SEC Filing | The Pennant Group, Inc.

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pntg-20230331

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 March 31, 2023.


☐			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 May 3, 2023, 29,740,003 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 MONTHS ENDED MARCH 31, 2023

TABLE OF CONTENTS


	Part I. Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 3 1 , 202 3 and December 31, 202 2	1
	Condensed Consolidated Statements of Income for the three months ended March 3 1 , 202 3 and 202 2	2
	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022	3
	Condensed Consolidated Statements of Cash Flows for the three months ended March 3 1 , 202 3 and 20 22	4
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
	Part II. Other Information
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39




Item 6.	Exhibits	40
	Signatures	41

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)


	March 31, 2023		December 31, 2022
Assets
Current assets:
Cash	$	2,952	$	2,079
Accounts receivable—less allowance for doubtful accounts of $573 and $592, respectively	50,660		53,420
Prepaid expenses and other current assets	13,140		18,323
Total current assets	66,752		73,822
Property and equipment, net	26,947		26,621
Right-of-use assets	264,109		260,868
Deferred tax assets, net	1,372		2,149
Restricted and other assets	10,652		10,545
Goodwill	79,497		79,497
Other indefinite-lived intangibles	58,827		58,617
Total assets	$	508,156	$	512,119
Liabilities and equity
Current liabilities:
Accounts payable	$	12,161	$	13,647
Accrued wages and related liabilities	20,495		23,283
Operating lease liabilities—current	16,856		16,633
Other accrued liabilities	16,116		16,684
Total current liabilities	65,628		70,247
Long-term operating lease liabilities—less current portion	250,041		247,042
Other long-term liabilities	6,240		6,281
Long-term debt, net	57,023		62,892
Total liabilities	378,932		386,462
Commitments and contingencies
Equity:
Common stock, $0.001 par value; 100,000 shares authorized; 30,203 and 29,729 shares issued and outstanding, respectively, at March 31, 2023; and 30,149 and 29,692 shares issued and outstanding, respectively, at December 31, 2022	29		29
Additional paid-in capital	101,334		99,764
Retained earnings	23,134		21,284
Treasury stock, at cost, 3 shares at March 31, 2023 and December 31, 2022	(65)		(65)
Total Pennant Group, Inc. stockholders’ equity	124,432		121,012
Noncontrolling interest	4,792		4,645
Total equity	129,224		125,657
Total liabilities and equity	$	508,156	$	512,119

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 March 31,
		2023		2022

Revenue		$	126,464	$	113,910

Expense
Cost of services		102,602		90,261
Rent—cost of services		9,597		10,051
General and administrative expense		8,705		10,033
Depreciation and amortization		1,280		1,147
Loss on asset dispositions and impairment, net		—		92
Total expenses		122,184		111,584
Income from operations		4,280		2,326
Other income (expense):
Other income		30		3
Interest expense, net		(1,406)		(629)
Other (expense), net		(1,376)		(626)
Income before provision for income taxes		2,904		1,700
Provision for income taxes		907		542
Net income		1,997		1,158
Less: net income attributable to noncontrolling interest		147		144
Net income and other comprehensive income attributable to The Pennant Group, Inc.		$	1,850	$	1,014
Earnings per share:
Basic		$	0.06	$	0.04
Diluted		$	0.06	$	0.03
Weighted average common shares outstanding:
Basic		29,751		28,572
Diluted		30,147		30,143

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, 2022	30,149	$	29	$	99,764	$	21,284	3	$	(65)	$	4,645	$	125,657
Net income attributable to The Pennant Group, Inc.	—	—		—		1,850		—	—		—		1,850
Net income attributable to noncontrolling interests	—	—		—		—		—	—		147		147
Share-based compensation	—	—		1,367		—		—	—		—		1,367
Issuance of common stock from the exercise of stock options	57	—		203		—		—	—		—		203
Net issuance of restricted stock	(3)	—		—		—		—	—		—		—
Balance at March 31, 2023	30,203	$	29	$	101,334	$	23,134	3	$	(65)	$	4,792	$	129,224


	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 noncontrolling 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

