SEC Filing | The Pennant Group, Inc.

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pntg-20220930

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, 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 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, 2022

TABLE OF CONTENTS


	Part I. Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	1
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021	2
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021	3
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021	5
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
	Part II. Other Information
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46




Item 6.	Exhibits	48
	Signatures	49

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, 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.

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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,
	2022		2021		2022		2021

Revenue	$	118,350	$	111,921	$	348,576	$	327,929

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

See accompanying notes to condensed consolidated financial statements.

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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, 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

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	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)
Share-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)
Share-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)
Share-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

See accompanying notes to condensed consolidated financial statements.

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THE PENNANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


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

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

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




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




Proceeds from Revolving Credit Facility	82,000		97,000
Payments on Revolving Credit Facility	(78,000)		(61,500)
Payments for deferred financing costs	—		(1,394)
Issuance of common stock upon the exercise of options	967		689
Net cash provided by financing activities	4,967		34,795
Net (decrease) increase in cash	(2,235)		3,664
Cash beginning of period	5,190		43
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,
	2022		2021
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,114	$	980
Income taxes	$	77	$	2,594
Lease liabilities	$	27,092	$	29,327
Right-of-use assets obtained in exchange for new operating lease obligations	$	10,326	$	2,842
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	$	(43,136)	$	—
Non-cash investing activity:
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, 2022, the Company’s subsidiaries operated 94 home health, hospice and home care agencies and 49 senior living communities located in Arizona, California, Colorado, Idaho, Iowa, Montana, Nevada, Oklahoma, Oregon, Texas, Utah, Washington, Wisconsin and Wyoming.

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, 2021 is derived from the Company’s annual audited Consolidated Financial Statements for the fiscal year ended December 31, 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

Table of Contents

THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 2020, the Company applied for and received $27,997 in funds under the Accelerated and Advance Payment (“AAP”) Program, all of which was recouped as of June 23, 2022.

3. TRANSACTIONS WITH ENSIGN

On October 1, 2019, The 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 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 other services at proximate operations.

Services included in cost of services were $812 and $2,035 for the three and nine months ended September 30, 2022 and $760 and $2,377 for the three and nine months ended September 30, 2021, respectively, that related primarily to 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 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 “Transaction”). The Transfer Agreements require one of the 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,
	2022		2021		2022		2021
Numerator:


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

Denominator:
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)	837		2,112		1,342		2,355
Adjusted weighted average common shares outstanding for diluted income per share	30,172		30,556		30,182		30,719

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


(a)						The diluted per share amounts do not reflect common equivalent shares outstanding of 1,858 and 1,806 for the three and nine months ended September 30, 2022 and 815 and 437 for the three and nine months ended September 30, 2021, 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 62.4% and 62.3% of the Company’s revenue, for the three and nine months ended September 30, 2022, and 62.2% and 62.6% for the three and nine months ended September 30, 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

Net service revenue is recognized in accordance with the Patient Driven Groupings Model (“PDGM”). 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 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.

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 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.

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, 2022 and 2021, is summarized in the following tables:


	Three Months Ended September 30, 2022
	Home Health and Hospice Services
	Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	$	23,040	$	35,367	$	—	$	58,407	49.4	%
Medicaid	2,151		4,065		9,127		15,343		13.0
Subtotal	25,191		39,432		9,127		73,750		62.4
Managed care	14,594		1,062		—		15,656		13.2
Private and other(a)	5,472		28		23,444		28,944		24.4
Total revenue	$	45,257	$	40,522	$	32,571	$	118,350	100.0	%


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

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


	Nine Months Ended September 30, 2022
	Home Health and Hospice Services
	Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	$	67,861	$	103,322	$	—	$	171,183	49.1	%
Medicaid	7,389		11,189		27,502		46,080		13.2
Subtotal	75,250		114,511		27,502		217,263		62.3
Managed care	42,106		2,999		—		45,105		13.0
Private and other(a)	16,538		194		69,476		86,208		24.7
Total revenue	$	133,894	$	117,704	$	96,978	$	348,576	100.0	%


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


	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 the Company’s home health and hospice services segment includes revenue from all payors generated in 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.

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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


	September 30, 2022		December 31, 2021
Medicare	$	31,125	$	31,327
Medicaid	9,127		11,793
Managed care