operating expenses that are necessary to operate our leased operations;

•they do not reflect any income tax payments we may be required to make;

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and do not reflect any cash requirements for such replacements; and

•other companies in our industry may calculate the same Non-GAAP Financial Measures differently than we do, which may limit their usefulness as comparative measures.

We compensate for these limitations by using Non-GAAP Financial Measures only to supplement net income on a basis prepared in accordance with GAAP in order to provide a more complete understanding of the factors and trends affecting our business.

We strongly encourage investors to review the Interim Financial Statements, included in this Quarterly Report in their entirety and to not rely on any single financial measure. Because these Non-GAAP Financial Measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. These Non-GAAP Financial Measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP. We strongly urge you to review the reconciliation of income from operations to the Non-GAAP Financial Measures in the table presented above, along with the Interim Financial Statements and related notes included elsewhere in this Quarterly Report.

We believe the following Non-GAAP Financial Measures are useful to investors as key operating performance measures and valuation measures:

Performance Measures:

Consolidated EBITDA

We believe Consolidated EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our asset base (depreciation and amortization expense) from our operating results.

We calculate Consolidated EBITDA as net income, adjusted for net income ~~(loss)~~ attributable to noncontrolling interest prior to the Spin-Off, before (a) interest expense (b) provision for income taxes and (c) depreciation and amortization.

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Consolidated Adjusted EBITDA

We adjust Consolidated EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance. We believe that the presentation of Consolidated Adjusted EBITDA, when considered with Consolidated EBITDA and GAAP net income is beneficial to an investor’s complete understanding of our operating performance.

We calculate Consolidated Adjusted EBITDA by adjusting Consolidated EBITDA to exclude the effects of non-core business items, which for the reported periods includes, to the extent applicable:

•costs at start-up operations;

•share-based compensation expense;

•acquisition related ~~costs;~~

•~~Spin-Off related transaction costs;~~costs and credit allowances;

•redundant or nonrecurring costs incurred as part of the Transition Services Agreement~~(as defined in Note 3,~~ ;

•~~Related Party Transactions~~loss related to senior living operations and assets transferred to Ensign; ).and

•unusual or non-recurring.

Segment Adjusted EBITDA from Operations

We calculate Segment Adjusted EBITDA from Operations by adjusting Segment Adjusted EBITDAR from Operations to include rent-cost of services. We believe that the inclusion of rent-cost of services provides useful supplemental information to investors regarding our ongoing operating performance for each segment.

Valuation Measure:

Consolidated Adjusted EBITDAR

We use Consolidated Adjusted EBITDAR as one measure in determining the value of prospective acquisitions. It is also a measure commonly used by us, research analysts and investors to compare the enterprise value of different companies in the healthcare industry, without regard to differences in capital structures. Additionally, we believe the use of Consolidated Adjusted EBITDAR allows us, research analysts and investors to compare operational results of companies with operating and finance leases. A significant portion of finance lease expenditures are recorded in interest, whereas operating lease expenditures are recorded in rent expense.

This measure is not displayed as a performance measure as it excludes rent expense, which is a normal and recurring operating expense and, as such, does not reflect our cash requirements for leasing commitments. Our presentation of Consolidated Adjusted EBITDAR should not be construed as a financial performance measure.

The adjustments made and previously described in the computation of Consolidated Adjusted EBITDA are also made when computing Consolidated Adjusted EBITDAR. We calculate Consolidated Adjusted EBITDAR by excluding rent-cost of services and rent related to start up operations from Consolidated Adjusted EBITDA.

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Three Months Ended September 30, ~~2021~~2022 Compared to the Three Months Ended September 30, ~~2020~~2021

Revenue


		Three Months Ended September 30,									Three Months Ended September 30,
		2021				2020					2022				2021
		Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage			Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage
		(In thousands)									(In thousands)
Home health and hospice services	Home health and hospice services									Home health and hospice services
Home health	Home health	$	34,228	30.6	%	$	25,162	25.5	%	Home health	$	39,873	33.8	%	$	34,228	30.6	%
Hospice	Hospice	39,069		34.9		33,440		34.0		Hospice	40,522		34.2		39,069		34.9
Home care and other(a)	Home care and other(a)	5,706		5.1		5,777		5.9		Home care and other(a)	5,384		4.5		5,706		5.1
Total home health and hospice services	Total home health and hospice services	79,003		70.6		64,379		65.4		Total home health and hospice services	85,779		72.5		79,003		70.6
Senior living services	Senior living services	32,918		29.4		34,018		34.6		Senior living services	32,571		27.5		32,918		29.4
Total revenue	Total revenue	$	111,921	100.0	%	$	98,397	100.0	%	Total revenue	$	118,350	100.0	%	$	111,921	100.0	%


(a)						Home care and other revenue is included with home health revenue in other disclosures in this Quarterly Report.

Our total revenue increased ~~$13.5~~$6.4 million, or ~~13.7%~~5.7% during the three months ended September 30, ~~2021. Quarter-to-date revenue from acquired operations between September 30, 2020 and September 30, 2021 resulted in adding $10.5 million or 10.6%.~~2022. We experienced growth of ~~$4.1~~$6.8 million from increased operational performance in our Home Health and Hospice segment as detailed below. The growth in Home Health and Hospice segment revenue was offset by a decrease in Senior Living segment revenue of ~~$1.1~~$0.3 million driven primarily by ~~a decrease in occupancy.~~the transfer of senior living communities to Ensign on March 1, 2022 and April 1, 2022.

