SEC Filing | The Pennant Group, Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

pntg-20210930

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.


☐			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 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

TABLE OF CONTENTS


	Part I. Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	1
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020	2
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020	3
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	5
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44
	Part II. Other Information
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45




Item 6.	Exhibits	46
	Signatures	47

Table of Contents

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
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

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,
	2021		2020		2021		2020

Revenue	$	111,921	$	98,397	$	327,929	$	282,986

Expense
Cost of services	89,619		75,486		259,908		213,834
Rent—cost of services	10,334		9,721		30,455		29,194
General and administrative expense	9,066		7,500		27,137		21,699
Depreciation and amortization	1,200		1,212		3,545		3,434
Total expenses	110,219		93,919		321,045		268,161
Income from operations	1,702		4,478		6,884		14,825
Other income (expense):
Other income (expense)	—		225		(24)		225
Interest expense, net	(512)		(192)		(1,344)		(896)
Other income (expense), net	(512)		33		(1,368)		(671)
Income before provision for income taxes	1,190		4,511		5,516		14,154
Provision for income taxes	69		104		1,013		2,430
Net income	1,121		4,407		4,503		11,724
Less: net loss attributable to noncontrolling interest	(124)		—		(342)		—
Net income and other comprehensive income attributable to The Pennant Group, Inc.	$	1,245	$	4,407	$	4,845	$	11,724
Earnings per share:
Basic	$	0.04	$	0.16	$	0.17	$	0.42
Diluted	$	0.04	$	0.15	$	0.16	$	0.39
Weighted average common shares outstanding:
Basic	28,444		28,055		28,364		27,967
Diluted	30,556		30,243		30,719		29,955

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

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
	Shares	Amount						Shares		Amount				Total

Balance at December 31, 2019	28,435	$	28	$	74,882	$	(3,799)	—		$	—	$	—	$	71,111
Net income attributable to The Pennant Group, Inc.	—	—		—		2,980		—		—		—		2,980
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
Share-based compensation	—	—		1,959		—		—		—		—		1,959
Issuance of common stock from the exercise of stock options	20	—		77		—		—		—		—		77
Net issuance of restricted stock	20	—		—		—		—		—		—		—
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
Net income attributable to The Pennant Group, Inc.	—	—		—		4,407		—		—		—		4,407
Share-based compensation	—	—		2,102		—		—		—		—		2,102
Issuance of common stock from the exercise of stock options	70	—		337		—		—		—		—		337
Net issuance of restricted stock	2	—		—		—		—		—		—		—
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

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,
	2021		2020
Cash flows from operating activities:
Net income	$	4,503	$	11,724
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	3,545		3,434
Amortization of deferred financing fees	358		248
Provision for doubtful accounts	528		397
Share-based compensation	7,483		6,017
Deferred income taxes	87		—

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

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



Escrow deposits	—		(5,287)
Other	(372)		(506)
Net cash used in investing activities	(18,066)		(27,578)
Cash flows from financing activities:




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

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE PENNANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(unaudited, in thousands)


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

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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, the Company’s subsidiaries operated 88 home health, hospice and home care agencies and 54 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 is derived from the Company’s annual audited Consolidated Financial Statements for the fiscal year ended December 31, 2020 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 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.

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

Table of Contents

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, the Company applied for and received $27,997 in funds under the Accelerated and Advance Payment (“AAP”) Program, of which $14,638 had been 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, 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.

On October 1, 2019, 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 Company has incurred costs of $706 and $2,441 for the three and nine months ended September 30, 2021, respectively, and $1,502 and $4,583 for the three and nine months ended September 30, 2020, respectively, which costs related primarily to administrative support under the Transitions Services Agreement with Ensign (the “Transition Services Agreement”), which expired two years from the Spin-Off date.

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.

Table of Contents

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,
	2021		2020		2021		2020
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.	$	1,245	$	4,407	$	4,845	$	11,724

Denominator:
Weighted average shares outstanding for basic net income per share	28,444		28,055		28,364		27,967
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
Adjusted weighted average common shares outstanding for diluted income per share	30,556		30,243		30,719		29,955

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


(a)						The calculation of dilutive 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 for the period) because their inclusion would have been antidilutive. Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount above were 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.

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% and 62.6% of the Company’s revenue, for the three and nine months ended September 30, 2021, and 60.4% and 59.3% for the three and nine months ended September 30, 2020, 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.

Table of Contents

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 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 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.

Table of Contents

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.

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 and 2020, is summarized in the following tables:


	Three Months Ended September 30, 2021
	Home Health and Hospice Services
	Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	$	20,227	$	35,059	$	—	$	55,286	49.4	%
Medicaid	1,938		3,074		9,330		14,342		12.8
Subtotal	22,165		38,133		9,330		69,628		62.2
Managed care	11,969		879		—		12,848		11.5
Private and other(a)	5,800		57		23,588		29,445		26.3
Total revenue	$	39,934	$	39,069	$	32,918	$	111,921	100.0	%


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

Table of Contents

THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


	Three Months Ended September 30, 2020
	Home Health and Hospice Services
	Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	$	15,156	$	30,321	$	—	$	45,477	46.2	%
Medicaid	1,938		2,813		9,181		13,932		14.2
Subtotal	17,094		33,134		9,181		59,409		60.4
Managed care	7,923		251		—		8,174		8.3
Private and other(a)	5,922		55		24,837		30,814		31.3
Total revenue	$	30,939	$	33,440	$	34,018	$	98,397	100.0	%


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

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


	Nine Months Ended September 30, 2021
	Home Health and Hospice Services
	Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	$	61,055	$	101,771	$	—	$	162,826	49.7	%
Medicaid	6,659		8,507		27,266		42,432		12.9
Subtotal	67,714		110,278		27,266		205,258		62.6
Managed care	34,586		2,241		—		36,827		11.2
Private and other(a)	16,594		302		68,948		85,844		26.2
Total revenue	$	118,894	$	112,821	$	96,214	$	327,929	100.0	%


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


	Nine Months Ended September 30, 2020
	Home Health and Hospice Services
	Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	$	39,540	$	85,551	$	—	$	125,091	44.2	%
Medicaid	5,491		9,779		27,369		42,639		15.1
Subtotal	45,031		95,330		27,369		167,730		59.3
Managed care	21,885		1,064		—		22,949		8.1
Private and other(a)	15,706		109		76,492		92,307		32.6
Total revenue	$	82,622	$	96,503	$	103,861	$