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)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	1,997	$	1,158
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	1,280		1,147
Amortization of deferred financing fees	130		129
Impairment of long-lived assets	—		97
Provision for doubtful accounts	151		184
Share-based compensation	1,367		2,440
Deferred income taxes	776		1,749

Change in operating assets and liabilities, net of acquisitions:
Accounts receivable	3,166		(3,161)
Prepaid expenses and other assets	4,317		(4,665)
Operating lease obligations	(18)		120
Accounts payable	(772)		367
Accrued wages and related liabilities	(2,788)		(794)
Other accrued liabilities	(1,077)		1,635
Contract liabilities (CARES Act advance payments)	—		(4,722)

Other long-term liabilities	467		245
Net cash provided by (used in) operating activities	8,996		(4,071)
Cash flows from investing activities:
Purchase of property and equipment	(2,314)		(2,392)





Other	(12)		(190)
Net cash used in investing activities	(2,326)		(2,582)
Cash flows from financing activities:




Proceeds from Revolving Credit Facility	40,500		11,000
Payments on Revolving Credit Facility	(46,500)		(6,000)

Issuance of common stock upon the exercise of options	203		90
Net cash (used in) provided by financing activities	(5,797)		5,090
Net increase (decrease) in cash	873		(1,563)
Cash beginning of period	2,079		5,190
Cash end of period	$	2,952	$	3,627

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)


	Three Months Ended March 31,
	2023		2022
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	1,536	$	499
Income taxes	$	30	$	(55)
Lease liabilities	$	8,927	$	9,516
Right-of-use assets obtained in exchange for new operating lease obligations	$	7,489	$	631
Non-cash adjustment to right-of-use assets and lease liabilities from lease modifications	$	—	$	9,349
Non-cash adjustment to right-of-use assets and lease liabilities from lease terminations and assignments	$	—	$	(33,804)
Non-cash investing activity:
Capital expenditures in accounts payable	$	566	$	720

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 March 31, 2023, the Company’s subsidiaries operated 96 home health, hospice and home care agencies and 51 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, 2022 is derived from the Company’s annual audited Consolidated Financial Statements for the fiscal year ended December 31, 2022, 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 from cost of sales to loss on asset dispositions and impairment of assets, net 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, all of which was repaid by December 31,

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2022. 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 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”). Pennant and Ensign continue to partner in the provision of services along the healthcare continuum.

The Company incurred costs of $273 for the three months ended March 31, 2023 and $643 for the three months ended March 31, 2022, that related primarily to shared services at proximate operations.

Expenses related to room and board charges at Ensign skilled nursing facilities for hospice patients were $940 for the three months ended March 31, 2023 and $574 for the three months ended March 31, 2022, and are included in cost of services.

The Company’s independent operating subsidiaries leased 29 and 32 communities from subsidiaries of Ensign under a master lease arrangement as of March 31, 2023 and March 31, 2022, 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 required one of the transferors to place $6,500 in escrow to cover post-closing capital expenditures and operating losses related to one of the communities, and such escrow was funded by an initial payment by the transferor at closing followed by eight equal monthly installments. The Transaction closed in April 2022.

4. 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.

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


	Three Months Ended March 31,
		2023		2022
Numerator:


Net income attributable to The Pennant Group, Inc.		$	1,850	$	1,014

Denominator:
Weighted average shares outstanding for basic net income per share		29,751		28,572
Plus: assumed incremental shares from exercise of options and assumed conversion or vesting of restricted stock(a)		396		1,571
Adjusted weighted average common shares outstanding for diluted income per share		30,147		30,143

Earnings Per Share:
Basic net income per common share		$	0.06	$	0.04
Diluted net income per common share		$	0.06	$	0.03


(a)						The diluted per share amounts do not reflect common equivalent shares outstanding of 2,002 for the three months ended March 31, 2023 and 1,690 for the three months ended March 31, 2022, because of their anti-dilutive effect.

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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, Commercial and managed care programs (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 62.0% of the Company’s revenue for the three months ended March 31, 2023, and 61.9% for the three months ended March 31, 2022. 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.

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.

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

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.