Home Health and Hospice Services


		Three Months Ended September 30,									Three Months Ended September 30,
		2021		2020		Change		% Change			2022		2021		Change		% Change
		(In thousands)									(In thousands)
Home health and hospice revenue	Home health and hospice revenue									Home health and hospice revenue
Home health services	Home health services	$	34,228	$	25,162	$	9,066	36.0	%	Home health services	$	39,873	$	34,228	$	5,645	16.5	%
Hospice services	Hospice services	39,069		33,440		5,629		16.8		Hospice services	40,522		39,069		1,453		3.7
Home care and other	Home care and other	5,706		5,777		(71)		(1.2)		Home care and other	5,384		5,706		(322)		(5.6)
Total home health and hospice revenue	Total home health and hospice revenue	$	79,003	$	64,379	$	14,624	22.7	%	Total home health and hospice revenue	$	85,779	$	79,003	$	6,776	8.6	%

		Three Months Ended September 30,									Three Months Ended September 30,
		2021		2020		Change		% Change			2022		2021		Change		% Change
Home health services:	Home health services:									Home health services:
Total home health admissions	Total home health admissions	9,213		6,771		2,442		36.1	%	Total home health admissions	10,152		9,213		939		10.2	%
Total Medicare home health admissions	Total Medicare home health admissions	4,211		3,418		793		23.2		Total Medicare home health admissions	4,637		4,211		426		10.1
Average Medicare revenue per 60-day completed episode	Average Medicare revenue per 60-day completed episode	$	3,404	$	3,448	$	(44)	(1.3)		Average Medicare revenue per 60-day completed episode	$	3,589	$	3,388	$	201	5.9
Hospice services:	Hospice services:									Hospice services:
Total hospice admissions	Total hospice admissions	2,219		2,133		86		4.0		Total hospice admissions	2,392		2,219		173		7.8
Average daily census	Average daily census	2,337		2,177		160		7.3		Average daily census	2,293		2,337		(44)		(1.9)
Hospice Medicare revenue per day	Hospice Medicare revenue per day	$	174	$	164	$	10	6.1		Hospice Medicare revenue per day	$	176	$	174	$	2	1.1
Number of home health and hospice agencies at period end	Number of home health and hospice agencies at period end	88		72		16		22.2		Number of home health and hospice agencies at period end	94		88		6		6.8

Home health and hospice revenue increased ~~$14.6~~$6.8 million, or ~~22.7%~~8.6%. Revenue grew due to an increase in certain key performance indicators including, an increase of ~~36.1% in total home health admissions, an increase of 23.2%~~10.1% in Medicare home health admissions, an increase ~~of 7.3%~~ in total hospice ~~average daily census, and an increase of 6.1% in hospice Medicare~~

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admissions of 7.8%, and an increase of 1.1% in hospice Medicare revenue per day, during the three months ended September 30, ~~2021~~2022 in comparison to the prior year’s quarter. Included in the key performance indicators, growth was partially driven by the addition of sixteen home health, hospice and home care operations between September 30, 2020 and September 30, 2021, adding $10.5 million or 16.2% in revenue, as well as additional revenue of $0.9 million due to the sequestration suspension in the current year.

Senior Living Services


		Three Months Ended September 30,												Three Months Ended September 30,
		2021			2020			Change			% Change			2022			2021			Change			% Change

Revenue (in thousands)	Revenue (in thousands)	$	32,918		$	34,018		$	(1,100)		(3.2)	%	Revenue (in thousands)	$	32,571		$	32,918		$	(347)		(1.1)	%
Number of communities at period end	Number of communities at period end	54			54			—			—		Number of communities at period end	49			54			(5)			(9.3)
Occupancy	Occupancy	73.7		%	76.8		%	(3.1)		%			Occupancy	76.5		%	73.7		%	2.8		%
Average monthly revenue per occupied unit	Average monthly revenue per occupied unit	$	3,174		$	3,173		$	1		—		Average monthly revenue per occupied unit	$	3,560		$	3,174		$	386		12.2

Senior living revenue decreased ~~$1.1~~$0.3 million, or ~~3.2%~~1.1%, for the three months ended September 30, ~~2021~~2022 compared to the same period in the prior year due primarily to the loss revenue from senior living communities transferred to Ensign, offset by occupancy growth of 2.8% and a ~~3.1% decrease~~12.2% increase in ~~occupancy~~average monthly revenue per occupied unit between September 30, ~~2020~~2021 and September 30, ~~2021.~~2022. Occupancy includes the most recently acquired senior living operation; occupancy excluding that community would have been 77.6% for the three months ended September 30, 2022.

Cost of Services

The following table sets forth total cost of services by each of our reportable segments for the periods indicated:

Three Months Ended September 30,
2021 2020 Change % Change
(In thousands)
Home Health and Hospice $ 65,606 $ 52,594 $ 13,012 24.7 %
Senior Living 24,013 22,892 1,121 4.9
Total cost of services $ 89,619 $ 75,486 $ 14,133 18.7 %


	Three Months Ended September 30,
	2022		2021		Change		% Change
	(In thousands)
Home Health and Hospice	$	71,112	$	65,606	$	5,506	8.4	%
Senior Living	23,568		24,013		(445)		(1.9)
Total cost of services	$	94,680	$	89,619	$	5,061	5.6	%

Total consolidated cost of services increased ~~$14.1~~$5.1 million or ~~18.7%~~5.6% for the three months ended September 30, ~~2021~~2022 when compared to the three months ended September 30, ~~2020.~~2021. Cost of services as a percentage of revenue ~~increased~~decreased by ~~3.4%~~0.1% from ~~76.7%~~80.1% to ~~80.1%~~80.0% for the three months ended September 30, ~~2021~~2022 when compared to the three months ended September 30, ~~2020.~~2021.

Home Health and Hospice Services

Three Months Ended September 30,
2021 2020 Change % Change
(In thousands)
Cost of service $ 65,606 $ 52,594 $ 13,012 24.7 %
Cost of services as a percentage of revenue 83.0 % 81.7 % 1.3 %


	Three Months Ended September 30,
	2022			2021			Change			% Change
	(In thousands)
Cost of service	$	71,112		$	65,606		$	5,506		8.4	%
Cost of services as a percentage of revenue	82.9		%	83.0		%	(0.1)		%

Cost of services related to our Home Health and Hospice services segment increased ~~$13.0~~$5.5 million, or ~~24.7%~~8.4%, primarily due to increased volume of services ~~provided and increased labor costs.~~provided. Cost of services as a percentage of revenue for the three months ended September 30, ~~2021 increased 1.3%~~2022 decreased 0.1% from ~~81.7%~~83.0% to ~~83.0%~~82.9% for the three months ended September 30, ~~2021~~2022 when compared to the three months ended September 30, ~~2020. Wage~~2021, primarily due to reduced insurance costs offset by increased ~~over the prior year from increases in per hour~~ wages and ~~overtime due to the staffing environment, resulting in higher overtime and per hour wages.~~purchased services.

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Senior Living Services

Three Months Ended September 30,
2021 2020 Change % Change
(In thousands)
Cost of service $ 24,013 $ 22,892 $ 1,121 4.9 %
Cost of services as a percentage of revenue 72.9 % 67.3 % 5.6 %


	Three Months Ended September 30,
	2022			2021			Change			% Change
	(In thousands)
Cost of service	$	23,568		$	24,013		$	(445)		(1.9)	%
Cost of services as a percentage of revenue	72.4		%	72.9		%	(0.5)		%

Cost of services related to our Senior Living services segment ~~increased $1.1~~decreased $0.4 million, or ~~4.9%~~1.9%. As a percentage of revenue, costs of service ~~increased~~decreased by ~~5.6%~~0.5% from ~~67.3%~~72.9% to ~~72.9%~~72.4% for the three months ended September 30, ~~2021~~2022 when compared to the three months ended September 30, ~~2020,~~2021, due primarily ~~as a result of a decrease in occupancy while experiencing increased wage pressures. Fixed costs have remained consistent with prior periods.~~to decreased wages and insurance expenses.

Rent—Cost of Services. Rent expense ~~increased 6.3%~~decreased 9.1% from ~~$9.7~~$10.3 million to ~~$10.3~~$9.4 million in the three months ended September 30, ~~2021~~2022 compared to the three months ended September 30, ~~2020,~~2021, primarily as a result of ~~acquisitions and CPI adjustments.~~the transfer of senior living communities to Ensign. Rent as a percentage of total revenue decreased ~~0.7%~~1.3% from ~~9.9%~~9.2% to ~~9.2% in~~7.9% for the three months ended September 30, ~~2021~~2022 compared to the three months ended September 30, ~~2020.~~2021.

General and Administrative Expense. Our general and administrative expense ~~increased $1.6~~decreased $3.2 million or ~~20.9%~~35.2% from ~~$7.5~~$9.1 million to ~~$9.1~~$5.9 million for the three months ended September 30, ~~2021~~2022 when compared to the three months ended September 30, ~~2020.~~2021. General and administrative expense as a percentage of revenue ~~increased 0.5%~~decreased 3.1% from ~~7.6%~~8.1% to ~~8.1%~~5.0%. The primary driver of the ~~increase~~decrease in general and administrative expense was ~~an increase~~the decrease in share-based compensation of ~~$1.5~~$5.2 million due primarily to the modification of certain outstanding RSUs granted in ~~wage~~connection with the spin-off as described above in Note 12, Options and ~~benefits related~~ Awards to ~~increased headcount~~the Interim Financial Statements included elsewhere in this Quarterly Report, during the three months ended September 30, ~~2021~~2022 when compared to the three months ended September 30, ~~2020.~~2021. Increases in wages and information systems costs offset the decrease from share-based compensation.

Depreciation and Amortization. Depreciation and amortization expense ~~decreased slightly~~was essentially flat as a percentage of total revenue. The impact of increased capital expenditures on depreciation was offset by the prior year impairment of assets that were transferred to Ensign during the current year.