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THE PENNANT GROUP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Revenue By Payor

Revenue by payor for the three months ended March 31, 2023 and 2022, is summarized in the following tables:


	Three Months Ended March 31, 2023
	Home Health and Hospice Services
	Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	$	23,376	$	37,380	$	—	$	60,756	48.0	%
Medicaid	2,191		4,598		10,842		17,631		14.0
Subtotal	25,567		41,978		10,842		78,387		62.0
Managed care	15,932		1,194		—		17,126		13.5
Private and other(a)	6,291		117		24,543		30,951		24.5
Total revenue	$	47,790	$	43,289	$	35,385	$	126,464	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.


	Three Months Ended March 31, 2022
	Home Health and Hospice Services
	Home Health Services		Hospice Services		Senior Living Services		Total Revenue		Revenue %
Medicare	$	21,357	$	33,721	$	—	$	55,078	48.4	%
Medicaid	2,506		3,265		9,623		15,394		13.5
Subtotal	23,863		36,986		9,623		70,472		61.9
Managed care	13,252		784		—		14,036		12.3
Private and other(a)	5,537		53		23,812		29,402		25.8
Total revenue	$	42,652	$	37,823	$	33,435	$	113,910	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 March 31, 2023 and December 31, 2022 is summarized in the following table:


	March 31, 2023		December 31, 2022
Medicare	$	29,814	$	31,321
Medicaid	9,603		10,700
Managed care	9,445		9,370
Private and other	2,371		2,621
Accounts receivable, gross	51,233		54,012
Less: allowance for doubtful accounts	(573)		(592)
Accounts receivable, net	$	50,660	$	53,420

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 76.9% and 77.8% of its total gross accounts receivable as of March 31, 2023 and December 31, 2022, respectively. Revenue from reimbursement under the Medicare and Medicaid programs accounted for 62.0% for the three months ended March 31, 2023, and 61.9% of the Company’s revenue for the three months ended March 31, 2022.

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. The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), reviews financial information at the operating segment level. The Company also reports an “all other” category that includes general and administrative expense from the Company’s Service Center.

As of March 31, 2023, the Company provided services through 96 affiliated home health, hospice and home care agencies, and 51 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 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) the costs associated with transitioning operations, (5) unusual, non-recurring or redundant charges, and (6) net income attributable to noncontrolling interest. General

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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.

The following tables present certain financial information regarding 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 months ended March 31, 2023 and 2022:


	Home Health and Hospice Services		Senior Living Services		All Other		Total
Three Months Ended March 31, 2023
Revenue	$	91,079	$	35,385	$	—	$	126,464
Segment Adjusted EBITDAR from Operations	$	14,412	$	10,241	$	(7,514)	$	17,139
Three Months Ended March 31, 2022
Revenue	$	80,475	$	33,435	$	—	$	113,910
Segment Adjusted EBITDAR from Operations	$	13,948	$	9,432	$	(8,146)	$	15,234

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


	Three Months Ended March 31,
		2023		2022
Segment Adjusted EBITDAR from Operations		$	17,139	$	15,234
Less: Depreciation and amortization		1,280		1,147
Rent—cost of services		9,597		10,051
Other expense		30		3
Adjustments to Segment EBITDAR from Operations:
Less: Costs at start-up operations(a)		203		131
Share-based compensation expense and related taxes(b)		1,419		2,440
Acquisition related costs and credit allowances(c)		32		—

Costs associated with transitioning operations(d)		47		(757)
Unusual, non-recurring or redundant charges(e)		398		37
Add: Net income attributable to noncontrolling interest		147		144
Condensed Consolidated Income from Operations		$	4,280	$	2,326


(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. 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)						During the three months ended March 31, 2023, an affiliate of the Company placed its memory care units into transition and is actively seeking to sublease the units to an unrelated third party. The amount above represents the net operating impact attributable to the units in transition. The amounts reported exclude rent and depreciation and amortization expense related to such operations. During January 2022, affiliates of the Company entered into 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 the remainder transferred on April 1, 2022. The amount above represents the net impact on revenue and cost of service attributable to all of the transferred entities. The amounts reported exclude rent and depreciation and amortization expense related to such operations.

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(e)						Represents unusual or non-recurring charges for legal services, implementation costs, integration costs, and consulting fees in general and administrative expenses. Costs identified as redundant or non-recurring incurred by the Company for additional services provided by Ensign. All amounts are included in general and administrative expense. Fees incurred were $273 for the three months ended March 31, 2023, and $643 for the three months ended March 31, 2022.