Provision for Income Taxes. ~~Our effective~~We recorded income tax ~~rate~~expense of $1.1 million and $0.1 million or 17.7% and 5.8% of earnings before income taxes for the three months ended September 30, 2022 and 2021, ~~was 5.8% of earnings before income taxes compared with an effective~~respectively. The increase in tax ~~rate of 2.3% for the three months ended September 30, 2020. SeeNote 14, Income Taxes~~,is primarily due to ~~the Interim Financial Statements included elsewhere in this Quarterly Report for further discussion.~~less excess tax benefits on equity compensation.

Nine Months Ended September 30, ~~2021~~2022 Compared to the Nine Months Ended September 30, ~~2020~~2021

Revenue
Nine Months Ended September 30,
2021 2020
Revenue Dollars Revenue Percentage Revenue Dollars Revenue Percentage
(In thousands)
Home health and hospice services
Home health $ 102,719 31.3 % $ 67,430 23.8 %
Hospice 112,821 34.4 96,503 34.1
Home care and other(a)
16,175 5.0 15,192 5.4
Total home health and hospice services 231,715 70.7 179,125 63.3
Senior living services 96,214 29.3 103,861 36.7
Total revenue $ 327,929 100.0 % $ 282,986 100.0 %


	Nine Months Ended September 30,
	2022				2021
	Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage
	(In thousands)
Home health and hospice services
Home health	$	117,962	33.8	%	$	102,719	31.3	%
Hospice	117,704		33.8		112,821		34.4
Home care and other(a)	15,932		4.6		16,175		5.0
Total home health and hospice services	251,598		72.2		231,715		70.7
Senior living services	96,978		27.8		96,214		29.3
Total revenue	$	348,576	100.0	%	$	327,929	100.0	%


(a)						Home care and other revenue is included with home health revenue in other disclosures in this Quarterly Report.

Our total revenue increased $44.9 million, or 15.9% during the nine months ended September 30, 2021. This increase was primarily the result of revenue from acquired home health and hospice operations of $29.6 million or 10.4% since September 30, 2020. The remaining increase in revenue were driven by growth from operational performance in our home health and hospice segment, offset by a decrease of $7.6 million in our senior living segment.

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Our total revenue increased $20.6 million, or 6.3%, during the nine months ended September 30, 2022. The increase in revenue was driven by increases in all key home health metrics, hospice admissions, hospice revenue per day, senior living occupancy, and senior living revenue per occupied room, partially offset by a decrease in hospice average daily census.

Home Health and Hospice Services

Nine Months Ended September 30,
2021 2020 Change % Change
(In thousands)
Home health and hospice revenue
Home health services $ 102,719 $ 67,430 $ 35,289 52.3 %
Hospice services 112,821 96,503 16,318 16.9
Home care and other 16,175 15,192 983 6.5
Total home health and hospice revenue $ 231,715 $ 179,125 $ 52,590 29.4 %
Nine Months Ended September 30,
2021 2020 Change % Change
Home health services:
Total home health admissions 28,079 18,166 9,913 54.6 %
Total Medicare home health admissions 13,115 8,686 4,429 51.0
Average Medicare revenue per 60-day completed episode $ 3,382 $ 3,311 $ 71 2.1
Hospice services:
Total hospice admissions 6,420 5,763 657 11.4
Average daily census 2,313 1,934 379 19.6
Hospice Medicare revenue per day $ 173 $ 164 $ 9 5.5
Number of home health and hospice agencies at period end 88 72 16 22.2


	Nine Months Ended September 30,
	2022		2021		Change		% Change
	(In thousands)
Home health and hospice revenue
Home health services	$	117,962	$	102,719	$	15,243	14.8	%
Hospice services	117,704		112,821		4,883		4.3
Home care and other	15,932		16,175		(243)		(1.5)
Total home health and hospice revenue	$	251,598	$	231,715	$	19,883	8.6	%

	Nine Months Ended September 30,
	2022		2021		Change		% Change
Home health services:
Total home health admissions	30,389		28,079		2,310		8.2	%
Total Medicare home health admissions	13,952		13,115		837		6.4
Average Medicare revenue per 60-day completed episode(a)	$	3,548	$	3,383	$	165	4.9
Hospice services:
Total hospice admissions	6,920		6,420		500		7.8
Average daily census	2,270		2,313		(43)		(1.9)
Hospice Medicare revenue per day	$	177	$	173	$	4	2.3
Number of home health and hospice agencies at period end	94		88		6		6.8


(a)						The year to date average for Medicare revenue per 60-day completed episode includes post period claim adjustments for prior periods.

Home health and hospice revenue increased ~~$52.6~~$19.9 million, or ~~29.4%~~8.6% during the nine months ended September 30, ~~2021.~~2022. Revenue grew primarily due to an increase in total hospice admissions of ~~54.6%~~7.8%, an increase of 8.2% in home health admissions, ~~(inclusive~~inclusive of an increase in total Medicare home health admissions of ~~51.0%)~~6.4%, ~~an increase~~offset by a decrease of ~~11.4% in total hospice admissions, and an increase of 19.6%~~1.9% in hospice average daily census during the nine months ended September 30, ~~2021~~2022 when compared to the nine months ended September 30, 2020. Growth occurred from the addition of $29.6 million in revenue from the acquisition of sixteen home health, hospice and home care operations from September 30, 2020 through September 30, 2021, as well as growth due to an increase in operational performance metrics compared to the prior year.2021.

Senior Living Services

Nine Months Ended September 30,
2021 2020 Change % Change
Revenue (in thousands) $ 96,214 $ 103,861 $ (7,647) (7.4) %
Number of communities at period end 54 54 — —
Occupancy 72.8 % 78.5 % (5.7) %
Average monthly revenue per occupied unit $ 3,179 $ 3,195 $ (16) (0.5)


	Nine Months Ended September 30,
	2022			2021			Change			% Change

Revenue (in thousands)	$	96,978		$	96,214		$	764		0.8	%
Number of communities at period end	49			54			(5)			(9.3)
Occupancy	75.1		%	72.8		%	2.3		%
Average monthly revenue per occupied unit	$	3,465		$	3,179		$	286		9.0

Senior living revenue ~~decreased $7.6~~increased $0.8 million, or ~~7.4%~~0.8%, for the nine months ended September 30, ~~2021~~2022 compared to the same period in the prior year primarily due to ~~a 5.7% decrease~~an increase of 9.0% in average monthly revenue per occupied unit and an addition of 2.3% in the occupancy ~~in occupancy~~rate between September 30, ~~2020~~2021 and September 30, ~~2021.~~2022. The increases were offset by the loss of revenue from the senior living communities transferred to Ensign. O

ccupancy includes the most recently acquired

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senior living operation; occupancy excluding that community would have been 75.4% for the nine months ended September 30, 2022.

Cost of Services


		Nine Months Ended September 30,									Nine Months Ended September 30,
		2021		2020		Change		% Change			2022		2021		Change		% Change
		(In thousands)									(In thousands)
Home Health and Hospice	Home Health and Hospice	$	191,200	$	146,093	$	45,107	30.9	%	Home Health and Hospice	$	208,345	$	191,200	$	17,145	9.0	%
Senior Living	Senior Living	68,708		67,741		967		1.4		Senior Living	69,313		68,708		605		0.9
Total cost of services	Total cost of services	$	259,908	$	213,834	$	46,074	21.5	%	Total cost of services	$	277,658	$	259,908	$	17,750	6.8	%

Consolidated cost of services increased ~~$46.1~~$17.8 million or ~~21.5%~~6.8% during the nine months ended September 30, ~~2021.~~2022. Cost of services as a percentage of revenue for the nine months ended September 30, ~~2021~~2022 increased by ~~3.7%~~0.4% to ~~79.3%~~79.7% from ~~75.6%~~79.3% compared to the nine months ended September 30, ~~2020.~~2021.

Home Health and Hospice Services


		Nine Months Ended September 30,												Nine Months Ended September 30,
		2021			2020			Change			% Change			2022			2021			Change			% Change
Cost of service (in thousands)	Cost of service (in thousands)	$	191,200		$	146,093		$	45,107		30.9	%	Cost of service (in thousands)	$	208,345		$	191,200		$	17,145		9.0	%
Cost of services as a percentage of revenue	Cost of services as a percentage of revenue	82.5		%	81.6		%	0.9		%			Cost of services as a percentage of revenue	82.8		%	82.5		%	0.3		%

Cost of services related to our Home Health and Hospice services segment increased ~~$45.1~~$17.1 million, or ~~30.9%~~9.0%, primarily due to the increased volume of ~~services from acquisitions and organic growth.~~services. Cost of services as a percentage of revenue for the nine months ended September 30, ~~2021~~2022 increased ~~0.9%~~by 0.3% compared to the nine months ended September 30, ~~2020. Wage costs increased over the prior year in per hour wages and overtime~~2021 primarily due to ~~the staffing environment, resulting in higher overtime and per hour wages.~~increased wage rates.

Senior Living Services

Nine Months Ended September 30,
2021 2020 Change % Change
Cost of service (in thousands) $ 68,708 $ 67,741 $ 967 1.4 %
Cost of services as a percentage of revenue 71.4 % 65.2 % 6.2 %


	Nine Months Ended September 30,
	2022			2021			Change			% Change
Cost of service (in thousands)	$	69,313		$	68,708		$	605		0.9	%
Cost of services as a percentage of revenue	71.5		%	71.4		%	0.1		%

Cost of services related to our Senior Living services segment increased ~~$1.0~~$0.6 million, or ~~1.4%~~0.9% during the nine months ended September 30, ~~2021.~~2022 in response to higher occupancy and wage rate increases. As a percentage of revenue, costs of service increased by ~~6.2%~~0.1% from ~~65.2%~~71.4% to ~~71.4%~~71.5% during the nine months ended September 30, ~~2021~~2022 when compared to the nine months ended September 30, ~~2020, as a result of a decrease in occupancy while experiencing higher~~2021, due primarily to increased wage ~~costs. Fixed costs remained consistent with the prior year.~~rates.

Rent—Cost of Services. Rent ~~increased 4.3%~~decreased 6.4% from ~~$29.2~~$30.5 million to ~~$30.5~~$28.5 million in the nine months ended September 30, ~~2021~~2022 compared to the same period in the prior year, primarily as a result of ~~acquisitions and CPI adjustments.~~the transfer of senior living communities to Ensign. As a percentage of revenue, rent—cost of services decreased ~~1.0%~~1.1% when compared to the nine months ended September 30, ~~2020.~~2021.