7. ACQUISITIONS

The Company’s is focused on acquiring 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.

2023 Acquisitions

During the three months ended March 31, 2023, the Company expanded its operations with the addition of one home health agency as well as two senior living communities. In connection with the addition of the two senior living communities, the Company entered into a new long-term “triple-net” lease. 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 one home health agency acquired was a Medicare license and is considered an asset acquisition. The fair value of the home health license acquired was $210 and was allocated to indefinite-lived intangible assets.

Subsequent Events

On May 1, 2023, the Company closed on the purchase of one home health agency that expands the Company’s footprint in Colorado. The purchase of the home health agency was $875. A subsidiary of the Company entered into an operations transfer agreement with the prior operator.

8. PROPERTY AND EQUIPMENT—NET

Property and equipment, net consist of the following:


	March 31, 2023		December 31, 2022
Land	$	96	$	96
Building	1,890		1,890
Leasehold improvements	19,106		18,759
Equipment	26,659		25,532
Furniture and fixtures	1,223		1,151
	48,974		47,428
Less: accumulated depreciation	(22,027)		(20,807)
Property and equipment, net	$	26,947	$	26,621

Depreciation expense was 1,275 for the three months ended March 31, 2023 and $1,114 for the three months ended March 31, 2022.

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 were immaterial impairments recorded during the three months ended March 31, 2023 and 2022.

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9. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

The following table represents activity in goodwill by segment for the three months ended March 31, 2023:


	Home Health and Hospice Services		Senior Living Services		Total
December 31, 2022	$	75,855	$	3,642	$	79,497
Additions	—		—		—

March 31, 2023	$	75,855	$	3,642	$	79,497

Other indefinite-lived intangible assets consist of the following:


	March 31, 2023		December 31, 2022
Trade name	$	1,385	$	1,385
Medicare and Medicaid licenses	57,442		57,232
Total	$	58,827	$	58,617

No goodwill or intangible asset impairments were recorded during the three months ended March 31, 2023 and 2022.

10. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:


	March 31, 2023		December 31, 2022
Refunds payable	$	2,017	$	2,244
Deferred revenue	1,609		1,592
Resident deposits	3,663		4,315
Property taxes	1,129		1,027
Deferred state relief funds	909		1,479
Accrued self-insurance liabilities	4,076		3,546

Other	2,713		2,481
Other accrued liabilities	$	16,116	$	16,684

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.

11. DEBT

Long-term debt, net consists of the following:


	March 31, 2023		December 31, 2022
Revolving Credit Facility	$	58,500	$	64,500
Less: unamortized debt issuance costs(a)	(1,477)		(1,608)
Long-term debt, net	$	57,023	$	62,892


(a)						Amortization expense for debt issuance costs was $130 for three months ended March 31, 2023 and $129 for the three months ended March 31, 2022, 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

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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 March 31, 2023, the Company’s weighted average interest rate on its outstanding debt was 7.53%. As of March 31, 2023, the Company had available borrowing on the Revolving Credit Facility of $87,314, which is net of outstanding letters of credit of $4,186.

The fair value of the Revolving Credit Facility approximates carrying value, due to the short-term 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, 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 March 31, 2023, the Company was compliant with all such financial covenants.

12. OPTIONS AND AWARDS

Outstanding options and restricted stock awards of the Company were granted under the 2019 Omnibus Incentive Plan (the “OIP”) and Long-Term Incentive Plan (the “LTIP”, and together with the OIP, the “Pennant Plans”).

Under 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 Pennant Plans.

Total share-based compensation expense for all Plans for the three months ended March 31, 2023 and 2022 was:


	Three Months Ended March 31,
		2023		2022
Share-based compensation expense related to stock options		$	850	$	842
Share-based compensation expense related to Restricted Stock		177		1,519
Share-based compensation expense related to Restricted Stock to non-employee directors		340		79
Total share-based compensation		$	1,367	$	2,440

In future periods, the Company estimates it will recognize the following share-based compensation expense for unvested stock options and unvested Restricted Stock as of March 31, 2023:


	Unrecognized Compensation Expense		Weighted Average Recognition Period (in years)
Unvested Stock Options	$	12,339	3.5
Unvested Restricted Stock	2,931		4.2
Total unrecognized share-based compensation expense	$	15,270

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On July 25, 2022 the Company modified certain outstanding RSUs granted to the former chief executive officer of the Company 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 outstanding RSUs and accelerated the vesting on the remaining 943 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 recorded in general and administrative expense in the third quarter of 2022.