General and Administrative Expense. Our general and administrative expense ~~increased $5.4~~decreased $1.4 million or ~~25.1%~~5.5% from ~~$21.7~~$27.1 million to ~~$27.1~~$25.7 million for the nine months ended September 30, ~~2021~~2022 when compared to the nine months ended September 30, ~~2020.~~2021. The ~~increase~~decrease in general and administrative expense was ~~primarily~~ due to ~~an increase~~a decrease of ~~$4.2~~$5.5 million in ~~wage and benefits during the nine months ended September 30, 2021 when compared~~share-based compensation, primarily in relation to the ~~nine months ended September 30, 2020.~~modification of certain outstanding RSUs granted in connection with the spin-off as described above in Note 12,

~~Depreciation~~Options and ~~Amortization.~~Awards ~~Depreciation and amortization expense decreased slightly as a percentage of total revenue.~~

~~Provision for Income Taxes~~. Our effective tax rate for the nine months ended September 30, 2021 was 18.4% of earnings before income taxes compared with an effective tax rate of 17.2% for the nine months ended September 30, 2020. The

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~~increase in the effective tax rate was due to an increase in non-deductible expenses including non-deductible compensation. SeeNote 14, Income Taxes~~, to the Interim Financial Statements included elsewhere in this Quarterly Report and a for ~~further discussion.~~the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021. Increases in wages and information systems costs offset the decrease from share-based compensation.

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Depreciation and Amortization.Depreciation and amortization expense increased slightly as a percentage of total revenue due the impairment of assets at December 31, 2021 that were transferred to Ensign on March 1, 2022 and April 1, 2022, during the nine months ended September 30, 2022

Loss on asset dispositions and impairment, net. Loss on asset dispositions and impairment, net includes a transaction fee of $6.5 million for post-closing capital expenditures and operating losses related to one of the communities transferred to Ensign as well as asset impairment for the nine months ended September 30, 2022.

Provision for Income Taxes. We recorded income tax expense of $0.2 million and $1.0 million or 6.3% and 18.4% of earnings before income taxes for the nine months ended September 30, 2022 and 2021, respectively. The decrease in tax is primarily due to less non-deductible equity compensation and tax benefit related to the Transfer Agreements with Ensign.

Liquidity and Capital Resources

Our primary sources of liquidity are net cash provided by operating activities and borrowings under our revolving credit facility.

Revolving Credit Facility

The Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its independent 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. Financial covenants require compliance with certain levels of leverage ratios that impact the amount of interest. As of September 30, ~~2021,~~2022, the Company was compliant with all such financial covenants.

As of September 30, ~~2021,~~2022, we had ~~$3.7~~$3.0 million of cash and ~~$101.7~~$88.3 million of available borrowing capacity on our Revolving Credit Facility.

We believe that our existing cash, generated through operations and our access to financing facilities, together with funding through third-party sources such as commercial banks, will be sufficient to fund our operating activities and growth needs, and provide adequate liquidity for the next twelve months.

The following table presents selected data from our Condensed Consolidated Statement of Cash Flows for the periods presented:
Nine Months Ended September 30,
2021 2020
(In thousands)
Net cash (used in) provided by operating activities $ (13,065) $ 53,087
Net cash used in investing activities (18,066) (27,578)
Net cash provided by (used in) financing activities 34,795 (17,591)
Net increase in cash 3,664 7,918
Cash at beginning of year 43 402
Cash at end of year $ 3,707 $ 8,320


	Nine Months Ended September 30,
	2022		2021
	(In thousands)
Net cash provided by operating activities	$	12,974	$	(13,065)
Net cash used in investing activities	(20,176)		(18,066)
Net cash provided by financing activities	4,967		34,795
Net (decrease) increase in cash	(2,235)		3,664
Cash at beginning of period	5,190		43
Cash at end of period	$	2,955	$	3,707

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Nine Months Ended September 30, ~~2021~~2022 Compared to the Nine Months Ended September 30, ~~2020~~2021

Our net cash flow from operating activities for the nine months ended September 30, ~~2021 decreased~~2022 increased by ~~$66.2~~$26.0 million when compared to the nine months ended September 30, ~~2020.~~2021. The primary driver of this difference can be attributed to the ~~$42.6~~$8.4 million increase in cash flows from a reduction in accounts receivable and a $8.4 million increase in cash flow related to the final repayment of the AAP. Additionally, there was a $1.6 million increase in other accrued liabilities driven by our becoming self-insured for employee health, dental, and vision care in 2022, and a $5.9 million change in cash flows related to the ~~AAP. We received $28.0~~the reduction in wages payable. Other factors that contributed to the net cash provided by operating activities were an increase of $1.7 million in ~~AAP~~cash inflows from changes in ~~the nine months ended September 30, 2020, and CMS recouped $14.6 million of those funds during the nine months ended September 30, 2021.~~accounts payable. Exclusive of the repayment of AAP, our net cash flow from operations would have been ~~$1.6~~$19.2 million positive for the nine months ended September 30, 2021. Other factors that contributed to the net cash used in operating activities were a decrease of $7.2 million in net income, an increase of $3.8 million in prepaid expenses, and a decrease of $6.8 million in accrued wages when compared to the nine months ended September 30, 2020.2022.

Our net cash used in investing activities for the nine months ended September 30, ~~2021 decreased~~2022 increased by ~~$9.5~~$2.1 million compared to the nine months ended September 30, ~~2020,~~2021, primarily due to a decrease in cash payments paid for business acquisitions of ~~$3.5~~$3.9 million, offset by an increase of $6.3 million in capital expenditures

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~~combined with a decrease of $5.3 million in escrow deposits related to acquisitions that occurred~~ during the period from September 30, ~~2020~~2021 to September 30, ~~2021.~~2022.

Our net cash provided by financing activities ~~increased~~decreased by approximately ~~$52.4~~$29.8 million for the nine months ended September 30, ~~2021~~2022 compared to the nine months ended September 30, ~~2020. This increase~~2021. The decrease was primarily due to less borrowings and a reduction in deferred financing cost during the ~~financing of our acquisitions and~~nine months ended September 30, 2022 compared to the ~~recoupment of the AAP.~~nine months ended September 30, 2021.

Contractual Obligations, Commitments and Contingencies

Other than certain draws and payments made on our Revolving Credit Facility, as described in Note 11, Debt, to the Interim Financial Statements in Part I of this Quarterly Report, there have been no material changes to our total obligations during the period covered by this Quarterly Report outside of the normal course of our business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. We are exposed to risks associated with market changes in interest rates. Our Revolving Credit Facility exposes us to variability in interest payments due to changes in LIBOR. We manage our exposure to this market risk by monitoring available financing alternatives.

LIBOR Phase-Out. LIBOR is in the process of being wound down. The Overnight and the 1-, 3-, 6- and 12-Months USD LIBOR settings will continue until June 2023. We are required to pay interest on borrowings under our Credit Facility at floating rates based on the 1-month LIBOR and we do not expect to transition away from the LIBOR benchmark until June 2023.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no material changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our results of operations or financial condition. However, the results of such matters cannot be predicted with certainty and we cannot assure you that the ultimate resolution of any legal or administrative proceeding or dispute will not have a material adverse effect on our business, financial condition, results of operations and cash flows. See Note 15, Commitments and Contingencies, to the Interim Financial Statements for a description of claims and legal actions arising in the ordinary course of our business.

Item 1A. Risk Factors

We have disclosed under the heading “Risk Factors” in the ~~2020~~2021 Annual Report risk factors that materially affect our business, financial condition or results of operations. You should carefully consider the risk factors set forth in the ~~2020~~2021 Annual Report and the other information set forth elsewhere in this Quarterly Report. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Since the filing of our ~~2020~~2021 Annual Report on February ~~24, 2021,~~28, 2022, the following additions have been made to the risk factors previously disclosed.

~~Rules mandating COVID-19 vaccination may subject us~~A Medicare Overpayment Audit of one of our Independent Operating Subsidiary could result in a material loss. From June 2021 to ~~penalties~~May 2022, a UPIC suspended one of our independent operating subsidiary’s rights to submit claims to and ~~exacerbate staffing challenges.~~ ~~Various federal, state~~obtain reimbursement from Medicare for its hospice agency services. The suspension concluded in May 2022 and ~~local governments have issued, or indicated an intention~~Medicare has resumed payment on new claims submitted by the agency. The payments suspended as of June 30, 2022 total $5.2 million and represent all Medicare payments due to ~~issue, COVID-19 vaccination requirements~~that independent operating subsidiary’s provider number during the suspension. During the suspension, the UPIC reviewed 107 patient records from a 10-month period to determine whether a Medicare overpayment was made to this independent operating subsidiary and whether repayment of any identified overpayment is due. Based on the results of it claim review, the UPIC alleged overpayments of $5.2 million based upon its sampled and extrapolated data. In September and October 2022, the Company submitted requests for ~~health care workers and other workers. On September 9, 2021, President Biden directed CMS~~redetermination of the alleged overpayments. In October 2022, the Company received a redetermination decision from the UPIC relating to ~~issue a rule mandating staff vaccination~~one of the four claim samples. The UPIC reversed its overpayment allegation with regard to 50% of the claims reviewed. The Company plans to continue to contest the UPIC’s initial overpayment determination for ~~providers who are reimbursed by government payors, such as Medicare and Medicaid.~~the claim samples redetermined adversely to the Company.

~~States where we operate have imposed~~This suspension and overpayment allegation may increase the likelihood that this or other of our independent operating subsidiaries may be subjected to additional scrutiny in the future. Additionally, the UPIC may review patient records from one or more of our other independent operating subsidiaries, which may lead to other of our independent operating subsidiaries’ hospice agencies having their ~~own vaccine mandates~~Medicare payments suspended, whether temporarily or on an indefinite or permanent basis, potentially leading to their closure and resulting adverse impacts on our revenues and profits.