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.

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.

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 as of March 31:


Grant Year	Options Granted	Risk-Free Interest Rate		Expected Life(a)	Expected Volatility(b)		Dividend Yield		Weighted Average Fair Value of Options
2023	467	4.1	%	6.5	41.5	%	—	%	$	7.25
2022	213	1.9	%	6.5	40.0	%	—	%	$	6.03


(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 three months ended March 31, 2023:


	Number of Options Outstanding	Weighted Average Exercise Price		Number of Options Vested	Weighted Average Exercise Price of Options Vested
December 31, 2022	2,219	20.76		973	$	16.90
Granted	467	15.02
Exercised	(25)	7.95
Forfeited	(24)	21.67
Expired	(24)	19.58
March 31, 2023	2,613	$	19.70	1,008	$	17.31

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Restricted Stock

A summary of the status of Pennant’s non-vested Restricted Stock, and changes during the three months ended March 31, 2023, is presented below:


	Non-Vested Restricted Stock	Weighted Average Grant Date Fair Value
December 31, 2022	418	$	14.26
Granted	32	10.80
Vested	(38)	11.12
Forfeited	(3)	15.63
March 31, 2023	409	$	14.28

13. LEASES

The Company’s independent operating subsidiaries lease 51 senior living communities and its administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from 15 to 25 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. The Company’s independent operating subsidiaries leased 29 and 32 communities from subsidiaries of Ensign (the “Ensign Leases”) under a master lease arrangement as of March 31, 2023 and March 31, 2022, respectively. Each of the leases have an initial 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 $3,416 for the three months ended March 31, 2023 and $3,484 for the three months ended March 31, 2022. In 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.

Fourteen of the Company’s affiliated senior living communities, excluding the communities that are operated under the Ensign Leases (as defined herein), are operated under three 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.

As further described in Note 3, on January 27, 2022, affiliates of the Company entered into Transfer Agreements with affiliates of Ensign, providing for the transfer of the operations of five 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 $33,804. One of the terminated leases was part of a master lease agreement. As a result of the transferred leases being removed from master lease arrangement, the remaining lease components under the master lease arrangement was modified which resulted in a net increase to the lease liability and ROU asset balance of $9,349 for the three months ended March 31, 2022.

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The components of operating lease cost, are as follows:


	Three Months Ended March 31,
		2023		2022
Operating Lease Costs:
Community Rent—cost of services		$	8,274	$	8,789
Office Rent—cost of services		1,323		1,262
Rent—cost of services		$	9,597	$	10,051

General and administrative expense		$	93	$	81
Variable lease cost (a)		$	1,730	$	1,575


(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 the Company’s triple net lease, and which is included in cost of services for the three months ended March 31, 2023 and 2022.

The following table shows the lease maturity analysis for all leases as of March 31, 2023, for the years ended December 31:


Year	Amount
2023 (Remainder)	$	27,102
2024	35,658
2025	34,302
2026	33,249
2027	32,662
Thereafter	253,638
Total lease payments	416,611
Less: present value adjustments	(149,714)
Present value of total lease liabilities	266,897
Less: current lease liabilities	(16,856)
Long-term operating lease liabilities	$	250,041

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 March 31, 2023, the weighted average remaining lease term is 12.5 years and the weighted average discount rate is 7.6%.

14. INCOME TAXES

The Company recorded income tax expense of $907 and $542, or 31.2% and 31.9% of earnings before income taxes for the three months ended March 31, 2023 and 2022, respectively. The decrease in effective tax is primarily due to a decrease in non-deductible equity compensation.

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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 and penalties subject to appeal may remain in place during such appeals, which may include suspension, termination, or revocation of participation in governmental programs for the payment of the services the Company provides. 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 it is presently in compliance in all material respects with all applicable laws and regulations.