The expiration of COVID-19 Emergency Waivers could result in increased expenses. Seven Emergency Waivers relating to the public health emergency (PHE) expired as ~~well. California, the most populous state, issued an order~~of May 7, 2022 and nine more expired on ~~August 5, 2021, requiring workers in home care,~~June 6, 2022. These include waivers relating to core services, reimbursement, staffing, and conditions of payment. In September 2022 HHS announced that certain additional waivers specific to home health and ~~adult and senior care facilities~~hospice would expire when the public health emergency designation is no longer renewed. HHS last renewed the PHE on October 13, 2022, which is scheduled to ~~receive at least one vaccine dose by September 30, 2021.On August 20, 2021,~~expire on January 11, 2023. HHS has previously indicated that it would provide 60 days’ advance notice prior to the State of Washington’s governor issued a proclamation requiring workers in almost any healthcare setting—including employees, contractors, and volunteers—to be fully vaccinated against COVID-19 (including both shotsexpiration of the ~~two-shot Pfizer~~PHE, and ~~Moderna vaccination course) by October 18, 2021. On August 30, 2021,~~thus far has not provided such notice that it will allow the ~~Colorado State Board~~PHE to expire. The expiration of ~~Health approved a COVID-19 vaccine requirement~~the Emergency Waivers may materially affect reimbursement for ~~employees, contractors,~~our services, telehealth flexibility, availability of staff, expenses incurred for inspection, testing, and ~~other individuals working in certain health care facilities including home care agencies, hospices, assisted living facilities,~~maintenance of equipment, our occupancy and ~~similar facilities or services, mandating that these workers receive one vaccine shot by September 30, 2021,~~lodging of residents and ~~be fully vaccinated by October 31, 2021. None of these state mandates allow for regular COVID-19 testing as an alternative to vaccination. On October 11, 2021, Texas issued an executive order banning~~patients, and ultimately the ~~practice of mandating vaccination, including by private employers~~revenues and profits we derive from our operations.

The ~~Company~~reduction of Medicare reimbursement our Independent Operating Subsidiaries receive may ~~be subject to fines, penalties or judgments, or~~result in reduced revenues. As discussed in Part I under Item 2, within the section titled Government Regulations, new payment rules may otherwise be negatively impacted, if it is found not to have complied with any such current or future vaccination requirements. Current or prospective employees may oppose vaccination, making it more difficult to recruit or retain staff.

~~Additionally, in October~~affect the reimbursement the Company’s independent operating subsidiaries receive, potentially affecting our revenues and profits. The Hospice Payment Final Rule provides an increase of 2021, the FDA and CDC approved the use of COVID-19 vaccine booster shots for certain individuals who work in high-risk environments. The Company may be subject to fines, penalties, judgments, or otherwise be negatively impacted based on loss of skilled workers or increased competition and cost to acquire skilled workers3.8% in the ~~event~~total cap amount allowed for hospice services in 2023, but reduces reimbursement for other services between 2.0% and 4.0% beginning in 2024 for hospice providers that fail to satisfy certain quality reporting metrics. Similarly, the 2023 Home Health Prospective Payment System Rate Update Final Rule provides a permanent decrease of ~~worker hesitancy or aversion~~3.9% to ~~vaccine booster shots, or a change~~the home health 30-day period standard payment rate due to anticipated changes in connection with PDGM, with exceptions only for LUPAs. Future rate decreases may significantly reduce the ~~definition or understanding~~Medicare

Table of ~~“fully vaccinated” under CMS, OSHA or other state regulations that currently, or may~~Contents

reimbursement made available for home health agencies in 2024 and the future, ~~require employees to have received booster shots to maintain their fully vaccinated status.~~

~~Expiration~~and may cause a material adverse effect on the revenues and profits of ~~Certain Waivers~~the Company and Changes in CMS Reporting Practices. In response to the COVID-19 pandemic, CMS issued numerous blanket waivers effective March 20, 2020, to ease reporting requirements and other administrative burdens on health care providers during the COVID-19 public health emergency. Certain of these waivers have begun to expire, and more waivers may expire in the fourth quarter of 2021 and in 2022. The expiration of these waivers may affect ourits independent operating costs due to the reinstitution of reporting regarding staffing data and other information that was not required to be reported during the COVID-19 public health emergency until the expiration of those waivers; the expiration of these waivers may additionally affect our ability to use certain billing codes when seeking reimbursement from Medicare or Medicaid, which may affect our financial performance.subsidiaries

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Item 6. Exhibits

EXHIBIT INDEX


Exhibit						Description

3.1						Amended and Restated Certificate of Incorporation of The Pennant Group, Inc., effective as of September 27, 2019 (incorporated by reference to Exhibit 3.1 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on October 3, 2019).

3.2						Second Amended and Restated By-laws of The Pennant Group, Inc. (incorporated by reference to Exhibit ~~3.2~~3.1 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on ~~October 3, 2019).~~February 22, 2002)

10.1						Consulting Agreement, dated July 25, 2022, between The Pennant Group, Inc. and Daniel H Walker (incorporated by reference to Exhibit 10.1 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on July 29, 2002)

10.2						Amendment to Restricted Stock Unit Agreement, dated July 25, 2022, between The Pennant Group, Inc. and Daniel H Walker (incorporated by reference to Exhibit 10.2 to The Pennant Group, Inc.’s Current Report on Form 8-K (File No. 001-38900) filed with the SEC on July 29, 2002)

31.1						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

32.2						Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH						Inline XBRL Taxonomy Extension Schema Document

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES

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


	The Pennant Group, Inc.

Dated: November ~~8, 2021~~7, 2022	BY:	/s/ JENNIFER L. FREEMAN
		Jennifer L. Freeman
		Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

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